PICO Holdings Inc.
Annual Report 2009

Plain-text annual report

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(MARK ONE)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period from __________ to __________Commission File Number 0-18786PICO HOLDINGS, INC.(Exact Name of Registrant as Specified in Its Charter)California94-2723335(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)875 Prospect Street, Suite 301La Jolla, California 92037(Address of Principal Executive Offices)Registrant’s Telephone Number, Including Area Code(888) 389-3222Securities Registered Pursuant to Section 12(b) of the Act:Common Stock, Par Value $.001, Listed on The NASDAQ Stock Market LLCSecurities Registered Pursuant to Section 12(g) of the Act:NoneIndicate by check mark whether the registrant is a well known seasoned issuer, as defined by Rule 405 of the Securities Act.Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes ¨ No ¨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 bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):Large accelerated filer Yes xAccelerated filer ¨Non-accelerated filer ¨Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). Yes ¨ No xApproximate aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant (based on the closingsales price of such stock as reported in the NASDAQ Global Market) as of June 30, 2009, the last business day of the registrant’s most recently completedsecond fiscal quarter, was $617,636,599.On February 26, 2010, the registrant had 22,595,678 shares of common stock, $.001 par value, outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Definitive Proxy Statement to be filed with the United States Securities and Exchange Commission pursuant to Regulation14A in connection with the registrant’s 2010 Annual Meeting of Shareholders, to be filed subsequent to the date hereof, are incorporated by referenceinto Part III of this Annual Report on Form 10-K. Such Definitive Proxy Statement will be filed with the United States Securities and ExchangeCommission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2009.  ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS Page No.PART I1 Item 1.BUSINESS1 Item 1A.RISK FACTORS8 Item 1B.UNRESOLVED STAFF COMMENTS14 Item 2.PROPERTIES14 Item 3.LEGAL PROCEEDINGS15 Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS16 PART II 16 Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES16 Item 6.SELECTED FINANCIAL DATA18 Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS18 Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK54 Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA55 Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE86 Item 9A.CONTROLS AND PROCEDURES86 Item 9B.OTHER INFORMATION88 PART III 88 Item 10.DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE88 Item 11.EXECUTIVE COMPENSATION88 Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS88 Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE88 Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES88 PART IV 88 Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES88 SIGNATURES100  PART INote About “Forward-Looking Statements”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,” as defined in the Private Securities Litigation Reform Act of 1995, regarding our business, financialcondition, results of operations, and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipateddevelopments, and other information concerning future matters. Words such as “may”, “will”, “could”, “expects”, “anticipates”, “intends”, “plans”,“believes”, “seeks”, “estimates”, and similar expressions or variations of such words are intended to identify forward-looking statements, but are notthe 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 canonly be based on current expectations and assumptions and are not guarantees of future performance. Consequently, forward-looking statements areinherently subject to risk and uncertainties, and the actual results and outcomes could differ materially from future results and outcomes expressed orimplied by such forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, withoutlimitation, those discussed under Part I, Item 1A “Risk Factors”, as well as those discussed elsewhere in this Annual Report on Form 10-K and in otherfilings we may make from time to time with the United States Securities and Exchange Commission (“SEC”) after the date of this report. Readers areurged 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. Weundertake no obligation to (and we expressly disclaim any obligation to) revise or update any forward-looking statements, whether as a result of newinformation, subsequent events, or otherwise, in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form10-K. Readers are urged to carefully review and consider the various disclosures made in this Annual Report on Form 10-K, and the other filings wemay make from time to time with the SEC after the date of this report, which attempt to advise interested parties of the risks and factors that may affectour business, financial condition, results of operations, and prospects.ITEM 1. BUSINESSIntroductionPICO Holdings, Inc. is a diversified holding company. In this Annual Report, PICO and its subsidiaries are collectively referred to as “PICO”, “theCompany”, or by words such as “we” and “our”. We seek to build and operate businesses where we believe significant value can be created from thedevelopment of unique assets, and to acquire businesses which we identify as undervalued and where our management participation in operations can aid inthe recognition of the business’s fair value, as well as create additional value.Our objective is to maximize long-term shareholder value. Our goal is to manage our operations to achieve a superior return on net assets over the longterm, as opposed to short-term earnings.Our business is separated into four operating segments:·Water Resource and Water Storage Operations;·Real Estate Operations;·Insurance Operations in “Run Off”; and·Corporate.As of December 31, 2009, our major consolidated subsidiaries are:·Vidler Water Company, Inc. (“Vidler”), a business that we started more than 14 years ago, which acquires and develops water resources and waterstorage operations in the southwestern United States, with assets and operations in Nevada, Arizona, Idaho, Colorado and New Mexico;·UCP, LLC (“UCP”), a business that we started in 2008, which acquires and develops partially-developed and finished residential housing lots inselected markets in California;·Nevada Land and Resource Company, LLC (“Nevada Land”), a business that we started when we acquired the company more than 12 years ago, whichsells property in northern Nevada and also sells or leases certain sub – surface rights (such as mineral rights, water rights and geothermal rights)associated with Nevada Land’s property;·Physicians Insurance Company of Ohio (“Physicians”), which is “running off” its medical professional liability insurance loss reserves; and·Citation Insurance Company (“Citation”), which is “running off” its property and casualty insurance and workers’ compensation loss reserves. 1 The address of our main office is 875 Prospect Street, Suite 301, La Jolla, California 92037, and our telephone number is (888) 389-3222.Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and, if applicable, amendments to those reports, are madeavailable free of charge on our web site (www.picoholdings.com) as soon as reasonably practicable after the reports are electronically filed with the SEC. Ourwebsite also contains other material about PICO. Information on our website is not incorporated by reference into this Form 10-K.HistoryPICO was incorporated in 1981 and began operations in 1982. The company was known as Citation Insurance Group until a reverse merger withPhysicians Insurance Company of Ohio on November 20, 1996. After the reverse merger, the former shareholders of Physicians owned approximately 80% ofCitation Insurance Group, the Board of Directors and management of Physicians replaced their Citation counterparts, and Citation Insurance Group changedits 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 theold Citation Insurance Group only, and does not reflect the performance of Physicians prior to the merger.Operating Segments and Major Subsidiary CompaniesThe following is a description of our operating segments and major subsidiaries. Unless otherwise indicated, we own 100% of each subsidiary. Thefollowing discussion of our segments should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in thisAnnual Report on Form 10-K.Water Resource and Water Storage OperationsOur Water Resource and Water Storage Operations are conducted through Vidler Water Company, Inc. and its subsidiaries.Vidler is a private company in the water resource development business in the southwestern United States. We develop new sources of water formunicipal and industrial use, either from existing supplies of water, such as water used for agricultural purposes, or from acquiring unappropriated(previously unused) water. We also develop water storage infrastructure to facilitate the efficient allocation of available water supplies. Vidler is not a waterutility, and does not currently 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 supplies ina particular location, or inadequate infrastructure to fully utilize existing and new water supplies, provide opportunities for Vidler because:·certain areas of the Southwest experiencing growth have insufficient known supplies of water to support future growth. Vidler identifies and developsnew water supplies for communities with limited economic water resources to support future community growth. In certain cases, to supply water fromthe water resources identified by Vidler, it may require regulatory approval to import the water from its source to where the demand is, or the permittingof the infrastructure required to convey the water, or both; and·infrastructure to recharge water will be required to store supplies during times of surplus to enable transfers from stored supplies in years whereaugmentation of existing supplies is required (for example, in drought conditions).We entered the water resource development business through Vidler in 1995. At the time, Vidler owned a limited quantity of water rights and relatedassets in Colorado. Since then, Vidler has acquired or developed:·additional water rights and related assets, predominantly in Nevada and Arizona, two of the leading states in population growth and new homeconstruction over the past several years. A water right is the legal right to divert water and put it to beneficial use. Water rights are assets which can bebought and sold. The value of a water right depends on a number of factors, which may include location, the seniority of the right, whether or not theright is transferable, or if the water can be exported. We seek to acquire water rights at prices consistent with their current use, which is typicallyagricultural, with the expectation of an increase in value if the water right can be converted through the development process to a higher use, such asmunicipal and industrial use. Typically, our water resources are the most competitive source of water (the most economical source of water supply) tosupport new growth in municipalities or new commercial developments; and·a water storage facility in Arizona. Vidler stores water for its own account at the Vidler Arizona Recharge Facility located approximately 70 miles westof Phoenix. An acre-foot is a unit commonly used to measure the volume of water, being the volume of water required to cover an area of one acre to adepth of one foot, and is equivalent to approximately 325,850 gallons. As a rule of thumb, one acre-foot of water would sustain two families of fourpersons each for one year. 2 We have also entered into “teaming” and joint development arrangements with third parties who have water assets but lack the capital or expertise tocommercially develop these assets. The first of these arrangements was a water delivery teaming agreement with Lincoln County Water District(“Lincoln/Vidler”), which is developing water resources in Lincoln County, Nevada. We have also entered into a joint development agreement with CarsonCity and Lyon County, Nevada to develop and provide water resources in Lyon County. We continue to explore additional teaming and joint developmentopportunities throughout the Southwest.Vidler generates revenues by:·selling its developed water resources to real estate developers or industrial users who must secure an assured supply of water in order to receive permitsfor their commercial projects; and·storing water at its water storage facility in Arizona from currently available surplus supplies, and then selling the stored water in future years tocommercial developers or municipalities that have either exhausted their existing water supplies, or in instances where our water represents the mosteconomical source of water for their commercial projects or communities.The following table details the water rights and water storage assets owned by Vidler or its subsidiaries at December 31, 2009. Please note that this isintended as a summary only.Name of assetandapproximatelocationBrief DescriptionPresent commercial use WATERRESOURCES Arizona: HarquahalaValleyground waterbasinLa PazCounty75 milesnorthwest ofmetropolitanPhoenix3,840 acre-feet of transferable groundwater 3,206 acres of realestate.Leased to farmers. Nevada: Fish SpringsRanch, LLC(51%interest)WashoeCounty, 40miles north ofReno12,987 acre-feet of permitted water rights, 7,987 acre-feet ofwhich are designated as water credits and are available for saleand use in the north valleys of Reno.8,600 acres of ranch land. Vidler has constructed a total of 35 miles of pipeline to deliver an initial8,000 acre-feet of water annually from Fish Springs Ranch to thenorth valleys of Reno, Nevada.LincolnCounty waterdeliveryteamingagreementApplications for more than 100,000 acre-feet of water rightsthrough an agreement with Lincoln County. It is currentlyanticipated that up to 40,000 acre-feet of the applications willbe permitted, and the water put to use on projects approved inLincoln County/northern Clark County, Nevada. Lincoln/Vidler were awarded 396 acre – feet of permitted waterrights in the Tule Desert Groundwater Basin in Lincoln Countyand own 1,000 acre – feet of permitted water rights in the KaneSprings Valley Basin in Lincoln County. In addition, Lincoln/Vidler also own 1,009 acre–feet of permittedagricultural - use water rights. Lincoln/Vidler is appealing the ruling in 2009 that awarded only 396 acre– feet of permitted water rights in the Tule Desert GroundwaterBasin. Lincoln/Vidler had applied for 7,240 acre – feet of water rights. Lincoln/Vidler has closed a sale agreement of 1,000 acre – feet ofpermitted water rights in Kane Springs Valley Basin in Lincoln Countywith a developer. Vidler’s portion of the water rights is approximately 747acre – feet. Vidler has agreed to finance the sale of its portion of the waterrights over the period ending April 2012 at 10% per annum. Lincoln/Vidler is putting the agricultural use water rights to beneficial useon property owned by Vidler in Dry Lake Valley in Lincoln County. 3 Sandy ValleyNear the Nevada/California state line near theInterstate 15 corridorWater rights applications for 2,000 acre-feet.Agreement to sell permitted water for proposeddevelopments in Sandy Valley. Muddy River water rightsIn the Moapa Valley, approximately 35 miles eastof Las Vegas near the Interstate 15 corridor 267 acre-feet of water rights.Currently leased to Southern Nevada WaterAuthority and available for specific developmentprojects in the future. Dry Lake ValleyLincoln County, Nevada Approximately 795 acres of real estate and 1,009acre–feet of permitted irrigation water rights.The property is being used by Lincoln / Vidler toput 1,009 acre – feet of agricultural use waterrights to beneficial use. Carson River GroundwaterCarson City, Lyon County and Douglas County,NevadaApproximately 1,200 acre-feet of municipal usewater rights and 3,500 acre-feet of Carson Riveragricultural use water rights. Options over 2,800 acre-feet of Carson Riveragricultural use water rights. 