10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from __________ to __________

Commission File Number 0-18786

PICO HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

California	94-2723335
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

875 Prospect Street, Suite 301

La Jolla, California 92037

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code (858) 456-6022

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.001 Par Value

(Title of Class)

Indicate by check mark whether the registrant is a well known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III or this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). Yes o  No x

Approximate aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant (based on the closing sales price of such stock as reported in the NASDAQ National Market) as of June 30, 2005 the last business day of the registrant’s most recently completed second fiscal quarter, was $193,820,064.

On March 8, 2006, the registrant had 13,271,440 shares of common stock, $.001 par value, outstanding, excluding 3,228,300 shares of common stock which are held by the registrant’s subsidiaries.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2006 Annual Meeting of Shareholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2005.

PICO HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

			Page No.
PART I
	Item 1.	BUSINESS	2
	Item 1A.	RISK FACTORS	9
	Item 2.	PROPERTIES	14
	Item 3.	LEGAL PROCEEDINGS	14
	Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	14
PART II
	Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	15
	Item 6.	SELECTED FINANCIAL DATA	16
	Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
	Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	44
	Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	44
	Item 9.	CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	74
	Item 9A.	CONTROLS AND PROCEDURES	74
PART III
	Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	76
	Item 11.	EXECUTIVE COMPENSATION	76
	Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS	76
	Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	76
	Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	76
PART IV
	Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	77
SIGNATURES			82

1

PART I

This Annual Report on Form 10-K (including the Management’s Discussion and Analysis of Financial Condition and Results of Operations section) contains forward-looking statements regarding our business, financial condition, results of operations and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipated developments, and other information concerning future matters. Words such as “expects,”“anticipates,”“intends,”“plans,”“believes,”“seeks,”“estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report on Form 10-K.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and the actual results and outcomes could differ from those discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Annual Report on Form 10-K. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

ITEM 1. BUSINESS

Introduction

PICO Holdings, Inc. (PICO and its subsidiaries are referred to as “PICO,”“the Company,”“we,” and “our”) is a diversified holding company. PICO seeks to acquire businesses and interests in businesses which we identify as undervalued based on fundamental analysis--that is, our assessment of what the business is worth, based on the private market value of its assets, earnings, and cash flow. We prefer long-established businesses, with a history of operating successfully through industry cycles, recessions and geo-political disruptions, in basic, “old economy” industries. Typically, the business will be generating free cash flow and have a low level of debt, or, alternatively, strong interest coverage ratios or the ability to realize surplus assets. As well as being undervalued, the business must have special qualities such as unique assets, a potential catalyst for change, or be in an industry with attractive economics. We are also interested in acquiring businesses and interests in businesses where there is significant unrecognized value in land and other tangible assets.

We have acquired businesses and interests in businesses by the acquisition of private companies, and the purchase of shares in public companies, both directly through participation in financing transactions, and through open market purchases. When acquisitions become core operating subsidiaries, we become actively involved in the management and strategic direction of the business.

Our objective is to generate superior long-term growth in shareholders’ equity, as measured by book value per share. We anticipate that PICO’s earnings will fluctuate from year to year, and that the results for any one year are not necessarily indicative of our future performance.

Our business is separated into five major operating segments:

· water resource & water storage operations;

· real estate operations in Nevada;

· Business Acquisitions & Financing, which contains businesses, interests in businesses, and other parent company assets;

· insurance operations in “run off”; and

· the operations of HyperFeed Technologies, Inc. (“HyperFeed”).

Each of these business segments is discussed in greater detail below.

Currently our major consolidated subsidiaries are:

· Vidler Water Company, Inc. (“Vidler”), which develops and owns water rights and water storage operations in the southwestern United States, primarily in Nevada and Arizona;

· Nevada Land and Resource Company, LLC (“Nevada Land”), which owns approximately 767,000 acres of land in Nevada, and the mineral rights and water rights related to the property;

· Citation Insurance Company, which is “running off” its historical property & casualty and workers’ compensation loss reserves, and Physicians Insurance Company of Ohio, which is “running off” its medical professional liability loss reserves;

· Global Equity AG, which holds our interest in Jungfraubahn Holding AG; and

· HyperFeed, which became a subsidiary in 2003. HyperFeed is a leading provider of ticker plant technologies, data distribution, smart order routing and managed data services to the financial community.

In 2003, we closed on the sale of Sequoia Insurance Company (“Sequoia”), which is accounted for in our consolidated financial statements for 2003 and prior years as a discontinued operation. See “Discontinued Operations.”

The address of our main office is 875 Prospect Street, Suite 301, La Jolla, California 92037, and our telephone number is (858) 456-6022.

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are made available on our website (www.picoholdings.com) as soon as reasonably practicable after the reports are electronically filed with the SEC. Our website also contains other material about PICO, and links to other sites, including some of the companies with which we are associated.

History

PICO was incorporated in 1981 and began operations in 1982. The company was known as Citation Insurance Group until a reverse merger with Physicians Insurance Company of Ohio on November 20, 1996. After the reverse merger, the former shareholders of Physicians owned approximately 80% of Citation Insurance Group, the Board of Directors and management of Physicians replaced their Citation counterparts, and Citation Insurance Group changed its name to PICO Holdings, Inc. You should be aware that some data on Bloomberg and other information services pre-dating the reverse merger relates to the old Citation Insurance Group only, and does not reflect the performance of Physicians prior to the merger.

Operating Segments and Major Subsidiary Companies

The following is a description of our operating segments and major subsidiaries. Unless otherwise indicated, we own 100% of each subsidiary.

Water Resource and Water Storage Operations - Vidler Water Company, Inc.

Vidler is a leading private company in the water resource development business in the southwestern United States. PICO identified water resource development in the Southwest as an attractive business opportunity due to the continued growth in demand for water resulting from population growth, economic development, environmental requirements, and the claims of Native Americans. We develop new sources of water for municipal and industrial use, and necessary storage infrastructure to facilitate the efficient allocation of available water supplies. Vidler is not a water utility, and does not intend to enter into regulated utility activities.

The inefficient allocation of available water between agricultural users and municipal or industrial users, or the lack of available known water supply in a particular location, provide opportunities for Vidler:

· the majority of water rights are currently owned or controlled by agricultural users, and in many locations there are insufficient water rights owned or controlled by municipal and industrial users to meet present and future demand;

· certain areas of the Southwest experiencing rapid growth have insufficient supplies of known water to support future growth. Vidler identifies and develops new water supplies for communities with no other known water resources to support future growth; and

· currently there are not effective procedures in place for the transfer of water from private parties with excess supply in one state to end-users in other states. However, regulations and procedures are steadily being developed to facilitate the interstate transfer of water. Infrastructure to store water will be required to accommodate and allow interstate transfer, and transfers from wet years to dry years. Currently there is limited storage capacity in place.

We entered the water resource development business with the acquisition of Vidler in 1995. At the time, Vidler owned a limited quantity of water rights and related assets in Colorado. Since then, Vidler has acquired or developed:

· additional water rights and related assets, predominantly in Arizona and Nevada, the two leading states in population growth and new home construction. A water right is the legal right to divert water and put it to beneficial use. Water rights are assets which can be bought and sold. In some states, the use of the water can also be leased. The value of a water right depends on a number of factors, including location, the seniority of the right, and whether or not the right is transferable. Vidler seeks to acquire water rights at prices consistent with their current use, with the expectation of an increase in value if the water right can be converted to a higher use. Our objective is to monetize our water rights for municipal and industrial use. Typically, our water rights are the most competitive source of water to support new growth in municipalities and new industry; and

· a water storage facility in Arizona and an interest in Semitropic, a water storage facility in California. At December 31, 2005, Vidler had “net recharge credits” representing more than 90,000 acre-feet of water in storage on its own account at the Vidler Arizona Recharge Facility. An acre-foot is a unit commonly used to measure the volume of water, being the volume of water required to cover one acre to a depth of one foot. As a rule of thumb, one acre-foot of water would sustain two families of four persons each for one year.

Vidler is engaged in the following activities:

· supplying water to end-users in the Southwest, namely water utilities, municipalities, developers, or industrial users. The source of water could be from identifying and developing a new water supply, or a change in the use of water from agricultural to municipal and industrial; and

· development of storage and distribution infrastructure to generate cash flow from the purchase and storage of water for resale, and charging customers fees for “recharge,” or placing water into storage.

After an acquisition and development phase spanning several years, Vidler completed its first significant sales of water rights for industrial use in 2001 and municipal use in 2002. During 2005, Vidler sold approximately 42,000 acre-feet of water rights, and the related land, in the Harquahala Valley Irrigation District of Arizona for $94.4 million, which added $55.5 million to income. The sales price of $94.4 million for this one asset exceeded the carrying value of Vidler’s total assets on our balance sheet prior to the sale ($83.5 million at December 31, 2004).

Vidler’s priority is to either monetize or develop recurring cash flow from its most important assets by:

· securing supply contracts utilizing its water rights in Nevada; and

· storing additional water at the Vidler Arizona Recharge Facility, and providing water supplies from net recharge credits already in storage.

Vidler has also entered into partnering arrangements with parties who have water assets but lack the capital or expertise to commercially develop these assets. Vidler continues to explore additional partnering opportunities throughout the Southwest.

2

The following table details the water rights and water storage assets owned by Vidler at December 31, 2005. Please note that this is intended as a summary, and that some numbers are rounded. Item 7 of this Form 10-K contains more detail about these assets, recent developments affecting them, and the current outlook.

Name of asset & approximate location	Brief Description	Present commercial use
WATER RIGHTS
Arizona:
Harquahala Valley ground water basin La Paz County 75 miles northwest of metropolitan Phoenix	2,703 acres of land 2,880 acre-feet of transferable ground water	Leased to farmers 42,000 acre-feet of transferable ground water, and the related land in Maricopa County, sold for $94.4 million in 2005
Nevada:
Fish Springs Ranch, LLC (51% interest) & V&B, LLC (50% interest) Washoe County, 40 miles north of Reno	8,600 acres of deeded ranchland 8,000 acre-feet of permitted water rights, which are transferable to the Reno/Sparks area	Vidler is currently farming the property. Cattle graze on part of the property on a revenue- sharing basis
Lincoln County Agreement	Applications* for more than 100,000 acre-feet of water rights through an agreement with Lincoln County, of which it is currently anticipated that up to 40,000 acre-feet will be permitted and put to use in Lincoln County/northern Clark County	2,100 acre-feet of permitted water rights in the Tule Desert Groundwater Basin sold in 2005 for $15.7 million Agreement to sell 7,240 acre-feet of water as, and when, supplies are permitted from existing applications Agreement to sell water to a developer as, and when, supplies are permitted from applications in Kane Springs Basin in Lincoln County, Nevada
	570 acre-feet of permitted water rights at Meadow Valley, located in Lincoln and Clark counties	Agreement to sell 570 acre-feet of water, pending resolution of a protest
Clark County
Sandy Valley Near the Nevada / California state line in the Interstate 15 corridor	415 acre-feet of permitted water rights Application for 1,000 acre-feet of water rights	Agreement to sell at least 415 acre-feet of water pending resolution of a protest of the permitting of the water rights
Muddy River water rights In the Moapa Valley, approximately 35 miles east of Las Vegas in the Interstate 15 corridor	221 acre-feet of water rights, plus approximately 46 acre-feet under option *The numbers indicated for water rights applications are the maximum amount which we have filed for. In some cases, we anticipate that the actual permits received will be for smallerquantities
Colorado:
Colorado water rights	87 acre-feet of water rights	Agreement to sell 87 acre-feet of senior water rights to the City of Golden, Colorado over a period of 10 years
	201 acre-feet of water rights	66 acre-feet leased. The balance is available for sale or lease
WATER STORAGE
Arizona:
Vidler Arizona Recharge Facility Harquahala Valley, Arizona	An underground water storage facility with estimated capacity exceeding 1 million acre-feet and annual recharge capability of up to 35,000 acre-feet	Vidler is currently buying water and storing it on its own account. At December 31, 2005, Vidler had net recharge credits equivalent to approximately 90,666 acre-feet of water in storage at the Arizona Recharge Facility. In addition, Vidler has purchased or ordered approximately 35,000 acre-feet of water for recharge in 2006
California:
Semitropic water storage facility	The right to store 30,000 acre-feet of water underground until 2035. This includes the right to minimum guaranteed recovery of approximately 2,700 acre-feet of water every year, and the right to recover up to approximately 6,800 acre-feet in one year in certain circumstances

3

Real Estate Operations in Nevada - Nevada Land And Resource Company, LLC

In April 1997, PICO paid $48.6 million to acquire Nevada Land, which at the time owned approximately 1,352,723 acres of deeded land in northern Nevada, and the water, mineral, and geothermal rights related to the property. Much of Nevada Land’s property is checker-boarded in square mile sections with publicly owned land. The lands generally parallel the Interstate 80 corridor and the Humboldt River, from Fernley, in western Nevada, to Elko County, in northeast Nevada.

Nevada Land is the largest private landowner in the state of Nevada. According to census data, Nevada has experienced the most rapid population growth of any state in the United States for the past 19 years in a row. The population of Nevada increased 66% in the 10 years ended April 1, 2000, and increased another 24.4%, to approximately 2.5 million people, from 2000 to 2005. Most of the growth is centered in southern Nevada, which includes the city of Las Vegas and surrounding municipalities. Land available for private development in Nevada is relatively scarce, as governmental agencies own approximately 87% of the land in Nevada.

Before we acquired Nevada Land, the property had been under the ownership of a succession of railway companies, to whom it was a non-core asset. Accordingly, when we acquired the company, we believed that the commercial potential of the property had not been maximized.

After acquiring Nevada Land, we completed a “highest and best use” study which divided the land into seven major categories. We developed strategies to maximize the value of each type of asset, with the objective of monetizing assets once they had reached their highest and best use. These strategies include:

· the sale of land and water rights. There is demand for land and water for a variety of purposes including residential development, residential estate living, farming, ranching, and from industrial users;

· the development of water rights. Nevada Land has applied for additional water rights on land it owns and intends to improve. Where water rights are permitted, we anticipate that the value, productivity, and marketability of the related land will increase;

· the development of land in and around growing municipalities; and

· the management of mineral rights.

During the period from April 23, 1997 to December 31, 2005, Nevada Land received consideration of approximately $53.6 million from the sale and exchange of land, and the sale of water rights. This is comprised of $52.5 million from the sale and exchange of land, and $1.1 million from the sale of water rights related to land that was sold. Over this period, we divested approximately 615,000 acres of land at an average price of $87 per acre, which compares to our average basis of $37 in the acres disposed of. The average gross margin percentage on the disposal of land and water rights over this period is 57.2%. The average cost for the total land, water, and mineral assets acquired with Nevada Land was $35 per acre.

At December 31, 2005, Nevada Land owned approximately 740,000 acres of former railroad land. In addition to the former railroad property, Nevada Land has acquired:

· 17,558 acres of land in a land exchange with a private landowner. This land is contiguous with Native American tribal lands and is culturally sensitive; and

· Spring Valley Ranches, which comprises 8,626 acres of deeded land located approximately 40 miles east of Ely in White Pine County, Nevada. We believe that the land has potential for the development of vacation home sites. Nevada Land is working on an initial development plan, and will seek to either develop the land in conjunction with a developer, or to sell the project to a developer.

In recent years, Nevada Land has filed additional applications for approximately 69,040 acre-feet of water rights on the Company’s lands. The applications consist of:

· on the former railroad lands, approximately 4,791 acre-feet of water rights have been certificated and permitted, and applications are pending for approximately 42,840 acre-feet of water use for agricultural, municipal, and industrial use. Potentially, some of these water rights could be utilized to support the growth of municipalities in northern Nevada; and

· 26,200 acre-feet of water rights for the beneficial use of irrigating another 6,550 acres of Spring Valley Ranches.

4

Business Acquisitions and Financing

Our Business Acquisitions and Financing segment contains businesses, interests in businesses, and other parent company assets.

PICO seeks to acquire businesses which we identify as undervalued based on fundamental analysis -- that is, our assessment of what the business is worth, based on the private market value of its assets, earnings, and cash flow. We prefer long-established businesses, with a history of operating successfully through industry cycles, recessions and wars, in basic “old economy” industries. Typically, the business will be generating free cash flow and have a low level of debt, or, alternatively, strong interest coverage ratios or the ability to realize surplus assets. As well as being undervalued, the business must have special qualities such as unique assets, a potential catalyst for change, or be in an industry with attractive economics. We are also interested in acquiring businesses and interests in businesses where there is significant unrecognized value in land and other tangible assets.

We have acquired businesses and interests in businesses through the acquisition of private companies, and the purchase of shares in public companies, both directly through participation in financing transactions and through open market purchases.

When we acquire an interest in a public company, we are prepared to play an active role, for example encouraging companies to use proper financial criteria when making capital expenditure decisions, or by providing financing or strategic input.

At the time we acquire an interest in a public company, we believe that the intrinsic value of the underlying business significantly exceeds the current market capitalization. The gap between market price and intrinsic value may persist for several years, and the stock price may decline while our estimate of intrinsic value is stable or increasing. Sometimes the gap is not eliminated until another party attempts to acquire the company, as was the case with our holding in Australian Oil & Gas Corporation Limited (“AOG”).

Between 1998 and 2002, we became the largest shareholder in AOG, an international provider of drilling services. We identified AOG as undervalued as rig utilization, which is critical to earnings and cash flow for drilling companies, had begun to recover in the U.S., but was still near cyclical lows in the international markets where AOG operates. Historically, there has been a time lag between recovery in rig utilization in the U.S. and in international markets.

We acquired our interest, at an average cost of approximately A$1.35 per share, through open market purchases, the reinvestment of dividends, and assisting AOG with a financing in early 2002. AOG had secured two major new contracts with multinational oil companies, but needed to raise capital to purchase equipment necessary to perform the contracts. We provided AOG with a bridging loan facility, which was repaid with the proceeds of a rights offering which we partly underwrote. After AOG’s expanded activities and earnings base became apparent, Ensign (Australia) Holdings Pty. Limited, a subsidiary of a Canadian oil services company which was already a shareholder in AOG, made a takeover offer for AOG at A$1.70 per share. Ensign was overbid by a number of other companies, before lifting its bid several times and eventually acquiring AOG in July 2002 for A$2.70 per share. Immediately prior to Ensign’s first bid, AOG shares had been trading at A$1.40. We believe that our active participation as shareholders was instrumental in achieving this outcome.

PICO began to invest in European companies in 1996. We have been accumulating shares in a number of undervalued asset-rich companies, particularly in Switzerland, which we believe will benefit from pan-European consolidation. We also believe that conversion to international standards of accounting would make the underlying value of such companies more visible. Due to historical restrictions on foreign ownership of Swiss real estate, many Swiss companies are partially-owned by cantons and local governments. In some cases, the ownership structure may not survive future business challenges.

At December 31, 2005, the market value (and carrying value) of our European portfolio was $83.7 million. This includes our 22.5% interest in Jungfraubahn Holding AG (“Jungfraubahn”), which had a market value (and carrying value) of $42 million at the end of 2005.

Before a substantial acquisition is made, after significant research and analysis, we must be convinced that -- for an acceptable level of risk -- there is sufficient value to provide the opportunity for superior returns. We also have a small portfolio of alternative investments where intrinsic value is more speculative, in an attempt to capitalize on areas of potentially greater growth without incurring undue risk. At December 31, 2005, the total pre-tax carrying value of this portfolio was less than $100,000.

During the late 1990’s, the businesses we acquired were primarily private companies and foreign public companies. During this period, we perceived that acquisitions in these areas carried less downside risk and offered greater upside potential than the acquisition opportunities available among publicly traded companies in North America.

In the foreseeable future, our acquisition efforts are likely to be focused on domestic and foreign public companies, where we perceive greater scope for value creation than with private companies.

5

Insurance Operations in Run Off

Our Insurance Operations in Run Off segment is comprised of Physicians Insurance Company of Ohio and Citation Insurance Company.

Physicians Insurance Company of Ohio

Until 1995, Physicians and The Professionals Insurance Company (“Professionals”) wrote medical professional liability insurance, mostly in the state of Ohio.

Due to persistent uneconomic pricing by competitors, Physicians and Professionals were unable to generate adequate premium volume in 1994 and the early part of 1995. Faced with these market conditions and with the opportunity for higher returns from activities other than medical professional liability insurance, in 1995 we concluded that maximum value would be obtained by placing Physicians in “run off.” This means handling and resolving the claims arising from its historical business, but not writing new business. In addition, the future book of business -- essentially the opportunity to renew expiring policies -- was sold for $6 million in cash.

After Physicians went into “run off,” the company expanded its insurance operations by acquisition:

· in 1995, we purchased Sequoia Insurance Company, which primarily wrote commercial lines of insurance in California and Nevada. After the acquisition, we re-capitalized Sequoia, which provided the capital to support growth in the book of business; and

· in 1996, Physicians completed a reverse merger with the parent company of Citation Insurance Company. At that time, Citation wrote various lines of commercial property and casualty insurance and workers’ compensation insurance, primarily in California and Arizona. The operations of Sequoia and Citation were combined, and eventually the business previously written by Citation was transferred to Sequoia. At the end of 2000, Citation ceased writing business and went into “run off”. In 2003, we sold Sequoia Insurance Company. See “Discontinued Operations” later in Item 1.

Physicians and Citation obtain the funds to pay claims from the maturity of fixed-income securities, the sale of investments, and collections from reinsurance companies (that is, specialized insurance companies who share in our claims risk).

Typically, most of the revenues of an insurance company in “run off” come from investment income on funds held as part of the insurance business. During the “run off” process, as claims are paid, both the loss reserve liabilities and the corresponding fixed-income investment assets decrease. Since interest income in this segment will decline over time, we are attempting to minimize segment overhead expenses as much as possible. For example, we have reduced head count and office space, and merged Professionals into Physicians, which simplified administration and reduced costs.

Although we regularly evaluate the strategic alternatives, we currently believe that the most advantageous option is for Physicians’ own claims personnel to manage the “run off.” We believe that this will ensure a high standard of claims handling for our policyholders and, from the Company’s perspective, ensure the most careful examination of claims made to minimize loss and loss adjustment expense payments. If we were to reinsure Physicians’ entire book of business and outsource claims handling, this would involve giving up management of the corresponding investment assets.

Administering our own “run off” also provides us with the following opportunities:

· we retain management of the associated investment portfolios. After we resumed direct management of our insurance company portfolios in 2000, we believe that the return on our portfolio assets has been attractive in absolute terms, and very competitive in relative terms. The fixed-income securities and unaffiliated common stocks in the “run off” insurance company investment portfolios generated total returns upwards of 20% in 2003, 22% in 2004, and 29% in 2005. This included total returns for the stocks component in excess of 39% in 2003, 41% in 2004, and 44% in 2005. Since the claims reserves of the “run off” insurance companies effectively recognize the cost of paying and handling claims in future years, the investment return on the corresponding investment assets, less non-insurance expenses, accrues to PICO. We aim to maximize this source of income; and

· to participate in favorable development in our claims reserves if there is any, although this entails the corresponding risk that we could be exposed to unfavorable development.

As the “run off” progresses, at an indeterminate time in the future, Physicians’ claims reserves may diminish to the point where it is more cost-effective to outsource claims handling to a third party administrator.

At December 31, 2005, Physicians had $11.9 million in medical professional liability loss reserves, net of reinsurance.

Citation Insurance Company

In 1996, Physicians completed a reverse merger with Citation’s parent company. In the past, Citation wrote various lines of commercial property and casualty insurance and workers’ compensation insurance, primarily in California and Arizona.

After the merger was completed, we identified redundancy between Sequoia and Citation, and combined the operations of the two companies. After we assumed management of Citation, we tightened underwriting standards significantly and did not renew much of the business which Citation had written previously. Eventually all business in California and Nevada was transitioned to Sequoia, and at the end of 2000 Citation ceased writing business and went into “run off.”

Prior to the reverse merger, Citation had been a direct writer of workers’ compensation insurance. Since PICO did not wish to be exposed to that line of business, shortly after the merger was completed Citation reinsured 100% of its workers compensation business with a subsidiary, Citation National Insurance Company (“CNIC”), and sold CNIC to Fremont Indemnity Company (“Fremont”) in 1997. As part of the sale of CNIC, all assets and liabilities, including the assets which corresponded to the workers’ compensation reserves reinsured with CNIC, and all records, computer systems, policy files, and reinsurance arrangements were transferred to Fremont. Fremont merged CNIC into Fremont, and administered and paid all of the workers’ compensation claims which had been sold to it. From 1997 until the second quarter of 2003, Citation booked the losses reported by Fremont, and recorded an equal and offsetting reinsurance recoverable from Fremont, as an admitted reinsurer, for all losses and loss adjustment expenses. This resulted in no net impact on Citation’s reserves and financial statements, and no net impact on PICO’s consolidated financial statements.

On June 4, 2003, the California Department of Insurance obtained a conservation order over Fremont, and applied for a court order to liquidate Fremont. On July 2, 2003, the California Superior Court placed Fremont in liquidation. Since Fremont was no longer an admitted reinsurance company under the statutory basis of insurance accounting, Citation reversed the $7.5 million reinsurance recoverable from Fremont in both its statutory basis and GAAP basis financial statements in the three months ended June 30, 2003 and year ended December 31, 2003. Citation was unsuccessful in court action to recover deposits reported as held by Fremont for Citation’s insureds.

In September 2004, Citation entered into a third-party administration agreement with Cambridge Integrated Services, Inc. to administer the claims handling and claims payment for Citation’s workers’ compensation insurance run-off book of business.

At December 31, 2005, Citation had $18.9 million in loss reserves, net of reinsurance. Citation’s loss reserves consist of $6.4 million for property and casualty insurance, principally in the artisans/contractors line of business, and $12.5 million for workers’ compensation insurance.

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HyperFeed Technologies, Inc.

HyperFeed is a leading provider of enterprise-wide ticker plant and transaction technology software and services enabling financial institutions to process and use high performance exchange data with Smart Order Routing and other applications.

HyperFeed is a publicly traded company (OTCBB: HYPR), based in Chicago, Illinois, and became a subsidiary of PICO Holdings in 2003, when we acquired direct ownership of a majority voting interest. HyperFeed became a separate reporting segment from May 15, 2003. Previously, HyperFeed was part of the Business Acquisitions & Financing segment.

PICO first invested in HyperFeed in 1995 through the purchase of common stock. We invested further capital as debt, which was later converted to equity, and received warrants for providing financing:

· in 2000, 2001, and 2002, we increased our holding through open market purchases, the conversion of preferred stock, and the exercise of warrants;

· on May 15, 2003, PICO purchased 443,622.9 HyperFeed common shares in a private placement for $1.2 million; and

· during 2004 and 2005, PICO loaned money to HyperFeed under a secured convertible promissory note agreement. On November 1, 2005, PICO elected to convert the $6.1 million in principal and interest outstanding on the note into 4,546,479 newly-issued common shares of HyperFeed, which represents a conversion price of $1.36 per share.

PICO now owns 6,117,790 HyperFeed common shares, representing a voting ownership of approximately 80.1%.

During 2002 and 2003, HyperFeed restructured its operations, culminating in the sale of its consolidated market data feed customers to Interactive Data Corporation for $8.5 million on October 31, 2003.

Discontinued Operations

Sequoia Insurance Company

On March 31, 2003, we closed on the sale of Sequoia. The gross sale proceeds were approximately $43.1 million, consisting of $25.2 million in cash and a dividend of $17.9 million. The dividend included the common stocks previously held in Sequoia’s investment portfolio, primarily consisted of a number of holdings in small-capitalization value stocks, which we believed were still undervalued based on the private market value of the underlying assets, earnings, and cash flow. These common stocks were added to the investment portfolio of Physicians, which was Sequoia’s direct parent company.

Physicians acquired Sequoia in 1995. Sequoia’s core business was property and casualty insurance in California and Nevada, focusing on the niche markets of commercial insurance for small to medium-sized businesses and farm insurance. Sequoia also wrote selected lines of personal insurance in California. During the period of our ownership, Sequoia’s management applied a selective approach to underwriting, aiming to earn a profit from underwriting (that is, a profit before investment income), and implemented numerous initiatives to improve efficiency and reduce expenses. As a result, Sequoia consistently had loss ratios and combined ratios better than the industry averages. During 2000, 2001, and 2002, Sequoia generated increased average premiums per commercial policy, and significant growth in its book of business, with combined ratios of 106.3%, 105.4%, and 101.6%, in those respective years.

From April 1, 2000, when we resumed direct management of Sequoia’s investment portfolio, the company’s portfolio of unaffiliated stocks, bonds, and cash equivalents earned returns (that is, interest and dividend income plus realized and unrealized gains, before fees and taxes) of approximately 6.1% in the last nine months of 2000, 10.4% in 2001, 12.6% in 2002, and 2.5% in the first three months of 2003.

Despite these factors, Sequoia continued to generate a return on capital lower than our expectation, and we concluded that value would be maximized by sale of the company, particularly given the increasingly restrictive regulatory & rating environment, and the highly competitive marketplace.

HyperFeed Technologies, Inc.

During 2003, HyperFeed completed the sale of two businesses, which are now recorded as discontinued operations:

· its retail trading business, PCQuote.com, which was sold for $370,000 in June 2003; and

· its consolidated market data feed customers, which were sold to Interactive Data Corporation, for $8.5 million. HyperFeed received $7 million in cash on closing, $500,000 in 2004, and $545,000 in 2005. HyperFeed could realize an additional $330,000 if, and when, milestones are met.

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Employees

At December 31, 2005, PICO had 82 employees. A total of 7 employees were engaged in land and related mineral rights and water rights operations; 5 in water rights and storage operations; 3 in property and casualty insurance operations; 2 in medical professional liability operations; and 17 in holding company activities. HyperFeed Technologies, Inc. has 48 employees.

Executive Officers

The executive officers of PICO are as follows:

Name	Age	Position
Ronald Langley	61	Chairman of the Board, Director
John R. Hart	46	President, Chief Executive Officer and Director
Richard H. Sharpe	50	Chief Operating Officer
James F. Mosier	58	General Counsel and Secretary
Maxim C. W. Webb	44	Chief Financial Officer and Treasurer
W. Raymond Webb	44	Vice President, Investments
John T. Perri	36	Vice President, Controller

Except for Maxim C. W. Webb, W. Raymond Webb and John T. Perri, each executive officer of PICO was an executive officer of Physicians prior to the 1996 merger between Physicians Insurance Company of Ohio and Citation Insurance Group, the predecessors to PICO Holdings, Inc. Each became an officer of PICO in November 1996 as a result of the merger. Maxim C. W. Webb was an officer of Global Equity Corporation and became an officer of PICO upon the effective date of the PICO/Global Equity Corporation Combination in December 1998. W. Raymond Webb and John T. Perri were elected as officers of PICO in April 2003.

Mr. Langley has been Chairman of the Board of PICO since November 1996 and of Physicians since July 1995. Mr. Langley has been a Director of PICO since November 1996 and a Director of Physicians since 1993. Mr. Langley has been a Director of HyperFeed Technologies, Inc., formerly, PC Quote, Inc., (“HyperFeed”) since 1995 and a Director of Jungfraubahn Holding AG since 2000.

Mr. Hart has been President and Chief Executive Officer of PICO since November 1996 and of Physicians since July 1995. Mr. Hart has been a Director of PICO since November 1996 and a Director of Physicians since 1993. Mr. Hart has been a Director of HyperFeed since 1997.

Mr. Sharpe has served as Chief Operating Officer of PICO since November 1996 and in various executive capacities since joining Physicians in 1977.

Mr. Mosier has served as General Counsel and Secretary of PICO since November 1996 and of Physicians since October 1984 and in various other executive capacities since joining Physicians in 1981.

Mr. Maxim Webb has been Chief Financial Officer and Treasurer of PICO since May 14, 2001. Mr. Webb served in various capacities with the Global Equity Corporation group of companies since 1993, including Vice President, Investments of Forbes Ceylon Limited from 1994 through 1996. Mr. Webb became an officer of Global Equity Corporation in November 1997 and Vice President, Investments of PICO on November 20, 1998.

Mr. Raymond Webb has been with the Company since August 1999 as Chief Investment Analyst and became Vice President, Investments in April 2003.

Mr. Perri has been Vice President, Controller of PICO since April 2003 and served in various capacities since joining the Company in 1998, including Financial Reporting Manager and Corporate Controller.

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ITEM 1A. RISK FACTORS

In addition to the risks and uncertainties discussed in certain sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and elsewhere in this document, the following risk factors should be considered carefully in evaluating PICO and our business. The statements contained in this Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Exchange Act, including statements regarding our expectations, beliefs, intentions, plans or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.

If  we do not successfully locate, select and manage investments and acquisitions, or if our investments or acquisitions otherwise fail or decline in value, our financial condition could suffer.

We invest in businesses that we believe are undervalued or that will benefit from additional capital, restructuring of operations or improved competitiveness through operational efficiencies. If a business in which we invest fails or its market value declines, we could experience a material adverse effect on our business, financial condition, the results of operations and cash flows. Additionally, our failure to successfully locate, select and manage investment and acquisition opportunities could have a material adverse effect on our business, financial condition, the results of operations and cash flows. Such business failures, declines in market values, and/or failure to successfully locate, select and manage investments and acquisitions could result in an inferior return on shareholders’ equity. We could also lose part or all of our capital in these businesses and experience reductions in our net income, cash flows, assets and shareholders’ equity.

Failure to successfully manage newly acquired companies could adversely affect our business.

Our management of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, and finance. These efforts result in additional expenses and involve significant amounts of management’s time. To successfully manage newly acquired companies, we must, among other things, continue to attract and retain key management and other personnel. The diversion of the attention of management from the day-to-day operations, or difficulties encountered in the integration process, could have a material adverse effect on our business, financial condition, and the results of operations and cash flows. If we fail to integrate acquired businesses into our operations successfully, we may be unable to achieve our strategic goals and the value of your investment could suffer.

Our acquisitions may not achieve expected rates of return, and we may not realize the value of the funds we invest.

We will continue to make selective acquisitions, and endeavor to enhance and realize additional value to these acquired companies through our influence and control. You will be relying on the experience and judgment of management to locate, select and develop new acquisition and investment opportunities. Any acquisition could result in the use of a significant portion of our available cash, significant dilution to you, and significant acquisition-related charges. Acquisitions may also result in the assumption of liabilities, including liabilities that are unknown or not fully known at the time of the acquisition, which could have a material adverse effect on us.

