The accompanying unaudited condensed consolidated financial statements of PICO Holdings, Inc. and subsidiaries (collectively, the “Company” or “PICO”) have been prepared in accordance with the interim reporting requirements of Form 10-Q, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete consolidated financial statements.

In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation of the financial statements presented have been included and are of a normal recurring nature. Operating results presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 20152016 filed with the SEC.

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company’s condensed consolidated financial statements relate to the assessment of other-than-temporary impairments, the application of the equity method of accounting, goodwill and intangibles,impairment losses, intangible assets, real estate and water assets, deferred income taxes, and stock-based compensation, and contingent liabilities.compensation. It is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.

On May 31, 2017, the Company changed its state of incorporation from California to Delaware. The reincorporation was approved by the requisite vote of shareholders at the Company’s Annual Meeting of Shareholders on May 4, 2017. Other than the change in the state of incorporation, the reincorporation did not result in any change in the business, physical location, management, assets, liabilities or net worth of the Company, nor did it result in any change in location of the Company’s employees, including the Company’s management and board of directors. Furthermore, the Company’s common stock continues to trade on the Nasdaq Global Market. The reincorporation did not alter any shareholder’s percentage ownership interest or number of shares owned in the Company. In conjunction with the reincorporation, the Company authorized 10 million shares of preferred stock, par value $0.001 per share. Shares of preferred stock may be issued from time to time in one or more series which may be by distinguishing number, letter or title. However, without shareholder approval, the Company’s board of directors is only authorized to designate and/or issue, out of the unissued shares of preferred stock, one or more series of preferred stock in connection with the vestingadoption of UCP restricteda tax benefit preservation plan. The issuance of preferred stock units (“RSU”) and stock-based compensation expense between additional paid-in-capital and noncontrolling interest within its condensed consolidated statementscould, among other things, have the effect of equity. The equity allocations for the UCP, LLC operating partnership are based on the economic and voting interest percentagesdelaying, deferring, discouraging or preventing a change in control of the Company and its noncontrolling interest in UCP. Issuancesmay adversely affect the market price of UCP Class Athe Company’s common stock and the voting and other rights of the holders of common stock.

On July 24, 2017, the Company’s board of directors adopted a tax benefit preservation plan (the “Plan”) designed to preserve the Company’s ability to utilize its net operating loss carryforwards as a result of certain stock ownership changes. Consequently, any person or group, together with its affiliates and associates (the “acquiring person”), acquiring beneficial ownership of 4.99%or more of the Company’s common stock after August 4, 2017 without the approval of the Company’s board of directors would be subjected to significant dilution in its holdings. Such dilution would occur as a consequence of each holder of a Right, other than Rights that are beneficially owned by the acquiring person, obtaining the right to purchase, upon exercise of a Right and payment of the purchase price, a number of shares of the Company’s common stock having a market value of two times the exercise price of the Right. Pursuant to the Plan, the Company issued one Right for UCP RSUs affecteach outstanding share of the economic and voting interest percentages, which accordingly are adjustedCompany’s common stock to shareholders of record at the endclose of each issuance period. The economic and voting interest percentages prevailing during the period are usedbusiness on August 4, 2017. Prior to determine the current period equity allocations for the operating partnership.

The costs assigned to the various components of real estate and tangible water assets were as follows (in thousands):

The Company owns the following intangible assets, which primarily represent indefinite-lived intangible water assets within its water resource and water storage operations segment (in thousands):

The cost and carrying value of available-for-sale investments were as follows (in thousands):

The amortized cost and carrying value of investments in debt securities, by contractual maturity, are shown below. Actual maturity dates may differ from contractual maturity dates because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

The Company owns U.S. Treasury Bills and certain corporate bonds and other debt securities, which arewere purchased based on the maturity and yield-to-maturity of the bond and an analysis of the fundamental characteristics of the issuer. At September 30, 2016,2017 and December 31, 2015,2016, there were no material unrealized losses on certain bonds in the portfolio. The Company does not consider those bonds to be other-than-temporarily impaired because the Company expects to hold, and will not be required to sell, these particular bonds, and it expects to recover the entire amortized cost basis at maturity.such securities. There were no impairment losses recorded on debt securities during the three andor nine months ended September 30, 20162017 and 2015.2016.

The Company’s investment in marketable equity securities at September 30, 20162017 principally consisted of common stock of Century and, to a lesser extent, other publicly traded small-capitalization companies in the U.S. and select foreign markets. At September 30, 2016,2017, the Company reviewed its equity securities in an unrealized loss position and concluded certainthe investment in Century was other than temporarily impaired based on the actual price the Company received on the sale of suchthe securities subsequent to September 30, 2017. The other securities in an unrealized loss position were not other-than-temporarily impaired as the declines were not of sufficient duration and severity, and publicly-available financial information, collectively, did not indicate impairment. The primary cause of the losslosses on those securities was normal market volatility. No other material impairment losses were recorded during the three andor nine months ended September 30, 20162017 and 2015.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions at the measurement date. The level within the fair value hierarchy in which the fair value measurements are classified include measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s policy is to recognize transfers between levels at the end of the reporting period. The following tables set forth the Company’s assets and liabilities that were measured at fair value, on a recurring basis, by level within the fair value hierarchy. There were no significant transfers between Level 1 and Level 2 during the nine months ended September 30, 20162017 or during the year ended December 31, 2015.2016.

At September 30, 20162017 (in thousands):

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.

The following tables set forth the Company’s non-financial assets that were measured at fair value, on a non-recurring basis, by level within the fair value hierarchy.