43 acres of ranch land. 950 acres of developable real estate.Development and Improvement agreements withCarson City and Lyon County to provide waterresources for planned future growth inLyon County with a connection between thewater systems of both municipalities. Parceled into 4 developable lots. Available for development. Other states: Colorado water rights173 acre-feet of water rights.67 acre-feet leased. 106 acre-feet are available forsale or lease. IdahoNear Boise, Idaho7,044 acre-feet of water rights and 1,886 acres offarm land.The properties are leased and currently beingfarmed. Vidler has also entered into a geothermallease agreement with a geothermal energyprovider. WATER STORAGE Vidler Arizona Recharge FacilityHarquahala Valley, ArizonaAn underground water storage facility withpermitted recharge capacity exceeding 1 millionacre-feet and annual recharge capability of at least35,000 acre-feet.Vidler is currently buying water and storing it onits own account. At December 31, 2009, Vidlerhad net recharge credits of approximately217,000 acre-feet of water in storage:approximately 212,000 acre – feet in the ArizonaRecharge Facility and approximately 5,000 acre– feet in an Arizona state owned storage sitewithin the Phoenix Active Management Area. Inaddition, Vidler has ordered approximately47,000 acre-feet of water for recharge in 2010(approximately 41,500 acre – feet at the ArizonaRecharge Facility and 5,500 acre – feet in thePhoenix Active Management Area). Real Estate OperationsOur Real Estate Operations are primarily conducted through Nevada Land, which operates in northern Nevada, and UCP, which operates in California.Nevada LandIn April 1997, PICO paid $48.6 million to acquire Nevada Land, which at the time owned approximately 1.35 million acres of deeded real estate innorthern Nevada, and certain water, mineral, and geothermal rights related to the property. As of December 31, 2009, Nevada Land owned approximately440,000 acres of land in northern Nevada. Much of Nevada Land’s property is “checker-boarded” in square mile sections with publicly owned land. Theproperties generally parallel the U.S. Interstate 80 corridor and the Humboldt River, from Fernley, in western Nevada, to Elko County, in northeast Nevada. 4 Nevada Land is one of the largest private landowners in the state of Nevada. Real estate available for private development in Nevada is relatively scarce,as governmental agencies own or control approximately 87% of the land in Nevada. Before we acquired Nevada Land, the property had been under theownership of a succession of railway companies, to whom it was a non-core asset. Accordingly, when we acquired Nevada Land, we believed that thecommercial potential of the property had not been maximized.After acquiring Nevada Land, we completed a “highest and best use” study which divided the real estate into categories. We developed strategies tomaximize the value of each category, with the objective of monetizing assets once they had reached their highest and best use. These strategies include:·the sale of real estate and water rights. There is demand for real estate and water for a variety of purposes including residential development, farming,ranching, and from industrial users;·the development of water rights. Nevada Land has applied for additional water rights and where water rights are permitted, we anticipate that the value,productivity, and marketability of the related real estate will increase;·the development of real estate in and around growing municipalities;·the management of mineral rights; and·the development of geothermal rights.In recent years, Nevada Land has filed additional applications for approximately 47,500 acre-feet of water rights on its properties. Of these applications,approximately 14,400 acre-feet of water rights have been certificated and permitted, and applications are pending for approximately 33,100 acre-feet of wateruse for agricultural, municipal, and industrial use. Potentially, some of these water rights could be utilized to support the growth of municipalities innorthern Nevada, or alternative energy requirements.Nevada Land has pending water rights applications filed with the Nevada State Engineer’s Office. Prior to a law change in 2003, the law governing waterrights required the Nevada State Engineer to act on an application within one year of its filing date or it was deemed cancelled. A recent Nevada SupremeCourt ruling in January, 2010, considered this new law with respect to 34 water right applications of Southern Nevada Water Authority (SNWA) that had beenfiled in 1989. The Court reversed and remanded a lower court ruling requiring the lower court to either reopen the 34 water right applications for protests orto require SNWA to re-file new applications. The Court indicated that “applicants cannot be punished for the State Engineer’s failure to follow his statutoryduty.” However, language in the opinion appeared to indicate that equity would require the applications to be reopened for protest but the early priority dateof their applications would remain intact. Nevada Land has pending water right applications filed with the Nevada State Engineer’s Office but the majorityof the water right applications that were filed prior to 2003 have already been acted on by the Nevada State Engineer, and, therefore, it appears that theseapplications are not in potential jeopardy under the Nevada Supreme Court ruling.UCPUCP was formed in 2007 with the objective of acquiring attractive and well-located finished and partially-developed residential lots, primarily in selectCalifornia markets. As of December 31, 2009, UCP owns or controls a total of 468 finished lots (which includes two model homes and six partiallycompleted homes) and 3,289 potential lots in various stages of entitlement. The finished and entitled lots are primarily located in and around the CentralValley and in the Central Coast areas of California. As of December 31, 2009, we have expended capital of over $70 million for the acquisition anddevelopment to date of these lots. Approximately $17.7 million of this capital has been financed by non–recourse, project specific debt. We believe that, despite the difficult conditions in the current housing market, there are still attractive opportunities for select real estate projects. UCPacquires properties with compelling valuations (our purchase price has to be at a steep discount to our estimated replacement cost) in areas where there appearto be sound demand fundamentals constricted by a limited supply of buildable lots (finished lots) and declining resale home inventory. While we are unableto predict when the housing market will recover, we fully anticipate, and are prepared, to carry and develop our projects for several years until homebuildersstart to replenish their inventory of lots. We believe we should generate our minimum required economic return despite the potential long duration of theseprojects, as our acquisition basis is low and our carrying and development costs are relatively insignificant, for most, but not all, of our projects. 5 Insurance Operations in “Run Off”This segment consists of Physicians Insurance Company of Ohio and Citation Insurance Company.Physicians Insurance Company of OhioUntil 1995, Physicians wrote medical professional liability insurance, mostly in the state of Ohio. In 1995, we concluded that maximum value would beobtained by selling the prospective book of business (the opportunity to renew existing policies and to write new policies) and placing Physicians in “runoff” (handling and resolving claims on expired policies, but not writing any new business). Physicians wrote its last policy in 1995; however, claims can befiled until 2017 related to events that allegedly occurred during the period when Physicians provided coverage.Insurance companies in “run off” obtain the funds to pay claims from the maturity of fixed-income securities, the sale of investments, and collectionsfrom reinsurance companies.Once an insurance company has gone into “run off” and the last of its policies has expired, typically most revenues come from interest and dividendincome, and realized gains and losses, from the securities investments. These assets are available to pay the insurance company’s loss reserves and anysurplus is shareholders’ equity. Occasionally, earned premiums are recorded, which relate to reinsurance.During the “run off” process, as claims are paid, both the loss reserve liabilities and the corresponding fixed-income investment assets decrease. Sinceinterest income in this segment will decline over time, we are attempting to minimize segment overhead expenses as much as possible.Although we regularly evaluate the strategic alternatives, we currently believe that the most advantageous option is for Physicians’ own claimspersonnel to manage the “run off”. We believe that this will ensure a high standard of claims handling for our policyholders and, from the Company’sperspective, ensure the most careful examination of claims made to minimize loss and loss adjustment expense payments.Administering our own “run off” also provides us with the following opportunities:·we retain management of the associated investment portfolios. Since the claims reserves of the “run off” insurance companies effectively recognize thecost of paying and handling claims in future years, the investment return on the corresponding investment assets, less non-insurance expenses, accruesto 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 tounfavorable development.As the “run off” progresses, at a time in the future which cannot currently be predicted, Physicians’ claims reserves may diminish to the point where it ismore cost-effective to outsource claims handling to a third party administrator.At December 31, 2009, Physicians had $2.3 million in medical professional liability loss reserves, net of reinsurance.Citation Insurance CompanyIn 1996, Physicians completed a reverse merger with Citation’s parent company. In the past, Citation wrote various lines of commercial property andcasualty insurance and workers’ compensation insurance, primarily in California and Arizona. At the end of 2000, Citation ceased writing business and wentinto “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 ofbusiness, shortly after the merger was completed, Citation reinsured 100% of its workers’ compensation business with a subsidiary, Citation NationalInsurance Company (“CNIC”), and sold CNIC to Fremont Indemnity Company (“Fremont”) in 1997. Fremont merged CNIC into Fremont, and administeredand 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 reportedby Fremont, and recorded an equal and offsetting reinsurance recoverable from Fremont, as an admitted reinsurer, for all losses and loss adjustmentexpenses. This resulted in no net impact on Citation’s reserves and financial statements, and no net impact on our consolidated financial statements.In June 2003, the California Department of Insurance obtained a conservation order over Fremont, and applied for a court order to liquidate Fremont. InJuly 2003, the California Superior Court placed Fremont in liquidation. Citation was unsuccessful in court action to recover deposits reported as held byFremont for Citation’s insureds.We currently have a third-party administration agreement with Intercare Insurance Services to administer the handling and payment of claims forCitation’s workers’ compensation insurance “run off” book of business.At December 31, 2009, Citation had $7.3 million in loss reserves, net of reinsurance. Citation’s loss reserves, net of reinsurance, consist of $543,000 forproperty and casualty insurance, principally in the artisans/contractors line of business, and approximately $6.8 million for workers’ compensation insurance. 6 CorporateThis segment consists of cash and fixed-income securities, a 37% equity interest in our unconsolidated affiliate spigit, Inc. (“spigit”), and other parentcompany assets and liabilities. From time to time, we invest a portion of our liquid funds in high quality fixed-income securities to earn a higher return thanis available from money market funds, which currently yield only negligible returns. This Corporate segment also contains the deferred compensationinvestment assets held in trust for the benefit of several PICO officers and non-employee directors, as well as the corresponding and offsetting deferredcompensation liabilities.PICO seeks to acquire businesses and interests in businesses which we identify as undervalued based on fundamental analysis -- that is, our assessment ofwhat the business is worth, based on the private market value of its assets, earnings, and cash flow. Typically, the business will be generating free cash flowand have a low level of debt, or, alternatively, strong interest coverage ratios or the ability to realize surplus assets. As well as being undervalued, thebusiness must have special qualities such as unique assets, a potential catalyst for change, or be in an industry with attractive economics. We are alsointerested 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 financialcriteria 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 currentmarket capitalization. The gap between market price and intrinsic value may persist for several years, and the stock price may decline while our estimate ofintrinsic value is stable or increasing. Sometimes the gap is not eliminated until another party attempts to acquire the company.When acquisitions become core operations, typically through majority ownership, we become involved in the management and strategic direction of thebusiness. If we acquire majority ownership, the business may become a separate segment in our consolidated financial statements.At December 31, 2009, substantially all of the publicly-traded equity securities held in this segment are deferred compensation assets; however, inprevious years the Corporate segment has included strategic shareholdings in other public companies, most notably our holding in Jungfraubahn HoldingAG (“Jungfraubahn”), which was sold in 2008.EmployeesAt December 31, 2009, PICO had 57 employees.Executive OfficersThe executive officers of PICO are as follows:NameAgePosition John R. Hart50President, Chief Executive Officer and DirectorRichard H. Sharpe54Executive Vice President and Chief Operating OfficerDamian C. Georgino49Executive Vice President of Corporate Development and Chief Legal OfficerJames F. Mosier62General Counsel and SecretaryMaxim C. W. Webb48Executive Vice President and Chief Financial Officer and TreasurerW. Raymond Webb48Vice President, InvestmentsJohn T. Perri40Vice President, ControllerMr. Hart has served as our President and Chief Executive Officer and as a member of our board of directors since 1996. Mr. Hart also serves as an officerand/or director of our following subsidiaries: Physicians Insurance Company of Ohio (director since 1993 and president and chief executive officer since1995); Vidler Water Company, Inc. (director since 1995, chairman since 1997 and chief executive officer since 1998); Citation Insurance Company (directorand chairman since 1996); and Nevada Land and Resource Company, LLC (director, chairman, and chief executive officer since 1997). From 1997 to 2006,Mr. Hart was a director of HyperFeed Technologies, Inc., an 80% owned subsidiary that dissolved in 2009 following bankruptcy proceedings, where heserved as chairman of the nominating committee and as a member of the compensation committee. 