We do not know of any reliable statistical data that would enable us to predict the probability of success or failure of our acquisitions and investments, or to predict the availability of suitable investments at the time we have available cash. We may not be able to find sufficient opportunities to make this business strategy successful. Additionally, when any of our acquisitions do not achieve acceptable rates of return or we do not realize the value of the funds invested, we may write-down the value of such acquisitions or sell the acquired businesses at a loss. We have made a number of acquisitions in the past that have been highly successful, and we have also made acquisitions that have lost either part or all of the capital invested. Further details of realized and unrealized gains and losses can be found in the Notes 1, 2, 3 and 4 to the accompanying consolidated financial statements and in Item 7A in this Form 10-K. Our ability to achieve an acceptable rate of return on any particular investment is subject to a number of factors which are beyond our control, including increased competition and loss of market share, quality of management, cyclical or uneven financial results, technological obsolescence, foreign currency risks and regulatory delays.

We may make investments and acquisitions that may yield low or negative returns for an extended period of time, which could temporarily or permanently depress our return on shareholders’ equity.

We generally make investments and acquisitions that tend to be long term in nature. We acquire businesses that we believe to be undervalued or may benefit from additional capital, restructuring of operations or management or improved competitiveness through operational efficiencies with our existing operations. We may not be able to develop acceptable revenue streams and investment returns. We may lose part or all of our investment in these assets. The negative impacts on cash flows, income, assets and shareholders’ equity may be temporary or permanent. We make acquisitions for the purpose of enhancing and realizing additional value by means of appropriate levels of shareholder influence and control. This may involve restructuring of the financing or management of the entities in which we invest and initiating or facilitating mergers and acquisitions. These processes can consume considerable amounts of time and resources. Consequently, costs incurred as a result of these investments and acquisitions may exceed their revenues and/or increases in their values for an extended period of time until we are able to develop the potential of these investments and acquisitions and increase the revenues, profits and/or values of these investments. Ultimately, however, we may not be able to develop the potential of these assets that we originally anticipated.

We may not be able to sell our investments when it is advantageous to do so and we may have to sell these investments at a discount.

No active market exists for some of the companies in which we invest. We acquire stakes in private companies that are not as liquid as investments in public companies. Additionally, some of our acquisitions may be in restricted or unregistered stock of U.S. public companies. Moreover, even our investments for which there is an established market are subject to dramatic fluctuations in their market price. These illiquidity factors may affect our ability to divest some of our acquisitions and could affect the value that we receive for the sale of such investments.

Our acquisitions of and investments in foreign companies subject us to additional market and liquidity risks which could affect the value of our stock.

We have acquired, and may continue to acquire, shares of stock in foreign public companies. Typically, these foreign companies are not registered with the SEC and regulation of these companies is under the jurisdiction of the relevant foreign country. The respective foreign regulatory regime may limit our ability to obtain timely and comprehensive financial information for the foreign companies in which we have invested. In addition, if a foreign company in which we invest were to take actions which could be deleterious to its shareholders, foreign legal systems may make it difficult or time-consuming for us to challenge such actions. These factors may affect our ability to acquire controlling stakes, or to dispose of our foreign investments, or to realize the full fair value of our foreign investments. In addition, investments in foreign countries may give rise to complex cross-border tax issues. We aim to manage our tax affairs efficiently, but given the complexity of dealing with domestic and foreign tax jurisdictions, we may have to pay tax in both the U.S. and in foreign countries, and we may be unable to offset any U.S. tax liabilities with foreign tax credits. If we are unable to manage our foreign tax issues efficiently, our financial condition and the results of operations and cash flows could be adversely affected.

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Variances in physical availability of water, along with environmental and legal restrictions and legal impediments, could impact profitability from our water rights.

The water rights held by us and the transferability of these rights to other uses and places of use are governed by the laws concerning water rights in the states of Arizona, Colorado and Nevada. The volumes of water actually derived from the water rights applications or permitted rights may vary considerably based upon physical availability and may be further limited by applicable legal restrictions. As a result, the amounts of acre-feet anticipated from the water rights applications or permitted rights do not in every case represent a reliable, firm annual yield of water, but in some cases describe the face amount of the water right claims or management’s best estimate of such entitlement. Legal impediments may exist to the sale or transfer of some of these water rights, which in turn may affect their commercial value. If we were unable to transfer or sell our water rights, we may lose some or all of our value in our water rights acquisitions.

Water we lease or sell may be subject to regulation as to quality by the United States Environmental Protection Agency acting pursuant to the federal Safe Drinking Water Act. While environmental regulations do not directly affect us, the regulations regarding the quality of water distributed affects our intended customers and may, therefore, depending on the quality of our water, impact the price and terms upon which we may in the future sell our water rights.

Our future water revenues are uncertain and depend on a number of factors, which may make our revenue streams and profitability volatile.

We engage in various water rights acquisitions, management, development, and sale and lease activities. Accordingly, our long-term future profitability will primarily be dependent on our ability to develop and sell or lease water and water rights, and will be affected by various factors, including timing of acquisitions, transportation arrangements, and changing technology. To the extent we possess junior or conditional water rights, such rights may be subordinated to superior water right holders in periods of low flow or drought.

In addition to the risk of delays associated with receiving all necessary regulatory approvals and permits, we may also encounter unforeseen technical difficulties which could result in construction delays and cost increases with respect to our water resource and water storage development projects.

Our profitability is significantly affected by changes in the market price of water. In the future, water prices may fluctuate widely as demand is affected by climatic, demographic and technological factors.

Our water activities may become concentrated in a limited number of assets, making our growth and profitability vulnerable to fluctuations in local economies and governmental regulations.

In the future, we anticipate that a significant amount of Vidler’s revenues and asset value will come from a limited number of assets, including our water rights in Nevada and Arizona and the Vidler Arizona Recharge Facility. Although we continue to acquire and develop additional water assets, in the foreseeable future we anticipate that our revenues will still be derived from a limited number of assets, primarily located in Arizona and Nevada.

Our water sales may meet with political opposition in certain locations, thereby limiting our growth in these areas.

The transfer of water rights from one use to another may affect the economic base of a community and will, in some instances, be met with local opposition. Moreover, certain of the end users of our water rights, namely municipalities, regulate the use of water in order to manage growth. If we are unable to effectively transfer water rights, our liquidity will suffer and our revenues would decline.

The market values of our real estate and water assets are linked to external growth factors.

The real estate and water assets we hold have market values that are significantly affected by the growth in population and the general state of the local economies where our real estate and water assets are located, primarily in the states of Arizona and Nevada.

In certain circumstances, we finance sales of real estate and water assets, and we secure such financing through deeds of trust on the property, which are only released once the financing has been fully paid off.

Purchasers of our real estate and water assets may default on their financing obligations and the market value of the secured property may be affected by the factors noted above. Accordingly, such defaults and declines in market values may have an adverse effect on our business, financial condition, and the results of operations and cash flows.

If we underestimate the amount of insurance claims, our financial condition could be materially misstated and our financial condition could suffer.

Our insurance subsidiaries may not have established reserves that are adequate to meet the ultimate cost of losses arising from claims. It has been, and will continue to be, necessary for our insurance subsidiaries to review and make appropriate adjustments to reserves for claims and expenses for settling claims. Inadequate reserves could have a material adverse effect on our business, financial condition, and the results of operations and cash flows. Inadequate reserves could cause our financial condition to fluctuate from period to period and cause our financial condition to appear to be better than it actually is for periods in which insurance claims reserves are understated. In subsequent periods when we discover the underestimation and pay the additional claims, our cash needs will be greater than expected and our financial results of operations for that period will be worse than they would have been had our reserves been accurately estimated originally.

The inherent uncertainties in estimating loss reserves are greater for some insurance products than for others, and are dependent on various factors including:

· the length of time in reporting claims;

· the diversity of historical losses among claims;

· the amount of historical information available during the estimation process;

· the degree of impact that changing regulations and legal precedents may have on open claims; and

· the consistency of reinsurance programs over time.

Because medical malpractice liability, commercial property and casualty, and workers’ compensation claims may not be completely paid off for several years, estimating reserves for these types of claims can be more uncertain than estimating reserves for other types of insurance. As a result, precise reserve estimates cannot be made for several years following the year for which reserves were initially established.

During the past several years, the levels of the reserves for our insurance subsidiaries have been very volatile. We have had to significantly increase and decrease these reserves in the past several years.

Furthermore, we have reinsurance agreements on all of our insurance books of business with reinsurance companies. We base the level of reinsurance purchased on our direct reserves on our assessment of the overall direct underwriting risk.

We attempt to ensure that we have acceptable net risk, but it is possible that we may underestimate the amount of reinsurance required to achieve the desired level of net claims risk.

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In addition, while we carefully review the credit worthiness of the companies we have reinsured part, or all, of our initial direct underwriting risk with, our reinsurers could default on amounts owed to us for their portion of the direct insurance claim. Our insurance subsidiaries, as direct writers of lines of insurance, have ultimate responsibility for the payment of claims, and any defaults by reinsurers may result in our established reserves not being adequate to meet the ultimate cost of losses arising from claims.

Significant increases in the reserves may be necessary in the future, and the level of reserves for our insurance subsidiaries may be volatile in the future. These increases or volatility may have an adverse effect on our business, financial condition, and the results of operations and cash flows.

State regulators could require changes to our capitalization and/or to the operations of our insurance subsidiaries, and/or place them into rehabilitation or liquidation.

Beginning in 1994, Physicians and Citation became subject to the provisions of the Risk-Based Capital for Insurers Model Act which has been adopted by the National Association of Insurance Commissioners for the purpose of helping regulators identify insurers that may be in financial difficulty. The Model Act contains a formula which takes into account asset risk, credit risk, underwriting risk and all other relevant risks. Under this formula, each insurer is required to report to regulators using formulas which measure the quality of its capital and the relationship of its modified capital base to the level of risk assumed in specific aspects of its operations. The formula does not address all of the risks associated with the operations of an insurer. The formula is intended to provide a minimum threshold measure of capital adequacy by individual insurance company and does not purport to compute a target level of capital. Companies which fall below the threshold will be placed into one of four categories: Company Action Level, where the insurer must submit a plan of corrective action; Regulatory Action Level, where the insurer must submit such a plan of corrective action, the regulator is required to perform such examination or analysis the Superintendent of Insurance considers necessary and the regulator must issue a corrective order; Authorized Control Level, which includes the above actions and may include rehabilitation or liquidation; and Mandatory Control Level, where the regulator must rehabilitate or liquidate the insurer. All companies’ risk-based capital results as of December 31, 2005 exceed the Company Action Level.

If we are required to register as an investment company, then we will be subject to a significant regulatory burden.

At all times we intend to conduct our business so as to avoid being regulated as an investment company under the Investment Company Act of 1940. However, if we were required to register as an investment company, our ability to use debt would be substantially reduced, and we would be subject to significant additional disclosure obligations and restrictions on our operational activities. Because of the additional requirements imposed on an investment company with regard to the distribution of earnings, operational activities and the use of debt, in addition to increased expenditures due to additional reporting responsibilities, our cash available for investments would be reduced. The additional expenses would reduce income. These factors would adversely affect our business, financial condition, and the results of operations and cash flows.

We are directly impacted by international affairs, which directly exposes us to the adverse effects of any foreign economic or governmental instability.

As a result of global investment diversification, our business, financial condition, the results of operations and cash flows may be adversely affected by:

· exposure to fluctuations in exchange rates;

· the imposition of governmental controls;

· the need to comply with a wide variety of foreign and U.S. export laws;

· political and economic instability;

· trade restrictions;

· changes in tariffs and taxes;

· volatile interest rates;

· changes in certain commodity prices;

· exchange controls which may limit our ability to withdraw money;

· the greater difficulty of administering business overseas; and

· general economic conditions outside the United States.

Changes in any or all of these factors could result in reduced market values of investments, loss of assets, additional expenses, reduced investment income, reductions in shareholders’ equity due to foreign currency fluctuations and a reduction in our global diversification.

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Because our operations are diverse, analysts and investors maynot be able to evaluate us adequately, which may negatively influence our share price.

PICO is a diversified holding company with operations in real estate and related water rights and mineral rights; water resource development and water storage; insurance operations in run-off; and business acquisitions and financing. Each of these areas is unique, complex in nature, and difficult to understand. In particular, the water resource business is a developing industry within the western United States with very little historical data, very few experts and a limited following of analysts. Because we are complex, analysts and investors may not be able to adequately evaluate our operations and PICO in total. This could cause them to make inaccurate evaluations of our stock, or to overlook PICO, in general. These factors could have a negative impact on the trading volume and price of our stock.

Fluctuations in the market price of our common stock may affect your ability to sell your shares.

The trading price of our common stock has historically been, and is expected to be, subject to fluctuations. The market price of the common stock may be significantly impacted by:

· quarterly variations in financial performance and condition;

· shortfalls in revenue or earnings from levels forecast by securities analysts;

· changes in estimates by such analysts;

· product introductions;

· our competitors’ announcements of extraordinary events such as acquisitions;

· litigation; and

· general economic conditions.

Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results of operations could fluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include the inclusion or exclusion of operating earnings from newly acquired or sold operations. At December 31, 2005, the closing price of our common stock on the NASDAQ National Market was $32.26 per share, compared to $15.67 at December 31, 2003. On a quarterly basis between these two dates, closing prices have ranged from a high of $35.14 to a low of $15.67.

Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our common stock.

We may not be able to retain key management personnel we need to succeed, which could adversely affect our ability to make sound investment decisions.

We rely on the services of several key executive officers. If they depart, it could have a significant adverse effect. Messrs. Langley and Hart, our Chairman and CEO, respectively, are key to the implementation of our strategic focus, and our ability to successfully develop our current strategy is dependent upon our ability to retain the services of Messrs. Langley and Hart.

We use estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America.

The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of financial statements and the reported amount of revenues and expenses during the reporting period. We regularly evaluate our estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenues and expenses that are not readily apparent from other sources. The carrying values of assets and liabilities and the reported amount of revenues and expenses may differ by using different assumptions. In addition, in future periods, in order to incorporate all known experience at that time, we may have to revise assumptions previously made which may change the value of previously reported assets and liabilities. This potential subsequent change in value may have a material adverse effect on our business, financial condition, and the results of operations and cash flows.

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Repurchases of our common stock could have a negative effect on our cash flows and our stock price.

Our Board of Directors has authorized the repurchase of up to $10 million of our common stock. The stock purchases may be made from time to time at prevailing prices though open market, or negotiated transactions, depending on market conditions, and will be funded from available cash resources of the company. Such a repurchase program may have a negative impact on our cash flows, and could result in market pressure to sell our common stock.

Future changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards could have a significant effect on our reported results and may even affect our reporting transactions completed before the change is effective. New accounting pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results of the way we conduct our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, SEC regulations and NASDAQ Stock Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of substantial financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. Further, our board members, chief executive officer, and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business. If our efforts to comply with new or changes laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation could be harmed.

Absence of dividends could reduce our attractiveness to investors.

Some investors favor companies that pay dividends, particularly in market downturns. We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, we do not currently anticipate paying cash dividends on our common stock.

We may need additional capital in the future to fund the growth of our business, and financing may not be available.

We currently anticipate that our available capital resources and operating income will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months. However, we cannot assure you that such resources will be sufficient to fund the long-term growth of our business. We may raise additional funds through public or private debt or equity financings if such financings become available on favorable terms, but such financing may dilute our stockholders. We cannot assure you that any additional financing we need will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of unanticipated opportunities or otherwise respond to competitive pressures. In any such case, our business, operating results or financial condition could be materially adversely affected.

Litigation may harm our business or otherwise distract our management.

Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management. For example, lawsuits by employees, stockholders or customers could be very costly and substantially disrupt our business. Disputes from time to time with such companies or individuals are not uncommon, and we cannot assure that that we will always be able to resolve such disputes out of court or on terms favorable to us.

THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS AND FINANCIAL CONDITION AND COULD MAKE COMPARISON OF HISTORIC OPERATING RESULTS AND CASH FLOWS AND BALANCES DIFFICULT OR NOT MEANINGFUL.

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ITEM 2. PROPERTIES

PICO leases approximately 6,354 square feet in La Jolla, California for its principal executive offices.

Physicians leases approximately 1,892 square feet of office space in Columbus, Ohio for its headquarters. Citation leases office space for a claims office in Orange County, California. Vidler and Nevada Land lease office space in Carson City, Nevada. HyperFeed leases 15,000 square feet of office space in Chicago, Illinois, approximately 11,000 square feet of office space at two sites in Aurora, Illinois, approximately 3,000 square feet of office space in New York City, approximately 1,300 square feet of office space in San Francisco, California, and approximately 50 square feet of office space in London, England. Vidler and Nevada Land hold significant investments in land, water rights and mineral rights in the southwestern United States. We continually evaluate our current and future space capacity in relation to our business needs. We believe that our existing facilities are suitable and adequate to meet our current business requirements. See “Item 1-Business-Introduction.”

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various litigation that arises in the ordinary course of its business. Members of PICO’s insurance group are frequently a party in claims proceedings and actions regarding insurance coverage, all of which PICO considers routine and incidental to its business. Based upon information presently available, management is of the opinion that such litigation will not have a material adverse effect on the consolidated financial position, the results of operations or cash flows of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On December 8, 2005, a Special Meeting of the Company’s Shareholders was held. The only matter presented to the Company’s shareholders was the approval of the PICO Holdings, Inc. Long-Term Incentive Plan. The Proxy Statement for the Special Meeting of shareholders was dated November 8, 2005, and was filed with the SEC on November 8, 2005. The vote was 6,789,752 votes in favor, and 3,326,625 against.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of PICO is traded on the NASDAQ National Market under the symbol “PICO.” The following table sets out the high and low daily closing sale prices as reported on the NASDAQ National Market. These reported prices reflect inter-dealer prices without adjustments for retail markups, markdowns or commissions.

	2005				2004
	High		Low		High		Low
1st Quarter	$	27.00	$	20.93	$	16.60	$	15.31
2nd Quarter	$	29.76	$	23.94	$	19.04	$	15.38
3rd Quarter	$	35.14	$	28.41	$	19.04	$	17.12
4th Quarter	$	35.35	$	32.12	$	22.00	$	18.57

On March 8, 2006, the closing sale price of PICO’s common stock was $33.06 and there were approximately 642 holders of record.

PICO has not declared or paid any dividends in the last two years, and does not expect to pay any dividends in the foreseeable future.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total number of shares purchased	(b) Average Price Paid per Share	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
10/1/05 - 10/31/05	-	-
11/1/05 - 11/30/05	-	-
12/1/05 - 12/31/05	-	-

(1) In October 2002, PICO’s Board of Directors authorized the repurchase of up to $10 million of PICO common stock. The stock purchases may be made from time to time at prevailing prices through open market or negotiated transactions, depending on market conditions, and will be funded from available cash. As of December 31, 2005, no stock had been repurchased under this authorization.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents the Company’s selected consolidated financial data. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K and the consolidated financial statements and the related notes thereto included elsewhere in this document.

	Year Ended December 31,
	2005		2004			2003			2002			2001
OPERATING RESULTS	(In thousands, except share data)
Revenues:
Premium income earned (charged)									$	(42	)	$	980
Net investment income (loss)	$	15,918	$	9,065		$	8,116			9,595			1,161
Sale of real estate and water assets (Note 1)		124,984		10,879			19,751			15,232			17,106
Other income		5,481		8,183			5,011			4,489			4,313
Total revenues	$	146,383	$	28,127		$	32,878		$	29,274		$	23,560
Income (loss) from continuing operations	$	16,165	$	(10,636	)	$	(13,622	)	$	1,110		$	3,778
Income from discontinued operations, net		37		78			10,384			2,834			2,317
Cumulative effect of change in accounting principle, net										1,985			(981	)
Net income (loss)	$	16,202	$	(10,558	)	$	(3,238	)	$	5,929		$	5,114
PER COMMON SHARE BASIC AND DILUTED:
Income (loss) from continuing operations	$	1.25	$	(0.86	)	$	(1.10	)	$	0.09		$	0.30
Income from discontinued operations				0.01			0.84			0.23			0.19
Cumulative effect of change in accounting principle										0.16			(0.08	)
Net income (loss)	$	1.25	$	(0.85	)	$	(0.26	)	$	0.48		$	0.41
Weighted Average Shares Outstanding		12,959,029		12,368,068			12,375,933			12,375,466			12,384,682

Note 1: See Vidler Water Company in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

	Year Ended December 31,
	2005			2004			2003			2002		2001
FINANCIAL CONDITION	(In thousands, except per share data)
Assets (2)	$	441,773		$	354,624		$	330,897		$	265,587	$	270,742
Unpaid losses and loss adjustment expenses	$	46,647		$	55,944		$	60,864		$	52,703	$	61,538
Bank and other borrowings (2)	$	12,335		$	18,021		$	15,377		$	14,636	$	14,596
Discontinued operations, net (liabilities) assets	$	(476	)	$	(752	)	$	(1,351	)	$	37,332	$	33,266
Total liabilities and minority interest (2)	$	140,421		$	113,942		$	99,566		$	81,888	$	96,110
Shareholders' equity	$	300,875		$	239,929		$	229,160		$	221,032	$	207,899
Book value per share	$	22.67		$	19.40		$	18.52		$	17.86	$	16.81

Note: Book value per share is computed by dividing shareholders’ equity by the net of total shares issued less shares held as treasury shares.

(2) Excludes balances classified as discontinued operations.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The consolidated financial statements and other portions of this Annual Report on Form 10-K for the fiscal year ended December 31, 2005, including Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” reflect the effects of:

(1) presenting Sequoia Insurance Company and two businesses sold by HyperFeed Technologies, Inc. as discontinued operations. See Note 2 of Notes to Consolidated Financial Statements, “Discontinued Operations”; and

(2) presenting HyperFeed Technologies, Inc. as a separate segment beginning May 15, 2003. See Note 4 of Notes To Consolidated Financial Statements, “Consolidation of HyperFeed Technologies, Inc.”

COMPANY SUMMARY, RECENT DEVELOPMENTS, AND FUTURE OUTLOOK

WATER RESOURCES AND WATER STORAGE OPERATIONS - VIDLER WATER COMPANY, INC.

BACKGROUND

We believe that continuing trends in Nevada and Arizona indicate strong future demand for Vidler’s water rights and water storage assets.

Based on figures published by the Nevada State Demographer, in the five years from 2000 to 2005, the population of Clark County, Nevada, which includes metropolitan Las Vegas, increased 28.8% to almost 1.8 million residents. Around 70,000 people are moving to the area annually. Currently Las Vegas takes most of its water supply from Lake Mead, which is primarily fed by water flows from the Colorado River. Due to the continued growth in demand for water and a prolonged drought, the level of Lake Mead is close to 50 year lows. Accordingly, Las Vegas is aggressively seeking to conserve water (e.g., rules have been introduced restricting water use in new homes) and to diversify its sources of water supply. At the same time, the increasing cost of housing in Las Vegas is leading to more rapid growth in outlying areas within commuting distance.

Over time, we believe that these factors will lead to demand for water in parts of southern Nevada where Vidler owns or has an interest in water rights, including southern Lincoln County, Sandy Valley, and Moapa Valley (Muddy River) in Clark County. If growth management initiatives are introduced in Las Vegas, this will lead to even more rapid growth in the areas surrounding metropolitan Las Vegas.

Due to the low level of Lake Mead, the states of Arizona, California, and Nevada may be required to take no more than their current allotments of water from the Colorado River. This is likely to increase demand for the net recharge credits owned by Vidler, representing water which Vidler has in storage in its Arizona Recharge Facility. We also anticipate demand from developers and other entities to store water for various purposes, including back-up water supply for dry years by developers, and assured water supply for new development projects.

The Central Arizona Water Conservation District (“CAWCD”) is a three-county water district servicing the most populous parts of the state, including Maricopa County. A 2003 CAWCD study predicted that CAWCD will be able to use 9 million acre-feet of water from Arizona’s Colorado River supplies in the years from 2004 through 2050, assuming average annual precipitation. The CAWCD also estimated that 8.6 million acre-feet will be required over the same period by the Central Arizona Groundwater Replenishment District, the authority responsible for protecting groundwater supplies in the CAWCD three-county service area. The CAWCD also estimated demand of 3.5 million acre-feet from the Arizona Water Bank for various purposes (e.g., use in Nevada), and a further 4.3 million acre-feet to replenish groundwater reserves. Based on these forecasts, Arizona appears to be faced with a shortfall of 7.4 million acre-feet of water in the period through 2050, which will require CAWCD to purchase additional supplies.

The Southern Nevada Water Authority has released an updated 2006 water resource plan (which can be viewed at www.snwa.com) to develop and deliver water supplies to meet regional growth demands. This plan consists of (1) the storage of water, including up to 1.25 million acre-feet in Arizona, combined with (2) the development of further water resources in Nevada. We believe that Vidler’s assets are favorably positioned to contribute to the water resource solutions required in Nevada.

WATER RESOURCES

Arizona

During 2005, Vidler closed on the sale of its holdings of approximately 42,000 acre-feet of groundwater rights and the related land in the Harquahala ValleyIrrigation Districtto a real estate developer. The sales price of $94.4 million represented approximately $2,200 per acre-foot of transferable Harquahala Valley Irrigation District groundwater. This transaction added approximately $55.5 million to pre-tax income in 2005.

Any new residential development in Arizona must obtain a permit from the Arizona Department of Water Resources certifying a “designated assured water supply” sufficient to sustain the development for at least 100 years. Harquahala Valley ground water meets the designation of assured water supply, but in order to be used by municipalities in the heavily populated parts of Arizona, the water must be transported from the Harquahala Valley to the end users. Arizona state legislation allows Harquahala Valley ground water to be made available as assured water supply to cities and communities in Arizona through agreements with the Central Arizona Groundwater Replenishment District.

At December 31, 2005, Vidler owned approximately 2,880 acre-feet of ground water and the related land in the Harquahala Valley. The Harquahala Valley is located in La Paz County and Maricopa County, approximately 75 miles northwest of metropolitan Phoenix, Arizona. According to census data, the population of Maricopa County increased 15.9% from 2000 to 2004, with the addition of more than 120,000 people per year. Vidler anticipates that as the boundaries of the greater Phoenix metropolitan area push out, this is likely to lead to demand for water to support growth within the Harquahala Valley itself. The remaining water can also be transferred for municipal use outside of the Harquahala Valley.

Nevada

Vidler has acquired water rights in northern Nevada through the purchase of ranch properties, filing applications for new water rights, and entering into partnering arrangements with parties owning water rights, which they wish to maximize the value of.

Nevada is the state experiencing the most rapid population growth and new home construction in the United States. The population is concentrated in southern Nevada, which includes the Las Vegas metropolitan area.

1. Lincoln County

Vidler is working jointly with the Lincoln County Water District to locate and develop water resources in Lincoln County, Nevada. Lincoln County Water District and Vidler (“Lincoln/Vidler”) have filed applications for more than 100,000 acre-feet of water rights with the intention of supplying water for residential, commercial, and industrial use, as contemplated by the County’s approved master plan. We believe that this is the only known new source of water for Lincoln County. Vidler anticipates that up to 40,000 acre-feet of water rights will ultimately be permitted from these applications, and put to use in Lincoln County and northern Clark County.

Under the Lincoln County Land Act, more than 13,300 acres of federal land in southern Lincoln County near the fast growing City of Mesquite was offered for sale in February 2005. According to press reports, the eight parcels offered sold to various developers for approximately $47.5 million. The land was sold without environmental approvals, water, and city services, which will be required before development can proceed. Additional water supply will be required in Lincoln County if this land is to be developed.

Tule Desert Groundwater Basin

In 1998, Lincoln/Vidler filed for 14,000 acre-feet of water rights for industrial use from the Tule Desert Groundwater Basin. In November 2002, the Nevada State Engineer granted an application for 2,100 acre-feet of water rights, and ruled that another 7,244 acre-feet could be granted, but would be held in abeyance while Lincoln/Vidler pursues additional studies:

· in October 2005, Lincoln/Vidler closed on the sale of 2,100 acre-feet of water to a developer in Lincoln County for approximately $15.7 million, which represents a price of $7,500 per acre-foot. Under the agreement between the Lincoln County Water District and Vidler, the proceeds from the sale of water will be shared equally after Vidler is reimbursed for the expenses incurred in developing water resources in Lincoln County. Consequently, the net cash proceeds to Vidler were approximately $10.8 million, and the transaction added $10.1 million to revenues and $9.1 million to pre-tax income in 2005; and

· the developer has up to 10 years to purchase an additional 7,240 acre-feet of water, as and when supplies are permitted from the applications. We anticipate that the hearings to permit these applications will commence in 2006. During 2005, Vidler successfully drilled a series of production and monitoring wells to provide evidence to support the applications. The initial price of $7,500 per acre-foot will increase at 10% each year. In addition, the developer will pay a commitment fee equal to 10% of the outstanding balance of unpurchased water each year, beginning August 9, 2006, which will be applied to the purchase of water.

The Lincoln County undertaking is an example of a transaction where Vidler can partner with an entity, in this case a government entity, to provide the necessary capital and skills to commercially develop water assets, thereby providing a significant economic benefit to the partner.

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Coyote Springs

Coyote Springs is a planned mixed-use development to be located approximately 40 miles north of Las Vegas, at the junction of U.S. Highway 93 and State Highway 168, partially within Lincoln County, Nevada, and partially within Clark County, Nevada. Coyote Springs is the largest privately-held property for development in southern Nevada. The developer, Coyote Springs Investment, LLC (“CSIL”), has received entitlements for approximately 50,000 residential units, 6 golf courses, and 1,200 acres of retail and commercial development on 13,100 acres in Clark County. CSIL expects to receive additional entitlements for its 29,800 acres in Lincoln County. Based on the entitlements obtained so far, it is estimated that the community will require approximately 35,000 acre-feet of permanent water. Additional water will be required as further entitlements are obtained. It is expected that full absorption of the residential units will take 25 years or more.

Pardee Homes has agreed to be the master residential developer on the first phase of the development. Construction of a golf course has begun, and CSIL has stated that the first houses should start going up in 2007.

Lincoln/Vidler have agreed to sell approximately 560 acre-feet of water rights at Meadow Valley, located in Lincoln and Clark counties, to CSIL for approximately $3.4 million, or $6,050 per acre-foot. The water rights are the subject of an existing protest, and escrow will close within 14 days of the protest being successfully resolved.

We anticipate that Lincoln County/Vidler could provide the majority of the water required for the Coyote Springs project from the jointly filed applications for water rights in various basins in Lincoln County.

Lincoln/Vidler have agreed to sell additional water to CSIL, as and when supplies are permitted from existing applications in Kane Springs, Nevada. The applications are for up to 17,375 acre-feet of water, although the actual permits received may be for a lesser quantity, which cannot be accurately predicted. It is anticipated that the applications will be heard in 2006, and that it could take up to 12 months after the hearing for the application to be permitted and the sale closed. The initial purchase price for the water will be $6,050 per acre-foot for the first year of the agreement. The price of unpurchased water will increase 10% each year on the anniversary of the agreement.

Lincoln County Power Plant Project

Vidler has entered into an option agreement to sell its interest in a project to construct a new electricity-generating plant in southern Lincoln County, for $4.8 million. It is anticipated that the new plant will supply electricity to the new communities to be developed near Mesquite, and surrounding areas, which are expected to be fast-growing. If the purchaser exercises the option to purchase the interest in the power project, the agreement is scheduled to close in 2007. The purchaser has made all of the scheduled option exercise payments to date.

This project is 100% owned by Vidler, and does not form part of the Lincoln/Vidler undertaking.

2. Sandy Valley, Nevada

In June 2002, the Nevada State Engineer awarded Vidler 415 acre-feet of water rights near Sandy Valley, Nevada. Vidler has filed another application for 1,000 acre-feet.

The award of the permit for the 415 acre-feet of water rights has been appealed, and is currently in the Nevada Supreme Court, which we believe is the final court of appeal for the matter. Once the appeal has been concluded, we anticipate utilizing the water rights to support future growth in Sandy Valley or surrounding areas in southwestern Nevada.

3. Muddy River water rights

The Muddy River is a perennial river fed by the Muddy Springs in southern Nevada, originating in Nevada and flowing into Lake Mead. Currently, Muddy River water rights are utilized for agriculture and electricity generation; however, in the future, we anticipate that Muddy River water rights may be utilized to support development in southern Nevada. The Southern Nevada Water Authority 2006 water resource plan identifies Muddy River water rights as a water resource to support future growth in Clark County, Nevada.

At December 31, 2005, Vidler owned approximately 221 acre-feet of Muddy River water rights, and had the right to acquire an additional 46 acre-feet.

4. Fish Springs Ranch

In 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC (“Fish Springs”) and a 50% interest in V&B, LLC. These companies own the Fish Springs Ranch and other properties totaling approximately 8,600 acres in Honey Lake Valley in Washoe County, 45 miles north of Reno, Nevada, and permitted water rights related to the properties, which are transferable to the Reno/Sparks area. The Fish Springs Ranch water rights have been identified as the most economical and proven new source of supply to support new growth in the north valley communities of Washoe County. According to census data, from 2000 to 2004, the population of Washoe County (including Reno/Sparks) increased by 12.1% to approximately 381,000 people.

Residential property developers have publicly stated that Reno is constrained for land. If additional water can be supplied to Reno and the surrounding areas, this will allow the development of additional land. Indicative market prices for new water delivered to Reno have appreciated strongly, commensurate with increases in the value of raw land and finished homes.  Given these market conditions, Fish Springs has determined that it would be advantageous to construct, at its own expense, a pipeline approximately 35 miles long, to convey 8,000 acre-feet of water annually from Fish Springs Ranch to a central storage tank in northern Reno to supply the northern valleys.  A Final Environmental Impact Statement for the pipeline has been completed, and the comment period has ended. Fish Springs is awaiting the Record of Decision and the granting of rights-of-way by the Department of the Interior. The total cost of the pipeline is estimated to be in the $65 million to $70 million range. We are exploring various forms of project financing.

As of March 2006, Vidler has commitments for future capital expenditures amounting to approximately $12 million, relating to the construction of a pipeline to convey water from the Fish Springs Ranch to Reno, Nevada. See Note 14 of Notes To Consolidated Financial Statements, “Commitments and Contingencies”.