The Company leases some of its offices under non-cancelable operating leases that expire at various dates through 2021.2020. Rent expense for office space was $469,000$70,000 and $1.5 million$159,000 for the three months ended September 30, 2017 and 2016, respectively, and was $275,000 and $473,000 for the nine months ended September 30, 2016, respectively,2017 and was $511,000 and $1.7 million for the three and nine months ended September 30, 2015,2016, respectively.

Future minimum payments under all operating leases are as follows (in thousands):

Neither PICO nor its subsidiaries are parties to any potentially material pending legal proceedings.

The Company is subject to various litigation matters that arise in the ordinary course of its business. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to possible outcomes, and as such, are not meaningful indicators of the potential liability. The Company regularly reviews contingencies to determine the adequacy of accruals and related disclosures. The amount of ultimate loss may differ from these estimates, and it is possible that the financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

Whether any losses finally determined in any claim, action, investigation, or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations, or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such losses, damages or remedies may have on the Company’s condensed consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.

The unrealized gain on available-for-sale investments is net of a deferred income tax liability of $3.5 million$243,000 at September 30, 20162017 and $2.8$3.6 million at December 31, 2015.2016.

The following table reports amounts that were reclassified from accumulated other comprehensive income or loss and included in earnings (in thousands):

The Company has agreementsIn July 2017, the Company’s board of directors elected to terminate the Company’s deferred compensation plans. Consequently, while participant compensation remains deferred at September 30, 2017, the plan is no longer active. In accordance with certain officers and employees to defer compensation into Rabbi Trust accounts held in the nameapplicable regulations, distribution of the Company.remaining assets and settlement of the deferred compensation obligation will be made to the participants no earlier than one year from the date the plans were terminated. The total value of the deferred compensation obligation for all participants at September 30, 20162017 and December 31, 2015,2016 was $26.7$4.1 million and $25.5$27.3 million, respectively, and is included in the accompanying consolidated balance sheets.respectively. These totals include a fair value of $653,000$23,000 and $805,000$839,000 of the Company’s common stock, for each of the respective periods, with the balance in various publicly traded equities, bonds, and bonds.cash. In conjunction with the termination of the Company’s former CEO, assets with a value of $23.4 million were distributed from the trust accounts in April 2017.

During the three and nine months ended September 30, 2016, the Company distributed 22,644 shares of the Company’s common stock out of its deferred compensation Rabbi Trusts in satisfaction of the related liability. The distribution was reported as a reduction of treasury stock in the condensed consolidated statements of equity for the nine months ended September 30, 2016.2017, the Company sold the majority of its remaining oil and gas lease assets to the service agent the Company had contracted with to operate and manage such oil and gas operations. The Company received book value for the majority of the assets sold resulting in no significant gain or loss on the transaction. The service agent continues to provide management services to the Company in conjunction with exiting the business.

PICO is a diversified holding company engaged in the following operating and reportable segments: Water Resource and Water Storage Operations Real Estate Operations, Corporate, and Discontinued Agribusiness Operations.Corporate. The accounting policies of the reportable segments are the same as those described in the Company’s 20152016 Annual Report on Form 10-K filed with the SEC.SEC, however, the Company’s real estate segment has been sold and deconsolidated as of August 4, 2017. Prior reported balances of the Company’s real estate segment have been reclassified as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.

Management analyzes segments using the following information:

Segment assets (in thousands):

Segment revenues and loss before taxes (in thousands):

On April 10, 2017, UCP entered into a merger agreement with Century whereby each outstanding share of UCP common stock was converted into $5.32 in cash and 0.2309 of a newly issued share of Century common stock representing 9% of Century’s common stock outstanding. The transaction closed on August 4, 2017 and as a result the third quarterCompany deconsolidated UCP as of 2015,the closing date. In October 2017, the Company sold substantially allits entire position of the assets used in its agribusiness segment to CHS Inc. (“CHS”)Century common stock for a net selling price$59.2 million. A loss of $105.3 million. After repayment of $80.9 million of outstanding debt and $5.9 million in selling and other related costs of the sale, the Company received net proceeds of $18.4 million$842,000 was realized on the date of close.sale however such loss was accrued during the three months ended September 30, 2017. Consequently, no additional gain or loss will be recognized in the fourth quarter of 2017.

The Company was required to deposit $10.2 millionassets and liabilities of such net proceeds in escrow accounts, $6 million of which secures general indemnification obligations through January 2017,UCP qualified as held-for-sale and $4.2 million of which was associated with specified operational matters related to air quality and waste water permit issues (“operational escrow”). The Company resolved the air quality issue and received $2.4 millionhave been classified as discontinued operations as of the operational escrow amountearliest period presented. Consequently, prior periods presented have been recast from amounts previously reported in October 2015. However, in February 2016,the Company’s real estate segment to reflect the business as discontinued operations. As a result of the merger, the Company was notified that the relevant regulatory authorities had not approved the waste water permit at the levels required under the sale agreement. Consequently, the remaining $1.8 million of the operational escrow amount was released to CHS in full satisfaction of the matter, resulting in the Company recording the amount as additionalrecorded a loss on the sale of discontinued operations for$9.3 million during the nine months ended September 30, 2016. Remaining amounts2017, as calculated in the following table (in thousands, except per share amounts).

In February 2017, the Company received the final $6 million that had been held in escrow are reported as accounts receivable infor general indemnification claims related to the table below.

The following table presents the details of the Company’s results from discontinued agribusiness operations included in the condensed consolidated statement of operations and comprehensive income or lossloss. The three and nine months ended September 30, 2017 included results ending on August 4, 2017, the date the merger of UCP and Century closed: (in thousands):