7 Mr. Sharpe has served as Executive Vice President and Chief Operating Officer of PICO since November 1996 and in various executive capacities sincejoining Physicians in 1977.Mr. Georgino has served as Executive Vice President of Corporate Development and Chief Legal Officer since September 2007. Beginning in 2003, hewas a partner with the law firm of Pepper Hamilton LLP. From 2000 to 2003 he was a partner with the international law firm of LeBoeuf, Lamb, Greene andMacRae, LLP (now Dewey & LeBoeuf LLP). Prior to that, Mr. Georgino served as Executive Vice President, General Counsel and Corporate Secretary ofUnited States Filter Corporation (also known as “US Filter”).Mr. Mosier has served as General Counsel and Secretary of PICO since November 1996 and of Physicians since October 1984 and in various otherexecutive capacities since joining Physicians in 1981.Mr. Maxim Webb has been Executive Vice President and Chief Financial Officer and Treasurer of PICO since May 14, 2001. Mr. M. Webb served invarious capacities with the Global Equity Corporation group of companies since 1993, including Vice President, Investments of Forbes Ceylon Limited from1994 through 1996. Mr. M. Webb became an officer of Global Equity Corporation in November 1997 and Vice President, Investments of PICO on November20, 1998.Mr. Raymond Webb has been with our 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 our company in 1998, includingFinancial Reporting Manager and Corporate Controller.ITEM 1A. RISK FACTORSThe following information sets out factors that could cause our actual results to differ materially from those contained in forward-looking statementswe have made in this Annual Report on Form 10-K and those we may make from time to time. You should carefully consider the following risks, togetherwith other matters described in this Form 10-K or incorporated herein by reference in evaluating our business and prospects. If any of the following risksoccurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our securities could decline, in some casessignificantly. There may be other additional risks, not presently known to us, which may also impair our business operations.Our future water revenues are uncertain and depend on a number of factors that may make our revenue streams and profitability volatile.We engage in various water resource acquisitions, management, development, and sale and lease activities. Accordingly, our future revenue streams andprofitability will primarily be dependent on our ability to acquire, develop and sell or lease water and water rights. Our long-term profitability will beaffected by various factors, including the availability and timing of water resource acquisitions, regulatory approvals and permits associated with suchacquisitions, transportation arrangements, and changing technology. We may also encounter unforeseen technical or other difficulties which could result incost increases with respect to our water resource and water storage development projects. Moreover, our profitability is significantly affected by changes inthe market price of water. Future sales and prices of water may fluctuate widely as demand is affected by climatic, economic, demographic and technologicalfactors as well as the relative strength of the residential, commercial, financial, and industrial real estate markets. Additionally, to the extent that we possessjunior or conditional water rights, during extreme climatic conditions, such as periods of low flow or drought, our water rights could be subordinated tosuperior water rights holders. The factors described above are not within our control. One or more of these factors could impact the revenue streams andprofitability of our water resources, negatively affect our financial condition and cash flows, and cause our results of operations to be volatile.Our water activities may become concentrated in a limited number of assets, making our growth and profitability vulnerable to fluctuations in localeconomies and governmental regulations.In the future, we anticipate that a significant amount of our revenues and asset value will come from a limited number of assets, including our waterresources in Nevada and Arizona and our Arizona Recharge Facility. Water resources in this region are scarce and we may not be successful in continuing toacquire and develop additional water assets. If we are unable to develop additional water assets, our revenues will be derived from a limited number of assets,primarily located in Arizona and Nevada. As a result of this concentration, our invested capital and results of operations will be vulnerable to fluctuations inlocal economies and governmental regulations.Our Arizona Recharge Facility is one of the few private sector water storage sites in Arizona. To date, we have stored approximately 212,000 acre feet atthe facility for our own account. We have not stored any water on behalf of any customers, and have not as yet generated any revenue from the rechargefacility. We believe that the best economic return on the asset will come from storing water in surplus years for sale in dry years; however, we cannot becertain that we will ultimately be able to sell the stored water at a price sufficient to provide an adequate economic profit. 8 We have constructed a pipeline approximately 35 miles long to deliver water from Fish Springs Ranch to the northern valleys of Reno, Nevada. As ofDecember 31, 2009, the total cost of the pipeline project, including our water credits, capitalized on our balance sheet is approximately $101.1 million. Todate, Vidler has only entered into sale agreements for a very small proportion of the total amount of water that will be conveyed through the pipeline to thenorthern valleys of Reno. Although the current market pricing of water in the area exceeds our total cost of the pipeline and water credits, we cannot provideany assurance that the sales prices we may obtain in the future will provide an adequate economic return. Furthermore, the principal buyers of this water arelargely real estate developers who are having to contend with the effects of the current economic downturn and if our negotiations with these buyers do notresult in prices that are acceptable to us, we may choose to monetize the water resources at a later time, which would have an adverse effect on our near-termrevenues and cash flows.General economic conditions could have a material adverse effect on our financial results, financial condition and our ability to grow or finance ourbusinesses.All of our businesses are sensitive to general economic conditions, both nationally and locally, as well as international economic conditions. Generaleconomic conditions and the effects of a recession could have a material adverse effect on the demand for our real estate and water assets, near-term cash flowfrom operations, results of operations, financial condition and our ability to grow our business. These conditions include higher unemployment, inflation,deflation, increased commodity costs, decreases in consumer demand, changes in buying patterns, a weakened dollar, general transportation and fuel costs,higher consumer debt levels, higher tax rates and other changes in tax laws or other economic factors that may affect commercial and residentialdevelopment. Specifically, the recent increase in national unemployment may delay a recovery of the residential real estate market, which could adverselyaffect the demand for our real estate and water assets. Any prolonged lack of demand for our real estate and water assets could have a significant adverseaffect on our revenues, profitability, and cash flows.A prolonged continuation of the significant and sustained downturn that the homebuilding industry is undergoing will materially adversely affect ourbusiness and results of operations.The homebuilding industry is experiencing a significant and sustained downturn having been impacted by lack of consumer confidence, housingaffordability and large supplies of resale and new home inventories and alternatives to new homes. These factors have resulted in an industry-wide softeningof demand for new homes. These conditions in the homebuilding industry have a material adverse effect on the growth of the local economies in our marketswhere our real estate and water assets are located, which include Nevada, Arizona, California, Colorado, Idaho, and New Mexico. Among otherconsiderations, continuation of the residential and commercial real estate development process is essential for our profitability. Additionally, currenteconomic credit conditions have adversely impacted global credit markets and have restricted liquidity in financial markets. These conditions couldadversely affect the availability and cost of capital. Economic conditions, including restricted liquidity in financial markets, could adversely impact variousdevelopment projects within the markets in which our real estate and water assets are located and this could materially affect our ability to monetize suchassets. Declines in the U.S. housing market have reduced revenues and profitability in our real estate and water resource businesses and may continue to doso in the future. We may not be able to realize the anticipated value of our real estate and water assets on our projected timeframe, if at all.The financial markets are experiencing significant volatility, driven by continued fallout from the credit crisis and overall weakening globaleconomy. We expect that the current downturn will have a near term adverse effect on real estate market fundamentals. These events have impacted thevalues of real estate assets, including potentially our real estate and water assets. Values of real estate assets have declined from the values achieved over thelast 24 months. It is uncertain how much of the declines are attributable to the current illiquidity and volatility in the markets, the prospects of a deepeningrecession and its impact on real estate or a longer-term re-pricing of real estate assets. Depending on how the markets perform over the next several months, oryears, these events could result in a decline in the value of our existing real estate and water assets, result in our having to retain such assets for longer thanwe initially expected, cause us to divest such assets for less than our intended return on investment, or cause us to write-down such assets to realizablevalue. Such events would adversely impact our profitability, cash flows and financial condition. 9 The fair values of our real estate and water assets are linked to growth factors concerning the local markets in which we operate and may be impactedby broader economic issues.The real estate and water assets we hold have fair values that are significantly affected by the growth in population and the general state of the localeconomies where our real estate and water assets are located, primarily in the states of Arizona and Nevada, but also in California, Colorado, Idaho, and NewMexico. The recent increase in national unemployment and issues related to the credit markets may deepen or prolong a slowdown of these localeconomies. This could materially and adversely affect the demand for our real estate and water assets and, consequently, our growth, revenues, and the returnon our investment in these assets. We may not receive all of the permitted water rights we expect from the water rights applications we have filed in Nevada.We have filed certain water rights applications in Nevada, primarily as part of the water teaming agreement with Lincoln County. We deploy the capitalrequired to enable the filed applications to be converted into permitted water rights over time as and when we deem appropriate or as otherwise required. Weonly expend capital in those areas where our initial investigations lead us to believe that we can obtain a sufficient volume of water to provide an adequateeconomic return on the capital employed in the project. These capital expenditures largely consist of drilling and engineering costs for water production,costs of monitoring wells, and legal and consulting costs for hearings with the State Engineer, and National Environmental Protection Act, or “NEPA”,compliance costs. Until the State Engineer permits the water rights, we can not provide any assurance that we will be awarded all of the water that we expectbased on the results of our drilling and our legal position. For example, in 2009, the Nevada State Engineer found that only 396 acre-feet of unappropriatedwater rights remained in the Tule Desert Groundwater Basin, instead of the 7,240 acre-feet of water rights for which Lincoln/Vidler had applied. As a result,Lincoln/Vidler had to file an appeal of the Nevada State Engineer’s ruling and commence related litigation and it may be a considerable period of time beforeLincoln/Vidler is able to ascertain the final volume of water rights that will be permitted by the Nevada State Engineer. See Item 3. Legal Proceedings. Anysignificant reduction in the volume of water awarded to us from our base expectations for any water rights could adversely affect our revenues, profitability,and cash flows. Variances in physical availability of water, along with environmental and legal restrictions and legal impediments, could impact profitability.We value our water assets, in part, based upon the volume (amounts in acre-feet) of water we anticipate from water rights applications and permittedrights. The water and water rights held by us and the transferability of these rights to other uses, persons, and places of use are governed by the lawsconcerning water rights in the states of Arizona, Colorado, Idaho, Nevada, and New Mexico. The volumes of water actually derived from the water rightsapplications or permitted rights may vary considerably based upon physical availability and may be further limited by applicable legal restrictions. As aresult, the volume of water anticipated from the water rights applications or permitted rights do not in every case represent a reliable, firm annual yield ofwater, but in some cases describe the face amount of the water right claims or management’s best estimate of such entitlement. Additionally, we may facelegal restrictions on the sale or transfer of some of our water assets, which may affect their commercial value. If we were unable to transfer or sell our waterassets, we may lose some or all of our stated or anticipated returns. If we do not successfully identify, select and manage acquisitions and investments, or if our acquisitions or investments otherwise fail or decline in value,our financial condition could suffer.We acquire and invest in businesses and assets that we believe are undervalued or that will benefit from additional capital, restructuring of operations,strategic initiatives, or improved competitiveness through operational efficiencies. If an acquired business, investment or asset fails or its fair value declines,we could experience a material adverse effect on our business, financial condition, the results of operations and cash flows. Additionally, we may not be ableto find sufficient opportunities to make our business strategy successful. If we fail to successfully identify, select and manage acquisition and investmentopportunities, particularly water and water rights, our business, financial condition, the results of operations and cash flows could be materiallyaffected. Such business failures, declines in fair values, and/or failure to successfully identify, select and manage acquisitions or investments, particularlywater and water rights, could result in a negative return on equity. We could also lose part or all of our capital in these businesses and experience reductionsin our net income, cash flows, assets and equity.Future acquisitions and dispositions of our businesses, assets, operations and investments are possible, and, if unsuccessful, could reduce the value of ourcommon shares. Any future acquisitions or dispositions may result in significant changes in the composition of our assets and liabilities. Consequently, ourfinancial condition, results of operations and the trading price of our common shares may be affected by factors different from those affecting our financialcondition, results of operations and trading price at the present time.