5. Big Springs Ranch and West Wendover, Nevada

In December 2003, Vidler closed on the sale of approximately 37,500 acres of deeded ranch land and the related water rights at Big Springs Ranch for $2.8 million. The ranch land was located approximately 65 miles east of Elko, in northeastern Nevada.

In December 2003, Vidler closed on the sale of approximately 6,500 acres of developable land near West Wendover, Nevada for $12 million. West Wendover is adjacent to the Nevada/Utah border in the Interstate 80 corridor. The land at West Wendover was acquired in 1999 through a land exchange with the Bureau of Land Management, under which Vidler gave up approximately 70,500 acres of ranch land at Big Springs Ranch in return for the parcels of developable land.

The assets at Big Springs Ranch and West Wendover were different in nature from Vidler’s remaining assets in Arizona and Nevada, in that the land comprised the bulk of the value of Big Springs Ranch and West Wendover, with the water rights being a lesser component.

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Colorado

Vidler is completing the process of monetizing its water rights in Colorado, through sale or lease:

· in 2000, Vidler closed on the sale of various water rights and related assets to the City of Golden, Colorado for $1 million, and granted the City options to acquire other water rights over the following 15 years. The City exercised options to acquire water assets for $146,000 in 2003, $142,000 in 2004, and $143,000 in 2005. If the remaining options are exercised, the present value of the aggregate purchase price is approximately $1 million;

· in 2003, Vidler closed on the sale of the Wet Mountain water rights for $414,000;

· in 2004, Vidler closed on the sale of approximately 6.5 acre-feet of water rights for $266,000; and

· in 2005, Vidler closed on the sale of approximately 5.5 acre-feet of water rights for $261,000.

Discussions are continuing to either lease or sell the remaining water rights in Colorado, which are listed in the table in the Vidler section of Item 1, “Business.”

WATER STORAGE

1. Vidler Arizona Recharge Facility

During 2000, Vidler completed the second stage of construction at its facility to “bank,” or store, water underground in the Harquahala Valley, and received the necessary permits to operate a full-scale water “recharge” facility. “Recharge” is the process of placing water into storage underground. Vidler has the permitted right to recharge 100,000 acre-feet of water per year at the Vidler Arizona Recharge Facility, and anticipates being able to store in excess of 1 million acre-feet of water in the aquifer underlying much of the valley. When needed, the water will be “recovered,” or removed from storage, by ground water wells.

Vidler has the only permitted, complete private water storage facility in Arizona. Given that Arizona is the only southwestern state with surplus flows of Colorado River water available for storage, we believe that Vidler’s is the only private water storage facility where it is practical to “bank,” or store, water for users in other states, which is known as “interstate banking.” Having a permitted water storage facility also allows Vidler to acquire, and store, surplus water for re-sale in future years.

The Vidler Arizona Recharge Facility is the first privately owned water storage facility for the Colorado River system, which is a primary source of water for the Lower Division States of Arizona, California, and Nevada. The water storage facility is strategically located adjacent to the Central Arizona Project (“CAP”) aqueduct, a conveyance canal running from Lake Havasu to Phoenix and Tucson. The water to be recharged will come from surplus flows of CAP water. We believe that proximity to the CAP is a competitive advantage, because it minimizes the cost of water conveyance.

Vidler is able to provide storage for users located both within Arizona and out-of-state. Potential users include industrial companies, developers, and local governmental political subdivisions in Arizona, and out-of-state users such as municipalities and water agencies in Nevada and California. The Arizona Water Banking Authority (“AWBA”) has the responsibility for intrastate and interstate storage of water for governmental entities.

Vidler has not yet stored water for customers at the facility, but the company has been recharging water for its own account since 1998, when the pilot plant was constructed. At the end of 2005, Vidler had “net recharge credits” representing approximately 90,666 acre-feet of water in storage at the facility, and had purchased or ordered a further 35,000 acre-feet for recharge in 2006. Vidler purchased the water from the CAP, and intends to resell this water at an appropriate time.

Vidler is in discussions with a number of developers and other entities which could lead to the sale of net recharge credits. We believe that the storage site, the net recharge credits, and Vidler’s remaining water rights and land in the Harquahala Valley could be an attractive combination to developers looking to secure water supply to support new development in the Harquahala Valley, which is approximately 75 miles northwest of metropolitan Phoenix, Arizona. The Vidler Arizona Recharge Facility is located in La Paz County, close to the county line with fast-growing Maricopa County. According to census data, the population of Maricopa County increased 15.9% from 2000 to 2004, with the addition of more than 120,000 people per year. Vidler anticipates that as the boundaries of the greater Phoenix metropolitan area push out, this is likely to lead to demand for water to support growth within the Harquahala Valley itself.

Vidler anticipates being able to recharge 35,000 acre-feet of water per year at the facility, and to store in excess of 1 million acre-feet of water in the aquifer. Vidler’s estimate of the aquifer’s storage volume is primarily based on a hydrological report prepared by an independent engineering firm for the Central Arizona Water Conservation District in 1990, which concluded that there is storage capacity of 3.7 million acre-feet.

Recharge and recovery capacity is critical, because it indicates how quickly water can be put into storage or recovered from storage. In wet years, it is important to have a high recharge capacity, so that as much available water as possible may be stored. In dry years, the crucial factor is the ability to recover water as quickly as possible. There is a long history of farmers recovering significant quantities of water from the Harquahala Valley ground water aquifer for irrigation purposes.

2. Semitropic

Vidler originally had an 18.5% right to participate in the Semitropic Water Banking and Exchange Program, which operates a 1,000,000 acre-foot water storage facility at Semitropic, near the California Aqueduct, northwest of Bakersfield, California.

The strategic value of the guaranteed right to recover an amount of water from Semitropic every year -- even in drought years -- became clear to water agencies, developers, and other parties seeking a reliable water supply. For example, developers of large residential projects in Kern County and Los Angeles County must be able to demonstrate that they have sufficient back-up supplies of water in the case of a drought year before they are permitted to begin development. Accordingly, during 2001, Vidler took advantage of current demand for water storage capacity with guaranteed recovery, and began to sell its interest in Semitropic. The strategic value of the guaranteed right to recover water was again highlighted by two court decisions in February 2003 which held that developers could not rely on water from state water projects.

In May 2001, Vidler closed the sale of 29.7% of its original interest (i.e., approximately 55,000 acre-feet of water storage capacity) to The Newhall Land and Farming Company for $3.3 million, resulting in a pre-tax gain of $1.6 million.

In September 2001, Vidler closed the sale of another 54.1% of its original interest (i.e., approximately 100,000 acre-feet of water storage capacity) to the Alameda County Water District for $6.9 million, resulting in a pre-tax gain of $4.1 million.

Vidler’s remaining interest includes approximately 30,000 acre-feet of storage capacity. We have the guaranteed right to recover a minimum of approximately 2,700 acre-feet every year. In some circumstances, we have the right to recover up to approximately 6,800 acre-feet in any one year. We are considering various alternatives for the remaining interest, including sale to developers or industrial users. Currently Vidler is not storing any water at Semitropic for third parties. Vidler is required to make annual payments of approximately $530,000 under its agreement with Semitropic Water Storage District.

Other Projects

During 2005, Vidler received net cash proceeds of approximately $105.1 million from the sales in the Harquahala Valley Irrigation District and Lincoln County described above. After the payment of federal and state tax liabilities arising from these sales, which are estimated at $26 million ($24.2 million of which was paid in 2005), likely uses of Vidler’s available cash include continuing:

· to develop new supplies of water in Lincoln County, Nevada (e.g., drilling costs and legal & professional fees); and

· to investigate and evaluate water and land opportunities in the southwestern United States, which meet our risk/reward and value criteria, in particular assets which have the potential to add value to our existing assets. Vidler routinely evaluates the purchase of further water-righted properties in Arizona and Nevada. Vidler also continues to be approached by parties who are interested in obtaining a water supply, or discussing joint ventures to commercially develop water assets and/or develop water storage facilities in Arizona, Nevada, and other southwestern states.

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NEVADA REAL ESTATE OPERATIONS - NEVADA LAND AND RESOURCE COMPANY, LLC

The majority of Nevada Land’s revenues come from the sale of land. In addition, various types of recurring revenue are generated from use of the Nevada Land’s properties, including leasing, easements, and mineral royalties. Nevada Land also generates interest revenue from land sales contracts where Nevada Land has provided partial financing, and from temporary investment of the proceeds of land sales.

Nevada Land recognizes revenue from land sales, and the resulting gross margin, when the sales transactions close. On closing, the entire sales price is recorded as revenue, and a gross margin is recognized depending on the cost basis attributed to the land which was sold. Since the date of closing determines the accounting period in which the sales revenue and margin are recorded, Nevada Land’s reported revenues and income fluctuate from period to period, depending on the dates when specific transactions close, and land sales for any one year are not necessarily indicative of land sales in future years.

In 2005, Nevada Land generated $20.2 million in revenues from the sale of approximately 252,000 acres of former railroad land. The average sales price of $80 per acre compares to our average basis of $30 per acre in the parcels which were sold. In 2005, 69.5% of land sales were settled for cash, and Nevada Land provided partial financing for the remainder. Vendor financing is collateralized by the land conveyed, and typically is subject to a minimum 30% down payment and carries a 10% interest rate.

In 2004 and 2005, land sales were significantly higher than in preceding years. The $20.2 million in total sales in 2005 consisted of 66 individual sales transactions, reflecting demand for various types of land with various uses, including rural-suburban-urban living, desert lands, and ranching.

During 2004 and 2005, the market for many types of real estate in Nevada was buoyant. We believe that higher prices for land in and around municipalities has increased the demand for, and in some locations the price of, property 50 miles or more from municipalities, which our lands typically are. It can take a year or more to complete a land sale transaction, the timing of land sales is unpredictable, and historically the level of land sales has fluctuated from year to year. Accordingly, it should not be assumed that the higher level of sales in 2004 and 2005 can be maintained.

BUSINESS ACQUISITIONS AND FINANCING

This section describes the most significant interests in public companies included in this segment during 2005.

Excluding HyperFeed, we estimate that the common stock interests in public companies reported in this segment generated a total return (i.e., realized and unrealized gains, plus dividends received, in U.S. dollars) of approximately 19% in 2005, compared to approximately 39% in 2004, and 29% in 2003.

Notes

Conversion of Swiss Franc amounts to U.S. dollars

Income statement items (revenues, expenses, gains, and losses) for foreign operations are translated into U.S. dollars using the average foreign exchange rate for the year, and balance sheet items (assets and liabilities) are translated at the actual exchange rate at the balance sheet date.

For the convenience of the reader, the average Swiss Franc exchange rate for 2005 used for income statement items was CHF1.2450 to the U.S. dollar (2004: CHF1.2279), and the actual Swiss Franc exchange rate at December 31, 2005 used for balance sheet items was CHF1.3139 (December 31, 2004: CHF1.1395).

HyperFeed Technologies, Inc.

In 2001, 2002, and 2003 until May 15, PICO’s investment in HyperFeed common shares was recorded in this segment using the equity method under Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” Since May 15, 2003, when HyperFeed became a consolidated subsidiary, its results have been recorded in a separate segment, “HyperFeed Technologies”.

1. Jungfraubahn Holding AG

PICO owns 1.3 million shares of Jungfraubahn, which represents approximately 22.5% of that company. At December 31, 2005, the market (carrying) value of our holding was $42 million.

In September 2002, we increased our holding to more than 20% of Jungfraubahn, and became the largest shareholder in that company. Despite the increase in our shareholding to more than 20%, we continue to account for this investment under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At this time, we do not believe that we have the requisite ability to exercise “significant influence” over the financial and operating policies of Jungfraubahn, and therefore do not apply the equity method of accounting.

In February 2006, Jungfraubahn issued a press release containing an initial review of 2005 operations, using Swiss accounting principles. The full text is available on Jungfraubahn’s website www.jungfraubahn.com. The contents of Jungfraubahn’s website are not incorporated in this 10-K.

In the press release, Jungfraubahn reported that passenger traffic revenues increased by 7.3% in 2005, and that the winter sports business recorded a 9.7% increase in revenues. Jungfraubahn indicated that it expected an “improved” financial result from the previous year. Jungfraubahn went on to say that the “2005/2006 winter season is showing very positive development” with a 6.9% increase in guests in the Jungfrau region through to the end of January 2006, and that forward bookings from tour operators and “the general economic environment” put the company in a “confident mood for the coming summer season.”

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The release also stated that two long-serving directors will be retiring from the Jungfraubahn board in May 2006, and that Professor Dr. Thomas Bieger has the board’s support to become the new Chairman of Jungfraubahn. It was also disclosed that Jungfraubahn’s Chief Executive Officer, Mr. Walter Steuri, intends to retire in 2008.

In September 2005, Jungfraubahn announced its results for the six months to June 30, 2005. Reported revenues were CHF 60.2 million (US$48.4 million), increasing 7% year over year in Swiss francs, and exceeding CHF 60 million for the first time. Net income was CHF 7.3 million (US$5.8 million), or approximately CHF 1.24 per share (US$1.00), a 34% increase year over year.

Jungfraubahn announced its results for the 2004 financial year in June 2005, so the 2005 results will not be released until after this 10-K has been filed. Revenues were CHF 116.1 million (US$94.6 million), and net income was CHF 14.6 million (US$11.9 million), or CHF 2.5 per share (US$2.04). Jungfraubahn’s operating activities generated net cash flow of CHF 27.5 million (US$22.4 million).

At June 30, 2005, Jungfraubahn had shareholders’ equity of CHF 314.4 million or approximately CHF 53.88 (US$42.04) in book value per share. At December 31, 2005, Jungfraubahn’s stock price was CHF 42.05 (US$32.00). At December 31, 2004, Jungfraubahn’s stock price was CHF 35.5 (US$ 31.15).

2. Other European Investments

Raetia Energie AG

PICO owns 70,556 shares in Raetia Energie, which is a producer of hydro electricity. At December 31, 2005, our investment in Raetia Energie had a basis of $3.2 million, and a market value of $18.2 million.

We first purchased this stock in 1997, increased our holding in 1998, 2002 & 2003, and sold part of our holding in 2004 and 2005. Over the life of the investment so far, we have generated a total return (i.e., realized and unrealized gains, plus dividends received in U.S. dollars) in the range of 400%.

During 2003, the carrying value of our holding appreciated by $5.8 million (almost 105%) in U.S. dollars. In 2004, our holding in Raetia generated a total return of $6.5 million (almost 58%). In 2005, our holding in Raetia generated a total return of $3 million (18%), consisting of approximately $2.8 million in realized and unrealized gains, and $236,000 in dividends.

Accu Holding AG

PICO has acquired 29,294 shares in Accu Holding, which represents a voting ownership interest of approximately 29.2%. We do not have the ability to exercise significant influence over Accu Holding’s activities, so the investment is carried at market value under SFAS No. 115.

Accu Holding manufactures batteries at two plants in Switzerland. Following a decline in demand for batteries during the 2001-2003 economic slowdown, Accu adjusted its production and cost structure. Accu is also preparing to redevelop the site of a former factory near Zurich, which could have significant value.

Our initial holding (14,164 shares) in Accu had a cash cost of approximately $5 million. During 2004, we subscribed for our full entitlement in, and partly underwrote, a 1:1 rights offering at CHF100 per share, acquiring an additional 15,130 shares for approximately $1.2 million.

The Accu stock price declined significantly during 2002, 2003, and 2004. As explained in the Business Financing and Acquisitions portion of “Results of Operations -- Years Ended December 31, 2004, 2003, and 2002,” we regularly review stocks which have declined in price from our cost. If we determine that the decline in market value is other-than-temporary, we record a charge which writes our basis in the investment down from its original cost to current carrying value, which typically is the market price at the balance sheet date when the provision is recorded. It should be noted that charges for other-than-temporary impairments do not affect shareholders’ equity or book value per share, since the after-tax decline in the market value of investments carried under SFAS No. 115 is already reflected in shareholders equity in our balance sheet. Also, the carrying (book) value of the holding does not change. If the stock price subsequently recovers, the basis does not change.

Given the extent and duration of the decline in the market price of Accu stock, we determined that the decline in Accu’s market value is also other-than-temporary. Accordingly, we recorded pre-tax charges for other-than-temporary impairment of our holding in Accu of $2.2 million in 2002, $823,000 in 2003, and $1.3 million in 2004. These charges were recorded as realized losses and reduced the basis of the investment. At December 31, 2005, the holding had a basis of $2.3 million, and a market (carrying) value of $4.2 million (CHF5.6 million).

SIHL

In 2000 and 2001, we acquired approximately 10.6% of SIHL for $4 million, through participation in a restructuring/capital raising and open market purchases. Our investment in SIHL is accounted for under SFAS No. 115.

At the time, SIHL’s core business was digital imaging, but the company had surplus property assets in and around Zurich, including a major development project known as Sihlcity. SIHL’s operations were adversely affected by the economic downturn in late 2001 and 2002, and SIHL was unable to improve profitability and reduce debt as previously expected. In 2003, SIHL sold its core business, and announced a debt restructuring with its banks. Although there is no longer a public trading market for SIHL, the agreement with the banks provides the shareholders with a partial return in certain circumstances.

Due to the extent and duration of the decline in the market value of SIHL stock, we recorded pre-tax charges for other-than-temporary impairment of our holding in SIHL of $1.6 million in 2002, and $293,000 in 2003. A $547,000 charge for permanent impairment in 2004 reduced our basis in SIHL to zero at December 31, 2004.

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INSURANCE OPERATIONS IN RUN OFF

Typically, most of the revenues of an insurance company in “run off” come from investment income (i.e., interest from fixed-income securities and dividends from stocks) earned on funds held as part of their insurance business. In addition, from time to time, gains or losses are realized from the sale of investments.

In broad terms, Physicians and Citation hold cash and fixed-income securities corresponding to their loss reserves and state capital & deposit requirements, and the excess is invested in small-capitalization value stocks in the U.S. and selected foreign markets.

Given the relatively low level of interest rates, we expect to generate limited income from our bond holdings. To maintain liquidity and to guard against capital losses which would be brought on by higher interest rates, our bond holdings are concentrated in issues maturing in 5 years or less. At December 31, 2005, the duration of Citation’s bond portfolio was 3.5 years, and the duration of the Physicians bond portfolio was 2.2 years. The duration of a bond portfolio measures the amount of time it will take for the cash flows from scheduled interest payments and the maturity of bonds to equal the current value of the portfolio. Duration indicates the sensitivity of the market value of a bond portfolio to changes in interest rates. If interest rates increase, the market value of existing bonds will decline. During periods when market interest rates decline, such as 2003 and 2004, the market value of existing bonds increases. Typically, the longer the duration, the greater the sensitivity of the value of the bond portfolio to changes in interest rates. Duration of less than 5 years is generally regarded as medium term, and less than 3 years is generally regarded as short term.

Typically, we hold bonds issued by the U.S. Treasury and government-sponsored enterprises (e.g., Freddie Mac and FNMA) only to the extent required for capital under state insurance codes, or as required for deposits or collateral with state regulators. Otherwise, the bond portfolios consist almost entirely of investment-grade corporate issues with 10 or less years to maturity. At December 31, 2005, the aggregate market value of Physicians’ and Citation’s bond portfolio was within 1% of amortized cost. We do not own any municipal bonds, and did not own any corporate bonds in the telecommunications, utilities, energy trading, automotive, and auto finance sectors, which experienced difficulties in recent years.

The equities component of the insurance company portfolios is concentrated on a limited number of asset-rich small-capitalization value stocks in the U.S. These positions have been accumulated at a significant discount to our estimate of the private market value of each company’s underlying “hard” assets (i.e., land and other tangible assets). The insurance company portfolios also have a degree of international diversification through holdings of small-capitalization value stocks in New Zealand and Australia, and selected large-capitalization resource stocks with world class mining operations in foreign countries. Dividends and realized gains or losses from stocks held in the insurance company portfolios are reported in the Insurance Operations in Run Off segment.

During 2004 and 2005, we sold our holdings in the shares of Keweenaw Land Association, Limited (Pink Sheets: KEWL). Keweenaw owns approximately 155,000 acres of northern hardwood timberlands on the Upper Peninsula of Michigan, including some acreage with a higher and better use than timberland. The Keweenaw stock price increased 55% in 2003, and 35% in 2004. We had been accumulating shares of Keweenaw since 1998, and earned a total return over the life of the investment of better than 20% per annum.

On February 7, 2005, we reported on Schedule 13G that Physicians and Citation own a total of 310,000 common shares of Consolidated-Tomoka Land Co. (Amex: CTO), representing approximately 5.5% pf CTO. Consolidated-Tomoka owns approximately 12,000 acres of land in and around Daytona Beach, Florida, and a portfolio of income properties in the southeastern United States. The investment was purchased between September 2002 and February 2004 at a cash cost of $6.5 million, or approximately $20.90 per share. At December 31, 2005, the market value and carrying value of the investment was $22 million (before taxes).

No other investments of the insurance companies have reached a threshold requiring public disclosure under the securities laws of the countries where the investments are held (typically a 5% voting interest).

In 2005, we estimate that the total return on the fixed-income securities and unaffiliated common stocks in Citation’s portfolio was approximately 22.6%, including approximately 41.8% for the stocks component (70.2% of the portfolio at December 31, 2005). We estimate that the total return on the fixed-income securities and unaffiliated common stocks in Physicians’ portfolio was approximately 32.1% in 2005, including approximately 49.3% for the stocks component (74.0% of the portfolio at December 31, 2005).

In 2004, we estimate that the total return on the fixed-income securities and unaffiliated common stocks in Citation’s portfolio was approximately 22.0%, including approximately 44% for the stocks component (53.7% of the portfolio at December 31, 2004). We estimate that the total return on the fixed-income securities and unaffiliated common stocks in Physicians’ portfolio was approximately 25.5% in 2004, including approximately 41% for the stocks component (64.3% of the portfolio at December 31, 2004).

In 2003, we estimate that the total return on the fixed-income securities and unaffiliated common stocks in Citation’s portfolio was approximately 19.6%, including better than 40% for the stocks component (40.7% of the portfolio at December 31, 2003). We estimate that the total return on the fixed-income securities and unaffiliated common stocks in Physicians’ portfolio was approximately 21.5% in 2003, including better than 39% for the stocks component (53.7% of the portfolio at December 31, 2003).

Over time, the investment assets and investment income of a “run off” insurance company are expected to decline, as fixed-income investments mature or are sold to provide the funds to pay down the company’s claims reserves. However, since the sale of Sequoia closed on March 31, 2003, the investment assets of the Insurance Operations in Run Off segment have actually increased, as appreciation in stocks has more than offset the maturity or sale of fixed-income securities to pay claims.

The financial results of insurance companies in “run off” can be volatile if there is favorable or unfavorable development in the loss reserves. For example, in 2003 and 2005 Physicians recorded significant income from favorable reserve development, but Citation recorded a significant loss in 2003, partly due to increases in the workers’ compensation and property and casualty insurance loss reserves.

Physicians Insurance Company of Ohio

Physicians wrote its last policy in 1995; however, claims can be filed until 2017 resulting from events allegedly occurring during the period when Physicians provided coverage.

By its nature, medical professional liability insurance involves a relatively small number (frequency) of relatively large (severity) claims. We have purchased excess of loss reinsurance to limit our potential losses. The amount of risk we have retained on each claim varies depending on the accident year but, in general, we are liable for the first $1 million to $2 million per claim.

Due to the long “tail” (i.e., period of time between the occurrence of the alleged event giving rise to the claim, and the claim being reported to us) in the medical professional liability insurance business, it is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves. Our loss reserves are reviewed by management every quarter and are assessed in the fourth quarter of each year, based on independent actuarial analysis of past, current, and projected claims trends in the 12 months ended September 30 of each year.

At December 31, 2005, medical professional liability reserves totaled $11.9 million, net of reinsurance, compared to $16.4 million net of reinsurance at December 31, 2004, and $19.6 million net of reinsurance at December 31, 2003.

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PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

	Year Ended December 31,
	2005		2004		2003
Direct Reserves	$	12.9 million	$	19.6 million	$	23.6 million
Ceded Reserves		( 1.0)		( 3.2)		(4.0)
Net Medical Professional Liability Insurance Reserves	$	11.9 million	$	16.4 million	$	19.6 million

At December 31, 2005, our direct reserves, or reserves before reinsurance, essentially equaled the independent actuary’s best estimate. The independent actuary is continually reviewing our claims experience and projected claims trends in order to arrive at the most accurate estimate possible. The independent actuary did not explicitly forecast a range of reserves, but arrived at a best estimate through weighting the results of five different projection methods for each accident year, and in total. Under the different projection methods, the lowest direct reserve calculation was approximately $9.2 million, and the highest direct reserve calculation was $12.9 million. Consequently, our loss reserves could differ depending on the particular method of calculation chosen.

Changes in assumptions about future claim trends, and the cost of handling claims, could lead to significant increases and decreases in our loss reserves. When loss reserves are reduced, this is referred to as favorable development. If loss reserves are increased, the development is referred to as adverse or unfavorable.

At December 31, 2005, approximately $3.1 million, or 24% of our direct reserves were case reserves, which are the loss reserves established when a claim is reported to us. Our provision for incurred but not reported claims (“IBNR”, i.e., the event giving rise to the claim has allegedly occurred, but the claim has not been reported to us) was $6.3 million, or 49% of our direct reserves. The loss adjustment expense reserves, totaling $3.5 million, or 27% of direct reserves, recognize the cost of handling claims over the next 11 years while Physicians’ loss reserves run off.

Over the past 3 years, the trends in open claims and claims paid have been:

	Year Ended December 31,
	2005		2004		2003
Open claims at the start of the year		41		68		144
New claims reported during the year		6		11		22
Claims closed during the year		-19		-38		-98
Open claims at the end of the year		28		41		68
Total claims closed during the year		19		38		98
Claims closed with no indemnity payment		-16		-22		-91
Claims closed with an indemnity payment		3		16		7
Net indemnity payments	$	878,000	$	1,778,000	$	3,048,000
Net loss adjustment expense payments		499,000		898,000		912,000
Total claims payments during the year	$	1,377,000	$	2,676,000	$	3,960,000
Average indemnity payment	$	293,000	$	111,000	$	435,000

PHYSICIANS INSURANCE COMPANY OF OHIO - CHANGE IN LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

	Year Ended December 31,
	2005		2004		2003
Beginning Reserves	$	16.4 million	$	19.6 million	$	30.3 million
Loss & Loss Adjustment Expense Payments		( 1.4)		( 2.7)		( 4.0)
Re-estimation of Prior Year Loss Reserves		( 3.1)		( 0.5)		( 6.7)
Net Medical Professional Liability Insurance Reserves	$	11.9 million	$	16.4 million	$	19.6 million
Re-estimation as a percentage of undiscounted beginning reserves		- 19%		- 3%		- 22%

During 2005, our medical professional liability insurance claims reserves, net of reinsurance, decreased by $4.5 million, from $16.4 million to $11.9 million. Claims and loss adjustment expense payments for the year were approximately $1.4 million, accounting for 31% of the net decrease in reserves. During 2005, Physicians continued to experience favorable trends in the “severity” (size) of claims, and, to a lesser extent, the “frequency” (number) of claims. Consequently, independent actuarial analysis of Physicians’ loss reserves concluded that Physicians’ reserves against claims were significantly greater than the actuary’s projections of future claims payments. Reserves were reduced in 10 of Physicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of approximately $3.1 million, or 19.2% of reserves at the start of the year.

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The net reduction in reserves of approximately $3.1 million was primarily due to a decrease in claims severity, and was recorded in Physicians’ reserve for IBNR claims.

As shown in the table above, in 2005 Physicians made $878,000 in net indemnity payments to close 3 cases, an average indemnity payment of $293,000 per case. Total claims payments in 2005 were less than anticipated. At December 31, 2005, the average case reserve per open claim was approximately $111,000.

There were no changes in key actuarial assumption in 2005. It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments -- either increases or decreases -- in future years. See “Critical Accounting Policies” and “Risk Factors.”

During 2004, our medical professional liability insurance claims reserves, net of reinsurance, decreased by $3.2 million, from $19.6 million to $16.4 million. Claims and loss adjustment expense payments for the year were approximately $2.7 million, accounting for 84% of the net decrease in reserves. During 2004, Physicians continued to experience favorable trends in the “severity” of claims, and, to a lesser extent, the “frequency” of claims. Consequently, independent actuarial analysis of Physicians’ loss reserves concluded that Physicians’ reserves against claims were greater than the actuary’s projections of future claims payments. Reserves were reduced in 16 of Physicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of approximately $489,000, or 2.5% of reserves at the start of the year.

In 2004 Physicians made $1.8 million in net indemnity payments to close 16 cases, an average indemnity payment of $111,000 per case. Total claims payments in 2004 were less than anticipated, and the average indemnity payment returned to more typical levels than in 2003. There were no changes in key actuarial assumption in 2004.

During 2003, our medical professional liability insurance claims reserves, net of reinsurance, decreased by $10.7 million, from $30.3 million to $19.6 million. Claims and loss adjustment expense payments for the year were approximately $4 million, accounting for 37% of the net decrease in reserves. During 2003, Physicians continued to experience favorable trends in the “severity” of claims, and, to a lesser extent, the “frequency” of claims. Consequently, independent actuarial analysis of Physicians’ loss reserves concluded that Physicians’ reserves against claims were significantly greater than the actuary’s projections of future claims payments. Reserves were reduced in all of Physicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of approximately $6.7 million, or 22.1% of reserves at the start of the year.

In 2003 Physicians made $3 million in net indemnity payments to close 7 cases, an average indemnity payment of $435,000 per case. Although total claims payments in 2003 were less than anticipated, the average indemnity payment was higher than in 2002 and our future projection, due to the mix of cases closed in 2003. There were no changes in key actuarial assumptions in 2003.

Since it is almost ten years since Physicians wrote its last policy, and the reserves for direct IBNR claims and unallocated loss adjustment expenses at December 31, 2005 are approximately $9.5 million ($8.8 million net of reinsurance), it is conceivable that further favorable development could be recorded in future years if claims trends remain favorable, particularly claims severity. However, given that favorable development of $3.1 million was recorded in 2005, there is less potential for favorable development in future years than there has been in the past, particularly as Physicians’ remaining claims reserves get smaller. In addition, we caution (1) that claims can be reported until 2017, and (2) against over-emphasizing claims count statistics -- for example, the last claims to be resolved by a “run off” insurance company could be the most complex and the most severe.

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Citation Insurance Company

Property and Casualty Insurance Loss Reserves

Citation went into “run off” from January 1, 2001. At December 31, 2005, after five years of “run off,” Citation had $6.4 million in property and casualty insurance loss and loss adjustment expense reserves, after reinsurance.

Approximately 99.4% of Citation’s net property and casualty insurance reserves are related to one line of business, artisans/contractors liability insurance. The remaining 0.6% is comprised of commercial property and casualty insurance policies, all of which expired in 2001. As a general rule, based on state statutes of limitations, we believe that no new commercial property and casualty insurance claims can be filed in California and Arizona, although in these states claims filing periods may be extended in certain limited circumstances.

We have purchased excess of loss reinsurance to limit our potential losses. The amount of risk we have retained on each claim varies depending on the accident year, but we can be liable for the first $50,000 to $250,000 per claim.

Citation wrote artisans/contractors insurance until 1995, the year before Physicians merged with Citation’s parent company. No artisans/contractors business was renewed after the merger. Artisans/contractors liability insurance has been a problematic line of business for all insurers who offered this type of coverage in California during the 1980’s and 1990’s. California experienced a severe recession in the early 1990’s, which caused a steep downturn in real estate values. In an attempt to improve their position, many homeowners filed claims against developers of new home communities and condominiums, and related parties such as general contractors, for alleged construction defects. Citation’s average loss ratio (i.e., the cost of making provision to pay claims as a percentage of earned premium) for all years from 1989 to 1995 for this insurance coverage is over 375%. The nature of this line of business is that we receive a large number (high frequency) of small (low severity) claims.

Citation primarily insured subcontractors, and only rarely insured general contractors. A large percentage of the claims received in 2003, 2004, and 2005 related to Additional Insured Endorsements (“AIE”). In general, these represent claims from general contractors who were not direct policyholders of Citation’s, but were named as insureds on policies issued to Citation’s subcontractor policyholders. Most of Citation’s subcontractor insureds are not initially named as defendants in construction defect law suits, but are drawn into litigation against general contractors, typically when the general contractor’s legal expenses reach the limit of their own insurance policy. The courts have held that subcontractors who performed only a minor role in the construction can be held in on complicated litigation against general contractors. Accordingly, the cost of legal defenses can be as significant as claims payments. Typically, AIE claims are shared among more than one subcontractor and more than one insurance carrier. This reduces the expense to any one carrier, so AIE claims typically involve smaller claims payments than claims from actual policyholders.

Although Citation wrote its last artisans/contractors policy in 1995 and the statute of limitations in California is 10 years, this can be extended in some situations.

Over the past 3 years, the trends in open claims and claims paid in the artisans/contractors line of business has been:

	Year Ended December 31,
	2005		2004		2003
Open claims at the start of the year		217		317		290
New claims reported during the year		101		183		290
Claims closed during the year		-169		-283		-263
Open claims at the end of the year		149		217		317
Total claims closed during the year		169		283		263
Claims closed with no payment		-77		-158		-106
Claims closed with LAE payment only (no indemnity payment)		-17		-39		- 40
Claims closed with an indemnity payment		75		86		117

Due to the long “tail” (i.e., period between the occurrence of the alleged event giving rise to the claim and the claim being reported to us) in the artisans/contractors line of business, it is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves. Our loss reserves are regularly reviewed, and certified annually by an independent actuarial firm, as required by California state law. The independent actuary analyzes past, current, and projected claims trends for all active accident years, using several forecasting methods. The appointed actuary believes this will result in more accurate reserve estimates than using a single method. We typically book our reserves to the actuary’s best estimate.

Changes in assumptions about future claim trends and the cost of handling claims can lead to significant increases and decreases in our property and casualty loss reserves. Due to the large number of claims received in the artisans/contractors line of business in 1997, 1998, and 1999, Citation was forced to increase its reserves in each of those years. In 2000 and 2001, reserve changes were less than 1% of beginning reserves. In 2002, Citation reduced reserves by $889,000, representing a 4.6% change in beginning reserves, primarily due to reduced severity of claims as described in preceding paragraphs. However, in 2003 Citation increased reserves by $847,000, or 5.8% of beginning reserves, primarily due to the increased number of new claims received (higher frequency). In 2004, we reduced reserves by $254,000, or 1.9% of beginning reserves, principally due to reduced severity of claims. In 2005, we reduced reserves by $1.8 million, or 18% of beginning reserves, principally due to reduced severity of claims.