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, researchand development, sales and marketing, operations, taxation, regulatory matters, and finance. These efforts result in additional expenses and involvesignificant amounts of our management’s time and could distract our management from the day-to-day operations of our business. The diversion of ourmanagement’s attention from the day-to-day operations, or difficulties encountered in the integration process, could have a material adverse effect on ourbusiness, financial condition, and the results of operations and cash flows. If we fail to integrate acquired businesses, resources, or assets into our operationssuccessfully, we may be unable to achieve our strategic goals or an economic return and the value of your investment could suffer.We operate in a variety of industries and market sectors, all of which are very competitive and susceptible to economic downturns and would beadversely affected by a recession. A worsening of general economic or market conditions may require us to devote more of our management resources tonewly acquired companies and may result in lower valuations for our businesses or investments or have a negative impact on the credit quality of our assets. 10 Our acquisitions may result in dilution to our shareholders and increase our exposure to additional liabilities.We make selective acquisitions of companies that we believe could benefit from our resources of additional capital, business expertise, managementdirection and oversight, or existing operations. We endeavor to enhance and realize additional value to these acquired companies through our influence andcontrol. Any acquisition could result in the use of a significant portion of our available cash, significant dilution to you, and significant acquisition-relatedcharges. Acquisitions may also result in the assumption of liabilities, including liabilities that are unknown or not fully known to us at the time of theacquisition, which could have a material adverse financial effect on us. Additionally, our acquisitions and investments may yield low or negative returns foran extended period of time, which could temporarily or permanently depress our return on shareholders’ equity, and we may not realize the value of the fundsinvested. We generally make acquisitions and investments that tend to be long term in nature, and for the purpose of realizing additional value by means ofappropriate levels of influence and control. We acquire businesses that we believe to be undervalued or may benefit from additional capital, restructuring ofoperations or management or improved competitiveness through operational efficiencies with our existing operations or through appropriate and strategicmanagement input. We may not be able to develop acceptable revenue streams and investment returns through the businesses we acquire, and as a result wemay lose part or all of our investment in these assets. Additionally, when any of our acquisitions do not achieve acceptable rates of return or we do notrealize the value of the funds invested, we may write down the value of such acquisitions or sell the acquired businesses at a loss. Some of our prioracquisitions have lost either part or all of the capital we invested. Unsuccessful acquisitions could have negative impacts on our cash flows, income, assetsand shareholders’ equity, which may be temporary or permanent. Moreover, the process we employ to enhance value in our acquisitions and investments canconsume considerable amounts of time and resources. Consequently, costs incurred as a result of these acquisitions and investments may exceed theirrevenues and/or increases in their values, if any, for an extended period of time.Our ability to achieve an acceptable rate of return on any particular investment is subject to a number of factors which may be beyond our control,including increased competition and loss of market share, the ability of management to implement their strategic and operational directives, cyclical oruneven financial results, technological obsolescence, foreign currency risks and regulatory delays.Purchasers of our real estate and water assets may default on their obligations to us and adversely affect our results of operations and cash flow.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 areonly released once the financing has been fully paid off. Purchasers of our real estate and water assets may default on their financing obligations. Suchdefaults may have an adverse effect on our business, financial condition, and the results of operations, profitability, and cash flows.Our sale of water resources may be subject to environmental regulations which would impact our revenues, profitability, and cash flows.The quality of the water resources we lease or sell may be subject to regulation by the United States Environmental Protection Agency acting pursuant tothe United States Safe Drinking Water Act. While environmental regulations do not directly affect us, the regulations regarding the quality of waterdistributed affects our intended customers and may, therefore, depending on the quality of our water, impact the price and terms upon which we may in thefuture sell our water resources. If we need to reduce the price of our water resources in order to make a sale to our intended customers, our balance sheet,results of operations and financial condition could suffer.Our water resources sales may meet with political opposition in certain locations, thereby limiting our growth in these areas.The water resources we hold and the transferability of these assets and rights to other uses, persons, or places of use are governed by the laws concerningwater rights in the states of Arizona, California, Nevada, Colorado, Idaho, and New Mexico. Our sale of water resources is subject to the risks of delayassociated with receiving all necessary regulatory approvals and permits. Additionally, the transfer of water resources from one use to another may affect theeconomic base or impact other issues of a community including development, and will, in some instances, be met with local opposition including NativeAmerican tribes. Moreover, certain of the end users of our water resources, namely municipalities, regulate the use of water in order to manage growth,thereby creating additional requirements that we must satisfy to sell and convey water resources. If we are unable to effectively transfer, sell and conveywater resources, our ability to monetize this asset will suffer and our revenues and financial condition would decline.Our insurance companies hold material positions in equities and fixed-income securities which can cause volatility in our profitability and financialcondition.Our insurance subsidiaries hold significant positions in equities and fixed-income securities as part of their investment portfolios to cover payments forinsurance claims and related costs established in our reserves for unpaid loss and loss adjustment expenses. The fair values of the portfolios are subject toextreme volatility that has affected most markets in 2008 and 2009. For example, during 2008, our insurance company investment portfolios significantlydeclined in value as global equity and fixed-income markets in general declined in response to the weakening global economy and the tightening of creditavailability. As a result of the decline in value of our securities, our financial condition suffered and, in the future, any volatility in our insurance investmentportfolios could adversely impact our financial condition and cash flows. Furthermore, if the duration and extent of the declines in value of any of oursecurities are prolonged, we may have to provide other-than-temporary impairments against such securities which will adversely impact our profitability. Inaddition, our insurance subsidiaries’ investment portfolios consist in part of thinly-traded U.S. and non-U.S. equities. These equity securities are illiquid innature and we cannot provide any assurance that we can timely, effectively, and efficiently liquidate and monetize those positions. 11 Our acquisitions of and investments in non-U.S. 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, businesses and securities in non-U.S. public companies and other assets or businesses not located in theU.S. Typically, these non-U.S. securities are not registered with the SEC and regulation of these companies is under the jurisdiction of the relevant non-U.Scountry. The respective non-U.S regulatory regime may limit our ability to obtain timely and comprehensive financial information for the non-U.S.companies in which we have invested. In addition, if a non-U.S. company in which we invest were to take actions which could be deleterious to itsshareholders, non-U.S. legal systems may make it difficult or time-consuming for us to challenge such actions. These factors may affect our ability to acquirecontrolling stakes, or to dispose of our non-U.S. investments, or to realize the full fair value of our non-U.S. investments. In addition, investments in non-U.S.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 U.S. andnon-U.S. tax jurisdictions, we may have to pay tax in both the U.S. and in non-U.S. countries, and we may be unable to offset any U.S. tax liabilities with non-U.S. tax credits. If we are unable to manage our non-U.S. tax issues efficiently, our financial condition and the results of operations and cash flows could beadversely affected. In addition, our base currency is United States dollars. Accordingly, we are subject to foreign exchange risk through our acquisitions ofstocks in non-U.S. public companies. We attempt to mitigate this foreign exchange risk by borrowing funds in the same currency to purchase theequities. Significant fluctuations in the non-U.S. currencies in which we hold investments or consummate transactions could negatively impact our financialcondition and the results of operations and cash flows. We also may be unable to effectively and efficiently repatriate funds into the U.S. upon monetizationof assets, securities, or businesses not located in the U.S., which could have an impact on our liquidity. Volatile fluctuations in our insurance reserves could cause our financial condition to be materially misstated.Our insurance subsidiaries have established reserves that we believe are adequate to meet the ultimate cost of losses arising from claims. However, it hasbeen, and will continue to be, necessary for our insurance subsidiaries to review and make appropriate adjustments to reserves for claims and expenses forsettling claims. Inadequate reserves could cause our financial condition to fluctuate from period to period and cause our financial condition to appear to bebetter than it actually is for periods in which insurance claims reserves are understated. In subsequent periods if we discover an underestimation and pay theadditional 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 beenhad our reserves been adequately estimated.The inherent uncertainties in estimating loss reserves are greater for some insurance products than for others, and are dependent on various factorsincluding:·the length of time in reporting claims;·the range 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 severalyears, estimating reserves for these types of claims can be more uncertain than estimating reserves for other types of insurance. As a result, precise reserveestimates cannot be made for several years following the year for which reserves were initially established. During the past several years, the levels of thereserves for our insurance subsidiaries have been very volatile. We have had to significantly increase and decrease these reserves in the past severalyears. We may need to significantly increase the reserves in the future, and the future level of reserves for our insurance subsidiaries may be volatile. Theseincreases or volatility may have an adverse effect on our business, financial condition, and the results of operations and cash flows.If we underestimate the amount of reinsurance we need or if the companies with which we have reinsurance agreements default on their obligations, wemay be unable to cover claims made and that would have a material adverse effect on our results of operations and cash flows.We have reinsurance agreements with reinsurance companies on all of our insurance books of business. We purchase reinsurance based upon ourassessment of the overall direct underwriting risk. It is possible that we may underestimate the amount of reinsurance required to achieve the desired level ofnet claims risk, and a claim may exceed the combined value of our reserve and the amount of reinsurance available. Additionally, our reinsurers coulddefault on amounts owed to us for their portion of the direct insurance claim. Our insurance subsidiaries, as direct writers of lines of insurance, have ultimateresponsibility for the payment of claims, and any defaults by reinsurers may result in our established reserves not being adequate to meet the ultimate cost oflosses arising from claims. If claims made exceed the amount of our direct reserves and the available reinsurance, we may be subject to regulatory action orlitigation and our results of operation and cash flows would suffer as a result.State regulators could require changes to our capitalization and/or to the operations of our insurance subsidiaries, and/or place them intorehabilitation or liquidation.Beginning in 1994, our subsidiaries, Physicians and Citation, became subject to the provisions of the Risk-Based Capital for Insurers Model Act whichhas been adopted by the National Association of Insurance Commissioners for the purpose of helping regulators identify insurers that may be in financialdifficulty. The Model Act contains a formula which takes into account asset risk, credit risk, underwriting risk and all other relevant risks. Under thisformula, each insurer is required to report to regulators using formulas which measure the quality of its capital and the relationship of its modified capitalbase 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 aninsurer. The formula is intended to provide a minimum threshold measure of capital adequacy by an individual insurance company and does not purport tocompute a target level of capital. Companies which fall below the threshold will be placed into one of four categories: Company Action Level, where theinsurer must submit a plan of corrective action; Regulatory Action Level, where the insurer must submit such a plan of corrective action, the regulator isrequired 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 theregulator must rehabilitate or liquidate the insurer. As of December 31, 2009, all of our insurance subsidiaries’ risk-based capital results exceeded theCompany Action Level. However, we cannot assure you that insurance subsidiaries’ risk-based capital results will exceed the Company Action Level in thefuture. If the risk-based capital of any of our insurance subsidiaries fails to exceed the Company Action Level, we will be subject to the regulatory actiondescribed above and our results of operations could suffer. 12 We may not be able to retain key management personnel we need to succeed, which could adversely affect our ability to successfully operate ourbusinesses.To run our day-to-day operations and to successfully manage newly acquired companies we must, among other things, continue to attract and retain keymanagement. We rely on the services of several key executive officers. If they depart, it could have a significant adverse effect upon our business. Mr. Hart,our CEO, is key to the implementation of our strategic focus, and our ability to successfully develop our current strategy is dependent upon our ability toretain his services. Also, increased competition for skilled management and staff employees in our businesses could cause us to experience significantincreases in operating costs and reduced profitability.We use estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States ofAmerica.The preparation of our financial statements in conformity with United States GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of financial statements and the reported amount of revenues andexpenses during the reporting period. We regularly evaluate our estimates, which are based on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances. The results of these evaluations form the basis for our judgments about the carrying values of assetsand liabilities and the reported amount of revenues and expenses that are not readily apparent from other sources. The carrying values of assets and liabilitiesand the reported amount of revenues and expenses may differ by using different assumptions. In addition, in future periods, in order to incorporate all knownexperience at that time, we may have to revise assumptions previously made which may change the value of previously reported assets and liabilities. Thispotential subsequent change in value may have a material adverse effect on our business, financial condition, and the results of operations and cash flows.Because our operations are diverse, analysts and investors may not be able to evaluate us adequately, which may negatively influence the price of ourstock.We are a diversified holding company with investments and operations in a variety of business segments. Each of these areas is unique, complex innature, and difficult to understand. In particular, the water resource business is a developing industry in the United States with very little historical data, veryfew experts and a limited following of analysts. Because we are complex, analysts and investors may not be able to adequately evaluate our operations andenterprise as a going concern. This could cause analysts and investors to make inaccurate evaluations of our stock, or to overlook PICO in general. As aresult, the trading volume and price of our stock could suffer and may be subject to excessive volatility.