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There were no changes in key actuarial assumptions during 2003, 2004, and 2005. See “Critical Accounting Policies” and “Risk Factors.”

At December 31, 2005, Citation’s net property and casualty reserves were carried at $6.4 million, approximately equal to the actuary’s best estimate.

CITATION INSURANCE COMPANY - PROPERTY & CASUALTY INSURANCE LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
	December 31, 2005		December 31, 2004		December 31, 2003
Direct Reserves	$	8.2 million	$	11.6 million	$	14.8 million
Ceded Reserves		( 1.8)		( 1.4)		( 1.5)
Net Reserves	$	6.4 million	$	10.2 million	$	13.3 million

At December 31, 2005, $0.6 million of Citation’s net property and casualty reserves (approximately 10%) were case reserves, $2.6 million represented provision for IBNR claims (40%), and the loss adjustment expense reserve was $3.2 million (50%).

The change in Citation’s reserves over the past 3 years has resulted from:

CITATION INSURANCE COMPANY - CHANGE IN PROPERTY & CASUALTY INSURANCE LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

	Year Ended December 31,
	2005		2004		2003
Beginning Reserves	$	10.2 million	$	13.3 million	$	14.6 million
Loss & Loss Adjustment Expense Payments		( 2.0)		( 2.8)		( 2.2)
Re-estimation of Prior Year Loss Reserves		( 1.8)		(0.3)		0.9
Net Property & Casualty Insurance Reserves	$	6.4 million	$	10.2 million	$	13.3 million
Re-estimation as a percentage of beginning reserves		- 18%		- 2%		+ 6%

During 2005, Citation’s property and casualty insurance claims reserves, net of reinsurance, decreased from $10.2 million to $6.4 million. Claims payments for the year were approximately $2 million. Following actuarial analysis during 2005, Citation decreased loss reserves by approximately $1.8 million due to favorable development in the artisans/contractors book of business resulting from decreased claims severity.

During 2004, Citation’s property and casualty insurance claims reserves, net of reinsurance, decreased from $13.3 million to $10.2 million. Claims payments for the year were $2.8 million. Following actuarial analysis during 2004, Citation decreased loss reserves by $254,000 due to favorable development in the artisans/contractors book of business resulting from decreased claims severity.

During 2003, Citation’s property and casualty insurance claims reserves, net of reinsurance, decreased from $14.6 million to $13.3 million. Claims payments for the year were $2.2 million. Following actuarial analysis during 2003, Citation increased loss reserves by $847,000 due to adverse development in the artisans/contractors book of business resulting from an increased frequency of new claims.

It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments--either increases or decreases--in future years.

Workers’ Compensation Loss Reserves

Until 1997, Citation was a direct writer of workers’ compensation insurance in California, Arizona, and Nevada. In 1997, Citation reinsured 100% of its workers’ compensation business with a subsidiary, Citation National Insurance Company (“CNIC”), and sold CNIC to Fremont Indemnity Company (“Fremont”). As part of the sale of CNIC, all assets and liabilities, including the assets which corresponded to the workers’ compensation reserves reinsured with CNIC, and all records, computer systems, policy files, and reinsurance arrangements were transferred to Fremont. Fremont merged CNIC into Fremont, and administered and paid all of the workers’ compensation claims which had been sold to it. From 1997 until the second quarter of 2003, Citation booked the losses reported by Fremont but recorded an equal and offsetting reinsurance recoverable from Fremont (as an admitted reinsurer) for all losses and loss adjustment expenses. This resulted in no net impact on Citation’s reserves and financial statements.

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On July 2, 2003, the California Superior Court placed Fremont in liquidation. Since Fremont is in liquidation, it was no longer an admitted reinsurance company under the statutory basis of insurance accounting. Consequently, Citation reversed the reinsurance recoverable from Fremont of approximately $7.5 million in its financial statements prepared on both the statutory basis and GAAP basis in the second quarter of 2003.

Workers’ compensation has been a problematic line of business for all insurers who offered this type of coverage in California during the 1990’s. We believe that this is primarily due to claims costs escalating at a greater than anticipated rate, in particular for medical care.

The nature of this line of business is that we receive a relatively small number (low frequency) of relatively large (high severity) claims. Although the last of Citation’s workers’ compensation policies expired in 1998, new workers’ compensation claims can still be filed for events which allegedly occurred during the term of the policy. The state statute of limitations is 10 years, but claim filing periods may be extended in some circumstances. At December 31, 2005, Citation had 232 open workers’ compensation claims, compared to 227 open claims at both December 31, 2004 and December 31, 2003. During 2005, 33 new claims were filed, 22 claims were reopened, and 50 claims were closed. During 2004, 17 claims were closed during the year, which were offset by an additional 17 claims being allocated to Citation from the Fremont liquidation. Since Citation ceased writing workers’ compensation coverage 6 years ago, most of the claims which are still open tend to be severe, and likely to lead to claims payments for a prolonged period of time.

At December 31, 2005, Citation had workers’ compensation reserves of $25.6 million before reinsurance, and $12.5 million after reinsurance. Citation purchased excess reinsurance to limit its potential losses in this line of business. In general, we have retained the risk on the first $150,000 to $250,000 per claim. The workers’ compensation reserves are reinsured with General Reinsurance, a subsidiary of Berkshire Hathaway, Inc.

CITATION INSURANCE COMPANY - WORKERS’ COMPENSATION LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

	December 31,
	2005		2004		2003
Direct Reserves	$	25.6 million	$	24.8 million	$	22.4 million
Ceded Reserves		(13.1)		(12.7)		(11.9)
Net Reserves	$	12.5 million	$	12.1 million	$	10.5 million

It is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves in the workers’ compensation line of business due to:

· the long “tail” (i.e., period between the occurrence of the alleged event giving rise to the claim and the claim being reported to us); and

· the extended period over which policy benefits are paid.

Our workers’ compensation loss reserves were reviewed at December 31, 2005 by an independent actuary who issues an opinion annually, as required by California state law. The independent actuary analyzes past, current, and projected claims trends for all active accident years, using several forecasting methods. The appointed actuary believes this will result in more accurate reserve estimates than using a single method. Our reserves are typically booked at close to the actuary’s best estimate. Until 2003, we booked the direct reserves and an equal offsetting reinsurance recoverable based on reports provided by Fremont.

Changes in assumptions about future trends in claims and the cost of handling claims can lead to significant increases and decreases in our loss reserves.

Following independent actuarial analysis at September 30, 2005 and December 31, 2005, Citation increased its workers’ compensation net loss reserves by $1.3 million, or approximately 11% of $12.1 million in net reserves at the start of 2005. This adverse development was primarily due to an increase in projected medical care costs, and an adjustment to reinsurance. There can be no assurance that our workers’ compensation reserves will not develop adversely in the future, particularly if medical care costs continue to inflate.

Following independent actuarial analysis, during 2004 Citation increased its workers’ compensation net loss reserves by $1.2 million, or approximately 11.4% of net reserves at the start of 2004. The adverse development was primarily due to an increase in projected medical care costs.

When the Fremont reinsurance recoverable was reversed after Fremont went into liquidation in 2003, our workers’ compensation reserves were approximately $7.5 million. Following independent actuarial analysis at September 30, 2003 and December 31, 2003, Citation increased its workers’ compensation net loss reserves by $3 million, or approximately 39.9% of the initial $7.5 million in reserves. This adverse development was primarily as a result of setting reserves at a more realistic level than Fremont had previously carried them based on management and actuarial review and assessment of claims files after Fremont had been placed in liquidation.

The change in Citation’s workers’ compensation reserves during 2003, 2004, and 2005 resulted from:

CITATION INSURANCE COMPANY - CHANGE IN WORKERS’ COMPENSATION LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

	Year Ended December 31,
	2005		2004		2003
Beginning Net Reserves	$	12.1 million	$	10.5 million	$	0.0 million
Reversal of reinsurance recoverable from Fremont						7.5
Adjusted Beginning Net Reserves	$	12.1 million	$	10.5 million	$	7.5 million
Loss and Loss Adjustment Expense liability / (payments)		(0.9)		0.4
Re-estimation of Prior Year Loss Reserves		1.3		1.2		3.0
Net Workers’ Compensation Insurance Reserves	$	12.5 million	$	12.1 million	$	10.5 million
Re-estimation as a percentage of adjusted beginning reserves		+ 11%		+ 11%		+ 40%

There were no changes in key actuarial assumptions during 2003, 2004, and 2005. It should be noted that such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to further reserve adjustments--either increases or decreases--in future years. See “Critical Accounting Policies” and “Risk Factors.”

At December 31, 2005, Citation’s net workers’ compensation reserves were carried at $12.5 million, approximately equal to the actuary’s best estimate. Approximately $3.1 million of Citation’s net workers’ compensation reserves (25%) were case reserves, $5.9 million represented provision for IBNR claims (47%), and the unallocated loss adjustment expense reserve was $3.5 million (28%).

Until September 30, 2004, the workers’ compensation claims were handled by Fremont and the California Insurance Guarantee Association. Since then, the workers’ compensation claims have been handled by a third-party administrator on Citation’s behalf.

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HYPERFEED TECHNOLOGIES

During 2003, HyperFeed continued to restructure its operations, which culminated in the sale of two business units:

· in June 2003, HyperFeed sold its retail trading business, PCQuote.com, for approximately $370,000; and

· in November 2003, HyperFeed sold its consolidated market data feed service contracts for $8.5 million. HyperFeed recorded a gain on the sale of $6.6 million in 2003.

Through these disposals, HyperFeed exited two low margin businesses, and replaced the business with revenues from providing products and services to the purchasers.

Now, HyperFeed is purely a developer and provider of software, ticker plant technologies, and managed services to the financial markets industry.

During 2004 and 2005, PICO loaned money to HyperFeed under a secured convertible promissory note agreement. On November 1, 2005, PICO elected to convert the $6.2 million in principal and interest outstanding on the note into 4,546,479 newly-issued common shares of HyperFeed, which represents a conversion price of $1.36 per share. PICO now owns 6,117,790 HyperFeed common shares, representing a voting ownership of approximately 80.1%.

For 2005, HyperFeed generated revenues of $4.3 million and a reported net loss of $9.2 million. At December 31, 2005, HyperFeed had $302,000 in cash and cash equivalents, and $500,000 in external borrowings (i.e., excluding borrowings from PICO).

As of December 31, 2005, PICO had advanced $810,000 to HyperFeed in the form of a promissory note. It is anticipated that this promissory note, as well as subsequent promissory notes issued in 2006 and additional funding, will be consolidated into a secured convertible promissory note agreement later in 2006.

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CRITICAL ACCOUNTING POLICIES

PICO’s principal assets and activities comprise:

· Vidler and Nevada Land’s land, water rights, and water storage operations;

· the “run off” of property and casualty insurance, workers’ compensation, and medical professional liability insurance loss reserves;

· business acquisitions and financing; and

· HyperFeed Technologies.

Following is a description of what we believe to be the critical accounting policies affecting PICO, and how we apply these policies.

1. Estimation of reserves in insurance companies

We must estimate future claims and ensure that our loss reserves are adequate to pay those claims. This process requires us to make estimates about future events. The accuracy of these estimates will not be known for many years. For example, part of our claims reserves cover “IBNR” claims (i.e., the event giving rise to the claim has occurred, but the claim has not been reported to us). In other words, in the case of IBNR claims, we must provide for claims which we do not know about yet.

At December 31, 2005, the loss reserves, net of reinsurance, of our two insurance subsidiaries were:

· Citation, $18.9 million; and

· Physicians, $11.9 million. Physicians wrote its last policy in 1995. However, under current law, claims can be made until 2017 for events which allegedly occurred during the periods when we provided insurance coverage to medical professionals.

Our medical professional liability insurance reserves are certified annually by an independent actuary, as required by Ohio insurance law. Actuarial estimates of our future claims obligations have been volatile. Net reserves were reduced by $3.1 million in 2005, $503,000 in 2004 and $6.7 million in 2003, after independent actuarial studies concluded that Physicians’ claims reserves were greater than projected claims payments. There can be no assurance that our claims reserves are adequate and that there will not be reserve increases or decreases in the future.

Citation’s loss reserves are reviewed regularly, and certified annually by an independent actuarial firm, as required by California insurance law.

In addition, we have to make judgments about the recoverability of reinsurance owed to us on direct claims reserves. In making this assessment, we carefully review the creditworthiness of reinsurers, as well as relying on schedules in statutory filings with state Departments of Insurance which show separate deposits held as assets for the benefit of reinsureds.

As discussed on preceding pages in the “Insurance Operations in Run Off” section of Item 7, during 2003 we booked a reversal of reinsurance recoverable of approximately $7.5 million from Fremont Indemnity Company, which fully reserved against the reinsurance recoverable from Fremont.

See “Insurance Operations In Run Off” and “Regulatory Insurance Disclosure” in Item 7.

2. Carrying value of long-lived assets

Our principal long-lived assets are real estate and water assets owned by Vidler, and real estate at Nevada Land. At December 31, 2005, the total carrying value of real estate and water assets was $76.9 million, or 17% of PICO’s total assets.

As required by GAAP, our long-lived assets are reviewed regularly to ensure that the estimated future undiscounted cash flows from these assets will at least recover their carrying value. Our management conducts these reviews utilizing the most recent information available; however, the review process inevitably involves the significant use of estimates and assumptions, especially the estimated market values of our real estate and water assets.

In our water resource and water storage business, we develop some projects and assets from scratch. This can require cash outflows (e.g., to drill wells to prove that water is available) in situations where there is no guarantee that the project will ultimately be commercially viable. If we determine that it is probable that the project will be commercially viable, the costs of developing the asset are capitalized (i.e., recorded as an asset in our balance sheet, rather than being charged as an expense). If the project ends up being viable, in the case of a sale, the capitalized costs are included in the cost of real estate and water assets sold and applied against the purchase price. In the case of a lease transaction, or when the asset is fully developed and ready for use, the capitalized costs are amortized (i.e., charged as an expense in our income statement) and match any related revenues.

If we determine that the carrying value of an asset cannot be justified by the forecast future cash flows of that asset, the carrying value of the asset is written down to fair value immediately, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

3. Accounting for investments and investments in unconsolidated affiliates

At December 31, 2005, PICO and its subsidiaries held equities with a carrying value of approximately $195 million. These holdings are primarily small-capitalization value stocks listed in the U.S., Switzerland, New Zealand, and Australia. Depending on the circumstances, and our judgment about the level of our involvement with the investee company, we apply one of two accounting policies.

In the case of most holdings, we apply SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Under this method, the investment is carried at market value in our balance sheet, with unrealized gains or losses being included in shareholders’ equity, and the only income recorded being from dividends.

In the case of investments where we have the ability to exercise significant influence over the company we have invested in, we apply the equity method under Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

The application of the equity method (APB No. 18) to an investment may result in a different outcome in our financial statements than market value accounting (SFAS No. 115). The most significant difference between the two policies is that, under the equity method, we include our proportionate share of the investee’s earnings or losses in our statement of operations, and dividends received are used to reduce the carrying value of the investment in our balance sheet. Under market value accounting, the only income recorded is from dividends received.

The assessment of what constitutes the ability to exercise “significant influence” requires our management to make significant judgments. We look at various factors in making this determination. These include our percentage ownership of voting stock, whether or not we have representation on the investee company’s Board of Directors, transactions between us and the investee, the ability to obtain timely quarterly financial information, and whether PICO management can affect the operating and financial policies of the investee company. When we conclude that we have this kind of influence, we adopt the equity method and change all of our previously reported results from the investee to show the investment as if we had applied equity accounting from the date of our first purchase. This adds volatility to our reported results.

The use of market value accounting or the equity method can result in significantly different carrying values at specific balance sheet dates, and contributions to our statement of operations in any individual year during the course of the investment. The total impact of the investment on PICO’s shareholders’ equity over the entire life of the investment will be the same whichever method is adopted.

For equity and debt securities accounted for under SFAS No. 115 which are in an unrealized loss position in local currency terms, we regularly review whether the decline in market value is other-than-temporary. In general, this review requires management to consider several factors, including specific adverse conditions affecting the investee’s business and industry, the financial condition of the investee, the long-term prospects of the investee, and the extent and duration of the decline in market value of the investee. Accordingly, management has to make important assumptions regarding our intent and ability to hold the security, and our assessment of the overall worth of the security. Risks and uncertainties in our methodology for reviewing unrealized losses for other-than-temporary declines include our judgments regarding the overall worth of the issuer and its long-term prospects, and our ability to realize on our assessment of the overall worth of the business.

In a subsequent quarterly review, if we conclude that an unrealized loss previously determined to be temporary is other-than-temporary, an impairment loss will be recorded. The other-than-temporary impairment charge will have no impact on shareholders’ equity or book value per share, as the decline in market value will already have been recorded through shareholders’ equity. However, there will be an impact on reported income before and after tax and on our earnings per share, due to recognition of the unrealized loss and related tax effects. When a charge for other-than-temporary impairment is recorded, our basis in the security is decreased. Consequently, if the market value of the security later recovers and we sell the security, a correspondingly greater gain will be recorded in the statement of operations.

These accounting treatments for investments and investments in unconsolidated affiliates add volatility to our statements of operations.

4. Revenue recognition

We recognize revenue on the sale of real estate and water rights based on the guidance of FASB No. 66, “Accounting for Sales of Real Estate”. Specifically, we recognize revenue when:

(a) there is a legally binding sale contract;

(b) the profit is determinable (i.e., the collectability of the sales price is reasonably assured, or any amount that will not be collectable can be estimated);

(c) the earnings process is virtually complete (i.e., we are not obliged to perform significant activities after the sale to earn the profit, meaning we have transferred all risks and rewards to the buyer); and

(d) the buyer’s initial and continuing investment are sufficient to demonstrate a commitment to pay for the property.

Unless all of these conditions are met, we use the deposit method of accounting. Under the deposit method of accounting, until the conditions to fully recognize a sale are met, payments received from the buyer are recorded as liabilities and no gain is recognized

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RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Shareholders’ Equity

At December 31, 2005, PICO had shareholders’ equity of $300.9 million ($22.67 per share), compared to $239.9 million ($19.40 per share) at the end of 2004, and $229.2 million ($18.52 per share) at the end of 2003. Book value per share increased 16.9% in 2005, compared to increases of 4.8% in 2004, and 3.7% in 2003.

The principal factors leading to the $61 million increase in shareholders’ equity during 2005 were:

· the year’s $16.2 million in net income;

· a $24.2 million net increase in unrealized appreciation in investments after-tax; and

· the issuance of 905,000 new shares for net proceeds of $21.4 million.

The principal factors leading to the $10.7 million increase in shareholders’ equity during 2004 were a net increase of $21.1 million in unrealized appreciation in investments, which was partially offset by a $10.6 million net loss.

Balance Sheet

Total assets at December 31, 2005 were $441.8 million, compared to $354.6 million at December 31, 2004. During 2005, total assets increased by $87.2 million, principally due to the receipt of the proceeds from sale of water rights and land at prices significantly higher than the previous carrying value of the assets sold.

At December 31, 2005, on a consolidated basis, available for sale equity securities showed a net unrealized gain of $66.1 million after tax. This total consists of approximately $66.2 million in gains, partially offset by $136,000 in losses.

Total liabilities at December 31, 2005 were $139.9 million, compared to $112.4 million at December 31, 2004. During 2005, total liabilities increased by $27.5 million, primarily due to a net $27 million increase in deferred compensation liability at December 31, 2005 over the SAR liability at December 31, 2004, which resulted from the amendment of the 2003 SAR program in September 2005. See “Business Acquisitions and Financing” segment analysis later in Item 7.

Net Income

PICO reported net income of $16.2 million in 2005 ($1.25 per share), compared to a net loss of $10.6 million ($0.85 per share) in 2004, and a net loss of $3.2 million ($0.26 per share) in 2003.

2005

The $16.2 million ($1.25 per share) in net income consisted of:

· income before taxes and minority interest of $32.9 million from continuing operations;

· the add-back of $1.2 million in minority interest, which reflects the interest of outside shareholders in the net losses of subsidiaries which are less than 100%-owned by PICO (principally HyperFeed); and

· income from discontinued operations of $37,000 after tax; which were partially offset by

· an $18 million provision for income taxes.

2004

The net loss of $10.6 million ($0.85 per share) consisted of:

· a $16.9 million loss before taxes and minority interest from continuing operations; which was partially offset by

· a $3 million income tax benefit;

· the add-back of $3.2 million in minority interest, which reflects the interest of outside shareholders in the net losses of subsidiaries which are less than 100%-owned by PICO (principally HyperFeed); and

· income from discontinued operations of $78,000 after tax.

2003

The net loss of $3.2 million ($0.26 per share) consisted of:

· a $13.8 million loss before taxes and minority interest from continuing operations; and

· the deduction of $1 million in minority interest, which reflects the interest of outside shareholders in the net income of subsidiaries which are less than 100%-owned by PICO; partially offset by

· a $1.2 million income tax benefit; and

· income from discontinued operations of $10.5 million after tax.

Comprehensive Income

In accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” PICO reports comprehensive income as well as net income from the Consolidated Statement of Operations. Comprehensive income measures changes in shareholders’ equity, and includes unrealized items which are not recorded in the Consolidated Statement of Operations, for example, foreign currency translation and the change in investment gains and losses on available-for-sale securities.

Over the past three years, PICO has recorded:

· comprehensive income of $39.6 million in 2005, primarily consisting of a $24.2 million net increase in net unrealized appreciation in investments and net income of $16.2 million, which were partially offset by a $810,000 net decrease in foreign currency translation;

· comprehensive income of $10.9 million in 2004, primarily consisting of net increases of $21.1 million in net unrealized appreciation in investments and $374,000 in foreign currency translation, which were partially offset by the $10.6 million net loss;

· comprehensive income of $8.2 million in 2003, primarily consisting of net increases of $10.9 million in net unrealized appreciation in investments and $570,000 in foreign currency translation, which were partially offset by the $3.2 million net loss.

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Operating Revenues

	Year Ended December 31,
	2005		2004		2003
Vidler Water Company	$	106,449,000	$	1,964,000	$	16,816,000
Nevada Land & Resource Company		21,811,000		11,560,000		5,889,000
Business Acquisitions and Financing		5,743,000		2,852,000		5,549,000
Insurance Operations in Run Off		8,108,000		5,747,000		3,245,000
HyperFeed Technologies		4,271,000		6,004,000		1,379,000
Total Revenues	$	146,382,000	$	28,127,000	$	32,878,000

In 2005, total revenues were $146.4 million, compared to $28.1 million in 2004, and $32.9 million in 2003. Revenues increased by $118.3 million year over year in 2005, primarily due to $104.5 million higher revenues from Vidler due to two significant water sales, which added $104.4 million to revenues. In addition, revenues from Nevada Land increased $10.3 million year over year, principally as a result of $9.7 million higher land sales revenues. Revenues decreased by $4.8 million year over year in 2004.

Total expenses in 2005 were $113.3 million, compared to $45 million in 2004, and $46.2 million in 2003. In 2005, the largest expense was $46.5 million, being the cost of land and water rights sold by Vidler and Nevada Land. In 2004, the largest expense item was SAR expense of $9.9 million. In 2003, the largest expense item was the $12.6 million cost of land and water rights sold. See “Business Acquisitions and Financing” segment analysis later in Item 7.

Income (Loss) Before Taxes and Minority Interest

	Year Ended December 31,
	2005			2004			2003
Vidler Water Company	$	56,212,000		$	( 5,701,000	)	$	( 543,000	)
Nevada Land & Resource Company		12,038,000			5,290,000			2,004,000
Business Acquisitions and Financing		(38,463,000	)		(15,156,000	)		(8,112,000	)
Insurance Operations in Run Off		10,539,000			4,060,000			(2,902,000	)
HyperFeed Technologies		( 7,410,000	)		( 5,390,000	)		(4,225,000	)
Income (Loss) Before Taxes and Minority Interest	$	32,916,000		$	(16,897,000	)	$	(13,778,000	)

The principal items in the $32.9 million in income before taxes and minority interest in 2005 were:

· Vidler generated segment income of $56.2 million, principally due to the $65.7 million in gross margin earned from the two significant sales of water;

· income of $12 million from Nevada Land, which included $12.6 million in gross margin from the sale of land;

· a $38.5 million loss from Business Acquisitions and Financing, which included a $23.9 million SAR expense;

· income of $10.5 million from Insurance Operations in Run Off, which included $5.1 million in realized gains on the sale of investments, and a benefit of approximately $3.7 million from favorable reserve development; and

· a $7.4 million loss from the continuing operations of HyperFeed.

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Vidler Water Company, Inc.

	Year Ended December 31,
	2005			2004			2003
Revenues:
Sale of Real Estate & Water Assets	$	104,812,000		$	408,000		$	15,360,000
Lease of Agricultural Land		298,000			485,000			703,000
Interest		1,177,000			471,000			80,000
Other		162,000			600,000			673,000
Segment Total Revenues	$	106,449,000		$	1,964,000		$	16,816,000
Expenses:
Cost of Real Estate & Water Assets		(38,957,000	)		( 240,000	)		(10,682,000	)
Commission and Other Cost of Sales		( 1,066,000	)					( 601,000	)
Depreciation & Amortization		( 1,173,000	)		(1,184,000	)		( 1,020,000	)
Interest		( 270,000	)		( 403,000	)		( 431,000	)
Overhead		( 4,449,000	)		(1,574,000	)		( 1,400,000	)
Project Expenses		( 4,322,000	)		(4,264,000	)		( 3,225,000	)
Segment Total Expenses	$	(50,237,000	)	$	(7,665,000	)	$	(17,359,000	)
Income (Loss) Before Tax	$	56,212,000		$	(5,701,000	)	$	(543,000	)

Vidler generated total revenues of $106.4 million in 2005, compared to $2 million in 2004 and $16.8 million in 2003. Over the past 5 years, several large sales of water rights and land have generated the bulk of Vidler’s revenues. Since the date of closing determines the accounting period in which the sales revenue and gross margin are recorded, Vidler’s reported revenues and income fluctuate from period to period depending on the dates when specific transactions close. Consequently, sales of water rights and land for any year are not indicative of likely revenues in future years.

In 2005, Vidler generated $104.8 million in revenues from the sale of water rights and land. This primarily represented two transactions, which generated $104.4 million in revenues:

· the sale of approximately 42,000 acre-feet of transferable groundwater rights, and the related land, in the Harquahala Valley Irrigation District of Arizona. This transaction added $94.4 million to revenues and $56.6 million to gross margin, and the net cash proceeds to Vidler were $83.1 million (after the repayment of borrowings related to the land sold); and

· the sale of approximately 2,100 acre-feet of water in Lincoln County by Lincoln/Vidler. Under the agreement between the Lincoln County Water District and Vidler, the proceeds from the sale of water will be shared equally after Vidler is reimbursed for the expenses incurred in developing water resources in Lincoln County. Consequently, the net cash proceeds to Vidler were approximately $10.8 million, and the transaction added $10.1 million to revenues and $9.1 million to gross margin.

In 2004, Vidler generated revenues of $408,000 and gross margin of $168,000 from the sale of water rights in Colorado.

In 2003, Vidler generated $15.4 million in revenues from the sale of water rights and land. This primarily represented two transactions, which generated $14.8 million in revenues:

· the sale of approximately 6,500 acres of land and the related water rights near West Wendover, Nevada. This transaction added $12 million to revenues and $4.1 million to gross margin; and

· the sale of approximately 37,500 acres of land and the related water rights at Big Springs Ranch in Elko County, Nevada. This transaction added $2.8 million to revenues and $505,000 to gross margin.

Other Revenues include income from leasing out farm properties owned by Vidler and water rights in Colorado, and various revenues from properties farmed by Vidler (e.g., sales of hay and cattle).

In 2005, interest revenue was $1.2 million, which was significantly higher than in previous years due to interest earned from temporary investment of the proceeds from water rights and land sales in government obligations money market funds and investment-grade corporate bonds, mostly maturing in 2005 and 2006.

In 2004, interest revenue was $471,000, which primarily consisted of interest earned on notes receivable resulting from the sale of land and water rights at West Wendover and Big Springs Ranch in 2003. The West Wendover note was fully repaid during 2005, and the remaining principal of $158,000 on the Big Springs Ranch note is scheduled to be repaid in 2006.

Total segment expenses, including the cost of water rights and other assets sold, were $50.2 million in 2005, $7.7 million in 2004, and $17.4 million in 2003. However, excluding the cost of water rights and other assets sold and related selling costs, segment operating expenses were $10.2 million in 2005, $7.4 million in 2004, and $6.1 million in 2003. After we entered the water resource business, the water rights and water storage operations acquired by Vidler were development-stage assets, which were not ready for immediate commercial use. Although Vidler is generating significant revenues from the sale of water rights, the segment is still incurring costs related to long-lived assets which will not generate revenues until future years, e.g., operating, maintenance, and amortization expenses at storage facilities which are not yet storing water for customers.

Overhead Expenses consist of costs which are not related to the development of specific water resources, such as salaries and benefits, rent, and audit fees. Overhead Expenses were $4.4 million in 2005, $1.6 million in 2004, and $1.4 million in 2003. In 2005, overhead expenses include the accrual of approximately $2.9 million in incentive compensation for Vidler management.

Project Expenses consist of costs related to the development of existing water resources, such as maintenance and professional fees. Project Expenses are recorded as expenses are incurred, and could fluctuate from period to period depending on activity regarding Vidler’s various water resource projects. Costs related to the development of water resources which meet the criteria to be recorded as assets in our financial statements are capitalized to the cost of the asset, and amortized against matching revenues once revenues are generated. Project Expenses were $4.3 million in 2005, $4.3 million in 2004, and $3.2 million in 2003. Project expenses principally relate to:

· the operation and maintenance of the Vidler Arizona Recharge Facility;

· the development of water rights in the Tule Desert groundwater basin (part of the Lincoln County agreement);

· the utilization of water rights at Fish Springs Ranch as future municipal water supply for the north valleys of the Reno, Nevada area; and

· the operation of Fish Springs Ranch, and maintenance of the associated water rights.

In 2005, segment operating expenses (i.e., all expenses other than cost of sales and related selling expenses) were $2.8 million higher than in 2004, principally due to the $2.9 million in incentive compensation accrued in 2005.

In 2004, segment operating expenses were $1.3 million higher than in 2003, principally due to a $1 million increase in project expenses.

Vidler recorded segment income of $56.2 million in 2005, compared to segment losses of $5.7 million in 2004 and $543,000 in 2003.

Segment income for 2005 was $61.9 million higher than in 2004, principally due to a $65.7 million increase in the gross margin from the sale of water rights and land year over year, from $168,000 in 2004 to $65.9 million in 2005, which included the sales in the Harquahala Valley Irrigation District and by Lincoln/Vidler described above.

The 2004 segment loss was $5.2 million greater than in 2003, primarily as a result of a $3.9 million decrease in the gross margin from the sale of land and water rights and a $1.3 million increase in segment operating expenses year over year.

32

Nevada Land & Resource Company, LLC

	Year Ended December 31,
	2005			2004			2003
Revenues:
Sale of Land	$	20,173,000		$	10,472,000		$	4,141,000
Sale of Water Rights								250,000
Lease and Royalty		584,000			611,000			695,000
Interest and Other		1,054,000			477,000			803,000
Segment Total Revenues	$	21,811,000		$	11,560,000		$	5,889,000
Expenses:
Cost of Land and Water Rights Sold		(7,573,000	)		(4,257,000	)		(1,968,000	)
Operating Expenses		(2,200,000	)		(2,013,000	)		(1,917,000	)
Segment Total Expenses	$	(9,773,000	)	$	(6,270,000	)	$	(3,885,000	)
Income Before Tax	$	12,038,000		$	5,290,000		$	2,004,000

Nevada Land generated revenues of $21.8 million in 2005, compared to $11.6 million in 2004, and $5.9 million in 2003.

In each of the past 3 years, land sales have been the largest contributor to revenues in this segment. It can take a year or more to complete a land sale transaction, the timing of land sales is unpredictable, and historically the level of land sales has fluctuated from year to year. Accordingly, it should not be assumed that the level of sales in 2005 can be maintained. In 2005, Nevada Land recorded revenues of $20.2 million from the sale of 252,094 acres of land. In 2004, Nevada Land recorded revenues of $10.5 million from the sale of 120,683 acres of land, compared to revenues of $4.1 million from the sale of 75,131 acres of land in 2003. In 2003, Nevada Land also generated revenues from the sale of water rights of $250,000.

Lease and royalty income amounted to $584,000 in 2005, compared to $611,000 in 2004, and $695,000 in 2003. Most of this revenue comes from land leases, principally for grazing, agricultural, communications, and easements.

Interest and other revenues contributed $1.1 million in 2005, compared to $477,000 in 2004 and $803,000 in 2003.

After deducting the cost of land sold, the gross margin on land sales was $12.6 million in 2005, $6.2 million in 2004, and $2.2 million in 2003. This represented a gross margin percentage of 62.5% in 2005, 59.3% in 2004, and 54.3% in 2003.

Segment operating expenses were $2.2 million in 2005, $2 million in 2004, and $1.9 million in 2003.

Nevada Land recorded income of $12 million in 2005, compared to $5.3 million in 2004, and $2 million in 2003.

The $6.7 million increase in segment income from 2004 to 2005 is principally attributable to a $6.4 million increase in gross margin on land sales year over year. The volume of land sold increased 109% year over year, land sales revenue rose 93%, and the gross margin percentage on land sales improved 3.2%, from 59.3% in 2004 to 62.5% in 2005. The $3.3 million increase in segment income from 2003 to 2004 is principally attributable to a $4 million increase in gross margin on land sales year over year.

33

Business Acquisitions And Financing

	Year Ended December 31,
	2005			2004			2003
Business Acquisitions & Financing Revenues (Charges):
Realized Gains (Losses):
On Sale or Impairment of Holdings	$	2,666,000		$	840,000		$	1,707,000
SFAS No. 133 Change In Warrants					(556,000	)		461,000
Investment Income		2,957,000			2,088,000			2,092,000
Other		120,000			480,000			1,289,000
Segment Total Revenues	$	5,743,000		$	2,852,000		$	5,549,000
Stock Appreciation Rights Expense	$	(23,894,000	)	$	( 9,875,000	)	$	( 5,970,000	)
Other Expenses		(20,312,000	)		( 8,133,000	)		( 7,126,000	)
Segment Total Expenses	$	(44,206,000	)	$	(18,008,000	)	$	(13,096,000	)
Loss Before Investees’ Loss	$	(38,463,000	)	$	(15,156,000	)	$	( 7,547,000	)
Equity Share of Investees’ Net Loss								( 565,000	)
Loss Before Taxes	$	(38,463,000	)	$	(15,156,000	)	$	(8,112,000	)

The Business Acquisitions and Financing segment recorded revenues of $5.7 million in 2005, $2.9 million in 2004, and $5.5 million in 2003. Revenues in this segment vary considerably from year to year, primarily due to fluctuations in net realized gains or losses on the sale or impairment of holdings. We do not sell holdings on a regular basis. A holding may be sold if the price of a security has significantly exceeded our target, or if there have been changes which we believe limit further appreciation potential on a risk-adjusted basis. Consequently, the amount of net realized gains or losses recognized during any accounting period has no predictive value. In addition, in this segment various income items relate to specific investments held during a particular accounting period. Since our investments change over time, results in this segment are not necessarily comparable from year to year.

In 2005, net realized gains were $2.7 million, the largest of which was a $1.8 million realized gain on the sale of part of our holding in Raetia Energie AG. These realized gains were partially offset by a $142,000 charge for other-than-temporary impairment of our holding in a Swiss public company, to reflect a decline in the market value of that stock during 2005.

In 2004, net realized gains were $284,000. Net realized gains on the sale or impairment of holdings were $840,000. This primarily represented realized gains of $1.4 million on the sale of a domestic stock and $1 million on the sale of two unrelated foreign stocks, which were largely offset by charges of $1.3 million for other-than-temporary impairment of our holding in Accu Holding AG during 2004, and $547,000 for impairment of our holding in SIHL during 2004. In addition, a $556,000 charge, to reduce the carrying value of our HyperFeed warrants to zero, was recorded as a realized loss in accordance with Statement of Financial Accounting Standards No. 133, “Accounting For Derivative Instruments and Hedging Activities”.

In 2003, net realized gains of $2.2 million were recorded. This primarily represented $1.7 million in realized gains on the sale of two unrelated foreign stocks. In addition, income of $461,000 was recorded under SFAS No. 133, primarily representing an increase in the estimated fair value of HyperFeed warrants during 2003.

We regularly review any securities in which we have an unrealized loss. If we determine that the decline in market value is other-than-temporary, under GAAP we record a charge to reduce the basis of the security from its original cost to current carrying value, which is usually the market price at the balance sheet date when the provision is recorded. The determination is based on various factors, including the extent and the duration of the unrealized loss. A charge for other-than-temporary impairment is a non-cash charge, which is recorded as a realized loss.

It should be noted that:

· charges for other-than-temporary impairments do not affect book value per share, as the after-tax decline in the market value of investments carried under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” is already reflected in shareholders’ equity in our balance sheet; and

· the carrying (book) value of the holding does not change. The impairment simply reclassifies the decline from an unrealized decrease in shareholders’ equity to a realized loss in the consolidated statement of operations.

The written-down value becomes our new basis in the investment. In future accounting periods, unrealized gains or losses from that basis will be recorded in shareholders’ equity, and when the investment is sold a realized gain or loss from that basis will be recorded in the statement of operations. For example, during 2003 and 2004 we sold our holding in MC Shipping, Inc. Although this resulted in realized gains of $1.3 million under GAAP in 2003 and 2004, the gains only recovered part of a charge for other-than-temporary impairment of this holding recorded in 1998.

In this segment, investment income includes interest on cash and short-term fixed-income securities, and dividends from partially owned businesses. Investment income totaled $3 million in 2005, $2.1 million in 2004, and $2.1 million in 2003. Investment income fluctuates depending on the level of cash and temporary investments, the level of interest rates, and the dividends paid by partially owned businesses.

PICO’s equity share of investees’ income (loss) represents our proportionate share of the net income (loss) and other events affecting equity in the investments which we carry under the equity method, less any dividends received from those investments. We did not carry any investments under the equity method in 2004 and 2005. In 2003, our equity share of investees’ losses, principally HyperFeed, was $565,000.

Total segment expenses were $44.2 million in 2005, $18 million in 2004, and $13.1 million in 2003. The expenses recognized in this segment primarily consist of holding company costs which are not allocated to our other segments, most notably Stock Appreciation Rights (SAR) expense, PICO’s corporate overhead, and the U.S. dollar change in value of a Swiss franc inter-company loan. SAR expense was $23.9 million in 2005, $9.9 million in 2004, and $6 million in 2003. Other expenses were $20.2 million in 2005, $8.1 million in 2004, and $7.1 million in 2003.

The Business Acquisitions and Financing segment generated pre-tax losses of $38.5 million in 2005, $15.2 million in 2004, and $8.1 million in 2003.

In 2005, SAR expense was $23.9 million (see below), and other expenses were $20.3 million, principally consisting of:

· the accrual of $8.4 million in incentive compensation. Six of PICO’s officers participate in an incentive compensation program tied to growth in the Company’s book value per share relative to a pre-determined threshold;

· other parent company overhead of $8.3 million; and

· a $3.6 million expense resulting from the effect of depreciation in the Swiss Franc on the inter-company loan during 2005.

Our interests in Swiss public companies are held by Global Equity AG, a wholly owned subsidiary which is incorporated in Switzerland. Part of Global Equity AG’s funding comes from a loan from PICO, which is denominated in Swiss Francs. During accounting periods when the Swiss Franc appreciates relative to the US dollar -- such as 2003 and 2004 -- under GAAP we are required to record a benefit through the statement of operations to reflect the fact that Global Equity AG owes PICO more US dollars. In Global Equity AG’s financial statements, an equivalent debit is included in the foreign currency translation component of shareholders’ equity (since it owes PICO more dollars); however, this does not go through the statement of operations. During accounting periods when the Swiss Franc depreciates relative to the US dollar -- such as 2005 -- opposite entries are made and an expense is recorded in the statement of operations. Accordingly, we were required to record an expense of $3.6 million before tax in our statement of operations in 2005, even though there was no net impact on shareholders’ equity, before any related tax effects.

Since 2003, the change in the “in the money” amount (i.e., the difference between the market value of PICO stock and the exercise price of the SAR) of SAR outstanding during each accounting period has been recorded through the consolidated statement of operations. An increase in the “in the money” amount of SAR (i.e., if the price of PICO stock rises during the accounting period) was recorded as an expense.

During 2005, in conjunction with the Company entering into new employment agreements with its Chairman and President & CEO, PICO’s Compensation Committee retained an independent compensation expert to review the various components of executive compensation. The independent compensation expert suggested a number of changes to the existing compensation programs, particularly in light of new accounting pronouncements concerning stock-based compensation, and recent developments in the law relating to executive compensation, both of which have changed significantly since the programs were introduced.

After receiving the consultant’s report, the Company’s Compensation Committee elected to amend the 2003 SAR Program, and to replace it with a stock-based incentive plan, the PICO Holdings, Inc. 2005 Long-Term Incentive Plan (the “2005 Incentive Plan”), which was approved by the Company’s shareholders on December 8, 2005.

On September 21, 2005, the 2003 SAR program was amended, and the spread value of the SAR outstanding was monetized based on the last sale price of PICO stock on that date ($33.23). This resulted in a $23.9 million expense to record the increase in SAR liability from the start of 2005 through September 21, 2005, which comprised our total SAR expense for 2005. During 2005, excluding new shares issued, PICO’s equity market capitalization increased by approximately $142.1 million. See “Equity Compensation Plan Information” in Item 5, “Market for Registrant’s Common Equity and Related Stockholder Matters.”

34

On December 8, 2005, the Company’s Shareholders approved the 2005 Incentive Plan. On December 12, 2005, the Compensation Committee granted 2,185,965 stock-based SAR, with an exercise price of $33.76, to various of the Company’s officers, employees, and non-employee Directors. When stock-based SAR are exercised, new shares of stock will be issued to the participant to satisfy the spread value of the SAR being exercised (i.e., the difference between the market value of the stock and the exercise price of the SAR).

No expense was recorded in 2005 related to the 2005 Incentive Plan as the PICO stock price ($32.26) was below the exercise price ($33.76) at the end of 2005.

In 2004, SAR expense was $9.9 million, consisting of a $9.8 million increase in SAR liability, and $113,000 in payments on the exercise of SAR. The increase in SAR liability resulted from a $5.10 per share (32%) increase in the PICO stock price during 2004, which represented an increase of approximately $63.1 million in PICO’s equity market capitalization. Other expenses were $8.1 million, including the accrual of $1.7 million in incentive compensation, other parent company overhead of $6.6 million, and SISCOM expenses of $1.5 million. SISCOM ceased operations in January 2005. Segment expenses were reduced by a $2.1 million benefit resulting from the effect of appreciation in the Swiss Franc on the inter-company loan during 2004.

In 2003, SAR expense was $6 million, consisting of a $3.5 million charge on the initial adoption of the SAR program in July 2003, and a $2.5 million expense to record the increase in the “in the money” amount of SAR during the period from July 17, 2003 through the end of 2003. Other expenses were $7.1 million, including the accrual of $1.3 million in incentive compensation, other parent company overhead of $6.6 million, and $1.5 million in SISCOM expenses. Segment expenses were reduced by a $2.3 million benefit resulting from the effect of appreciation in the Swiss Franc on the inter-company loan during 2003.

Insurance Operations in Run Off

	Year Ended December 31,
	2005		2004			2003
Revenues:
Net Investment Income	$	3,051,000	$	2,765,000		$	2,680,000
Realized Gains On Sale or Impairment of Investments		5,057,000		2,982,000			562,000
Other							3,000
Segment Total Revenues	$	8,108,000	$	5,747,000		$	3,245,000
(Expenses) / Recoveries :
Underwriting (Expenses) / Recoveries		2,431,000		(1,687,000	)		(6,147,000	)
Segment Total (Expenses) / Recoveries	$	2,431,000	$	(1,687,000	)	$	(6,147,000	)
Income (Loss) Before Taxes:
Physicians Insurance Company of Ohio	$	8,552,000	$	3,417,000		$	7,314,000
Citation Insurance Company		1,987,000		643,000			(10,216,000	)
Income (Loss) Before Taxes	$	10,539,000	$	4,060,000		$	( 2,902,000	)

Once an insurance company has gone into “run off” and the last of its policies has expired, typically most revenues come from investment income and realized gains or losses on the sale of the securities investments which correspond to the insurance company’s reserves and shareholders’ equity.

The financial results of insurance companies in run off can be volatile if there is favorable or unfavorable development in their loss reserves. Physicians recorded significant income from favorable reserve development in 2003 and 2005. Citation recorded income from favorable reserve development in 2005; however in 2003 Citation recorded a significant loss, principally due to the reversal of the $7.5 million Fremont reinsurance recoverable and $3.9 million in reserve increases in the property and casualty insurance and workers’ compensation loss reserves. See the Citation section of the “Company Summary, Recent Developments, and Future Outlook” portion of Item 7.

The Insurance Operations in Run Off segment generated income of $10.5 million in 2005, consisting of $8.5 million from Physicians and $2 million from Citation. In 2004, the segment generated income of $4.1 million, consisting of $3.4 million from Physicians and $643,000 from Citation. In 2003, the segment incurred a $2.9 million loss, consisting of a $7.3 million profit from Physicians, which was more than offset by a $10.2 million loss from Citation

35

Physicians Insurance Company of Ohio

	Year Ended December 31,
	2005		2004			2003
MPL Revenues:
Net Investment Income	$	2,016,000	$	1,546,000		$	1,353,000
Net Realized Investment Gain		4,016,000		2,109,000			84,000
Earned Premium
Segment Total Revenues	$	6,032,000	$	3,655,000		$	1,437,000
MPL Underwriting Recoveries (Expenses)	$	2,520,000	$	(238,000	)	$	5,877,000
Income Before Taxes	$	8,552,000	$	3,417,000		$	7,314,000

Physicians’ total revenues were $6 million in 2005, compared to $3.7 million in 2004 and $1.4 million in 2003.

Investment income was $2 million in 2005, compared to $1.5 million in 2004 and $1.4 million in 2003. Investment income varies from year to year, depending on the amount of fixed-income securities in the portfolio, the prevailing level of interest rates, and the dividends paid on the common stocks in the portfolio. The $470,000 year over year increase in investment income from 2004 to 2005 is primarily due to higher dividends received from common stocks and, to a lesser extent, higher interest income from cash balances as a result of higher short-term interest rates.

The $4 million net realized investment gain recorded in 2005 included a $1.3 million gain on the sale of the remaining shares in Keewenaw Land Association Limited, and gains on the sale of various other portfolio holdings. The $2.1 million net realized investment gain recorded in 2004 included a $1.7 million gain on the sale of shares in Keewenaw and gains on the sale of various other portfolio holdings.

In 2005, Physicians recorded a $2.5 million underwriting recovery. The $3.1 million net reduction in reserves more than offset regular loss and loss adjustment expense and operating expenses of $635,000 for the year. The changes in reserves are more fully explained in the Physicians section of the “Company Summary, Recent Developments, and Future Outlook” portion of Item 7.

In 2004, Physicians’ operating and underwriting expenses totaled $238,000. A $489,000 net reduction in reserves partially offset Physicians’ regular loss and loss adjustment expense and operating expenses of $727,000 in 2004.

In 2003, Physicians recorded a $5.9 million underwriting recovery. The $6.7 million net reduction in reserves more than offset regular loss and loss adjustment expense and operating expenses of $876,000 for the year.

Citation Insurance Company

	Year Ended December 31,
	2005			2004			2003
Revenues:
Net Investment Income	$	1,035,000		$	1,219,000		$	1,327,000
Realized Investment Gains		1,041,000			873,000			478,000
Other								3,000
Segment Total Revenues	$	2,076,000		$	2,092,000		$	1,808,000
Expenses:
Underwriting Expenses	$	(89,000	)	$	(1,449,000	)	$	(12,024,000	)
Income (Loss) Before Taxes	$	1,987,000		$	643,000		$	(10,216,000	)

In 2005, Citation generated total revenues of $2.1 million, primarily consisting of $1 million in investment income and net realized investment gains of $1.1 million from the sale of various portfolio holdings. Citation’s investment income has declined in recent years, as its bond portfolio is being run down to provide the funds to pay claims. Underwriting expenses totaled $89,000. Underwriting expenses were reduced by the $510,000 net decrease in loss reserves, consisting of a $1.8 million reduction in property and casualty reserves, which was partially offset by a $1.3 million increase in workers’ compensation reserves. As a result of these factors, Citation recorded income of $2 million before taxes for 2005.

In 2004, Citation generated total revenues of $2.1 million, primarily consisting of $1.2 million in investment income and net realized investment gains of $873,000 from the sale of various portfolio holdings. Underwriting expenses totaled $1.4 million, including a net increase in loss reserves of $932,000, consisting of a $1.2 million increase in workers’ compensation reserves, which was partially offset by a $254,000 reduction in property and casualty insurance reserves. Consequently, Citation recorded income of $643,000 before taxes for 2004.

In 2003, Citation generated total revenues of $1.8 million, primarily consisting of $1.3 million in investment income and net realized investment gains of $478,000. Underwriting expenses totaled $12 million, including the $7.5 million reversal of the reinsurance recoverable from Fremont related to the workers’ compensation book of business. Underwriting expenses also included increases in reserves of $3 million in workers’ compensation, and $847,000 in property and casualty insurance, due to unfavorable development in prior year loss reserves. As a result of these factors, Citation incurred a loss of $10.2 million before taxes for 2003.

The $1.3 million improvement in Citation’s result from 2004 to 2005 is primarily due to a $1.4 million reduction in underwriting expenses year over year. The $1.4 million favorable change in underwriting expenses year over year was due to the combined effect of the reserve increase in 2004 which increased expenses by $932,000 last year, and the reserve reduction in 2005 which reduced expenses by $510,000 this year. Excluding the reserve changes in both years, underwriting expenses would have been approximately $599,000 in 2005, and approximately $517,000 in 2004.

The $10.9 million improvement in Citation’s result from 2003 to 2004 is primarily due to (1) the $7.5 million reinsurance reversal in 2003 which did not recur in 2004; and (2) a lower expense for reserve increases in 2004 ($932,000) than in 2003 ($3.9 million).

36

HyperFeed Technologies

	Year Ended December 31,
	2005			2004			2003
Revenues:
Service	$	4,270,000		$	5,995,000		$	1,363,000
Investment Income		1,000			9,000			16,000
Segment Total Revenues	$	4,271,000		$	6,004,000		$	1,379,000
Expenses:
Cost of Service		( 1,443,000	)		( 1,585,000	)		(1,069,000	)
Depreciation and Amortization		( 757,000	)		( 870,000	)		( 624,000	)
Other		( 9,481,000	)		( 8,939,000	)		(3,911,000	)
Segment Total Expenses	$	(11,681,000	)	$	(11,394,000	)	$	(5,604,000	)
Segment Loss Before Taxes	$	( 7,410,000	)	$	(5,390,000	)	$	(4,225,000	)

In 2005, HyperFeed generated $4.3 million in revenues. Service revenues were $4.3 million and the costs of service were $1.4 million, resulting in gross margin of $2.9 million. After the deduction of $9.5 million in other operating expenses, HyperFeed generated a segment loss before taxes and minority interest of $7.4 million.

In 2004, HyperFeed generated $6 million in revenues. Service revenues were $6 million and the costs of service were $1.6 million, resulting in gross margin of $4.4 million. After the deduction of $9.8 million in other operating expenses, HyperFeed generated a segment loss before taxes and minority interest of $5.4 million.

During the period from May 15, 2003 (commencement of consolidation) to December 31, 2003, HyperFeed generated $1.4 million in revenues. Service revenues were $1.4 million and the costs of service were $1.1 million, resulting in gross margin of $294,000. After $4.5 million in other operating expenses, HyperFeed generated a segment loss of $4.2 million.

37

Discontinued Operations

Sequoia Insurance Company

	Year Ended December 31,
	2005	2004	2003
Revenues			$	16,433,000
Expenses				(12,759,000	)
Income Before Taxes			$	3,674,000
Income Taxes				(1,285,000	)
Net Income			$	2,389,000

In the first three months of 2003 prior to its sale, Sequoia Insurance Company generated income of $2.4 million after-tax, which is included in the “Income from discontinued operations, net of tax” line in the Consolidated Statement of Operations for 2003.

PICO also recorded a $443,000 after-tax gain from the sale of Sequoia in 2003, which forms part of the “Gain on disposal of discontinued operations, net” line in the Consolidated Statement of Operations for 2003.

Discontinued Operations of HyperFeed

	Year Ended December 31,
	2005			2004			2003
Income (Loss)	$	(508,000	)	$	(422,000	)	$	545,000
Gain on Sale of Discontinued Operations		545,000			500,000			7,008,000
Net Income & Gain	$	37,000		$	78,000		$	7,553,000

The discontinued operations of HyperFeed consist of the consolidated market data feed customers, which were sold for $8.5 million in 2003.

In 2005, the discontinued operations of HyperFeed generated a net gain of $37,000. A $545,000 gain was recorded on the sale of discontinued operations, which forms part of the “Gain on disposal of discontinued operations, net” line in the Consolidated Statement of Operations for 2005. This gain was more than offset by a loss from discontinued operations of $508,000, which is included in the “Income from discontinued operations, net of tax” line in the Consolidated Statement of Operations for 2005.

In 2004, the discontinued operations of HyperFeed recorded a net gain of $78,000. This consisted of a $500,000 gain from the sale of discontinued operations, which was partially offset by a loss from discontinued operations of $422,000.

During the period from May 15, 2003 until December 31, 2003, the discontinued operations of HyperFeed generated a net gain of $7.6 million. This consisted of income of $545,000, and a $7 million gain from the sale of discontinued operations.

38

LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Cash Flow

PICO’s assets primarily consist of our operating subsidiaries, holdings in other public companies, marketable securities, and cash and cash equivalents. On a consolidated basis, the Company had $37.8 million in cash and cash equivalents at December 31, 2005, compared to $17.4 million at December 31, 2004. In addition to cash and cash equivalents, at December 31, 2005 the consolidated group held fixed-income securities with a market value of $92.8 million, and equities with a market value of $194.6 million.

These totals include cash of $3.8 million, fixed-income securities with a market value of $31.3 million, and equities with a market value of $90.8 million, held by our insurance companies. The totals also include cash of $5.5 million, fixed-income securities with a market value of $33.9 million, and equities with a market value of $1.5 million held in the deferred compensation Rabbi Trusts.

Our cash flow position fluctuates depending on the requirements of our operating subsidiaries for capital, and activity in our insurance company investment portfolios. Our primary sources of funds include cash balances, cash flow from operations, the sale of holdings, and -- potentially -- the proceeds of borrowings or offerings of equity and debt.

In broad terms, the cash flow profile of our principal operating subsidiaries is:

· As Vidler’s water assets are monetized, Vidler is generating free cash flow as receipts from the sale of water rights and land have overtaken maintenance capital expenditure, financing costs, and operating expenses;

· Nevada Land is actively selling land which has reached its highest and best use. Nevada Land’s principal sources of cash flow are the proceeds of cash sales, and collections of principal and interest on sales contracts where Nevada Land has provided vendor financing. These receipts and other revenues significantly exceed Nevada Land’s operating costs, so Nevada Land is generating strong cash flow;

· Investment income more than covers the operating expenses of the “run off” insurance companies, Physicians and Citation. The funds to pay claims are coming from the maturity of fixed-income investments, the realization of fixed-income investments and stocks held in their investment portfolios, and recoveries from reinsurance companies; and

· HyperFeed maintains its own cash & cash equivalent balances, and borrowings. At December 31, 2005, HyperFeed had approximately $302,000 in cash and cash equivalents, and external borrowings of $500,000. In addition to the external borrowings, at December 31, 2005, PICO had advanced $810,000 to HyperFeed in the form of a promissory note. It is anticipated that this promissory note, as well as subsequent promissory notes issued in 2006 and additional funding, will be consolidated into a secured convertible promissory note agreement later in 2006. See Note 4 to the Company’s Notes to Consolidated Financial Statements, “Investment in HyperFeed Technologies, Inc.”.

The Departments of Insurance in Ohio and California prescribe minimum levels of capital and surplus for insurance companies, set guidelines for insurance company investments, and restrict the amount of profits which can be distributed as dividends. At December 31, 2005 the insurance companies had statutory surplus of $82.8 million, which cannot be distributed without regulatory approval. Physicians Insurance Company of Ohio intends to seek approval to pay a dividend of $6.5 million in 2006.

Typically, our insurance subsidiaries structure the maturity of fixed-income securities to match the projected pattern of claims payments. When interest rates are at very low levels, to insulate the capital value of the bond portfolios against a decline in value which could be brought on by a future increase in interest rates, the bond portfolios may have a shorter duration than the projected pattern of claims payments.

As shown in the Consolidated Statements of Cash Flow, there was a $20.4 million net increase in cash and cash equivalents in 2005, compared to a $6.9 million net decrease in 2004, and a $2.2 million net increase in 2003.

During 2005, Operating Activities provided cash of $69.2 million, compared to $7 million used in 2004, and $426,000 used in 2003.

The most significant cash inflows from operating activities were:

· In 2005, Vidler’s sale of water rights and land in the Harquahala Valley Irrigation District generated an operating cash flow of approximately $87.4 million ($94.4 million gross sales price, less $5.7 million to exercise options to acquire certain farms that we sold in the transaction, and $1.2 million closing and other costs). In addition, Lincoln/Vidler’s sale of 2,100 acre-feet of water resulted in an operating cash flow to Vidler of approximately $10.8 million. Due to the income recognized on these sales, we paid $24.2 million in estimated federal and state taxes in 2005. All other operating activities resulted in an operating cash outflow of approximately $4.8 million;

· in 2004, the collection of $6.3 million of principal on two collateralized notes receivable, related to Vidler’s sale of assets at Big Springs Ranch and West Wendover in 2003, and $4.2 million from cash land sales by Nevada Land;

· in 2003, approximately $4 million in proceeds of land and related assets sold by Nevada Land, and $5.5 million from the cash portion of two significant sales of land and related assets by Vidler.

In all three years, the principal uses of cash were operating expenses at Vidler and Nevada Land, claims payments by Physicians and Citation, and group overhead.

Investing Activities used cash of $70.1 million in 2005. The sale or maturity of fixed-income securities provided cash of $23.6 million, but $78.7 million of cash was used to purchase fixed-income securities. This principally reflected the temporary investment of liquid funds from Vidler’s water sales and the May 2005 PICO stock offering, in corporate bonds maturing in 2006 and 2007. Cash outflows of $22.6 million for the purchase of stocks exceeded cash inflows of $12 million from the sale of stocks.

In 2004, Investing Activities generated cash of $580,000. The sale and maturity of fixed-income securities exceeded new purchases, providing a $12.3 million net cash inflow. During 2004, a net $7.6 million was invested in stocks, consisting of $10.9 million in sales, and $18.5 million of new purchases. In addition, $1.3 million was expended to purchase the minority shareholdings in Vidler and SISCOM.

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Investing Activities generated cash of $5.0 million in 2003. The cash inflow in 2003 primarily resulted from cash received of $25.1 million from the sale of Sequoia (gross proceeds of approximately $43 million, less the $17.9 million dividend of common stocks and debt securities received). The remaining 2003 cash flow items principally reflect the net investment of $6.3 million in fixed-income securities and $10.9 million in marketable equity securities, and the payment of $1.2 million in cash to acquire additional shares of HyperFeed. The net investment in fixed-income securities represents routine activity in the investment portfolios of our insurance companies, and the temporary investment of surplus funds in fixed-income securities.

Financing Activities provided $17.5 million of cash in 2005. This primarily represented the sale of 905,000 newly-issued shares of PICO common stock for net proceeds of $21.4 million, partially offset by the repayment of $3.9 million in principal on notes collateralized by certain of the farm properties which Vidler sold in the Harquahala Valley Irrigation District.

In 2004, Financing Activities provided cash of $1.5 million. This was principally due to a $2.4 million increase in Swiss franc borrowings to fund additional purchases of stocks in Switzerland, which was partially offset by the repayment of $1.3 million in borrowings by Vidler.

Financing Activities used $617,000 of cash in 2003, primarily due to the repayment of $534,000 in non-recourse borrowings collateralized by farm properties owned by Vidler. In addition, during 2003 Global Equity A.G. repaid borrowings to a Swiss bank of $9.1 million (CHF 12.1 million) and took out an equivalent amount of new borrowings from another Swiss bank.

We believe that our cash and cash equivalent balances and short-term investments will be sufficient to satisfy cash requirements for at least the next twelve months. Although we cannot accurately predict the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our net revenues or results of operations.

As of March 2006, Vidler had commitments for future capital expenditures amounting to approximately $11.8 million, relating to the construction of a pipeline to convey water from the Fish Springs Ranch to Reno, Nevada.

Share Repurchase Program

In October 2002, PICO’s Board of Directors authorized the repurchase of up to $10 million of PICO common stock. The stock purchases may be made from time to time at prevailing prices through open market or negotiated transactions, depending on market conditions, and will be funded from available cash.

As of December 31, 2005, no stock had been repurchased under this authorization.

Commitments and Supplementary Disclosures

1. At December 31, 2005:

· PICO had no “off balance sheet” financing arrangements;

· PICO has not provided any debt guarantees; and

· PICO has no commitments to provide additional collateral for financing arrangements. PICO’s Swiss subsidiary, Global Equity AG, has Swiss Franc borrowings which partially finance some of the Company’s European stock holdings. If the market value of those stocks declines below certain levels, we could be required to provide additional collateral or to repay a portion of the Swiss Franc borrowings.

Vidler, a PICO subsidiary, is party to a lease to acquire 30,000 acre-feet of underground water storage privileges and associated rights to recharge and recover water located near the California Aqueduct, northwest of Bakersfield. The agreement requires a minimum payment of $401,000 per year adjusted annually by the engineering price index until 2007. PICO signed a Limited Guarantee agreement with Semitropic Water Storage District (“Semitropic”) that requires PICO to guarantee Vidler’s annual obligation up to $519,000, adjusted annually by the engineering price index.

Aggregate Contractual Obligations:

The following table provides a summary of our contractual cash obligations and other commitments and contingencies as of December 31, 2005.

	Payments Due by Period
Contractual Obligations	Less than 1 year		1 -3 years		3 -5 years		More than 5 years		Total
Bank borrowings	$	12,296,940	$	37,928					$	12,334,868
Operating leases		1,464,331		2,213,707	$	752,540	$	3,124,420		7,554,998
Expected claim payouts		10,077,054		16,845,308		10,448,305		9,276,239		46,646,906
Other borrowings/obligations		8,265,665		3,505,900						11,771,565
Total	$	32,103,990	$	22,602,843	$	11,200,845	$	12,400,659	$	78,308,337

2. Recent Accounting Pronouncements

In December 2004, FASB issued Statement 123(Revised), Share-Based Payment, which replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.Statement 123(Revised) is effective for public entities as of the beginning of the annual period that begins after June 15, 2005. The new Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost should be recognized over the period during which an employee is required to provide service in exchange for the award--the requisite service period (usually the vesting period). As all of the stock-settled SARs granted under PICO’s 2005 Plan were fully vested at December 31, 2005, no stock-based compensation will be recorded for these awards under SFAS 123R. If and when PICO grants additional awards, the fair value of such awards will be recognized and recorded over the vesting period.

In March 2005, FASB issued Interpretation number 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 which clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations ,and refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. There was no effect of adoption of the statement on the accompanying consolidated financial statement of the Company.

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Regulatory Insurance Disclosures

Liabilities for Unpaid Loss and Loss Adjustment Expenses

Liabilities for unpaid loss and loss adjustment expenses are estimated based upon actual and industry experience, and assumptions and projections as to claims frequency, severity and inflationary trends and settlement payments. Such estimates may vary from the eventual outcome. The inherent uncertainty in estimating reserves is particularly acute for lines of business for which both reported and paid losses develop over an extended period of time.

Several years or more may elapse between the occurrence of an insured medical professional liability insurance or casualty loss or workers’ compensation claim, the reporting of the loss and the final payment of the loss. Loss reserves are estimates of what an insurer expects to pay claimants, legal and investigative costs and claims administrative costs. PICO’s insurance subsidiaries are required to maintain reserves for payment of estimated losses and loss adjustment expenses for both reported claims and claims which have occurred but have not yet been reported. Ultimate actual liabilities may be materially more or less than current reserve estimates.

Reserves for reported claims are established on a case-by-case basis. Loss and loss adjustment expense reserves for incurred but not reported claims are estimated based on many variables including historical and statistical information, inflation, legal developments, the regulatory environment, benefit levels, economic conditions, judicial administration of claims, general trends in claim severity and frequency, medical costs and other factors which could affect the adequacy of loss reserves. Management reviews and adjusts incurred but not reported claims reserves regularly.

The liabilities for unpaid losses and loss adjustment expenses of Physicians and Citation were $46.6 million at December 31, 2005, $56 million at December 31, 2004 and $60.9 million at December 31, 2003 before reinsurance reserves, which reduce net unpaid losses and loss adjustment expenses. Of those amounts, the liabilities for unpaid loss and loss adjustment expenses of prior years decreased by $3.7 million in 2005, increased by $443,000 in 2004 and increased by $4.7 million in 2003.

See Note 11 of Notes to PICO’s Consolidated Financial Statements, “Reserves for Unpaid Loss and Loss Adjustment Expenses” for additional information regarding reserve changes.

Although insurance reserves are certified annually by independent actuaries for each insurance company as required by state law, significant fluctuations in reserve levels can occur based upon a number of variables used in actuarial projections of ultimate incurred losses and loss adjustment expenses.

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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT

The following table presents the development of balance sheet liabilities for 1995 through 2005 for all continuing operations property and casualty and workers’ compensation lines of business and medical professional liability insurance. The “Net liability as originally estimated” line shows the estimated liability for unpaid losses and loss adjustment expenses recorded at the balance sheet date on a discounted basis, prior to 2000, for each of the indicated years. Reserves for other lines of business that Physicians ceased writing in 1989, which are immaterial, are excluded. The “Gross liability as originally estimated” represents the estimated amounts of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date on an undiscounted basis, including losses that had been incurred but not reported.

	1995		1996			1997			1998			1999
	(In thousands)
Net liability as originally estimated:	$	135,825	$	153,891		$	110,931		$	89,554		$	88,112
Discount		16,568		12,217			9,159			8,515			7,521
Gross liability as originally estimated:		152,393		166,108			120,090			98,069			95,633
Cumulative payments as of:
One year later		26,331		54,500			37,043			23,696			22,636
Two years later		63,993		88,298			57,622			41,789			31,987
Three years later		85,649		107,094			73,096			50,968			39,150
Four years later		99,730		121,698			82,249			58,129			45,140
Five Years later		110,299		130,247			89,398			64,119			51,566
Six years later		115,312		137,462			95,454
Seven years later		118,396		143,532
Eight years later		121,837
Nine years later
Ten years later
Liability re-estimated as of:
One year later		145,824		166,870			129,225			114,347			96,727
Two years later		145,031		182,963			145,543			115,539			85,786
Three years later		150,439		193,498			146,618			104,689			83,763
Four years later		155,183		194,423			135,930			102,704			88,460
Five Years later		157,973		183,333			133,958			107,409			88,167
Six years later		149,074		181,705			138,520
Seven years later		147,525		185,201
Eight years later		141,028
Nine years later
Ten years later
Cumulative Redundancy (Deficiency)	$	11,365		($19,093	)		($18,430	)		($9,340	)	$	7,466

			Year Ended December 31,
	2000		2001			2002			2003		2004		2005
	(In Thousands)
Net liability as originally estimated:	$	74,896	$	54,022		$	44,906		$	43,357	$	36,603	$	28,618
Discount
Gross liability before discount as originally estimated:		74,896		54,022			44,906			43,357		36,603		28,618
Cumulative payments as of:
One year later		9,767		7,210			6,216			6,515		4,227
Two years later		16,946		13,426			12,729			10,740
Three years later		23,162		19,939			16,956
Four years later		29,675		24,166
Five Years later		33,902
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Liability re-estimated as of:
One year later		63,672		52,115			49,574			43,115		32,845
Two years later		61,832		56,782			49,331			39,358
Three years later		66,494		56,540			45,574
Four years later		66,275		52,784
Five Years later		62,519
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Redundancy (Deficiency)	$	12,377	$	(2,518	)	$	(668	)	$	3,999	$	3,758

RECONCILIATION TO FINANCIAL STATEMENTS
Gross liability - end of year	$	60,847		$	53,905		$	44,476
Reinsurance recoverable		(17,490	)		(17,302	)		(15,858	)
Net liability - end of year		43,357			36,603			28,618
Reinsurance recoverable		17,490			17,302			15,858
		60,847			53,905			44,476
Discontinued personal lines insurance		17			51			132
Liability to California Insurance Guarantee Association for Workers' Compensation payouts					2,038			2,038
Balance sheet liability	$	60,864		$	55,994		$	46,646
Gross re-estimated liability - latest	$	59,506		$	51,898
Re-estimated recoverable - latest		(20,148	)		(19,053	)
Net re-estimated liability - latest	$	39,358		$	32,845
Net cumulative redundancy	$	3,999		$	3,758

Each decrease or increase includes the effects of all changes in amounts during the current year for prior periods. For example, the amount of the redundancy related to losses settled in 1995, but incurred in 1992, will be included in the decrease or increase amount for 1992, 1993 and 1994. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. For example, Physicians commuted reinsurance contracts in several different years that significantly increased the estimate of net reserves for prior years by reducing the recoverable loss and loss adjustment expense reserves for those years. Accordingly, it may not be appropriate to extrapolate future increases or decreases based on this table.