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 we expect will continue to be, subject to fluctuations. The market price of our commonstock may be significantly impacted by:·quarterly variations in financial performance and condition;·shortfalls in revenue or earnings from estimates forecast by securities analysts or others;·changes in estimates by such analysts;·product introductions;·the availability of economically viable acquisition or investment opportunities, including water resources and real estate, which will return an adequateeconomic return;·our competitors’ announcements of extraordinary events such as acquisitions;·litigation; and·general economic conditions and other matters described herein. Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results of operations couldfluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include the inclusion or exclusion of operating earningsfrom newly acquired or sold operations. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analystsrelating 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 ourcommon stock. Such fluctuations in the market price of our common stock could affect the value of your investment and your ability to sell your shares. Inaddition, some investors favor companies that pay dividends, particularly in market downturns. We have never declared or paid any cash dividends on ourcommon stock. We currently intend to retain any future earnings for funding growth and, therefore, we do not currently anticipate paying cash dividends onour common stock.We may need additional capital in the future to fund the growth of our business and acquisitions, and financing may not be available on favorableterms, if at all, or without dilution to our shareholders.We currently anticipate that our available capital resources and operating income will be sufficient to meet our expected working capital and capitalexpenditure requirements for at least the next 12 months. However, we cannot provide any assurance that such resources will be sufficient to fund the long-term growth of our business and acquisitions. We may raise additional funds through public or private debt, equity or hybrid securities financings, including,without limitation, through the issuance of securities pursuant to our universal shelf registration statement on file with the SEC.We may experience difficulty in raising necessary capital in view of the recent volatility in the capital markets and increases in the cost offinance. Increasingly stringent rating standards could make it more difficult for use to obtain financing. If we raise additional funds through the issuance ofequity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly issued securities may haverights, preferences or privileges senior to those of existing shareholders. The incurrence of indebtedness would result in increased debt service obligationsand could result in operating and financing covenants that would restrict our operations. We cannot provide any assurance that any additional financing wemay 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, if and when needed,our ability to fund our operations, take advantage of unanticipated opportunities, respond to competitive pressures or otherwise execute our strategic planwould be significantly limited. In any such case, our business, operating results or financial condition could be materially adversely affected. 13 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 byemployees, shareholders or customers could be very costly and substantially disrupt our business. Additionally, from time to time we or our subsidiaries willhave disputes with companies or individuals which may result in litigation that could necessitate our management’s attention and require us to expend ourresources. We may be unable to accurately assess our level of exposure to specific litigation and we cannot provide any assurance that we will always be ableto resolve such disputes out of court or on terms favorable to us. We may be forced to resolve litigation in a manner not favorable to us, and such resolutioncould have a material adverse impact on our consolidated financial condition or results of operations.Our governing documents could prevent an acquisition of our company or limit the price that investors might be willing to pay for our common stock.Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party from acquiring, or make itmore difficult for a third party to acquire, control of our company without approval of our board of directors. For example, our bylaws require advance noticefor stockholder proposals and nominations for election to our board of directors. We are also subject to the provisions of Section 1203 of the CaliforniaGeneral Corporation Law, which requires a fairness opinion to be provided to our shareholders in connection with their consideration of any proposed“interested party” reorganization transaction. All or any of these factors could limit the price that certain investors might be willing to pay in the future forshares of our common stock.We are impacted by international affairs, which directly expose us to the adverse effects of any foreign economic or governmental instability.Because our investments are globally diversified, our business, financial condition, 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 non-U.S. and U.S. tax laws;·political and economic instability;·volatile interest rates;·exchange controls which may limit our ability to withdraw money; and·general economic conditions outside the United States.Changes in any or all of these factors could result in reduced market values of our investments, loss of assets, additional expenses, reduced investmentincome, reductions in shareholders’ equity due to foreign currency fluctuations. If we were to experience any of these negative effects, we may be required toreduce our global diversification.If equity analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, theprice of our common stock could decline.The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. Wedo not control these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue otherunfavorable commentary or cease publishing reports about us or our business.THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS ANDCASH FLOWS AND FINANCIAL CONDITION AND COULD MAKE COMPARISON OF HISTORIC FINANCIAL STATEMENTS, INCLUDING RESULTSOF OPERATIONS AND CASH FLOWS AND BALANCES, DIFFICULT OR NOT MEANINGFUL.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESWe lease approximately 6,354 square feet in La Jolla, California for our principal executive offices. Physicians leases approximately 1,892 square feet ofoffice space in Columbus, Ohio for its headquarters. Citation leases approximately 1,530 square feet of office space for a claims office in Orange County,California. Vidler and Nevada Land lease approximately 6,859 square feet of office space in Carson City, Nevada. UCP leases a total of approximately 4,820square feet of office space in San Jose, California and Fresno, California. We continually evaluate our current and future space capacity in relation to ourbusiness needs. We believe that our existing facilities are suitable and adequate to meet our current business requirements.Vidler, Nevada Land and UCP have significant holdings of real estate and water assets in the southwestern United States. For a description of our realestate and water assets, see “Item 1-Operating Segments and Major Subsidiary Companies”. 14 ITEM 3. LEGAL PROCEEDINGSWe are subject to various litigation arising in the ordinary course of our business. Our insurance companies are frequently a party in claims proceedingsand actions regarding insurance coverage, all of which we consider routine and incidental to our business. Based upon information presently available, weare of the opinion that such litigation will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.Neither we nor our subsidiaries are parties to any potentially material pending legal proceedings other than the following.Exegy Litigation:HyperFeed Technologies, Inc. (“HyperFeed”), a majority-owned subsidiary, was a provider of enterprise-wide ticker plant and transaction technologysoftware and services that enabled financial institutions to process and use high performance exchange data with Smart Order Routing and otherapplications. During 2006, PICO and HyperFeed negotiated a business combination with Exegy Incorporated (“Exegy”). On August 25, 2006, PICO,HyperFeed, and Exegy entered into a contribution agreement, pursuant to which the common stock of HyperFeed owned by PICO would have beencontributed to Exegy in exchange for Exegy’s issuance of certain Exegy stock to PICO. However, in a letter dated November 7, 2006, Exegy informed PICOand HyperFeed that it was terminating the agreement. In connection with the termination of the contribution agreement, the parties filed certainlawsuits. HyperFeed thereafter filed for bankruptcy pursuant to Chapter 7 of the U.S. Bankruptcy Code.The lawsuit filed by Exegy against PICO and HyperFeed sought monetary damages and declaratory judgment that Exegy’s purported November 7, 2006termination of the August 25, 2006 contribution agreement was valid. The lawsuit filed by PICO and HyperFeed against Exegy alleged that Exegy’stermination of the contribution agreement was wrongful and in bad faith. Both cases were consolidated in the United States Bankruptcy Court, District ofDelaware. During the second quarter of 2009, as part of a global resolution of the HyperFeed bankruptcy estate, the parties reached an agreement to resolve bothlawsuits. The settlement agreement was submitted to the Bankruptcy Court for approval, and on September 10, 2009, the Bankruptcy Court issued an orderapproving the agreement. The settlement fully resolves all outstanding litigation among PICO, HyperFeed, and Exegy relating to the termination of thecontribution agreement and the failed business combination. The settlement did not have a material impact on our condensed consolidated financialstatements. Fish Springs Ranch, LLC:In 2006, we, through Fish Springs Ranch, LLC, a 51% owned subsidiary, began construction of a pipeline from Fish Springs Ranch in northern Nevadato the north valleys of Reno, Nevada. The final regulatory approval required for the pipeline project was a Record of Decision for a right of way, which wasgranted on May 31, 2006. On October 26, 2006, the Pyramid Lake Paiute Tribe of Indians (the “Tribe”) filed suit against the Bureau of Land Management ofthe United States Department of the Interior (“BLM”) and the United States Department of the Interior in the United States in the United States District Courtfor the District of Nevada claiming that the BLM had failed to fulfill its legal obligations to protect and conserve the trust resources of the Tribe and seekingvarious equitable remedies. The Tribe asserted that the exportation of 8,000 acre-feet of water per year from the properties owned by Fish Springs Ranch,LLC would negatively impact their water rights located in a basin within the boundaries of the Tribe reservation. Fish Springs Ranch, LLC was allowed toparticipate in this proceeding and was later allowed to intervene directly in the action.On May 9, 2007, the Tribe initiated other legal action against the BLM and the Department of the Interior before the United States Court of Appeals forthe Ninth Circuit to stop construction of the pipeline and the transportation of water from the properties owned by Fish Springs Ranch, LLC. Again, FishSprings Ranch, LLC was allowed to participate in this proceeding and was later allowed to intervene directly in the action.While we believed the claims were without merit, the Tribe’s legal actions might have caused significant delays to the completion of the construction ofthe pipeline. To avoid future delays and additional costs of litigation, the parties reached a complete monetary settlement and signed a settlement agreementon May 30, 2007, that resolved all of the Tribe’s claims. The settlement agreement is subject to ratification by the United States Congress, which weanticipate will occur during 2009. The settlement agreement required Fish Springs Ranch to take the following action with respect to the Tribe:·pay $500,000 upon signing of agreement;·transfer 6,214 acres of real estate that Fish Spring Ranch, LLC owns, with a fair value of $500,000;·pay $3.1 million on January 8, 2008; and·pay $3.6 million on the later of January 8, 2009 or the date the United States Congress ratifies the settlement agreement. Interest accrues at the LondonInter-Bank Offered Rate, or LIBOR, from January 8, 2009, if the payment is made after that date. The United States Congress has not yet acted upon thesettlement.There are 13,000 acre-feet per-year of permitted water rights at Fish Springs Ranch. The existing permit allows up to 8,000 acre-feet of water per year tobe exported to support the development in the Reno area. The settlement agreement also provides that, in exchange for the Tribe agreeing to not oppose allpermitting activities for the pumping and export of groundwater in excess of 8,000 acre-feet of water per year, Fish Springs will pay the Tribe 12% of thegross sales price for each acre-foot of additional water that Fish Springs sells in excess of 8,000 acre-feet per year, up to 13,000 acre- feet per year. Currently,we do not have regulatory approval to export any water in excess of 8,000 acre-feet per year from the Fish Springs Ranch, and it is uncertain whether we willobtain such regulatory approval in the future. 15 Tule Desert Action to Reverse Ruling:On May 27, 2009, Lincoln County, Nevada and Vidler Water Company, Inc. (“Lincoln/Vidler”) filed a joint complaint against the Nevada StateEngineer in the Seventh Judicial District Court of the State of Nevada. On July 21, 2009, Lincoln/Vidler filed an additional United States federal complaintagainst two individuals in their official capacities as the Nevada State Engineer and the Acting Nevada State Engineer in the United States District Court forthe District of Nevada. In November 2002, the Nevada State Engineer awarded Lincoln/Vidler a joint permit for 2,100 acre-feet of municipal and industrialuse water rights from the Tule Desert Groundwater Basin in Lincoln County, Nevada, and ruled that an additional 7,240 acre-feet could be granted pendingadditional studies by Lincoln/Vidler. Lincoln/Vidler conducted those additional engineering and scientific studies. The results of those studies supportedthe 2002 ruling and were consistent with the potential drawdown of 7,240 acre-feet of water. As required by the 2002 ruling, in 2008, Lincoln/Vidler submitted these studies to the Nevada State Engineer. In April 2009, the Nevada State Engineerruled that it would permit the appropriation of a total of 2,500 acre-feet, including the 2,100 acre-feet previously awarded in November 2002. Accordingly,the 2009 ruling granted Lincoln/Vidler 396 acre-feet of additional permitted water rights instead of the 7,240 acre-feet of water rights that could have beengranted pursuant to the 2002 ruling. Lincoln/Vidler is seeking the reversal of the Nevada State Engineer’s 2009 ruling and the grant of a permit for anadditional 7,240 acre-feet of water rights.At a hearing held on July 24, 2009, the District Court Judge ruled in favor of Lincoln/Vidler, allowing discovery on various alleged improprieties by theState Engineers. Discovery has been ongoing since August 2009 in accordance with such District Court’s order. At this time, we are unable to reasonablypredict an outcome or estimate a range, if any, of any award or grant of relief.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNot applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESOur common stock is traded on the NASDAQ Global Market under the symbol “PICO”. The following table sets out the high and low daily closing saleprices as reported on the NASDAQ Global Market. These reported prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, orcommissions. 2009 2008 High Low High Low First Quarter $31.40 $19.75 $34.30 $29.47 Second Quarter $31.15 $27.01 $44.45 $31.44 Third Quarter $33.77 $25.78 $48.22 $35.91 Fourth Quarter $35.34 $29.93 $35.52 $17.97 On February 26, 2010, the closing sale price of our common stock was $34.04 and there were approximately 528 holders of record.We have not declared or paid any dividends in the last two years, and we do not expect to pay any dividends in the foreseeable future.Securities Authorized for Issuance Under Equity Compensation PlansThe information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters, “Securities Authorized for Issuance Under Equity Compensation Plans,” which is incorporated herein byreference. 16 Company Stock Performance GraphThis graph compares the total return on an indexed basis of a $100 investment in PICO common stock, the Standard & Poor’s 500 Index, and the Russell2000 Index. The measurement points utilized in the graph consist of the last trading day in each calendar year, which closely approximates the last day ofour fiscal year for that calendar year.The stock price performance shown on the graph is not necessarily indicative of future price performance. ISSUER PURCHASES OF EQUITY SECURITIESPeriod (a) Total number of sharespurchased (b) Average Price Paid perShare (c) Total Number of Shares(or Units) Purchased as Partof Publicly AnnouncedPlans or Programs (1) (d) Maximum Number (orApproximate Dollar Value)of Shares (or Units) thatMay Yet Be PurchasedUnder the Plans orPrograms (1) 10/1/08 - 10/31/08 - - 11/1/08 - 11/30/08 - - 12/1/08 - 12/31/08 - - (1) In October 2002, our Board of Directors authorized the repurchase of up to $10 million of PICO common stock. The stock purchases may be made fromtime to time at prevailing prices through open market or negotiated transactions, depending on market conditions, and will be funded from availablecash. As of December 31, 2009, we have not repurchased any stock under this authorization. 17 ITEM 6. SELECTED FINANCIAL DATAThe following table presents our selected consolidated financial data. The information set forth below is not necessarily indicative of the results offuture operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” inItem 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, 2009 2008 2007 2006 2005 OPERATING RESULTS (In thousands, except share data) Revenues: Total investment income $(817) $46,373 $19,788 $39,609 $15,917 Sale of real estate and water assets (includes gain on sale ofwaterstorage of $8.7 million in 2008) 12,936 12,054 9,496 41,509 124,984 Other income 3,913 1,925 4,645 1,605 1,210 Total revenues $16,032 $60,352 $33,929 $82,723 $142,111 Net income (loss) from continuing operations* $(21,759) $27,898 $(1,522) $31,477 $21,731 Loss from discontinued operations, net (2,268) (6,065)Net income (loss) (21,759) 27,898 (1,522) 29,209 15,666 Net loss attributable to noncontrolling interest (3,724) (733) (252) (34) (536) Net income (loss), attributable to PICO Holdings, Inc. $(18,035) $28,631 $(1,270) $29,243 $16,202 PER COMMON SHARE BASIC AND DILUTED: Net income (loss) from continuing operations $(0.86) $1.52 $(0.07) $2.10 $1.72 Loss from discontinued operations, net (0.15) (0.47) Net income (loss) $(0.86) $1.52 $(0.07) $1.95 $1.25 Weighted Average Shares Outstanding – basic 20,926,769 18,835,002 18,321,449 14,994,947 12,959,029 Weighted Average Shares Outstanding - diluted 20,926,769 18,861,853 18,321,449 15,025,341 12,959,029 (*) Amounts have been recast for the application of new accounting guidance related to the accounting for noncontrolling interests in consolidated financialstatements. See Note 1 to our Consolidated Financial Statements. As of December 31, 2009 2008 2007 2006 2005 FINANCIAL CONDITION (In thousands, except per share data) Total assets $687,617 $592,634 $676,342 $549,043 $441,830 Total asset of discontinued operations $4,616 Unpaid losses and loss adjustment expenses $24,175 $27,773 $32,376 $41,083 $46,647 Borrowings $41,221 $42,382 $18,878 $12,721 $11,835 Liabilities of discontinued operations $4,282 Total liabilities $107,921 $114,888 $150,492 $143,816 $139,856 Total PICO Holdings, Inc shareholders' equity $582,643 $477,746 $525,851 $405,227 $300,875 Book value per share (1) $25.79 $25.36 $27.92 $25.52 $22.67 (1) Book value per share is computed by dividing total PICO Holdings, Inc. shareholders’ equity by the net of total shares issued less shares held as treasuryshares. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSINTRODUCTIONThe following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated FinancialStatements and the accompanying Notes presented later in this Annual Report on Form 10-K.The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the readerunderstand our Company. The MD&A should be read in conjunction with our consolidated financial statements, and the accompanying notes, presentedlater in this Annual Report on Form 10-K. The MD&A includes the following sections:·Company Summary, Recent Developments, and Future Outlook — a brief description of our operations, the critical factors affecting them, and theirfuture prospects;·Critical Accounting Policies — a discussion of accounting policies which require critical judgments and estimates. Our significant accounting policies,including the critical accounting policies discussed in this section, are summarized in the notes to the consolidated financial statements;·Results of Operations — an analysis of our consolidated results of operations for the past three years, presented in our consolidated financialstatements; and·Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, contractual obligations and a discussion of factors affecting ourfuture cash flow. 18 COMPANY SUMMARY, RECENT DEVELOPMENTS AND FUTURE OUTLOOKWATER RESOURCE AND WATER STORAGE OPERATIONSBACKGROUNDThe long-term future demand for our water assets is driven by population growth relative to currently available water supplies in the southwestern UnitedStates.The population growth rate in the southwest has consistently been higher than the national rate for the past several years. According to the U.S. CensusBureau, in the nine-and-one-quarter year period from April 1, 2000 to July 1, 2009, the population of Nevada grew by a total of 32.3% (644,828 people),Arizona grew by 28.6% (1,465,146 people), Colorado grew by 16.8% (723,487 people), Idaho grew by 19.5% (251,848 people), New Mexico grew by 10.5%(190,625 people) and California grew by 9.1 % (3,090,016 people). These Southwestern state population growth statistics compares to a total nationalgrowth rate of 9.1% (25,584,644 people) and represents almost 25% of the national growth over the same period.The current and recent economic environment and housing slow-down in the U.S. has had the effect of decreasing the rate of growth in the Southwest in2007, 2008 and 2009 from earlier years, but the Southwest’s population growth is still in excess of the national growth rate. According to the CensusBureau’s annual estimate of state population changes for the years ended July 1, 2009 and 2008, Nevada’s annual growth rate was 1% (2008: 1.8%), Arizona1.5% (2008: 2.3%), Colorado 1.8% (2008: 2%), Idaho 1.2% (2008: 1.8%), New Mexico 1.2% (2008: 0.9%) and California 1% (2008: 1%). These populationgrowth statistics compare to the national total growth rate of 0.9% (2008: 0.9%).In 2008, the state of Nevada published a study, which represents the latest data available, of its estimated population projection from 2008 to 2028. TheNevada State Demographer’s Office estimates that Nevada’s population will grow by approximately 49% (1,334,231 people) in that 20 year period. Of thattotal, over 1 million people are expected to move to Clark County, which includes metropolitan Las Vegas, and over 200,000 people to western Nevada,which includes Carson City, Washoe County (where Reno is situated), and Lyon County. These population estimates have been revised downwards fromprevious growth estimates by the Nevada State Demographer, and take into account current economic conditions and factors.Currently, a significant portion of the Southwest’s water supplies come from the Colorado River. The balance is provided by other surface rights, such asrivers and lakes, groundwater (water pumped from underground aquifers), and water previously stored in reservoirs or aquifers. A prolonged drought(possibly in part due to increasing temperatures from climate change which can lead to a decreased snow pack runoff and therefore decreased surface water)and rapid population growth in the past few years have exacerbated the region’s general water scarcity. In turn, this leads to an increased likelihood ofconflict as additional stress is placed on the arid Southwest’s water resources. Future water needs in the Southwest will have to be derived from thedevelopment of new supplies as well as conservation and recycling. In 2005, the U.S. Department of the Interior published a study titled “Water 2025: Preventing Crises and Conflict in the West”. The study included amap of the western and southwestern states and highlighted the potential water supply crises by 2025. Various areas were designated as having moderate,substantial, or highly likely water conflict potential (areas where existing supplies are not adequate to meet water demands for people, agricultural use, andfor the environment). Areas identified as having a highly likely or substantial conflict potential included western Nevada, southern Nevada, and themetropolitan Phoenix to Tucson region. Starting over a decade ago, we have concentrated our acquisition and development efforts on water assets that willserve these markets.The development of our water assets is a long-term process: It requires significant capital and expertise. A complete project -- from acquisition,development, permitting and sale -- may take ten years or longer. Typically, in the regions in which we operate, new housing, commercial and industrialdevelopments require an assured water supply (access to water supplies for at least 100 years) before a permit for the development will be issued. The currenteconomic environment with the corresponding slow-down in housing throughout the U.S. - including the Southwest - has impacted the timing of sales of ourwater assets. However, we believe that the long-term demand for our assets, and their economic value, are substantially underpinned by the region’scontinued population growth and the increasing scarcity of sustainable water supplies to support that growth. The supply and demand factors whichcharacterize water resources in the Southwest also present us with a continuing business opportunity to provide sustainable water resource solutions foreconomic development and communities throughout the region.The following is a description and summary of our water resource and water storage assets at December 31, 2009. WATER RESOURCESArizonaAny new residential development in Arizona must obtain a permit from the Arizona Department of Water Resources certifying a “designated assuredwater supply” sufficient to sustain the development for at least 100 years. Harquahala Valley groundwater meets the designation of assured watersupply. Arizona state legislation allows Harquahala Valley groundwater to be made available as assured water supply to cities and communities in Arizonathrough agreements with the Central Arizona Groundwater Replenishment District.At December 31, 2009, Vidler owned approximately 3,840 acre-feet of groundwater and the related land in the Harquahala Valley. The HarquahalaValley is located in La Paz County and Maricopa County, approximately 75 miles northwest of metropolitan Phoenix, Arizona. According to U.S. CensusBureau data, the population of Maricopa County increased 28.7% from April 1 2000 to July 1, 2008, with the addition of more than 106,000 people peryear. Vidler anticipates that as the boundaries of the greater Phoenix metropolitan area continue to push out, this is likely to lead to demand for our land aswell as our water to support growth within the Harquahala Valley itself. The remaining water can also be transferred for municipal use outside of theHarquahala Valley. 19 In addition, the area in and around the Harquahala Valley appears to be a desirable area to site solar power-generating plants, due to the high solarity inthe region and its proximity to energy transmission lines. The water assets owned by Vidler in this region, including our water storage credits - (see “WaterStorage: Vidler Arizona Recharge Facility” below) - could potentially provide a water source for any solar or other energy plants that might be constructedin this area. NevadaVidler has acquired land and water rights in Nevada through the purchase of ranch properties (appropriating existing supplies of water), filingapplications for new water rights (appropriating new supplies of water), and entering into teaming arrangements with parties owning water rights, which theywish to develop.Nevada has experienced the highest rate of annual population growth in the United States in 19 of the past 22 years. As noted above, the rate ofpopulation growth has slowed in the last few years, but Nevada’s own population estimates forecast that the state will grow by over 1.3 million people by2028. The population is concentrated in southern Nevada, which includes the Las Vegas metropolitan area.1.Lincoln CountyThe Lincoln County Water District and Vidler (“Lincoln/Vidler”) have entered into a water delivery teaming agreement to locate and develop waterresources in Lincoln County, Nevada for planned projects under the County’s master plan. Under the agreement, proceeds from sales of water will be sharedequally after Vidler is reimbursed for the expenses incurred in developing water resources in Lincoln County. Lincoln/Vidler has filed applications for morethan 100,000 acre-feet of water rights with the intention of supplying water for residential, commercial, and industrial use, as contemplated by the county’sapproved 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 waterrights will ultimately be permitted from these applications, and put to use for planned projects in Lincoln County. Under the Lincoln County Land Act, more than 13,300 acres of federal land in southern Lincoln County near the City of Mesquite was offered for sale inFebruary 2005. According to press reports, the eight parcels offered were sold to various developers for approximately $47.5 million. The land was soldwithout environmental approvals, water, and city services, which will be required before development can proceed. Additional water supply will be requiredin Lincoln County if this land is to be developed.Tule Desert Groundwater BasinLincoln/Vidler jointly filed a permit application in 1998 for 14,000 acre-feet of water rights for industrial use from the Tule Desert Groundwater Basin inLincoln County, Nevada. In November 2002, the Nevada State Engineer awarded