The data in the above table is based on Schedule P from each of Physician’s and Citation’s 1995 to 2005 Annual Statements, as filed with state insurance departments; however, the development table above differs from the development displayed in Schedule P, Part-2, of the insurance Annual Statements as Schedule P, Part-2, excludes unallocated loss adjustment expenses.

Loss Reserve Experience

The inherent uncertainties in estimating loss reserves are greater for some insurance products than for others, and are dependent on the length of the reporting lag or “tail” associated with a given product (i.e., the lapse of time between the occurrence of a claim and the report of the claim to the insurer), on the diversity of historical development patterns among various aggregations of claims, the amount of historical information available during the estimation process, the degree of impact that changing regulations and legal precedents may have on open claims, and the consistency of reinsurance programs over time, among other things. Because medical professional liability insurance, commercial casualty and workers’ compensation claims may not be fully paid for several years or more, estimating reserves for such claims can be more uncertain than estimating reserves in other lines of insurance. As a result, precise reserve estimates cannot be made for several years following a current accident year for which reserves are initially established.

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There can be no assurance that the insurance companies have established reserves that are adequate to meet the ultimate cost of losses arising from such claims. It has been necessary, and will over time continue to be necessary, for the insurance companies to review and make appropriate adjustments to reserves for estimated ultimate losses and loss adjustment expenses. To the extent reserves prove to be inadequate, the insurance companies would have to adjust their reserves and incur a charge to income, which could have a material adverse effect on PICO’s statement of operations and financial condition.

Reconciliation of Unpaid Loss and Loss Adjustment Expenses

An analysis of changes in the liability for unpaid losses and loss adjustment expenses for 2005, 2004 and 2003 is set forth in Note 11 of Notes to PICO’s Consolidated Financial Statements, “Reserves for Unpaid Loss and Loss Adjustment Expenses.”

Reinsurance

All of PICO’s insurance companies seek to reduce the loss that may arise from individually significant claims or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance carriers. Various reinsurance treaties remain in place to limit PICO’s exposure levels. See Note 10 of Notes to PICO’s Consolidated Financial Statements, “Reinsurance.” PICO’s insurance subsidiaries are contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.

Medical Professional Liability Insurance through Physicians Insurance Company of Ohio

On July 14, 1995, Physicians entered into an Agreement for the Purchase and Sale of Certain Assets with Mutual Assurance, Inc. This transaction closed on August 28, 1995. Pursuant to the agreement, Physicians sold their professional liability insurance business and related liability insurance business for physicians and other health care providers.

Simultaneously with execution of the agreement, Physicians and Mutual entered into a reinsurance treaty pursuant to which Mutual agreed to assume all risks attaching after July 15, 1995 under medical professional liability insurance policies issued or renewed by Physicians on physicians, surgeons, nurses, and other health care providers, dental practitioner professional liability insurance policies including corporate and professional premises liability coverage issued by Physicians, and related commercial general liability insurance policies issued by Physicians, net of applicable reinsurance.

Prior to July 1, 1993, Physicians ceded a portion of the risk it wrote under numerous reinsurance treaties at various retentions and risk limits. However, during the last two accident years that Physicians wrote premium (July 1, 1993 to July 15, 1995), Physicians ceded reinsurance contracts through Odyssey America Reinsurance Corporation, a subsidiary of Odyssey Re Holdings Corp. (rated A by A. M. Best Company) and Medical Assurance Company, a wholly owned subsidiary of Pro Assurance Group (rated A- by Standard & Poors). Physicians ceded insurance to these carriers on an automatic basis when retention limits were exceeded. Physicians retained all risks up to $200,000 per occurrence. All risks above $200,000, up to policy limits of $5 million, were transferred to reinsurers, subject to the specific terms and conditions of the various reinsurance treaties. Physicians remains primarily liable to policyholders for ceded insurance should any reinsurer be unable to meet its contractual obligations.

Property and Casualty Insurance through Citation Insurance Company

For the property business, reinsurance provides coverage of $10.4 million excess of $150,000 per occurrence. For casualty business, excluding umbrella coverage, reinsurance provided coverage of $4.9 million excess of $150,000 per occurrence. Umbrella coverage’s were reinsured $9.9 million excess of $100,000 per occurrence. The catastrophe treaties for 1998 and thereafter provided coverage of 95% of $14 million excess of $1 million per occurrence. Facultative reinsurance was placed with various reinsurers.

Citation does not require reinsurance from 2002 onwards for all its property and casualty lines of business, as its last policy expired in December 2001.

If the reinsurers are “not admitted” for regulatory purposes, Citation has to maintain sufficient collateral with approved financial institutions to secure cessions of paid losses and outstanding reserves.

See Note 10 of Notes to Consolidated Financial Statements, “Reinsurance,” with regard to reinsurance recoverable concentration for all property and casualty lines of business as of December 31, 2005. Citation remains contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.

Workers’ Compensation Insurance through Citation Insurance Company

Claims and Liabilities Related to the Insolvency of Fremont Indemnity Company

In 1997, pursuant to a Quota Share Reinsurance Agreement (the “Reinsurance Agreement”), Citation ceded its California workers’ compensation insurance liabilities to Citation National Insurance Company (“CNIC”) and transferred all administrative services relating to these liabilities to Fremont. The Reinsurance Agreement became effective upon Fremont’s acquisition, with approval from the California Department of Insurance (the “Department”), of CNIC on or about June 30, 1997. Thereafter, on or about December 31, 1997, CNIC merged, with Department approval, with and into Fremont. Accordingly, since January 1, 1998, Fremont has been both the reinsurer and the administrator of the California workers’ compensation business ceded by Citation.

During the period from June 30, 1997 (the date on which Citation ceded its workers’compensation insurance liabilities) through July 2, 2003 (the date on which Fremont was placed in liquidation), Fremont maintained a workers’ compensation insurance securities deposit in California for the benefit of claimants under workers’ compensation insurance policies issued, or assumed, by Fremont.

Concurrent with Fremont’s posting of the portion of the total deposit that related to Citation’s insureds, Citation reduced its own workers’ compensation insurance reserves by the amount of that deposit.

On June 4, 2003, the Superior Court of the State of California for the County of Los Angeles (the “Liquidation Court”) entered an Order of Conservation over Fremont and appointed the California Department of Insurance Commissioner (the “Commissioner”) as the conservator. Pursuant to such order, the Commissioner was granted authority to take possession of all of Fremont’s assets, including its rights in the deposit for Citation’s insureds. Shortly thereafter, on July 2, 2003, the Liquidation Court entered an Order appointing the Commissioner as the liquidator of Fremont’s Estate.

Shortly thereafter, Citation concluded that, because Fremont had been placed in liquidation, Citation was no longer entitled to take a reinsurance credit for the deposit for Citation’s insureds under the statutory basis of accounting. Consequently, Citation reversed the $7.5 million reinsurance recoverable from Fremont in its June 30, 2003 financial statements prepared on the statutory basis of accounting. In addition, Citation made a corresponding provision for the reinsurance recoverable from Fremont at June 30, 2003 for GAAP purposes.

In June 2004, Citation filed litigation against the California Department of Insurance in the Superior Court of California to recover its workers’ compensation trust deposits held by Fremont prior to Fremont’s liquidation.

In September 2004, the Superior Court ruled against Citation’s action. As a result, Citation did not receive any distribution from the California Insurance Guarantee Association or Fremont and will not receive any credit for the deposit held by Fremont for Citation’s insureds.

In consideration of the potential cost and the apparent limited prospect of obtaining relief, Citation decided not to file an appeal.

Reinsurance Agreements on Workers’ Compensation Insurance Liabilities

In addition to the reinsurance agreements with Fremont noted above, Citation’s workers’ compensation insurance liabilities from policy years 1986 to 1997 retain additional reinsurance coverage with General Reinsurance, a wholly owned subsidiary of Berkshire Hathaway, Inc. (Standard & Poors rating of AAA.) Policy years 1986 and 1987 have a Company retention of $150,000; policy years 1988 and 1989 have a Company retention of $200,000 and policy years 1990 through to 1997 have a Company retention of $250,000. For policy years 1983 to 1985 partial reinsurance exists and is administered through Guy Carpenter Company as broker. These treaties are for losses in excess of $75,000 retention for 1983 and 1984 and $100,000 retention for 1985. The subscriptions on these treaties are for 30%, 35% and 52.5% for the respective treaty years.

See Note 10 of Notes to Consolidated Financial Statements, “Reinsurance,” with regard to reinsurance recoverable concentration for Citation’s workers’ compensation line of business as of December 31, 2005. Citation remains contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PICO’s balance sheets include a significant amount of assets and liabilities the fair value of which are subject to market risk. Market risk is the risk of loss arising from adverse changes in market interest rates or prices. PICO currently has interest rate risk as it relates to its fixed maturity securities and mortgage participation interests, equity price risk as it relates to its marketable equity securities, and foreign currency risk as it relates to investments denominated in foreign currencies. Generally, PICO’s borrowings are short to medium term in nature and therefore approximate fair value. At December 31, 2005, PICO had $92.8 million of fixed maturity securities and mortgage participation interests, $194.6 million of marketable equity securities that were subject to market risk, of which $98.6 million were denominated in foreign currencies, primarily Swiss francs. PICO’s investment strategy is to manage the duration of the portfolio relative to the duration of the liabilities while managing interest rate risk.

PICO uses two models to report the sensitivity of its assets and liabilities subject to the above risks. For its fixed maturity securities and mortgage participation interests, PICO uses duration modeling to calculate changes in fair value. For its marketable securities, PICO uses a hypothetical 20% decrease in the fair value to analyze the sensitivity of its market risk assets and liabilities. For investments denominated in foreign currencies, PICO uses a hypothetical 20% decrease in the local currency of that investment. Actual results may differ from the hypothetical results assumed in this disclosure due to possible actions taken by management to mitigate adverse changes in fair value and because the fair value of securities may be affected by credit concerns of the issuer, prepayment rates, liquidity, and other general market conditions. The sensitivity analysis duration model produced a loss in fair value of $1.1 million for a 100 basis point decline in interest rates on PICO’s fixed securities and mortgage participation interests. The hypothetical 20% decrease in fair value of PICO’s marketable equity securities produced a loss in fair value of $38.9 million before tax, that would impact the unrealized appreciation in shareholders’ equity. The hypothetical 20% decrease in the local currency of PICO’s foreign denominated investments produced a loss of $17.4 million that would impact the foreign currency translation in shareholders’ equity.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PICO’s financial statements as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 and the independent auditors’ report is included in this report as listed in the index.

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SELECTED QUARTERLY FINANCIAL DATA

Summarized unaudited quarterly financial data (in thousands, except share and per share amounts) for 2005 and 2004 are shown below. In management’s opinion, the interim financial statements from which the following data has been derived contain all adjustments necessary for a fair presentation of results for such interim periods and are of a normal recurring nature.

	Three Months Ended
	March 31,			June 30,		September 30,			December 31,
	2005			2005		2005			2005
Net investment income and net realized gain	$	4,670		$	5,657	$	2,611		$	2,981
Sale of land and water rights		2,154			96,171		3,914			22,745
Total revenues		8,116			103,211		8,138			26,918
Gross profit - Land and water rights		1,412			57,888		2,468			16,686
Gross profit - Service revenue		606			766		967			488
Net income (loss)		(6,963	)		23,592		(9,283	)		8,856
Basic and Diluted:
Net income (loss) per share	$	(0.56	)	$	1.83	$	(0.70	)	$	0.67
Weighted average common and equivalent shares outstanding		12,366,440			12,919,496		13,271,440			13,271,440

	Three Months Ended
	March 31,			June 30,			September 30,			December 31,
	2004			2004			2004			2004
Net investment income and net realized gain	$	743		$	1,782		$	704		$	5,836
Sale of land and water rights		276			2,096			1,151			7,355
Total revenues		2,397			5,766			4,307			15,658
Gross profit - Land and water rights		165			923			624			4,671
Gross profit - Service revenue		374			959			1,544			1,532
Net income (loss)		(5,018	)		(4,532	)		(2,183	)		1,174
Basic and Diluted:
Net income (loss) per share	$	(0.41	)	$	(0.37	)	$	(0.18	)	$	0.09
Weighted average common and equivalent shares outstanding		12,370,264			12,368,928			12,367,664			12,366,479

45

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2005 AND 2004

AND FOR EACH OF THE

THREE YEARS IN THE PERIOD

ENDED DECEMBER 31, 2005

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Accounting Firms	47-48
Consolidated Balance Sheets as of December 31, 2005 and 2004	49-50
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003	51
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2005, 2004, and 2003	52-54
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003	55
Notes to Consolidated Financial Statements	56-73

46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PICO Holdings, Inc.

We have audited the accompanying consolidated balance sheets of PICO Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We did not audit the financial statements of HyperFeed Technologies, Inc. (a consolidated subsidiary) for the year ended December 31, 2003, which statements reflect net income of $1,600,818 for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for HyperFeed Technologies, Inc., is based solely on the report of such other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of PICO Holdings, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

San Diego, California

March 9, 2006

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

HyperFeed Technologies, Inc.:

We have audited the consolidated statement of operations, stockholders' equity, and cash flows of HyperFeed Technologies, Inc. and subsidiary (the Company) as of December 31, 2003.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of HyperFeed Technologies, Inc. and subsidiary for the year then ended December 31, 2003 in conformity U.S. generally accepted accounting principles.

/s/ KPMG LLP

Chicago, Illinois

March 4, 2004

48

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

ASSETS

	2005		2004
Available for Sale Investments (Note 3):
Fixed maturities	$	92,813,137	$	39,479,216
Equity securities		194,633,197		142,978,213
Total investments		287,446,334		182,457,429
Cash and cash equivalents		37,794,416		17,407,138
Notes and other receivables, net (Note 6)		14,692,888		14,951,973
Reinsurance receivables (Note 10)		16,186,105		17,157,329
Real estate and water assets (Note 5)		76,891,435		110,700,456
Property and equipment, net (Note 8)		1,572,492		2,436,921
Other assets		7,188,858		9,512,807
Assets of discontinued operations (Note 2)		57,094		6,970
Total assets	$	441,829,622	$	354,631,023

49

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

LIABILITIES AND SHAREHOLDERS’ EQUITY

	2005			2004
Policy liabilities and accruals:
Unpaid losses and loss adjustment expenses (Note 11)	$	46,646,906		$	55,994,375
Reinsurance balance payable		325,081			673,024
Stock appreciation rights payable (Note 1)					15,731,741
Deferred compensation (Note 1)		42,737,293			2,730,069
Other liabilities		20,039,392			9,259,188
Bank and other borrowings (Note 19)		12,334,868			18,020,559
Net deferred income taxes (Note 7)		17,239,062			9,193,060
Other liabilities of discontinued operations (Note 2 )		533,548			759,372
Total liabilities		139,856,150			112,361,388
Minority interest		1,098,515			2,340,337
Commitments and Contingencies (Notes 10, 11, 12, 13, 14, 15 and 19)
Common stock, $.001 par value; authorized 100,000,000; 17,706,923 issued and outstanding at December 31, 2005 and 16,801,923 at December 31, 2004		17,707			16,802
Additional paid-in capital		257,466,412			236,089,222
Accumulated other comprehensive income (Note 1)		60,092,462			36,725,700
Retained earnings		61,725,860			45,524,219
		379,302,441			318,355,943
Less treasury stock, at cost (common shares: 4,435,483 in 2005 and 4,435,444 in 2004)		(78,427,484	)		(78,426,645	)
Total shareholders' equity		300,874,957			239,929,298
Total liabilities and shareholders' equity	$	441,829,622		$	354,631,023

50

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
Revenues:
Sale of real estate and water assets	$	124,984,427		$	10,879,172		$	19,751,160
Net investment income (Note 3)		8,196,470			5,799,357			5,370,104
Net realized gain on investments (Note 3)		7,721,774			3,265,505			2,745,657
Service revenue		4,269,618			5,994,688			1,363,925
Other		1,210,320			2,188,114			3,647,748
Total revenues		146,382,609			28,126,836			32,878,594
Costs and expenses:
Operating and other costs		42,470,210			25,568,411			19,203,015
Stock appreciation rights expense		23,894,241			9,874,865			5,969,762
Cost of real estate and water assets sold		46,530,763			4,496,652			12,648,864
Cost of service revenue		1,443,084			1,585,129			1,069,174
Loss and loss adjustment (recoveries) expenses (Note 11)		(3,664,832	)		443,284			4,667,024
Interest expense		692,159			792,076			721,322
Depreciation and amortization		2,101,252			2,263,355			1,813,114
Total costs and expenses		113,466,877			45,023,772			46,092,275
Equity in loss of unconsolidated affiliates								(564,785	)
Income (loss) before income taxes and minority interest		32,915,732			(16,896,936	)		(13,778,466	)
Provision (benefit) for federal, foreign and state income taxes (Note 7)		17,993,165			(3,047,721	)		(1,202,407	)
Income (loss) before minority interest		14,922,567			(13,849,215	)		(12,576,059	)
Minority interest in (income) loss of subsidiaries		1,241,822			3,212,811			(1,045,605	)
Income (loss) from continuing operations		16,164,389			(10,636,404	)		(13,621,664	)
Income (loss) from discontinued operations, net (Note 2)		(507,748	)		(422,280	)		2,933,366
Gain on sale of discontinued operations, net		545,000			500,000			7,450,486
Net income (loss)	$	16,201,641		$	(10,558,684	)	$	(3,237,812	)
Net income (loss) per common share - basic and diluted:
Income (loss) from continuing operations	$	1.25		$	(0.86	)	$	(1.10	)
Discontinued operations					0.01			0.84
Net income (loss) per common share	$	1.25		$	(0.85	)	$	(0.26	)
Weighted average shares outstanding		12,959,029			12,368,354			12,375,933

51

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

For the years ended December 31, 2005, 2004 and 2003

								Accumulated Other Comprehensive Income
	Common Stock		Additional Paid-In Capital		Retained Earnings			Net Unrealized Appreciation on Investments		Foreign Currency Translation			Treasury Stock			Total
Balance, January 1, 2003	$	16,802	$	236,082,703	$	59,320,715		$	9,999,442	$	(6,165,766	)	$	(78,222,192	)	$	221,031,704
Comprehensive Income for 2003
Net loss						(3,237,812	)
Net unrealized appreciation on investments net of deferred tax of $3.7 million and reclassification adjustment of $1.5 million									10,879,588
Foreign currency translation											570,140
Total Comprehensive Income																	8,211,916
Acquisition of shares of treasury stock for deferred compensation plans														(83,218	)		(83,218	)
Balance, December 31, 2003	$	16,802	$	236,082,703	$	56,082,903		$	20,879,030	$	(5,595,626	)	$	(78,305,410	)	$	229,160,402

52

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME, CONTINUED

For the years ended December 31, 2005, 2004 and 2003

								Accumulated Other Comprehensive Income
	Common Stock		Additional Paid-In Capital		Retained Earnings			Net Unrealized Appreciation on Investments		Foreign Currency Translation			Treasury Stock			Total
Balance, December 31, 2003	$	16,802	$	236,082,703	$	56,082,903		$	20,879,030	$	(5,595,626	)	$	(78,305,410	)	$	229,160,402
Comprehensive Loss for 2004
Net loss						(10,558,684	)
Net unrealized appreciation on investments net of deferred tax of $11 million and reclassification adjustment of $2.2 million									21,068,132
Foreign currency translation											374,164
Total Comprehensive Income																	10,883,612
Acquisition of treasury stock for deferred compensation plans														(121,235	)		(121,235	)
Other				6,519													6,519
Balance, December 31, 2004	$	16,802	$	236,089,222	$	45,524,219		$	41,947,162	$	(5,221,462	)	$	(78,426,645	)	$	239,929,298

The accompanying notes are an integral part of the consolidated financial statements.

53

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME, CONTINUED

For the years ended December 31, 2005, 2004 and 2003

							Accumulated Other Comprehensive Income
	Common Stock		Additional Paid-In Capital		Retained Earnings		Net Unrealized Appreciation on Investments		Foreign Currency Translation			Treasury Stock			Total
Balance, December 31, 2004	$	16,802	$	236,089,222	$	45,524,219	$	41,947,162	$	(5,221,462	)	$	(78,426,645	)	$	239,929,298
Comprehensive Income for 2005
Net income						16,201,641
Net unrealized appreciation on investments net of deferred tax of $14.6 million and reclassification adjustment of $5.2 million								24,177,250
Foreign currency translation										(810,488	)
Total Comprehensive Income																39,568,403
Acquisition of treasury stock for deferred compensation plans													(839	)		(839	)
Common stock offering, net of expenses of $1.2 million		905		21,377,190												21,378,095
Balance, December 31, 2005	$	17,707	$	257,466,412	$	61,725,860	$	66,124,412	$	(6,031,950	)	$	(78,427,484	)	$	300,874,957

54

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	16,201,641		$	(10,558,684	)	$	(3,237,812	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of acquisitions:
Provision for deferred taxes		(6,682,146	)		(2,211,306	)		(876,207	)
Depreciation and amortization		4,175,936			4,127,120			2,757,493
(Gain) loss on sale of investments		(7,721,774	)		(3,265,505	)		(2,745,657	)
(Gain) loss on sale of fixed assets		2,617			70,183			23,737
Gain on sale of Sequoia								(1,568,278	)
Allowance for uncollectible accounts		17,278			308,917			270,000
Impairment of goodwill					194,095
Equity in loss of unconsolidated affiliates								564,785
Minority interest		(1,241,822	)		(3,212,811	)		1,045,605
Changes in assets and liabilities, net of effects of acquisitions:
Notes and other receivables		241,807			1,169,650			(9,467,051	)
Other liabilities		10,000,132			(38,288	)		(1,278,704	)
Other assets		2,421,731			(2,333,997	)		217,549
Real estate and water assets		35,659,806			2,740,891			9,914,760
Income taxes		809,291			(9,291	)		71,846
Reinsurance receivable		971,224			556,683			(9,881,304	)
Reinsurance payable		(347,943	)		1,993			133,031
SAR payable and deferred compensation		24,275,483			10,918,238			7,163,360
Unpaid losses and loss adjustment expenses		(9,347,469	)		(4,869,509	)		8,160,771
Net operating cash provided by (used in) discontinued operations		(275,948	)		(598,940	)		(1,558,754	)
Other adjustments, net		(8,102	)		6,516			(135,323	)
Net cash provided by (used in) operating activities		69,151,742			(7,004,045	)		(426,153	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale investments:
Fixed maturities		13,757,855			18,334,850			12,637,514
Equity securities		11,993,556			10,871,372			14,735,268
Proceeds from maturity of investments		9,822,000			5,325,000			27,537,091
Purchases of available for sale investments:
Fixed maturities		(78,685,009	)		(11,322,556	)		(46,476,107	)
Equity securities		(22,552,436	)		(18,503,481	)		(25,667,968	)
Proceeds from the sale of Sequoia								25,144,350
Purchases of minority interest in subsidiaries					(1,322,138	)
Real estate and water asset capital expenditure		(2,563,728	)		(790,961	)		(2,315,322	)
Capitalized software costs		(1,529,828	)		(1,382,361	)
Purchases of property and equipment		(324,300	)		(669,598	)		(490,078	)
Proceeds from sales of property and equipment		1,550			40,249
Other investing activities, net		119						(98,429	)
Net cash provided by (used in) investing activities		(70,080,221	)		580,376			5,006,319
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock, net		21,378,095
Repayment of bank and other borrowings		(3,915,176	)		(1,344,516	)		(9,645,053	)
Proceeds from borrowings		35,000			2,908,196			9,111,446
Cash received on exercise of stock options (HyperFeed in 2005 and 2004)		8,880			41,416
Cash paid for purchase of PICO stock (for deferred compensation plans)		(839	)		(121,235	)		(83,218	)
Net cash provided by (used in) financing activities		17,505,960			1,483,861			(616,825	)
Effect of exchange rate changes on cash		3,809,797			(2,001,747	)		(1,693,730	)
Net increase (decrease) in cash and cash equivalents		20,387,278			(6,941,555	)		2,269,611
Cash and cash equivalents, beginning of year		17,407,138			24,348,693			22,079,082
Cash and cash equivalents, end of year	$	37,794,416		$	17,407,138		$	24,348,693
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	692,615		$	826,894		$	327,608
Income taxes paid	$	25,487,931		$	179,635			555,600

55

PICO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_______________

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

Organization and Operations:

PICO Holdings, Inc. and subsidiaries (collectively, “PICO” or “the Company”) is a diversified holding company.

Currently PICO’s major activities are:

· Owning and developing water rights and water storage operations in the southwestern United States through Vidler Water Company, Inc.

· Owning and developing land and the related mineral rights and water rights in Nevada through Nevada Land & Resource Company, LLC.

· The acquisition and financing of businesses.

· “Running off” the insurance loss reserves of Citation Insurance Company and Physicians Insurance Company of Ohio.

· Developing and providing ticker plant technologies and services to the financial markets through HyperFeed Technologies, Inc.

PICO was incorporated in 1981 and began operations in 1982. The company was known as Citation Insurance Group until a reverse merger with Physicians Insurance Company of Ohio (“Physicians”) on November 20, 1996. Following the reverse merger, the Company changed its name to PICO Holdings, Inc.

The Company’s primary operating subsidiaries as of December 31, 2005 are as follows:

Vidler Water Company, Inc. (“Vidler”). Vidler is a wholly owned Nevada corporation. Vidler’s business involves identifying end users, namely water utilities, municipalities or developers, in the Southwest who require water, and then locating a source and supplying the demand, either by utilizing the company’s own assets or securing other sources of supply. These assets comprise water rights in the states of Colorado, Arizona, and Nevada, and water storage facilities in Arizona and California.

Nevada Land & Resource Company, LLC (“Nevada Land”). Nevada Land is a Nevada Limited Liability Company, which owns approximately 767,000 acres of land in northern Nevada. Nevada Land’s business includes selling land and water rights, and leasing property.

Citation Insurance Company (“Citation”). Citation is a California-domiciled insurance company licensed to write commercial property and casualty insurance in Arizona, California, Colorado, Nevada, Hawaii, New Mexico and Utah. Citation ceased writing premiums in December 2000, and is now “running off” the loss reserves from its existing property and casualty and workers’ compensation lines of business. This means that it is handling claims arising from historical business, and selling investments when funds are needed to pay claims.

Physicians Insurance Company of Ohio (“Physicians”). Prior to selling its book of medical professional liability (“MPL”) insurance business in 1995, Physicians engaged in providing MPL insurance coverage to physicians and surgeons, primarily in Ohio. On August 28, 1995, Physicians entered into an agreement with Mutual Assurance, Inc. (“Mutual”) pursuant to which Physicians sold its recurring MPL insurance business to Mutual. Physicians is in “run off.” This means that it is handling claims arising from historical business, and selling investments when funds are needed to pay claims.

HyperFeed Technologies, Inc. (“HyperFeed”). HyperFeed is a developer and provider of software, ticker plant technologies and managed services to the financial markets industry. PICO owns approximately 80% of the outstanding voting stock of HyperFeed.

Unconsolidated Affiliates:

Investments in which the Company owns at least 20% but not more than 50% of the voting interest and, or has the ability to exercise significant influence are generally accounted for under the equity method of accounting. Accordingly, the Company’s share of the income or loss of the affiliate is included in PICO’s consolidated results. Currently, there are no investments the Company considers an unconsolidated equity affiliate.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). All significant intercompany balances and transactions have been eliminated.

Use of Estimates in Preparation of Financial Statements:

The preparation of financial statements in accordance with US 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 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 consolidated financial statements relate to the assessment of the carrying value of investments, unpaid losses and loss adjustment expenses, real estate and water assets, deferred income taxes and contingent liabilities. While management believes that the carrying value of such assets and liabilities are appropriate as of December 31, 2005 and 2004, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.

Revenue Recognition:

Sale of Real Estate and Water Assets

Revenue on the sale of real estate and water assets conforms with Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate,” and is recognized in full when (a) there is a legally binding sale contract; (b) the profit is determinable (i.e., the collectibility of the sales price is reasonably assured, or any amount that will not be collectible can be estimated); (c) the earnings process is virtually complete (i.e., the Company is not obligated to perform significant activities after the sale to earn the profit, meaning the Company has transferred all risks and rewards to the buyer); and (d) the buyer’s initial and continuing investment are adequate to demonstrate a commitment to pay for the property. If these conditions are not met, the Company records the cash received as a deposit until the conditions to recognize full profit are met.

Service Revenue (HyperFeed Technologies)

HyperFeed derives revenue primarily from licensing technology and providing management and maintenance services of HTPX and HBox software, ticker plant technologies, and managed services. Additionally, HyperFeed derives revenue from the development of customized software.

HyperFeed applies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended, which specifies the following four criteria that must be met prior to recognizing revenue: (1) persuasive evidence of the existence of an arrangement, (2) delivery, (3) fixed or determinable fee, and (4) probable collection. In addition, revenue earned on software arrangements involving multiple elements is allocated to each element based on the relative fair value of the elements.

Investments:

The Company’s investment portfolio at December 31, 2005 and 2004 is comprised of investments with fixed maturities, including U.S. government bonds, government sponsored enterprise bonds, and investment-grade corporate bonds; equity securities, including common stock, and common stock purchase warrants; and mortgage participation interests.

The Company applies the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company classifies all investments as available for sale. Unrealized investment gains or losses on securities available for sale are recorded directly to shareholders’ equity as accumulated other comprehensive income, or loss, net of applicable tax effects. The Company also applies the provisions of Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” for investments where management determines the Company has the ability to exercise significant influence over the operating and financial policies of the investee. The Company’s share of the income or loss of the investee is included in the consolidated statement of operations and any dividends are recorded as a reduction in the carrying value of the investment.

56

The Company regularly and methodically reviews the carrying value of its investments for impairment. When there is a decline in value of an investment to below cost, that is deemed other-than-temporary, a loss is recorded within net realized gains or losses in the consolidated statement of operations and the security is written down to its fair value. Impairment charges of $142,000, $1.9 million, and $1.1 million are included in realized losses for the years ended December 31, 2005, 2004 and 2003, respectively, related to various securities where the unrealized losses had been deemed other-than-temporary. If a security is impaired and continues to decline in value, additional impairment charges are recorded in the period of the decline if deemed other-than-temporary. Subsequent recoveries of such securities are reported as an unrealized gain and part of other comprehensive results in future periods. Realized gains on impaired securities are recorded only when sold.

Net investment income includes amortization of premium and accretion of discount on the level yield method relating to bonds acquired at other than par value. Realized investment gains and losses are included in revenues, are determined on an average basis and recorded on the trade date.

The Company has subsidiaries and makes acquisitions in the U.S. and abroad. Approximately $98.6 million and $81 million of the Company’s investments at December 31, 2005 and 2004, respectively, were invested internationally, including any equity values of affiliates. The Company’s most significant foreign currency exposure is in Swiss francs.

Cash and Cash Equivalents:

Cash and cash equivalents include highly liquid instruments purchased with original maturities of three months or less.

Real Estate and Water Assets:

Land, water rights, water storage, and land improvements are carried at cost. Water rights consist of various water interests acquired independently or in conjunction with the acquisition of real properties. Water rights are stated at cost and, when applicable, consist of an allocation of the original purchase price between water rights and other assets acquired based on their relative fair values. In addition, costs directly related to the acquisition of water rights are capitalized. This cost includes, when applicable, the allocation of the original purchase price and other costs directly related to acquisition, and any costs incurred to get the property ready for its intended use. Amortization of land improvements is computed on the straight-line method over the estimated useful lives of the improvements ranging from 5 to 15 years.

Property and Equipment:

Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated lives of the assets. Buildings and leasehold improvements are depreciated over 15-20 years, office furniture and fixtures are generally depreciated over seven years, and computer equipment is depreciated over three years. Maintenance and repairs are charged to expense as incurred, while significant improvements are capitalized. Gains or losses on the sale of property and equipment are included in other revenues.

Goodwill and Intangibles:

Goodwill represents the difference between the purchase price and the fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. Intangibles are generally assets arising out of a contractual or legal right. The Company applies the provisions of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Consequently, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value.

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Impairment of Long-Lived Assets:

The Company applies the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” As such, the Company records an impairment charge when the condition exists where the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding interest charges, for the lowest level for which there is identifiable cash flows that are independent of the cash flows of other groups of assets do not exceed the carrying amount. The Company prepares and analyzes cash flows at appropriate levels of grouped assets under SFAS No. 144. If the events or circumstances indicate that the remaining balance may be permanently impaired, such potential impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective long-lived asset.

Reinsurance:

The Company records all reinsurance assets and liabilities on the gross basis, including amounts due from reinsurers and amounts paid to reinsurers relating to the unexpired portion of reinsured contracts (prepaid reinsurance premiums).

Unpaid Losses and Loss Adjustment Expenses:

Reserves for MPL and property and casualty and workers’ compensation insurance unpaid losses and loss adjustment expenses include amounts determined on the basis of actuarial estimates of ultimate claim settlements, which include estimates of individual reported claims and estimates of incurred but not reported claims. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and updated based on current circumstances, and any adjustments are reflected in current operations.