Lincoln/Vidler a permit for 2,100 acre-feet of water rights, whichLincoln/Vidler subsequently sold in 2005, and ruled that an additional 7,240 acre-feet could be granted pending additional studies by Lincoln/Vidler (the“2002 Ruling”). Subsequent to the 2002 Ruling and consistent with the Nevada State Engineer’s conditions, Vidler engaged independent experts to conductthese additional engineering and scientific studies. These studies indicated that the pumping of an additional 7,240 acre-feet of water for 100 years wouldnot cause unreasonable drawdown in the Tule Desert Groundwater Basin or surrounding basins, and that the recharge to the groundwater basin ranges from5,400 acre–feet to as much as 10,500 acre-feet per annum.During 2008, Lincoln/Vidler submitted comprehensive and substantial evidence to the Nevada State Engineer to support its permit applications asrequired by the 2002 Ruling. On April 29, 2009, the Nevada State Engineer issued a ruling with respect to such applications (the “2009 Ruling”). In the2009 Ruling, the Nevada State Engineer determined that the perennial yield of the groundwater recharge in the Tule Desert Groundwater Basin is likely inthe range of 2,500 to 5,000 acre-feet per annum. The Nevada State Engineer further concluded that it would permit the appropriation of only one-half of theupper end of that range, or 2,500 acre-feet. Since 2,100 acre-feet had already been appropriated to and permitted to Lincoln/Vidler under the 2002 Ruling,the Nevada State Engineer found that only 396 acre-feet of unappropriated water remained in the Tule Desert Groundwater Basin. Accordingly, the 2009Ruling granted Lincoln/Vidler 396 acre-feet of additional permitted water rights, instead of the applied for 7,240 acre-feet of water rights.We believe that the data provided to the Nevada State Engineer appropriately supported our application for the additional 7,240 acre feet of water andwas consistent with the 2002 Ruling. Accordingly, on May 27, 2009, Lincoln/Vidler filed an appeal of the 2009 Ruling in Nevada District Court. Theoutcome of any appeal is inherently uncertain and it may be a considerable period of time before Lincoln/Vidler is able to ascertain the final volume of waterrights that will be permitted by the Nevada State Engineer from its applications in the Tule Desert Groundwater Basin. In addition, on July 21, 2009,Lincoln/Vidler filed a federal action in the United States District Court for the District of Nevada against two individuals in their official capacities as theNevada State Engineer and the Acting Nevada State Engineer. Lincoln/Vidler’s action seeks prospective injunctive and declaratory relief against the NevadaState Engineer on the basis of the Nevada State Engineer’s failure to provide Lincoln/Vidler with substantive and procedural due process of law. At a hearingheld on July 24, 2009, the District Court Judge ruled in favor of Lincoln/Vidler, allowing limited discovery on various alleged improprieties by the StateEngineer. Discovery has been ongoing since August, 2009, in accordance with such District Court’s order. The outcome of this federal action is inherentlyuncertain and it may be a considerable period of time before Lincoln/Vidler is able to obtain relief under this action, if at all. 20 As of December 31, 2008, our carrying value for the applications for the additional 7,240 acre-feet was $16.4 million, which primarily represented thedata collection, drilling and monitoring costs and expenses incurred to collect, interpret and submit the groundwater data to the Nevada StateEngineer. Under agreements in place with developers at the time of ruling, Vidler would only record approximately $4 million of revenue from the 396 acre-feet of water rights granted in the 2009 Ruling. Due to the 2009 Ruling, for the year ended December 31, 2009, we have written down the carrying value ofthese water rights and applications to their estimated recoverable value under the 2009 Ruling, and recorded a loss on impairment of approximately $12.4million, before any related tax effects.Coyote SpringsCoyote Springs (www.coyotesprings.com) is a planned mixed-use development to be located approximately 40 miles north of Las Vegas, Nevada, at thejunction of U.S. Highway 93 and State Highway 168, approximately two-thirds of which is within Lincoln County, Nevada, and the balance is in ClarkCounty, 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, six golf courses, and 1,200 acres of retail and commercial developmenton 13,100 acres in Clark County. CSIL expects to receive additional entitlements for its 29,800 acres in Lincoln County. Based on the entitlementsobtained so far, it is estimated that the community will require approximately 35,000 acre-feet of permanent water. Additional water will be required asfurther entitlements are obtained. It is expected that full absorption of the residential units will take 25 years or more. We anticipate that Lincoln/Vidler could provide the majority of the water required for the Coyote Springs project from the jointly filed applications forwater rights in various basins in Lincoln County.In 2005, Lincoln/Vidler agreed to sell water to CSIL as and when supplies were permitted from existing applications in Kane Springs, Nevada. A hearingwas completed in 2006 on a filing for water rights from Kane Springs, and in January, 2007, Lincoln/Vidler was awarded 1,000 acre-feet of permitted waterrights. The Nevada State Engineer has requested additional data before making a determination on the balance of the applications from this groundwaterbasin, where Lincoln/Vidler maintains priority applications for approximately 17,375 acre-feet of water. The actual permits received may be for a lesserquantity, which cannot be accurately predicted.In the fourth quarter of 2008, Lincoln/Vidler obtained the right-of-way over federally managed lands, on behalf of CSIL, relating to a pipeline to conveythe water rights from Kane Springs. During 2009, Lincoln /Vidler agreed to amend the sale agreement with CSIL for the 1,000 acre-feet of water rights whichbecame effective on obtaining the right–of–way. The sale price of the water rights is $8,052 per acre–foot for a total purchase price of approximately $8.1million. Vidler’s portion of the sale price is approximately $6 million. Vidler has agreed to finance the sale of its portion of the water rights over the periodending April 2012 at 10% per annum. Principal payments are due from CSIL in April 2010, April 2011 and April 2012, and under this payment schedule weanticipate recording the revenue from Vidler’s portion of the sale of water rights on an installment-sale basis as and when principal payments are receivedfrom CSIL. For the year ended December 31, 2009, we have recorded as interest income interest payments received from CSIL of approximately $300,000.Dry Lake ValleyIn December 2008, Vidler purchased approximately 795 acres and the appurtenant federal grazing allotments in Dry Lake Valley, Lincoln County,Nevada. The real estate, which represents the only private property located in the Dry Lake Valley, was purchased in order to place water applications ownedby Lincoln/Vidler to beneficial use.In September, 2009, the Nevada State Engineer permitted 1,009 acre-feet of irrigation water rights to Lincoln/Vidler and, as a result, Lincoln/Vidler are inthe process of drilling wells and installing irrigation systems to place the water in to beneficial use. It is anticipated that the costs to put the water in tobeneficial use will be approximately $1.5 million in 2010. Currently, the property and allotments are leased for cattle grazing and farming.The property lies in a portion of the valley that appears to be well suited for solar energy development. In addition, both the eastern and westernboundaries of the property abut federally granted major power transmission corridors. The western boundary of the property abuts the Lincoln CountyConservation, Recreation and Development Act of 2004 utility corridor that Southern Nevada Water Authority is currently in the process of permitting for itswater importation project. The property is also adjacent to one of the solar energy study areas designated by the Secretary of the Interior, which is beinganalyzed pursuant to a Programmatic Environmental Impact Statement (“PEIS”). The aims of the PEIS, among other things, are to evaluate utility–scale solarenergy development and to amend relevant Bureau of Land Management (“BLM”) land use plans with the consideration of establishing a new BLM solarenergy development program. This BLM site is designated as the Dry Lake Valley North site and consists of approximately 49,775 acres.Lincoln/Vidler Water Rights ApplicationsLincoln/Vidler has pending water rights applications filed with the Nevada State Engineer’s Office. Prior to a law change in 2003, the law governingwater rights required the Nevada State Engineer to act on an application within one year of its filing date or it was deemed cancelled. A recent NevadaSupreme Court ruling in January, 2010, considered this new law with respect to 34 water right applications of Southern Nevada Water Authority (SNWA) thathad been filed in 1989. The Court reversed and remanded a lower court ruling requiring the lower court to either reopen the 34 water right applications forprotests or to require SNWA to re-file new applications. The Court indicated that “applicants cannot be punished for the State Engineer’s failure to follow hisstatutory duty.” However, language in the opinion appeared to indicate that equity would require the applications to be reopened for protest but the earlypriority date of their applications would remain intact. 21 Lincoln/Vidler has pending water right applications filed with the Nevada State Engineer’s Office. Lincoln/Vidler had filed on water rights throughoutLincoln County in 1998 and again in 2003, 2004, 2005, 2006 and 2007 in all but six groundwater basins. Because of these re-filings, these water rightapplications are not in jeopardy under the Nevada Supreme Court ruling. Of the six basins not filed after 2003, Lincoln/Vidler, to ensure the protection ofthose filings, have re-filed in four of the six basins, determining that the remaining two basins have no water to be appropriated by the Nevada State Engineer. Lincoln County Power Plant ProjectIn 2005, Vidler entered into an option agreement to sell its interest in a project to construct a new electricity-generating plant in southernLincoln County, for $4.8 million. It is anticipated that the new plant will supply electricity to the new communities to be developed near Mesquite, andsurrounding areas. In December 2009, we agreed to extend the option period until December 31, 2011, in exchange for further option payments totaling$400,000. The purchaser has made all of the scheduled option payments to date.This project is 100% owned by Vidler, and does not form part of the Lincoln/Vidler teaming arrangement.2.Fish Springs RanchVidler has a 51% membership interest in, and is the managing partner of, Fish Springs Ranch, LLC (“Fish Springs”) which owns the Fish Springs Ranchand other properties totaling approximately 8,600 acres in Honey Lake Valley in Washoe County, approximately 40 miles north of Reno, Nevada. Inaddition, Fish Springs owns 12,987 acre-feet of permitted water rights related to the properties of which 7,987 acre-feet are transferable to the Reno/Sparksarea and designated as water credits. Currently, there is no regulatory approval to export the additional volume of 5,000 acre-feet per year of water from FishSprings Ranch to support development in northern Reno, and it is uncertain whether such regulatory approval will be granted in the future.The Fish Springs Ranch water rights have been identified as the most economical, sustainable, and proven new source of supply to support new growthin the north valley communities of Washoe County. Residential property developers have publicly stated that Reno is constrained for land and that there areno existing water supplies to support further development in the north valleys of Reno. If additional water can be supplied to Reno and the surroundingareas, this will allow the development of additional land in accordance with the community’s master plan. According to the Nevada State Demographer, from2000 to 2008, the population of Washoe County (including Reno/Sparks) increased by almost 25% to approximately 424,000 people. In addition, despitethe current housing downturn, we continue to expect that, in the long term, new home construction in the Reno area will be robust as the Nevada StateDemographer has forecast that the population of Washoe County will increase by over 150,000 people by 2028.During 2006, we began construction of a pipeline and an electrical substation to provide the power which will be required to pump the water to the northvalleys. Construction of the pipeline to convey the water from Fish Springs Ranch to a central storage tank in northern Reno was completed during 2008. Asof December 31, 2009, we have capitalized $101.1 million of direct pipeline costs and other related expenditure, including interest, plus the cost of our watercredits, within the Real Estate and Water Assets section of our consolidated balance sheet. As water is sold by Fish Springs and revenues are generated, theasset will be expensed as a cost of sale in our consolidated statement of operations in the period in which the associated revenues are recorded.In July 2008, the pipeline and associated infrastructure was dedicated to Washoe County, Nevada under the terms of an Infrastructure DedicationAgreement (“IDA”) between Washoe County and Fish Springs. Under the provisions of the IDA, Washoe County is responsible for the operation andmaintenance of the pipeline and Fish Springs has the exclusive right to the capacity of the pipeline to allow for the sale of water for future economicdevelopment in the north valley area of Reno. Water from Fish Springs that has regulatory approval to be imported to the North Valleys of Reno(approximately 8,000 acre-feet) is also available for sale under a Water Banking Agreement entered into between Fish Springs and Washoe County. Underthe Water Banking Agreement, Washoe County holds transferred and dedicated water rights in trust on behalf of Fish Springs, which will then be able totransfer and assign water rights credits. Fish Springs can sell the water credits to developers, who must then dedicate the water to the local water utility forservice.Without changing the potential revenues to Fish Springs, the IDA and Water Banking Agreement allow Washoe County to perform its role as a waterutility by delivering and maintaining water service to new developments. The agreements enable Fish Springs to complete its water development project byselling water credits to developers, who can then obtain will-serve commitments from Washoe County.Since the dedication of the pipeline in July 2008, and, as a result, the Fish Springs water becoming available for sale, we sold 12.8 water credits during2008 for sales proceeds of approximately $577,000. (One water credit is equivalent to a water right of one acre-foot volume of water per annum inperpetuity). There were no sales of Fish Springs’ water credits in 2009. The uncertain timing of future development means it is difficult to predict when watercredit sales will occur.In accordance with the Fish Springs partnership agreement, our 49% partner’s proportionate share of all costs related to the pipeline project, including afinancing cost of the London Inter-Bank Offered Rate (“LIBOR”) plus 450 basis points on Vidler’s funding of the pipeline related expenditures to the FishSprings partnership, will be recouped from the revenues generated from the sale of Fish Springs water resources. 