Income Taxes:

The Company’s provision for income tax expense includes federal, state, local and foreign income taxes currently payable and those deferred because of temporary differences between the income tax and financial reporting bases of the assets and liabilities. The liability method of accounting for income taxes also requires the Company to reflect the effect of a tax rate change on accumulated deferred income taxes in income in the period in which the change is enacted.

In assessing the realization of deferred income taxes, management considers whether it is more likely than not that any deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the period in which temporary differences become deductible. If it is more likely than not that some or all of the deferred income tax assets will not be realized a valuation allowance is recorded.

Earnings per Share:

Basic earnings per share are computed by dividing net earnings by the weighted average shares outstanding during the period. Diluted earnings per share are computed similarly to basic earnings per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents - PICO’s stock-settled stock appreciation rights are common stock equivalents for this purpose - using the treasury method, if dilutive. The number of additional shares is calculated by assuming that the common stock equivalents were exercised, and that the proceeds were used to acquire shares of common stock at the average market price during the period.

During 2005, the Company issued 2,185,965 stock-settled stock appreciation rights at a strike price of $33.76 per share (at December 31, 2005 the market price of a share of PICO common stock was $32.26). Such rights are common stock equivalents for purposes of earnings per share computations; however, none of the stock appreciation rights are included in the diluted earnings per share calculation for 2005 because they are out-of-the-money and consequently their effect on earnings per share is anti-dilutive.

During 2003 and 2004, the Company had cash-settled stock appreciation rights outstanding. The rights were not considered common stock equivalents for purposes of earnings per share because they were not convertible into common shares of the Company when exercised; the benefit was payable in cash. Consequently, diluted earnings per share was identical to that of the basic earnings per share in those years.

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Stock-Based Compensation:

On September 21, 2005, the Company amended its 2003 Cash-Settled Stock Appreciation Rights Program. The amendment of the SAR Program froze and monetized the value of each participant’s SAR. At the date of the amendment, the accrued benefit payable under this program was $39.4 million based on a PICO stock price of $33.23 per share. Concurrently with the amendment of the SAR Program, the participants elected to defer substantially all of amounts due to them by transferring the amounts into deferred compensation Rabbi Trusts established by the Company. Consequently, including previously deferred compensation, the Company has a total deferred compensation liability of $42.7 million at December 31, 2005 representing deferred compensation payable to various members of management and its Directors, and no remaining cash-settled stock appreciation rights payable.

On December 8, 2005 shareholders approved the PICO Holdings, Inc. 2005 Long Term Incentive Plan (the "2005 Plan"). The 2005 Plan provides for the grant or award of various equity incentives to PICO employees, non-employee directors and consultants. A total of 2,654,000 shares of common stock are issuable under the 2005 Plan and it provides for the issuance of incentive stock options, non-statutory stock options, free-standing stock-settled stock appreciation rights, restricted stock awards, performance shares, performance units, restricted stock units, deferred compensation awards and other stock-based awards. The plan allows for a broker assisted cashless exercise and net-settlement of tax withholding required. On December 12, 2005 2,185,965 stock-settled SARs were issued to various employees and non-employee directors of the Company with a strike price (market price of PICO common stock on the date of grant) of $33.76. The awards are fully vested and exercisable at anytime.

The Company applies the provisions of Emerging Issues Task Force No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. In summary, investment returns generated are reported within the Company’s financial statements (with a corresponding increase in the trust assets) and an expense is recorded within the caption, “Operating and other costs” for increases in the market value of the assets held with a corresponding increase in the deferred compensation liability (except in the case of PICO stock, which is reported as Treasury Stock, at cost). In the event the trust assets decline in value, the Company will recover previously expensed compensation.

The trusts hold various investments that are consistent with the Company’s investment policy. Such investments are held in separate accounts, accounted for as available for sale securities, and are reported in the accompanying consolidated balance sheets within the line item “Investments”. Assets of the trust will be distributed according to predetermined payout elections established by each employee.

In each of the three years presented in the accompanying consolidated financial statements, there is compensation expense recorded for the cash settled SARs issued from the 2003 Plan. Compensation cost was measured at the end of each period (in 2005 compensation cost was measured until the September 21, 2005 Plan Amendment) as the amount by which the quoted market price of PICO stock exceeded the exercise price. Changes in the quoted market price were reflected as an adjustment to the accrued compensation obligation and compensation expense in the Company’s consolidated financial statements. The Company recorded compensation expense of $23.9 million, $9.9 million and $6 million for the years ended December 31, 2005, 2004 and 2003, respectively, representing the difference between the exercise price of the vested SARs and the market value of PICO stock at the end of the reporting period (September 21 for the 2005 year). The cash liability for the accrued benefit was $15.7 million at December 31, 2004, reached $39.4 million during 2005 and as discussed above, when the Plan was amended, the liability was transferred to Rabbi Trust accounts leaving no accrued stock appreciation rights payable and increasing deferred compensation in the accompanying consolidated balance sheets.

At December 31, 2005 the Company has 2,185,965 stock-settled stock appreciation rights outstanding that are fully vested and all have an exercise price of $33.76. Since the number of shares to be issued upon exercise is not known at the grant date, the plan is considered a variable plan for accounting purposes and under APB 25, any in-the-money value of the vested options would be recorded as compensation expense. However, at December 31, 2005, the market value of PICO stock was less than the strike price of the outstanding stock-settled SARs and therefore no compensation expense was recorded in 2005 for the awards granted.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for those entities that elect to voluntarily adopt the fair value accounting provision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 also requires more prominent disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation as well as pro forma disclosure of the effect in interim financial statements. The transition and annual disclosure provision of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 until SFAS 123 Revised becomes effective in 2006. PICO has not adopted the fair value accounting provisions of SFAS No. 123, and will continue accounting for stock-based compensation under the intrinsic value method of APB No. 25, “Accounting for Stock Issued to Employees”, until SFAS No. 123(R) becomes effective on January 1, 2006.

Had compensation cost for the Company’s stock-based compensation plans been determined consistent with SFAS No. 148, the Company’s net income or loss and related per share amounts would approximate the following pro forma amounts for the years ended December 31 (Note that the Company’s cash-settled SARs that were outstanding in 2003, 2004 and until September 21, 2005 have no impact on the following table as cash-settled SARs are accounted for the same way under both APB No. 25 and SFAS No. 123, however the stock-settled SARs issued in December 2005 are included in the 2005 disclosure):

	2005			2004			2003
Reported net income (loss)	$	16,201,641		$	(10,558,684	)	$	(3,237,812	)
Add: Stock-based compensation recorded, net of tax
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		(19,623,058	)					(99,680	)
Pro forma net loss	$	(3,421,417	)	$	(10,558,684	)	$	(3,337,492	)
Reported net income (loss) per share: basic and diluted	$	1.25		$	(0.85	)	$	(0.26	)
Pro forma net loss per share: basic and diluted	$	(0.26	)	$	(0.85	)	$	(0.27	)

The effects of applying SFAS No. 148 in this pro forma disclosure are not indicative of future amounts.

No stock-based compensation is reported in the table above in 2004 since the only awards outstanding were cash-settled SARs, which are not subject to the fair value method prescribed by SFAS 123. The fair value of each stock-settled SAR granted in 2005 and the 2003 stock options outstanding granted in previous years is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend yield; risk-free interest rate ranging from 4.4% to 4.5% for grants in 2005, 1% for grants in 2003; expected life of a stock-settled SAR ranges from 3 to 10 years (10 years for previous stock-option grants); and volatility of 33% for 2005 grants and 36% for the 2003 grants.

The Black-Scholes model was used in estimating the fair value of the Company’s stock-settled SARs that are fully vested and are non-transferable. This model requires the input of highly subjective assumptions including the expected stock price volatility and estimated life of the stock-settled SAR. Because the Company’s stock-settled SARs have characteristics significantly different from those of any like instrument that is publicly traded, and because changes in the subjective input assumptions can materially change the fair value estimate, management believes the existing model does not necessarily provide a reliable single measure of the fair value of its stock-settled SARs.

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Comprehensive Income:

Comprehensive income or loss includes foreign currency translation and unrealized holding gains and losses, net of taxes on available for sale securities. The components are as follows:

	December 31,
	2005			2004
Net unrealized gain on securities	$	66,124,412		$	41,947,162
Foreign currency translation		(6,031,950	)		(5,221,462	)
Accumulated other comprehensive income	$	60,092,462		$	36,725,700

The accumulated balance is net of deferred income tax liabilities of $32.7 million and $18.2 million at December 31, 2005 and 2004, respectively.

Translation of Foreign Currency:

Financial statements of foreign operations are translated into U.S. dollars using average rates of exchange in effect during the year for revenues, expenses, realized gains and losses, and the exchange rate in effect at the balance sheet date for assets and liabilities. Unrealized exchange gains and losses arising on translation are reflected within accumulated other comprehensive income or loss.

Reclassifications:

Certain amounts in the financial statements for prior periods have been reclassified to conform to the current year presentation.

Recently Issued Accounting Pronouncements

In December 2004, FASB issued Statement 123(Revised), Share-Based Payment, which replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.Statement 123(Revised) is effective for public entities as of the beginning of the annual period that begins after June 15, 2005. The new Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.  This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost should be recognized over the period during which an employee is required to provide service in exchange for the award--the requisite service period (usually the vesting period). As all of the stock-settled SARs granted under PICO’s 2005 Plan were fully vested at December 31, 2005, no stock-based compensation will be recorded for these awards under SFAS 123R. If and when PICO grants additional awards, the fair value of such awards will be recognized and recorded over the vesting period.

In March 2005, FASB issued Interpretation number 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 which clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, and refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. There was no effect of adoption of the statement on the accompanying consolidated financial statement of the Company.

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2. DISCONTINUED OPERATIONS:

On March 31, 2003, the sale of Sequoia Insurance Company (“Sequoia”) closed for gross proceeds of $43.1 million, which consisted of $25.2 million in cash and a dividend of equity and debt securities previously held by Sequoia with a market value of $17.9 million. The net income from Sequoia included in PICO’s condensed consolidated results for the year ended December 31, 2003 was $2.4 million, which is reported as “Income from discontinued operations, net.” The Company also recorded a $443,000 gain on sale, net of estimated income taxes of $281,000 and selling costs of $845,000, which is reported as “Gain on disposal of discontinued operations, net” for the year ended December 31, 2003.

In 2003, HyperFeed sold its consolidated market data feed service contracts and its retail trading business and recorded a gain within discontinued operations of $7 million. In 2005 and 2004, HyperFeed recorded a gain of $545,000 and $500,000, respectively within discontinued operations on the sale of its Consolidated Market Data Feed business as certain milestones on the sale were met. These gains are included in the accompanying consolidated statements of operations in the line item titled “Gain on disposal of discontinued operations, net”. For the years ended December 31, 2005 and 2004, HyperFeed generated losses from discontinued operations of $508,000 and $422,000, respectively. During the 2003 period HyperFeed was a consolidated subsidiary of the Company, discontinued operations generated income of $545,000. Such amounts are included in “Income from discontinued operations, net”. The assets and liabilities of this HyperFeed operation are reported as discontinued operations in the December 31, 2005 and 2004 consolidated balance sheets.

In accordance with SFAS No. 144, Sequoia’s results and the results of the HyperFeed operation have been reclassified for all periods presented as discontinued operations in the accompanying consolidated financial statements. The results of operations from discontinued operations and any gain on sale are each reported separately, net of tax on the face of the statement of operations. The results of HyperFeed’s discontinued operation are not material and not presented in detail in these notes to the Company’s consolidated financial statements. The following is a detail of Sequoia’s results for the period included in the accompanying consolidated financial statements:

Statements of Operations for the Three Months Ended March 31, 2003:

	2003
Revenues:
Premium income	$	13,478,457
Net investment income and realized gains/losses		2,863,487
Other income		91,303
Total revenues		16,433,247
Expenses:
Loss and loss adjustment expenses		7,657,813
Policy acquisition costs		4,163,270
Insurance underwriting and other expenses		938,341
Total expenses		12,759,424
Income before provision for income taxes		3,673,823
Provision for income taxes		1,284,974
Net income	$	2,388,849
Income per common share - basic and diluted	$	0.19

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3. INVESTMENTS:

At December 31, the cost and carrying value of investments were as follows:

2005:	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government - sponsored enterprises	$	11,003,785			$	(175,787	)	$	10,827,998
Corporate securities		79,842,934		461,413		(592,208	)		79,712,139
Mortgage participation interests		2,273,000							2,273,000
		93,119,719		461,413		(767,995	)		92,813,137
Equity securities		95,643,097		99,223,898		(233,798	)		194,633,197
Total	$	188,762,816	$	99,685,311	$	(1,001,793	)	$	287,446,334

2004:	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government - sponsored enterprises	$	10,544,388	$	53,575	$	(16,993	)	$	10,580,970
Corporate securities		23,621,118		727,452		(123,324	)		24,225,246
Mortgage participation interests		4,673,000							4,673,000
		38,838,506		781,027		(140,317	)		39,479,216
Equity securities		83,759,017		59,316,810		(97,614	)		142,978,213
Total	$	122,597,523	$	60,097,837	$	(237,931	)	$	182,457,429

The amortized cost and carrying value of investments in fixed maturities at December 31, 2005, by contractual maturity, are shown below. Expected 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.

	Amortized		Carrying
	Cost		Value
Due in one year or less	$	59,743,168	$	59,551,654
Due after one year through five years		21,391,559		21,136,860
Due after five years		9,711,992		9,851,623
Mortgage participation interests		2,273,000		2,273,000
	$	93,119,719	$	92,813,137

Net investment income is as follows for each of the years ended December 31:

	2005			2004			2003
Investment income:
Fixed maturities	$	2,468,733		$	1,956,838		$	2,465,683
Equity securities		3,074,692			2,556,841			1,951,462
Other		2,696,075			1,318,073			999,387
Total investment income		8,239,500			5,831,752			5,416,532
Investment expenses:		(43,030	)		(32,395	)		(46,428	)
Net investment income	$	8,196,470		$	5,799,357		$	5,370,104

Pre-tax net realized gain or loss on investments is as follows for each of the years ended December 31:

	2005			2004			2003
Gross realized gains:
Fixed maturities	$	27,303		$	205,017		$	142,509
Equity securities and other investments		7,843,098			5,629,155			3,797,245
Total gain		7,870,401			5,834,172			3,939,754
Gross realized losses:
Fixed maturities		(6,899	)		(50,393	)		(33,960	)
Equity securities and other investments		(141,728	)		(2,518,274	)		(1,160,137	)
Total loss		(148,627	)		(2,568,667	)		(1,194,097	)
Net realized gain	$	7,721,774		$	3,265,505		$	2,745,657

Realized Gains

During 2005, the Company sold various securities generating $7.9 million in realized gains. Included in realized gains for the year is a $1.8 million gain from the sale of Keweenaw Land Association and a $1.8 million gain on the sale of Raetia Energy, a Swiss holding. During 2004, the Company sold various securities generating $5.8 million in realized gains. The most significant gain in 2004 was a $3.2 million gain from the sale of Keweenaw Land Association. In 2003, the Company realized a gain of $1.5 million on the sale of shares in Guinness Peat Group.

Realized Losses

Included in realized losses are impairment charges on securities. During 2005, 2004 and 2003, the Company recorded other-than-temporary impairments of $142,000, $1.9 million and $1.1 million, respectively, on equity securities to recognize what are expected to be other-than-temporary declines in value. The impairment charges are primarily within two securities, Accu Holding and SIHL.

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Accu Holding:

At December 31, 2005, the Company owned 29.2% of Accu Holding AG, a Swiss corporation. PICO lacks the ability to exercise significant influence based on consideration of a number of factors and therefore accounts for the holding as available for sale under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” In 2004 and 2003, the Company recorded other-than-temporary impairments of $1.3 million and $823,000, respectively, due to the severity and duration of the decline of Accu’s stock price. The stock value improved in 2005 and consequently, no impairment was recorded for the year ended December 31, 2005 on this holding. At December 31, 2005, the market value of PICO’s interest was $4.2 million.

SIHL:

At December 31, 2005 and 2004, the carrying value of SIHL was zero as the stock did not improve from the declines suffered in 2004. Given the severity and duration, the cause of the decline and lack of any evidence to support a recovery of the fair value, PICO recorded an impairment charge of $547,000 in 2004 effectively reducing the carrying amount to zero. The stock continues to trade, however, there is no material market value of the investment at December 31, 2005. In 2003, the Company recorded other-than-temporary impairment of $293,000.

Jungfraubahn Holding AG:

At December 31, 2005, the Company owned 1,313,657 shares of Jungfraubahn, which represents approximately 22.5% of the outstanding shares of Jungfraubahn. At December 31, 2005, the market value of the investment was $42 million and had an unrealized gain of $19.8 million, before tax. At December 31, 2004, the Company owned 1,308,160 shares of Jungfraubahn, which represented approximately 22.4% of the outstanding shares of Jungfraubahn. At December 31, 2004, the market value of the investment was $40.8 million and had an unrealized gain of $15.4 million, before tax. In 2005, 2004 and 2003, the Company received dividends from this security of $1.1 million, $1.1 million and $983,000, respectively.

Despite ownership of more than 20% of the voting stock of Jungfraubahn, the Company continues to account for this investment as available for sale under SFAS No. 115. At this time, the Company does not believe that it has the requisite ability to exercise “significant influence” over the financial and operating policies of Jungfraubahn, and therefore does not apply the equity method of accounting.

4. INVESTMENT IN HYPERFEED TECHNOLOGIES, INC:

At December 31, 2005 PICO owned 80% of the outstanding common stock of HyperFeed. In November 2005, PICO elected to convert the outstanding balance of $6.2 million of the convertible note with HyperFeed increasing its ownership from 51% to 80%. As the acquisition of the shares under the conversion did not represent a substantive acquisition from the minority shareholders, it was not accounted for using purchase method. HyperFeed will now be included in the combined federal income tax return with PICO and its other subsidiaries. By the end of the first quarter of 2005, the continued losses of HyperFeed reduced the carrying value of the minority interest to zero and from that date forward, PICO has reported all the losses of HyperFeed in these consolidated financial statements without any charge to the minority interest. PICO is currently evaluating whether it can use net operating losses of HyperFeed generated in years prior to PICO reaching 80% ownership under Section 382 of the Internal Revenue Code but does not expect to be able to utilize any significant amount of such losses.

On November 2, 2004, the Company entered into a Secured Convertible Promissory Note Agreement (“Note”) with HyperFeed that gave PICO the right to convert the balance into common stock of HyperFeed at any time. On March 28, 2005, the terms of the note were modified to increase the maximum borrowing under the note from $1.5 million to $4 million and to change the exercise price of the conversion right to the lesser of 80% of the 5 day average at March 28, 2005, or 80% of the 5 day average at the exercise date. In August 2005 the note was again modified to increase the line to $6 million and change the exercise price to the lesser of $1.36 per share or 80% of the 5 day average at the date of exercise and in doing so, HyperFeed issued to PICO a warrant to purchase 125,000 common shares of HyperFeed at $1.70 per share. By September 30, 2005 the principal and interest outstanding on the note was $4.7 million. Then during October 2005, HyperFeed drew $1.4 million to bring the outstanding principal balance to $6 million. On November 1, 2005, PICO elected to convert the entire outstanding principal and interest of $6.2 million in accordance with the provisions of the convertible note into 4,546,479 newly issued common shares of HyperFeed ($1.36 per share).

During 2005, 2004 and 2003 PICO provided funding of $7.2 million to HyperFeed either by acquiring common stock directly from HyperFeed or loaning HyperFeed money through the convertible note, which was subsequently converted to common stock as discussed above. Since the conversion of the note in November 2005, PICO has loaned HyperFeed an additional $3.3 million ($810,000 through December 31, 2005) which is planned to be rolled into a convertible note during the first quarter of 2006.

On May 15, 2003 the Company increased its ownership of HyperFeed from 44% to 51% by purchasing 443,623 shares for $1.2 million and at that time had the controlling financial interest through a direct ownership of a majority voting interest. Consequently, PICO consolidated HyperFeed’s results from that date forward. The accompanying consolidated financial statements for the year ended December 31, 2003 include the revenues and expenses and costs of HyperFeed beginning May 15, 2003. Prior to May 15 2003, the Company accounted for its investment in HyperFeed using the equity method of accounting.

At December 31, 2005 and 2004, the Company’s investment in HyperFeed consisted of 6,117,791 and 1,546,312 shares of common stock, representing 80% and 51%, respectively of the common shares outstanding. PICO also owned 310,616 common stock warrants that expired in April 2005. At December 31, 2004, these warrants had zero fair value as the exercise price is substantially higher than the market price of HyperFeed stock. At December 31, 2003, the carrying value of the investment in common stock warrants was an estimated fair value of $556,000, using the Black-Scholes option-pricing model. The warrant was reported as a derivative instrument under the provisions of SFAS No. 133 and consequently gains and losses, while the warrant had a fair value in 2004 and 2003, are reflected in the caption “Net Realized Loss on Investments” in the Statement of Operations. The warrant PICO holds from the 2005 transactions does not meet the definition of a derivative and no value is recognized on those instruments.

The market value of the common shares at December 31, 2005 and 2004, based on the closing price of HyperFeed common stock, is $8.3 million and $4.2 million, respectively.

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5. REAL ESTATE AND WATER ASSETS:

Through its subsidiary Nevada Land, the Company owns land and the related mineral rights and water rights. Through its subsidiary Vidler, the Company owns land and water rights and water storage assets consisting of various real properties in California, Arizona, Colorado and Nevada. The costs assigned to the various components at December 31, were as follows:

	2005		2004
Nevada Land:
Land and related mineral rights and water rights	$	30,066,419	$	37,642,378
Vidler:
Water and water rights		22,595,686		25,999,698
Land		11,213,306		35,482,710
California water storage (Semitropic)		2,472,697		2,036,240
Land improvements, net		10,543,327		9,539,430
		46,825,016		73,058,078
	$	76,891,435	$	110,700,456

On June 30, 2005, the Company completed a sale of approximately 42,000 acre-feet of water rights and the related 15,470 acres of land in the Harquahala Valley for $94.4 million in cash. The cost of the land and water sold was $37.8 million.

In 2005, Lincoln County Water District and Vidler (“Lincoln/Vidler”) closed on a sale of 2,100 acre feet of water to a developer for $15.7 million. The Company’s share of the revenues allocated to the sale of the 2,100 acre-feet was $10.1 million and the cost of the water sold was approximately $983,000.

Through November 2008, Vidler is required to make a minimum annual payment for the Semitropic water storage facility of $401,000. These payments are being capitalized and the asset is being amortized over its useful life of thirty-five years. Amortization expense was $102,000 in each of the three years ended December 31, 2005. At December 31, 2005 and 2004, Vidler owns the right to store 30,000 acre-feet of water. Vidler is also required to pay annual operating and maintenance charges and for the years ended December 31, 2005, 2004 and 2003, the Company expensed a total of $169,000, $148,000 and $155,000, respectively.

6. NOTES AND OTHER RECEIVABLES:

Notes and other receivables consisted of the following at December 31:

	2005			2004
Notes receivable	$	13,103,326		$	12,741,852
Trade receivable		303,795			1,121,298
Interest receivable		1,042,520			462,631
Other receivables		619,442			985,109
		15,069,083			15,310,890
Allowance for doubtful accounts		(376,195	)		(358,917	)
	$	14,692,888		$	14,951,973

Notes receivable, primarily from the sale of real estate and water assets have a weighted average interest rate of 9.2% and a weighted average life to maturity of approximately 7 years at December 31, 2005.

At December 31, 2004, notes receivable included $3 million of outstanding receivables arising from sales in 2003 of properties in West Wendover, Nevada. The properties were sold for $14.8 million, and through December 31, 2004 the buyer made principal and interest payments of approximately $12.2 million. The balance of the receivable was due to be repaid in full by December 31, 2004. However, the regularly scheduled principal and interest payment due were not paid and the receivable went past due. The Company restructured the note to allow the buyer additional time to pay the balance by extending the due date. By July 2005, the balance was paid in full.

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7. FEDERAL, FOREIGN AND STATE INCOME TAX:

The Company and its U.S. subsidiaries file a consolidated federal income tax return, which will include the results of HyperFeed from November 1, 2005. HyperFeed has various deferred tax balances, primarily NOL’s, on which the Company has provided a 100% valuation allowance at December 31, 2005 and 2004. In 2005, the Company has included the HyperFeed NOL's and the related 100% valuation allowance, in the accompanying tables in 2005 and 2004; in prior periods such amounts were excluded.  PICO is currently evaluating whether it can use some of the net operating losses that arose prior to PICO owning 80% of HyperFeed in its 2005 and future federal income tax returns under section 382 of the Internal Revenue Code but does not expect to be able to utilize any significant amount of such losses. Non-U.S. subsidiaries file tax returns in various foreign countries. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:

	2005			2004
Deferred tax assets:
Net operating loss carryforwards	$	16,422,288		$	20,284,732
Deferred compensation and SAR expense		13,992,344			5,478,064
Capital loss carryforwards		156,757			152,278
Loss reserves		1,633,853			2,797,075
Basis difference on securities		1,074,277			1,158,813
Impairment charges		5,587,354			2,968,817
Depreciation on fixed assets		1,141,768			974,079
Allowance for bad debts		992,244			963,894
Employee benefits		1,977,876			646,293
Cumulative loss on SFAS 133 derivatives		1,385,576			1,385,576
Other		2,226,762			1,444,529
Total deferred tax assets		46,591,099			38,254,150
Deferred tax liabilities:
Unrealized appreciation on securities		35,588,675			17,781,313
Revaluation of real estate and water assets		5,330,587			10,855,277
Foreign receivables		1,108,702			2,317,623
Installment land sales		3,941,476			1,781,292
Accretion of bond discount		83,540			83,097
Capitalized lease		287,528			279,313
Other		2,325,154			1,696,284
Total deferred tax liabilities		48,665,662			34,794,199
Net deferred tax liability before valuation allowance		(2,074,563	)		3,459,951
Valuation allowance		(15,164,499	)		(12,653,011	)
Net deferred income tax liability	$	(17,239,062	)	$	(9,193,060	)

Deferred tax assets and liabilities, the recorded valuation allowance, and federal income tax expense in future years can be significantly affected by changes in circumstances that would influence management’s conclusions as to the ultimate realization of deferred tax assets.

Pre-tax income (loss) from continuing operations for the years ended December 31 was under the following jurisdictions:

	2005		2004			2003
Domestic	$	32,119,040	$	(15,660,549	)	$	(12,548,084	)
Foreign		796,692		(1,236,387	)		(1,230,382	)
Total	$	32,915,732	$	(16,896,936	)	$	(13,778,466	)

Income tax expense (benefit) from continuing operations for each of the years ended December 31 consists of the following:

	2005			2004			2003
Current tax expense (benefit):
U.S. federal and state	$	24,602,202		$	(908,367	)	$	(326,200	)
Foreign		73,107			71,952
Total current tax expense (benefit)		24,675,309			(836,415	)		(326,200	)
Deferred tax expense (benefit):
U.S. federal and state	$	(6,715,681	)	$	(1,957,765	)	$	(177,746	)
Foreign		33,537			(253,541	)		(698,461	)
Total deferred tax benefit		(6,682,144	)		(2,211,306	)		(876,207	)
Total income tax expense (benefit)	$	17,993,165		$	(3,047,721	)	$	(1,202,407	)

The difference between income taxes provided at the Company’s federal statutory rate and effective tax rate is as follows:

	2005			2004			2003
Federal income tax provision (benefit) at statutory rate	$	11,520,506		$	(5,744,958	)	$	(4,723,807	)
Change in valuation allowance		2,690,123			1,832,458			2,351,656
State taxes		3,318,795
Write off of NOL's previously valued and other items					(809,124	)		493,420
Foreign rate differences		(216,626	)		277,366			243,870
Rate changes		(470,424	)
Permanent differences		1,150,791			1,396,537			432,454
Total	$	17,993,165		$	(3,047,721	)	$	(1,202,407	)

The expense for income taxes for the year ended December 31, 2005 includes estimated federal and state tax charges based on the consolidated pre-tax income. The effective tax rate charge for the year ended December 31, 2005 is 55% primarily due to the losses of HyperFeed without tax benefit, prior to HyperFeed becoming an 80% subsidiary on November 1, 2005, the accrual of state taxes on Vidler’s pre-tax income and permanent differences between accounting and taxable income primarily arising from certain management compensation which is not tax-deductible. For the year ended December 31, 2004 and December 31, 2003, the effective rate for the recorded tax benefit is 18% and 9%, respectively, primarily due to the losses of HyperFeed without tax benefit, and the increase in valuation allowances related to NOL’s within the group.

Provision has not been made for U.S. or additional foreign tax on the approximately $10 million of undistributed earnings of foreign subsidiaries. It is not practical to estimate the amount of additional tax that might be payable. Rate differences within the difference between statutory and effective tax rates reflect foreign results taxed at the local statutory rate, which can be as much as 25% lower than the U.S. statutory rate of 35%. At December 31, 2005 and 2004, the Company had no material federal income tax payable or receivable. As of December 31, 2005 the Company has a U.S. net operating loss carryforward before valuation allowance of $46.3 million, of which $43.3 million is unlikely to be utilized primarily due to the uncertainty of generating taxable income in the subsidiary in which the NOLs reside.

The Company’s U.S. NOLs expire as follows:

Year	Amount
2005	$	1,557,196
2006		300,612
2009		590,840
2010		773,628
2011		4,167,626
2012		9,490,363
2013		4,251,152
2014		4,607,516
2016		29,980
2017		1,902,826
2018		4,885,040
2019		4,784,512
2020		7,944,563
2021		1,013,711
		46,299,565
Valuation allowance		(43,327,254	)
Total	$	2,972,311

Included in the table above are HyperFeed NOLs of $40 million on which the Company has provided a 100% valuation allowance at December 31, 2005.

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8. PROPERTY AND EQUIPMENT:

The major classifications of the Company’s fixed assets are as follows at December 31:

	2005			2004
Office furniture, fixtures and equipment	$	5,478,684		$	6,366,383
Building and leasehold improvements		536,478			1,352,303
		6,015,162			7,718,686
Accumulated depreciation		(4,442,670	)		(5,281,765	)
Property and equipment, net	$	1,572,492		$	2,436,921

Depreciation expense was $990,000, $1.2 million and $1.1 million in 2005, 2004, and 2003, respectively.

9. SHAREHOLDERS’ EQUITY:

On May 6, 2005, the Company completed a sale of 905,000 shares of newly-issued common stock to institutional investors at a price of $25 per share. After placement costs, the net proceeds to the Company were $21.4 million. The Company filed a registration statement on Form S-3 to register the shares under the Securities Act, which became effective in July 2005.

Long Term Inventive Plan

PICO Holdings, Inc. 2005 Long Term Incentive Plan (the "2005 Plan"). The 2005 Plan was adopted by the Board and approved by shareholders on December 8, 2005. The 2005 Plan provides for the grant or award of various equity incentives to PICO employees, non-employee directors and consultants. A total of 2,654,000 shares of common stock are issuable under the 2005 Plan and it provides for the issuance of incentive stock options, non-statutory stock options, free-standing stock-settled stock appreciation rights, restricted stock awards, performance shares, performance units, restricted stock units, deferred compensation awards and other stock-based awards. On December 12, 2005, the Company granted 2,185,965 stock-settled SARs with an exercise price of $33.76 per share (being the market value of PICO stock at the date of grant) that were fully vested on that date. These are the only awards granted and outstanding and there are no restrictions that would prevent an employee from exercising these awards. Upon exercise, the Company will issue newly issued shares equal to the in-the-money value of the exercised SARs, net of the applicable federal and state employee taxes withheld. The Plan is considered a variable plan for accounting purposes since the number of shares to be issued is not known at the date of grant.

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10. REINSURANCE:

In the normal course of business, the Company’s insurance subsidiaries have entered into various reinsurance contracts with unrelated reinsurers. The Company’s insurance subsidiaries participate in such agreements for the purpose of limiting their loss exposure and diversifying risk. Reinsurance contracts do not relieve the Company’s insurance subsidiaries from their obligations to policyholders. All reinsurance assets and liabilities are shown on a gross basis in the accompanying consolidated financial statements. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Such amounts are included in “reinsurance receivables” in the consolidated balance sheets at December 31 as follows:

	2005		2004
Estimated reinsurance recoverable on:
Unpaid losses and loss adjustment expense	$	15,858,000	$	17,302,699
Reinsurance recoverable (payable) on paid losses and loss expenses		328,105		(145,370	)
Reinsurance receivables	$	16,186,105	$	17,157,329

Unsecured reinsurance risk of $100,000 or more is concentrated in the companies shown in the table below. The Company remains contingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.

CONCENTRATION OF REINSURANCE AT DECEMBER 31, 2005

	Reported Claims		Unreported Claims		Reinsurer Balances
General Reinsurance	$	7,483,950	$	6,408,794	$	13,892,744
TIG Reinsurance Group		312,612		350,000		662,612
Mutual Assurance		27,901		297,487		325,388
National Reinsurance Corporation		152,039				152,039
North Star Reinsurance Corp.		37,671		112,587		150,258
Swiss American Reinsurance Corporation		28,220		78,477		106,697
	$	8,042,393	$	7,247,345	$	15,289,738

The following is a summary of the net effect of reinsurance activity on the consolidated financial statements for each of the years ended December 31:

	2005			2004			2003
Losses and loss adjustment expenses incurred (recovered):
Direct		(2,092,123	)		1,159,439			4,941,702
Assumed		176,880			192,102			137,376
Ceded		(1,749,589	)		(908,257	)		(412,054	)
Net losses and loss adjustment expense (recovery)		(3,664,832	)		443,284			4,667,024

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11. RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:

Reserves for unpaid losses and loss adjustment expenses on MPL, property and casualty and workers’ compensation business represent management’s estimate of ultimate losses and loss adjustment expenses and fall within an actuarially determined range of reasonably expected ultimate unpaid losses and loss adjustment expenses.

Reserves for unpaid losses and loss adjustment expenses are estimated based on both company-specific and industry experience, and assumptions and projections as to claims frequency, severity, and inflationary trends and settlement payments. Such estimates may vary significantly from the eventual outcome. In management’s judgment, information currently available has been appropriately considered in estimating the loss reserves and reinsurance recoverable of the insurance subsidiaries.

Management prepares its statutory financial statements of Physicians in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance (“Ohio Department”). Conversely, Management prepares its statutory financial statements for Citation in accordance with accounting practices prescribed or permitted by the California Department of Insurance. Prescribed statutory accounting practices include guidelines contained in various publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The prescribed accounting practices of the Ohio Department of Insurance do not allow for discounting of claim liabilities. Activity in the reserve for unpaid claims and claim adjustment expenses was as follows for each of the years ended December 31:

	2005			2004			2003
Balance at January 1	$	55,994,375		$	60,863,884		$	52,703,113
Less reinsurance recoverable		(17,302,699	)		(17,490,157	)		(7,780,432	)
Net balance at January 1		38,691,676			43,373,727			44,922,681
Incurred loss and loss adjustment expenses (recoveries) for prior accident year claims		(3,664,832	)		443,284			4,667,024
Payments for claims occurring during prior accident years		(4,237,938	)		(5,125,335	)		(6,215,978	)
Net change for the year		(7,902,770	)		(4,682,051	)		(1,548,954	)
Net balance at December 31		30,788,906			38,691,676			43,373,727
Plus reinsurance recoverable		15,858,000			17,302,699			17,490,157
Balance at December 31	$	46,646,906		$	55,994,375		$	60,863,884

In 2005 Physicians reported positive development of $3.2 million in its medical professional line of business. Citation’s property and casualty line reported positive development of $1.8 million offset by adverse development in its workers’ compensation line of $1.3 million. In 2004, Physicians reported positive development of $489,000 in its medical professional line of business. Citation’s property and casualty line of business also reported positive development in 2004 of $254,000 but reported $1.2 million in adverse development in its workers’ compensation line of business.

In 1997, Citation ceded its workers’ compensation business to Fremont Indemnity Company (“Fremont”). However, in July 2003, Fremont was placed in liquidation and as a result Citation recorded a provision of $7.5 million of reinsurance recoverable from Fremont, which is included in incurred loss and loss adjustment expenses for the year ended December 31, 2003. In addition, during 2003, Citation also recorded adverse development in its property and casualty business of $3.9 million. The $11.4 million in negative development in Citation was offset by $6.7 million of positive development within Physicians’ medical professional liability loss reserves, reduced after actuarial analysis concluded that Physicians’ reserves against claims were significantly greater than the actuary’s projections of future claims payments.

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12. EMPLOYEE BENEFITS, COMPENSATION AND INCENTIVE PLAN:

For the year ended December 31, 2005, the Company accrued $8.4 million in incentive awards payable to certain members of management in accordance with the provisions of the Company’s bonus plan which, if certain thresholds are attained, is calculated based on growth in book value per share of the Company.  In addition, $2.8 million in incentive awards were recorded for certain members of Vidler’s management based on the combined net income of Vidler and Nevada Land and Resource Company in accordance with the related bonus plan.

PICO maintains a 401(k) defined contribution plan covering substantially all employees of the Company.  Matching contributions are based on a percentage of employee compensation. In addition, the Company may make a discretionary profit sharing contribution at the end of the Plan’s fiscal year within limits established by the Employee Retirement Income Securities Act. Total contribution expense for the years ended December 31, 2005, 2004 and 2003 was $384,000, $397,000 and $427,000, respectively.

13. REGULATORY MATTERS:

The regulations of the Departments of Insurance in the states where the Company’s insurance subsidiaries are domiciled generally restrict the ability of insurance companies to pay dividends or make other distributions. Based upon statutory financial statements filed with the insurance departments as of December 31, 2005, $6.5 million was available for distribution by the Company’s wholly-owned insurance subsidiaries to the parent company without the prior approval of the Department of Insurance in the states in which the Company’s insurance subsidiaries are domiciled. At December 31, 2005, the total statutory surplus in these insurance companies was $82.8 million and apart from the $6.5 million noted above, was unavailable for distribution without Department of Insurance approval.

14. COMMITMENTS AND CONTINGENCIES:

The Company leases some of its offices under non-cancelable operating leases that expire at various dates through October 2009. Rent expense for the years ended December 31, 2005, 2004 and 2003 for office space was $958,000, $959,000 and $323,000, respectively.

Vidler is party to a lease to acquire 30,000 acre-feet of underground water storage privileges and associated rights to recharge and recover water located near the California Aqueduct, northwest of Bakersfield. The agreement requires a minimum payment of $401,000 per year adjusted annually by the engineering price index until 2007. PICO signed a Limited Guarantee agreement with Semitropic Water Storage District (“Semitropic”) that requires PICO to guarantee Vidler’s annual obligation up to $519,000, adjusted annually by the engineering price index.

Future minimum payments under all operating leases for the years ending December 31, are as follows:

Year
2006	$	1,464,331
2007		1,351,073
2008		862,634
2009		546,819
2010		205,721
Thereafter		3,124,420
Total	$	7,554,998

Not included in the table above is an $11.8 million commitment Vidler made for capital expenditures related to the proposed construction of a pipeline to convey water from the Fish Springs Ranch in northern Nevada to Reno, Nevada.

The Company is subject to various other litigation that arises in the ordinary course of its business. Based upon information presently available, management is of the opinion that such litigation will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

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15. RELATED-PARTY TRANSACTIONS:

On September 21, 2005, the Compensation Committee approved new Employment Agreements for Ronald Langley, Chairman, and John R. Hart, President and CEO, to take effect January 1, 2006 and to expire on December 31, 2010. These Employment Agreements replaced the current Employment Agreements, which the Company entered into with Mr. Langley and Mr. Hart on January 1, 2002 which expired on December 31, 2005.

Each Employment Agreement provides for an annual salary of $1.1 million and an annual incentive award based on the growth of the Company’s book value per share, adjusted for any impact on book value by 7/8 of all stock appreciation rights-related expenses, net of tax, during the fiscal year above a threshold. Incentive awards of 5% of the increase in book value is earned when the Company’s percentage increase in book value per share as adjusted for a given fiscal year exceeds the threshold of 80% of the S&P 500 annualized total return for the five previous calendar years, including the given fiscal year.

The growth in book value per share exceeded the threshold each year in the three years ended December 31, 2005 and an award was accrued in the accompanying consolidated financial statements for PICO’s President and its Chairman of $5.9 million, $1.2 million, and $935,000, respectively.

In March 2000, an investment partnership registered as PICO Equity Investors, L.P. acquired 3,333,333 shares of PICO stock for approximately $50 million. PICO Equity Investors, an entity managed by PICO Equity Investors Management, LLC, which is owned by three of PICO’s current Directors, including the Chairman, and its president and chief executive officer, will exercise all voting and investment decisions with respect to these shares for up to 10 years. There is no monetary compensation for the management of either partnership. PICO used the $49.8 million net proceeds to develop existing water and water storage assets, acquire additional water assets, acquire investments, and for general working capital needs.

On March 6, 1996, Charles E. Bancroft, the President and Chief Executive Officer of Sequoia, entered into an incentive agreement with Sequoia after its acquisition by Physicians. Under the terms of this incentive agreement, Mr. Bancroft was to receive a payment equal to ten percent of the increase in Sequoia’s value upon his retirement, removal from office for reasons other than cause, or the sale of Sequoia to a third party. The Company recorded compensation expense related to this arrangement of $105,000 in 2003. The total accrued balance payable of $1.3 million was paid upon completion of the sale of Sequoia, which closed on March 31, 2003.

The Company entered into agreements with its president and chief executive officer, and certain other officers and Directors, to defer compensation into Rabbi Trust accounts held in the name of the Company. The total value of the Rabbi Trusts of $42.7 million, of which $1.3 million represents PICO stock with the balance in various stocks and bonds, is included in the Company’s consolidated balance sheets. Within these accounts the following officers and Directors are the beneficiaries of the following number of PICO shares: John Hart owns 19,940 PICO shares, Dr. Richard Ruppert owns 2,505 PICO shares, John Weil owns 8,084 PICO shares, Robert Broadbent, (retired from the Board on August 1, 2005) owns 8,183 PICO shares, and Carlos Campbell owns 2,644 PICO shares. The trustee for the accounts is Huntington National Bank. The accounts are subject to the claims of outside creditors, and any PICO stock held in the accounts is reported as treasury stock in the consolidated financial statements.

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16. STATUTORY INFORMATION:

The Company and its insurance subsidiaries are subject to regulation by the insurance departments of the states of domicile and other states in which the companies are licensed to operate and file financial statements using statutory accounting practices prescribed or permitted by the respective Departments of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory practices vary in certain respects from generally accepted accounting principles. The principal variances are as follows:

(1) Certain assets are designated as “non-admitted assets” and charged to policyholders’ surplus for statutory accounting purposes (principally certain agents’ balances and office furniture and equipment).

(2) Deferred policy acquisition costs are expensed for statutory accounting purposes.

(3) Equity in net income of subsidiaries and affiliates is credited directly to shareholders’ equity for statutory accounting purposes.

(4) Fixed maturity securities are carried at amortized cost.

(5) Loss and loss adjustment expense reserves and unearned premiums are reported net of the impact of reinsurance for statutory accounting purposes.

The Company and its wholly-owned insurance subsidiaries’ policyholders’ surplus and net income (loss) as of and for the years ended December 31, 2005, 2004 and 2003 on the statutory accounting basis are as follows:

	2005		2004		2003
Physicians Insurance Company of Ohio:	(Unaudited)
Policyholders' surplus	$	57,409,969	$	43,255,603	$	45,778,599
Statutory net income	$	6,514,608	$	9,628,569	$	7,659,200
Citation Insurance Company:
Policyholders' surplus	$	25,401,061	$	19,293,135	$	14,303,039
Statutory net income (loss)	$	1,655,790	$	562,129	$	(7,589,951	)

17. SEGMENT REPORTING:

PICO Holdings, Inc. is a diversified holding company. The Company acquires businesses which management believes are undervalued at the time, and have the potential to provide a superior rate of return over time, after considering the risk involved. The Company’s over-riding objective is to generate superior long-term growth in shareholders’ equity, as measured by book value per share. The Company accounts for segments as described in the significant accounting policies in Note 1.

Currently the major businesses that constitute operating and reportable segments are owning and developing water resources and water storage operations through Vidler Water Company, Inc.; owning and developing land and the related mineral rights and water rights through Nevada Land & Resource Company, LLC; “running off” the property and casualty and workers’ compensation loss reserves of Citation Insurance Company and the medical professional liability loss reserves of Physicians Insurance Company of Ohio; developing and providing ticker plant technologies and services to the financial markets through HyperFeed Technologies, Inc.; and the acquisition and financing of businesses.

Segment performance is measured by revenues and segment profit before tax. In addition, assets identifiable with segments are disclosed as well as capital expenditures, and depreciation and amortization. The Company has operations and investments both in the U.S. and abroad. Information by geographic region is also similarly disclosed.

Water Resources and Water Storage

Vidler is engaged in the following water resources and water storage activities:

· acquiring water rights, redirecting the water to its highest and best use, and then generating cash flow from either leasing the water or selling the right;

· development of storage and distribution infrastructure; and

· purchase and storage of water for resale in dry years.

Land and Related Mineral Rights and Water Rights

PICO is engaged in land and related mineral rights and water rights operations through its subsidiary Nevada Land. Nevada Land owns approximately 767,000 acres of land and related mineral and water rights in northern Nevada. Revenue is generated by land sales, land exchanges and leasing for grazing, agricultural and other uses. Revenue is also generated from the development of water rights and mineral rights in the form of outright sales and royalty agreements.

Insurance Operations in Run Off

This segment is comprised of Physicians Insurance Company of Ohio and Citation Insurance Company.

Until 1995, Physicians and its subsidiaries wrote medical professional liability insurance, primarily in the state of Ohio. Physicians has stopped writing new business and is in “run off.” This means that it is handling claims arising from historical business, and selling investments when funds are needed to pay claims.

In the past, Citation wrote commercial property and casualty insurance in California and Arizona and workers’ compensation insurance in California. Citation ceded all its workers’ compensation business in 1997, and ceased writing property and casualty business in December 2000 and is in run off.

In this segment, revenues come from premiums earned on policies written and investment income on the assets held by the insurance companies. As expected during the run-off process, the bulk of this segment’s revenues come from investment income. Investments directly related to the insurance operations are included within those segments. The assets of Sequoia, reported as discontinued operations for all periods presented, are included within the Insurance Run Off segment in those years as the equity of the discontinued operations was owned by Physicians. Sequoia was sold on March 31, 2003.

HyperFeed Technologies, Inc.

HyperFeed is a developer and provider of software, ticker plant technologies and managed services to the financial markets industry. PICO owns approximately 80% of the outstanding voting stock of HyperFeed.

Business Acquisitions and Financing

This segment contains businesses, interests in businesses, and other parent company assets.

PICO seeks to acquire businesses which are undervalued based on fundamental analysis--that is, the assessment of what the company is worth, based on the private market value of its assets, and/or earnings and cash flow. The Company has acquired businesses and interests in businesses through the purchase of private companies and shares in public companies, both directly through participation in financings and from open market purchases.

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Segment information by major operating segment follows:

	Land and Related Mineral Rights and Water Rights		Water Rights and Water Storage			Insurance Operations in Run Off			Business Acquisitions & Finance			HyperFeed			Consolidated
2005:
Revenues	$	21,811,469	$	106,448,584		$	8,108,639		$	5,743,002		$	4,270,915		$	146,382,609
Income (loss) before income taxes		12,038,040		56,211,819			10,539,533			(38,463,986	)		(7,409,674	)		32,915,732
Identifiable assets		66,513,641		86,353,051			156,366,749			127,980,663			4,615,518			441,829,622
Net investment income		1,010,194		1,177,078			3,051,278			2,956,623			1,297			8,196,470
Interest expense				269,954						391,360			30,845			692,159
Depreciation and amortization		81,228		1,172,974			11,276			78,892			1,959,002			3,303,372
Capital expenditures		5,947		4,658,969						122,753			1,779,446			6,567,115
2004:
Revenues	$	11,559,905	$	1,963,943		$	5,747,244		$	2,851,629		$	6,004,115		$	28,126,836
Income (loss) before income taxes		5,290,153		(5,701,110	)		4,059,818			(15,156,217	)		(5,389,580	)		(16,896,936	)
Identifiable assets		47,391,982		83,533,742			131,824,847			87,905,906			3,974,546			354,631,023
Net investment income		465,606		470,667			2,765,372			2,088,285			9,427			5,799,357
Interest expense				402,706						385,219			4,151			792,076
Depreciation and amortization		90,757		1,183,829			15,526			108,978			711,163			2,110,253
Capital expenditures		25,536		2,976,546			23,267			122,753			1,746,429			4,894,531
2003:
Revenues	$	5,889,560	$	16,815,624		$	3,244,748		$	5,548,563		$	1,380,099		$	32,878,594
Income (loss) before income taxes		2,004,626		(543,146	)		(2,902,354	)		(8,111,741	)		(4,225,851	)		(13,778,466	)
Identifiable assets		46,267,828		88,134,979			118,351,511			68,278,691			9,864,258			330,897,267
Net investment income		503,129		79,613			2,679,658			2,091,530			16,174			5,370,104
Interest expense				430,786						282,285			8,251			721,322
Depreciation and amortization		82,344		1,020,341			22,551			63,511			591,772			1,780,519
Capital expenditures		44,496		2,447,180			3,577			77,186			232,961			2,805,400

Segment information by geographic region follows:

	United States			Europe			Consolidated
2005
Revenues	$	143,166,274		$	3,216,335		$	146,382,609
Income before income taxes		32,119,765			795,967			32,915,732
Identifiable assets		356,663,916			85,165,706			441,829,622
Net investment income		6,764,018			1,432,452			8,196,470
Interest expense		300,799			391,360			692,159
Depreciation and amortization		3,303,372						3,303,372
Capital expenditures		6,567,115						6,567,115
2004
Revenues	$	27,616,915		$	509,921		$	28,126,836
Loss before income taxes		(15,623,800	)		(1,273,136	)		(16,896,936	)
Identifiable assets		285,687,909			68,943,114			354,631,023
Net investment income		4,475,589			1,323,768			5,799,357
Interest expense		406,857			385,219			792,076
Depreciation and amortization		2,110,253						2,110,253
Capital expenditures		4,894,531						4,894,531
2003
Revenues	$	32,722,396		$	156,198		$	32,878,594
Loss before income taxes		(12,548,084	)		(1,230,382	)		(13,778,466	)
Identifiable assets		285,378,620			45,518,647			330,897,267
Net investment income		4,281,653			1,088,451			5,370,104
Interest expense		439,037			282,285			721,322
Depreciation and amortization		1,780,519						1,780,519
Capital expenditures		2,805,400						2,805,400

72

18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that fair value:

- CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES, PAYABLES AND ACCRUED LIABILITIES: Carrying amounts for these items approximate fair value because of the short maturity of these instruments.

- INVESTMENTS: Fair values are estimated based on quoted market prices, or dealer quotes for the actual or comparable securities. Fair value of warrants to purchase common stock of publicly traded companies is estimated based on values determined by the use of accepted valuation models. Fair value for equity securities that do not have a readily determinable fair value is estimated based on the value of the underlying common stock. The Company regularly evaluates the carrying value of securities to determine whether there has been any diminution in value that is other-than-temporary and adjusts the value accordingly.

- BANK AND OTHER BORROWINGS: Carrying amounts for these items approximate fair value because current interest rates and, therefore, discounted future cash flows for the terms and amounts of loans disclosed in Note 19, are not significantly different from the original terms.

	December 31, 2005				December 31, 2004
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Fixed maturities	$	92,813,137	$	92,813,137	$	39,479,216	$	39,479,216
Equity securities		194,633,197		194,633,197		142,978,213		142,978,213
Cash and cash equivalents		37,794,416		37,794,416		17,407,138		17,407,138
Financial liabilities:
Bank and other borrowings		12,334,868		12,334,868		18,020,559		18,020,559

19. BANK AND OTHER BORROWINGS:

At December 31, 2005 borrowings consisted primarily of notes used to finance the purchase of equity securities in Switzerland. During 2005, the notes payable incurred on land acquisition in Vidler were paid off in conjunction with the sale of real estate and water assets in Arizona. The weighted average interest rate on the outstanding borrowings was approximately 3.5% at December 31, 2005, with principal and interest due throughout the term. At December 31, 2004, bank and other borrowings consisted of loans and promissory notes incurred to finance the purchase of land in Vidler and equity securities in Switzerland. The weighted average interest rate on these borrowings was approximately 4.1% at December 31, 2004, with principal and interest due throughout the term.

	2005		2004
3.27%-3.32% (2.74% in 2004) Swiss loans	$	11,796,940	$	13,602,457
7.25% (5.25% in 2004) Demand notes		500,000		465,000
7% - 8% Notes due:
2005 - 2006		37,928		73,293
8.5% Notes due:
2005 and 2004				240,511
2006 - 2009				2,660,293
2010 - 2019				652,671
9% -10% Notes due:
2005				73,793
2006 - 2008				252,541
	$	12,334,868	$	18,020,559

PICO’s subsidiary, Global Equity AG, has a loan facility with a Swiss bank for a maximum of $11.8 million (15.5 million CHF), $13.6 million (15.5 million CHF) at December 31, 2004. At December 31, 2005, the Company had borrowed $11.8 million, $9.5 million due to mature in May 2006 and $2.3 million due to mature in August 2006. The borrowing is based on a margin not to exceed 30% of the securities deposited with the bank. It is anticipated the Company will refinance the loan facility when it becomes due. The actual amount available is dependent on the value of the collateral held after a safety margin established by the bank. It may be used as an overdraft or for payment obligations arising from securities transactions.

The Company’s future minimum principal repayments for the years ending December 31 are as follows:

2006	$	12,334,868
2007
2008
2009
2010
Thereafter
Total	$	12,334,868

73

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report. There were no changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation of the Company's consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly present the form and substance of transactions and that the financial statements reasonably present the Company's financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the company's financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances.

Deloitte & Touche LLP, an independent registered public accounting firm, audits the Company's consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board and provides an objective, independent opinion on the Company’s financial statements.

The board of directors of the Company has an Audit Committee composed of three independent directors. The committee meets periodically with financial management and Deloitte & Touche LLP to review accounting, control, auditing and financial reporting matters.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of company management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s evaluation under the framework in Internal Control-Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2005. Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, as stated in their report, which is included herein.

74

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PICO Holdings, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that PICO Holdings, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2005 of the Company and our report dated March 9, 2006 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

San Diego, California

March 9, 2006

75

ITEM 9A. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item regarding directors will be set forth in the section headed “Election of Directors” in our definitive proxy statement with respect to our 2006 annual meeting of shareholders, to be filed on or before April 30, 2006 and is incorporated herein by reference. The information required by this item regarding the Company’s code of ethics will be set forth in the section headed “Code Of Ethics” in our definitive 2006 proxy statement and is incorporated herein by reference. Information regarding executive officers is set forth in Item 1 of Part 1 of this Report under the caption “Executive Officers.”

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be set forth in the section headed “Executive Compensation” in our 2006 definitive proxy statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in our 2006 definitive proxy statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be set forth in the section headed “Certain Relationships and Related Transactions” and “Compensation Committee, Interlocks and Insider Participation” in our definitive 2006 proxy statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item will be set forth in the section headed “Fees Paid to Deloitte & Touche LLP” in our definitive 2006 proxy statement and is incorporated herein by reference.

76

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.

1. Financial Statements.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Accounting Firms	47-48
Consolidated Balance Sheets as of December 31, 2005 and 2004	49-50
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003	51
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003	52-54
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003	55
Notes to Consolidated Financial Statements	56-73

2. Financial Statement Schedules.

Report of Independent Registered Accounting Firm	78
Schedule I - Condensed Financial Information of Registrant	79
Schedule II - Valuation and Qualifying Accounts	80
Schedule V - Supplementary Insurance Information	81

3. Exhibits

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation of PICO.(1)
3.2	Amended and Restated By-laws of PICO. (2)
10.1	PICO Holdings, Inc. 2005 Long-Term Incentive Plan.(3)
10.4	Bonus Plan of Dorothy A. Timian-Palmer.(5)
10.5	Bonus Plan of Stephen D. Hartman.(5)
10.7	Employment Agreement of Ronald Langley.(4)
10.8	Employment Agreement of John R. Hart.(4)
21.1	Subsidiaries of PICO
23.1	Consent of Independent Registered Accounting Firm - Deloitte & Touche LLP.
23.2	Consent of Independent Registered Accounting Firm - KPMG LLP.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

(1) Incorporated by reference to exhibit of same number filed with Form 8-K dated December 4, 1996.

(2) Filed as Appendix to the prospectus in Part I of Registration Statement on Form S-4 (File No. 333-06671).

(3) Incorporated by reference to Proxy Statement for Special Meeting of Shareholders on December 8, 2005, dated November 8, 2005, and filed with the SEC on November 8, 2005.

(4) Incorporated by reference to exhibit of same number filed with Form 10-Q for the quarterly period ended September 30, 2005.

(5) Incorporated by reference to Form 8-K filed with the SEC on February 25, 2005.

77

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PICO Holdings, Inc.

We have audited the consolidated financial statements of PICO Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, and have issued our reports thereon dated March 9, 2006; such reports are included elsewhere in this Form 10-K.  Our audits also included the consolidated financial statement schedules of the Company listed in Item 15.  These consolidated financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ Deloitte & Touche LLP

San Diego, California

March 9, 2006

78

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)

CONDENSED BALANCE SHEETS

	December 31, 2005			December 31, 2004
ASSETS
Cash and cash equivalents	$	9,993,387		$	9,291,851
Investments in subsidiaries (eliminated in consolidation)		279,054,059			205,073,285
Equity securities and other investments		54,835,786			11,967,876
Deferred income taxes		11,315,901			7,188,824
Other assets (Intercompany receivable of $0 in 2005, and $32.3 million in 2004 eliminated in consolidation)		2,973,165			33,434,215
Total assets	$	358,172,298		$	266,956,051
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expense and other liabilities (Intercompany payable of $283,000 in 2005, and $0 in 2004 eliminated in consolidation)	$	57,297,341		$	27,026,753
Common stock, $.001 par value, authorized 100,000,000 shares: issued 17,706,923 at December 31, 2005 and 16,801,923 at December 31, 2005		17,707			16,802
Additional paid-in capital		257,466,412			236,089,222
Accumulated other comprehensive income		60,092,462			36,725,700
Retained earnings		61,725,860			45,524,219
		379,302,441			318,355,943
Less treasury stock, at cost (2005: 4,435,483 shares and 2004: 4,435,444 shares)		(78,427,484	)		(78,426,645	)
Total shareholders' equity		300,874,957			239,929,298
Total liabilities and shareholders' equity	$	358,172,298		$	266,956,051

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,

	2005			2004			2003
Investment income, net (Intercompany interest of $2.8 million in 2005, $3.1 million in 2004, and $3.2 million in 2003 eliminated in consolidation)	$	4,659,888		$	5,484,542		$	6,417,240
Equity in loss of subsidiaries		39,424,867			(2,135,617	)		(8,528,754	)
Total revenues (charges)		44,084,755			3,348,925			(2,111,514	)
Expenses (Intercompany interest of $1.4 million in 2005, $1.1 million in 2004, and $1.7 million in 2003 eliminated in consolidation)		39,991,535			18,639,014			15,017,239
Income (loss) from continuing operations before income taxes		4,093,220			(15,290,089	)		(17,128,753	)
Benefit for income taxes		(12,071,169	)		(4,653,685	)		(3,392,527	)
Income (loss) before cumulative effect		16,164,389			(10,636,404	)		(13,736,226	)
Income from discontinued operations, net		37,252			77,720			10,498,414
Cumulative effect of accounting change, net
Net income (loss)	$	16,201,641		$	(10,558,684	)	$	(3,237,812	)
CONDENSED STATEMENTS OF CASH FLOWS
Cash flow from operating activities:		2005			2004			2003
Net income (loss)	$	16,201,641		$	(10,558,684	)	$	(3,237,812	)
Adjustments to reconcile net income (loss) to net cash used or provided by operating activities:
Equity in loss of subsidiaries		(39,424,867	)		2,135,617			8,528,754
Income from discontinued operations, net		(37,252	)		(77,720	)		(10,498,414	)
Cumulative effect of accounting change, net								-
Changes in assets and liabilities:
Accrued expenses and other liabilities		30,270,588			9,739,501			8,685,843
Other assets		26,420,985			6,638,581			(3,094,770	)
Net cash provided by (used in) operating activities		33,431,095			7,877,295			383,601
Cash flow from investing activities:
Proceeds from sale of investments		7,731,833			10,988,612			8,539,180
Proceeds from maturities of investments		4,860,000						18,673,000
Purchases of proerty and equipment		(87,012	)
Purchase of investments (Intercompany purchases of $39.2 million eliminated in consolidation, none in 2004 or 2003)		(66,611,636	)		(16,105,426	)		(34,296,877	)
Net cash used in investing activities		(54,106,815	)		(5,116,814	)		(7,084,697	)
Cash flow from financing activities:
Proceeds from stock offering, net		21,378,095
Other					6,519
Purchase of treasury shares for deferred compensation plans		(839	)		(121,235	)		(83,218	)
Net cash provided by (used in) financing activities		21,377,256			(114,716	)		(83,218	)
Increase (decrease) in cash and cash equivalents		701,536			2,645,765			(6,784,314	)
Cash and cash equivalents, beginning of year		9,291,851			6,646,086			13,430,400
Cash and cash equivalents, end of year	$	9,993,387		$	9,291,851		$	6,646,086

79

SCHEDULE II

PICO HOLDINGS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

			Additions (1)
Description	Balance at Beginning of Period		Charged to Costs and Expenses		Deductions			Balance at End of Period
Year-end December 31, 2005:
Allowance for doubtful accounts	$	358,917		17,278				$	376,195
Year-end December 31, 2004:
Allowance for doubtful accounts	$	2,450,604		308,917	$	(2,400,604	)	$	358,917
Year-end December 31, 2003:
Allowance for doubtful accounts	$	2,500,604		420,000	$	(470,000	)	$	2,450,604

(1) Includes $150,000 in 2003 from the consolidation of HyperFeed.

80

SCHEDULE V

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION

(In thousands)

Year Ended December 31, 2005

	Losses, Claims and Loss Expense Reserves		Net Investment Income		Losses and Loss Expenses			Other Operating Expenses
Medical professional liability	$	12,844	$	2,016	$	(3,155	)	$	635
Property and casualty and workers' compensation		33,803		1,035		(510	)		599
Total medical professional liability and property and casualty and workers' compensation		46,647		3,051		(3,665	)		1,234
Other operations				5,145					115,898
Total continuing	$	46,647	$	8,196	$	(3,665	)	$	117,132

SCHEDULE V

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION

(In thousands)

Year Ended December 31, 2004

	Losses, Claims and Loss Expense Reserves		Net Investment Income		Losses and Loss Expenses			Other Operating Expenses
Medical professional liability	$	19,593	$	3,656	$	(489	)	$	728
Property and casualty and workers' compensation		36,401		2,092		932			516
Total medical professional liability and property and casualty and workers' compensation		55,994		5,748		443			1,244
Other operations				51					43,337
Total continuing	$	55,994	$	5,799	$	443		$	44,581

SCHEDULE V

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION

(In thousands)

Year Ended December 31, 2003

	Losses, Claims and Loss Expense Reserves		Net Investment Income		Losses and Loss Expenses			Other Operating Expenses
Medical professional liability	$	23,626	$	1,353	$	(6,753	)	$	876
Property and casualty and workers' compensation		37,238		1,327		11,420			604
Total medical professional liability and property and casualty and workers' compensation		60,864		2,680		4,667			1,480
Other operations				2,690					39,945
Total continuing	$	60,864	$	5,370	$	4,667		$	41,425

81

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 10, 2006

PICO Holdings, Inc.
By:	/s/ John R. Hart
	John R. Hart
	Chief Executive Officer
	President and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 10, 2006 by the following persons in the capacities indicated.

/s/ Ronald Langley	Chairman of the Board
Ronald Langley
/s/ John R. Hart	Chief Executive Officer, President and Director
John R. Hart	(Principal Executive Officer)
/s/ Maxim C. W. Webb	Chief Financial Officer and Treasurer
Maxim C. W. Webb	(Chief Accounting Officer)
/s/ S. Walter Foulkrod, III, Esq.	Director
S. Walter Foulkrod, III, Esq.
/s/ Richard D. Ruppert, MD	Director
Richard D. Ruppert, MD
/s/ Carlos C. Campbell	Director
Carlos C. Campbell
/s/ Kenneth J. Slepicka	Director
Kenneth J. Slepicka
/s/ John D. Weil	Director
John D. Weil

82

INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation of PICO.(1)
3.2	Amended and Restated By-laws of PICO. (2)
10.1	PICO Holdings, Inc. 2005 Long-Term Incentive Plan.(3)
10.4	Bonus Plan of Dorothy A. Timian-Palmer.(5)
10.5	Bonus Plan of Stephen D. Hartman.(5)
10.7	Employment Agreement of Ronald Langley.(4)
10.8	Employment Agreement of John R. Hart.(4)
21.1	Subsidiaries of PICO
23.1	Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP.
23.2	Consent of Independent Registered Public Accounting Firm - KPMG LLP.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

(1) Incorporated by reference to exhibit of same number filed with Form 8-K dated December 4, 1996.

(2) Filed as Appendix to the prospectus in Part I of Registration Statement on Form S-4 (File No. 333-06671).

(3) Incorporated by reference to Proxy Statement for Special Meeting of Shareholders on December 8, 2005, dated November 8, 2005, and filed with the SEC on November 8, 2005.

(4) Incorporated by reference to exhibit of same number filed with Form 10-Q for the quarterly period ended September 30, 2005.

(5) Incorporated by reference to Form 8-K filed with the SEC on February 25, 2005.

111

EX-21.1

Link to 10-K

SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1

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Name of Subsidiary	Jurisdiction of Incorporation/Organization
Vidler Water Company, Inc.	Nevada
Nevada Land and Resource Company, LLC.	Nevada
Nevada Land and Resource Holdings, Inc.	Nevada
Citation Insurance Company	California
PICO Investment Corporation	Ohio
Physicians Insurance Company of Ohio	Ohio
HyperFeed Technologies, Inc.	Delaware
Global Equity AG	Switzerland
Torrey Pines Holdings (Netherlands) B.V.	Holland

EX-23.1

Link to 10-K

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-36881 on Form S-8 of our reports dated March 9, 2006 relating to the consolidated financial statements and financial statement schedules of PICO Holdings, Inc. and subsidiaries (the “Company”) and management’s report on the effectiveness of internal control over financial reporting appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2005.

/s/ Deloitte & Touche LLP

San Diego, California

March 9, 2006

EX-23.2

Link to 10-K

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-3688) and Form S-3 (No. 33-125362) of PICO Holdings, Inc. of our report dated March 4, 2004, relating to the consolidated statements of operations, stockholders’ equity, and cash flows of HyperFeed Technologies, Inc and subsidiary for the year ended December 31, 2003, which report appears in the December 31, 2005 annual report on Form 10-K of PICO Holdings, Inc.

/s/ KPMG LLP

Chicago, Illinois

March 9, 2006

EX-31.1

Link to 10-K

EXHIBIT 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John R. Hart, certify that:

1. I have reviewed this annual report on Form 10-K of PICO Holdings, Inc. (the “Registrant”);

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:March 10, 2006

/s/ John R. Hart

John R. Hart

President and Chief Executive Officer

EX-31.2

Link to 10-K

EXHIBIT 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Maxim C. W. Webb, certify that:

1. I have reviewed this annual report on Form 10-K of PICO Holdings, Inc. (the “Registrant”);

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:March 10, 2006

/s/ Maxim C. W. Webb

Maxim C. W. Webb

Chief Financial Officer

EX-32.1

Link to 10-K

EXHIBIT 32.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Annual Report of PICO Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Hart, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that to the best of my knowledge:

(1)The Report fully complies with requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	March 10, 2006	/s/ John R. Hart
		John R. Hart
		President and Chief Executive Officer

EX-32.2

Link to 10-K

EXHIBIT 32.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Annual Report of PICO Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Maxim C.W. Webb, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that to the best of my knowledge:

(1)The Report fully complies with requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	March 10, 2006	/s/ Maxim C. W. Webb
		Maxim C. W. Webb
		Chief Financial Officer