22 3.Carson City and Lyon County, Western NevadaThe capital city of Nevada, Carson City, and Lyon County are located in the western part of the state, close to Lake Tahoe and the border withCalifornia. There are currently few existing water sources to support future growth and development in the Dayton corridor area, which is located in thisregion.In 2007, Vidler entered into development and improvement agreements with both Carson City and Lyon County to provide water resources for plannedfuture growth in Lyon County and to connect, or “intertie,” the municipal water systems of Carson City and Lyon County.The agreements allow for Carson River water rights owned or controlled by Vidler to be conveyed for use in Lyon County. The agreements also allowVidler to bank water with Lyon County and authorize Vidler to build the infrastructure to upgrade and inter-connect the Carson City and Lyon County watersystems. It is anticipated that the Lyon County utility will have at least 4,000 acre-feet of water available for development projects in the Dayton corridor forwhich there is currently limited supplies of water, as well as new water infrastructure to improve Lyon County’s water management program.During 2009, Vidler substantially completed the infrastructure required to connect the Carson City water system with the Lyon County water system andthe infrastructure is now sufficient to deliver an expected volume of water of at least 4,000 acre-feet per year. Our initial estimates of the total capital costs forthe proposed new infrastructure were as much as approximately $23 million over a four to six year period. However, as of December 31, 2009, we haveexpended a total of approximately $5.7 million to complete the connection infrastructure and we anticipate that further capital expenditures will be limitedto approximately $2 million in order to recover the water in Lyon County as and when demand occurs.Vidler has acquired and optioned water rights consisting of both Carson River agriculture designated water rights and certain municipal and industrialdesignated water rights. On completion of our re-designation development process of the agriculture designated water rights to municipal and industrial use,we anticipate that Vidler will have at least 4,000 acre-feet available for municipal use in Lyon County for future development, principally by means ofdelivery through the new infrastructure constructed by Vidler. The uncertain timing of future development means it is difficult to predict when water rightssales will occur.4.Sandy Valley, NevadaIn June 2002, the Nevada State Engineer awarded Vidler 415 acre-feet of water rights near Sandy Valley, Nevada. The award of the permit for the 415acre-feet of water rights was appealed in the Nevada Supreme Court by certain residents of Sandy Valley. The Supreme Court denied Vidler the originallypermitted rights due to a procedural error in certifying the record on appeal. Vidler appealed this decision in the Supreme Court but was not successful inkeeping the original rights. However, Vidler has water rights applications for 2,000 acre-feet for groundwater appropriation in Sandy Valley and is preparingthese applications to go through the permitting process to obtain perfected water rights.5.Muddy River, NevadaThe 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 beutilized to support development in southern Nevada. The Southern Nevada Water Authority 2006 water resource plan identifies Muddy River water rights asa water resource to support future growth in Clark County, Nevada.At December 31, 2009, Vidler owned approximately 267 acre-feet of Muddy River water rights and which are leased to Southern Nevada WaterAuthority.ColoradoVidler is completing the process of monetizing its water rights in Colorado, through sale or lease:·in 2007, Vidler closed on the sale of approximately 0.6 acre-feet of water rights for $45,000;·in 2008, Vidler closed on the sale of approximately 3.9 acre-feet of water rights for $302,000; and·in 2009, Vidler closed on the sale of approximately 1.6 acre–feet of water rights for $127,000.Vidler has 173 acre-feet of water rights remaining in Colorado, of which 106 acre-feet are available for sale or lease and 67 acre-feet have been leased. 23 IdahoIn 2007, Vidler closed on the purchase of two farm properties in Idaho totaling approximately 1,886 acres of land, together with the related 7,044 acre-feet of agricultural water rights. The properties are leased and currently being farmed, and grow apples, silage corn, alfalfa and potatoes.These purchases represented Vidler’s first acquisition of real estate and water resources in Idaho. The properties are located near the areas of Boise,Nampa, and Caldwell, where future development could be constrained by the lack of developable land with water to support development. We believe thatthe properties are well suited for residential planned unit development, although we are also considering other alternatives for both the land and the waterresources acquired.During 2009, Vidler entered in to a geothermal lease agreement with a geothermal energy company with respect to the two Idaho properties. Vidlerreceived an initial payment of approximately $375,000 and is entitled to annual lease payments of approximately $4,700 over the ten year leaseperiod. Vidler is also entitled to 3.5% of gross proceeds for the use of any geothermal resources on the properties for the commercial production of electricalenergy and 10% of gross proceeds for the use of any geothermal resources on the properties for the commercial production of non-electrical energy.WATER STORAGE1.Vidler Arizona Recharge FacilityDuring 2000, Vidler completed the second stage of construction at its facility to “bank,” or store, water underground in the Harquahala Valley, andreceived the necessary permits to operate a full-scale water “recharge” facility. “Recharge” is the process of placing water into storage underground. Vidlerhas 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 as much as1 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 groundwater wells.The Vidler Arizona Recharge Facility is a privately owned water storage facility for the Colorado River system, which is a primary source of water for theLower Basin 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 recharged water comes from surplus flows of CAP water. Proximity tothe CAP provides a competitive advantage as 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, power-generatingcompanies, developers, and local governmental political subdivisions in Arizona, and out-of-state users such as municipalities and water agencies in Nevadaand California. The Arizona Water Banking Authority (“AWBA”) has the responsibility for intrastate and interstate storage of water for governmentalentities.Vidler’s recharge facility is one of the few permitted and completed private water storage facilities in Arizona. Given that Arizona is the onlysouthwestern state with surplus flows of Colorado River water available for storage, we believe that the Vidler site is a private water storage facility where it ispractical to “bank,” or store, water for users in other states, which is known as “interstate water banking”. Having a permitted water storage facility alsoallows Vidler to acquire, and store, surplus water for re-sale in future years.Vidler has not yet generated any revenue from the facility. We believe that the best economic return on the facility will come from storing water insurplus years for sale in dry years or when other need for the water arises. Vidler has been recharging water for its own account since 1998, when the pilotplant was constructed. At the end of 2009, Vidler had “net recharge credits” of approximately 212,000 acre-feet of water in storage at the facility as well asapproximately 5,000 acre–feet of water at an Arizona state owned storage site within the Phoenix Active Management Area. Vidler has ordered a further47,000 acre-feet of water for recharge in 2010 of which approximately 41,500 acre-feet is to be recharged at our facility and approximately 5,500 acre–feet inthe Phoenix Active Management Area.Subsequent to December 31, 2009, in January, 2010, Vidler acquired for $15.75 million a single-purpose limited liability company whose primary assetwas approximately 126,000 acre–feet of stored water (“net recharge credits”) in the Roosevelt Water Conservation District (“RWCD”). For the purposes ofstoring water, the RWCD is part of the Phoenix, Arizona Active Management Area (which corresponds to the Phoenix metropolitan area). Accordingly, thisstored water may be recovered and used anywhere in the Phoenix Active Management Area and could have a variety of uses for commercial developmentswithin the Phoenix metropolitan area. 24 2.Semitropic, CaliforniaVidler originally purchased an 18.5% right to participate in the Semitropic Water Banking and Exchange Program, which operates a 1 million acre-footwater storage facility at Semitropic, near the California Aqueduct, northwest of Bakersfield, California.In July, 2008, Vidler completed the sale of its remaining interest of 30,000 acre-feet of storage capacity at the Semitropic Water Banking and ExchangeProgram in a transaction with the San Diego County Water Authority. The sale generated cash proceeds of $11.7 million and we recorded a net gain, asrevenue, of $8.7 million in 2008. In 2009, Vidler sold its entire inventory of water of approximately 10,252 acre-feet for total sale proceeds of approximately$3.1 million. As a result of this sale, as of December 31, 2009, Vidler no longer owns any water assets in California.OTHER PROJECTSNew Mexico ProjectDuring 2009, Vidler commenced a new water resource development project in the state of New Mexico. At this stage of the project, as of December 31,2009, all expenditures relating to this venture have been expensed through the statement of operations as incurred, until such time we believe we havesufficient evidence that further expenditures will be recovered by subsequent cash flows generated from the sale of permitted water rights. We are in theexploratory stage of the project. We have conducted geophysical surveys and applied for and were granted exploratory and monitoring well permits from theState Engineer’s Office of New Mexico and our drilling operations are currently underway.Vidler’s business plan for this project is to drill exploratory and monitoring wells to prepare a groundwater flow model with the ultimate objective ofbeing awarded permitted water rights by the New Mexico State Engineer’s Office. Vidler has identified a demand of up to 1,500 acre-feet of water per annumin and around the Santa Fe region of New Mexico. We have budgeted further expenditures of up to $4 million to complete the development of this projectover the next one or two years. The project is being developed in a partnership in which Vidler is the 95% owner.OtherWe continue to investigate and evaluate water and land opportunities in the southwestern United States, which meet our risk/reward and value criteria,and, in particular, assets which have the potential to add value to our existing assets. We routinely evaluate the purchase of further water-righted propertiesor other water resources in the southwest and western United States, particularly Nevada, Arizona, Colorado, New Mexico and Idaho. We also continue to beapproached by parties who are interested in obtaining a water supply, or discussing joint ventures to commercially develop water assets and/or develop waterstorage facilities in Arizona, Nevada, and other southwestern states.REAL ESTATE OPERATIONSOur Real Estate Operations segment’s revenues are derived from the sale of Nevada Land’s property in northern Nevada and UCP’s sale of residentialdevelopments in California. 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 real estate sales contracts where Nevada Land has provided partialfinancing, and from temporary investment of sale proceeds.We recognize the sale of real estate when a transaction closes. On closing, the entire sales price is recorded as revenue, and the associated cost basis isreported within cost of real estate sold. Since typically the date of closing determines the accounting period in which the revenue and cost of real estate arerecorded, the reported results of our Real Estate Operations segment fluctuate from period to period, depending on the dates when transactionsclose. Consequently, results for any one year are not necessarily indicative of likely results in future years.Nevada LandThe continuing slow-down in U.S. real estate markets has affected Nevada Land’s 2009, 2008 and 2007 results of operations, when compared to prioryears. In 2009, 2008 and 2007, the volume of acreage sold declined by 97%, 91% and 52% respectively from 2006 activity, and the land sales revenuesgenerated by Nevada Land in 2009, 2008 and 2007 declined by approximately 95%, 86% and 43% respectively from 2006 land sale revenues. However,gross margin percentages on land sales (the total of sales less costs of sales divided by sales) have remained consistent at approximately 70% throughout2009, 2008 and 2007 compared to a gross margin percentage of approximately 67% in 2006. In addition, Nevada Land owns several other rights, such asmineral rights, water rights and geothermal rights which are typically retained even when the surface right is sold as a land sale. The annual lease and royaltyincome generated by Nevada Land has remained fairly consistent throughout 2009, 2008 and 2007 at $658,000, $628,000 and $611,000 respectively. 25 Despite the slow-down in real estate sales at Nevada Land, we are seeing strong development activity with respect to our geothermal rights, whichappears to reflect the increased demand in the U.S. for alternative energy sources. Nevada Land owns the geothermal rights to over 1.3 million acres innorthern Nevada. We hold the geothermal rights on property we still own, and we have retained the geothermal rights on all land sales that we havepreviously recorded. Typically, we structure geothermal development agreements with power companies that incorporate a lease element, as well as a royaltyon the actual energy generated from a geothermal plant. We are currently a party to seven geothermal leases, over a total of 16,500 acres, in varying stages ofdevelopment with five different power companies. During 2009, Nevada Land generated income of $1 million from the sale of geothermal rights on itsproperty.UCPSince commencing operations in early 2008, UCP has focused on acquiring finished and entitled residential lots in and around the Fresno MetropolitanArea (the Central Valley area of California) as well as in certain locations in the Central Coast region of California, and in particular, the Montereyregion. We believe that the residential real estate markets where UCP has acquired development properties are attractive in the long term due to highaffordability ratios, favorable market demographics (population growth and diverse employment bases) and fundamental supply and demand forces arisingfrom the existing balance of inventories of standing homes and lots and the demand for homes. (See below for highlights of these factors in MontereyCounty and the Central Valley region of California.)East Garrison, Monterey County, CaliforniaDuring 2009, UCP closed on its most significant acquisition to date: a 244 acre site in Monterey County, California (the “East Garrison Master–PlannedCommunity”). During the third quarter of 2009, UCP acquired a note for a discount to its face value for a total, including acquisition costs, of approximately$22.6 million. As intended, UCP subsequently foreclosed on the underlying real estate that acted as security for the note. As a result of this foreclosure, UCPacquired 1,400 entitled residential units consisting of the East Garrison Master–Planned Community. East Garrison is located on the north–east corner of thehistoric former Fort Ord Army base just outside Monterey, California. The East Garrison Master–Planned Community consists of three phases which arebased on the timing of development as contained within the approved master plan. It is our current intention to complete the development of 441 partiallyfinished lots in Phase 1 to fully finished lots (lots with all horizontal infrastructures such as electricity, gas and sewer lines as well as roads and curbs). Weestimate that costs associated with completing the 441 lots and other project costs will total approximately $20 million in the next two years prior tomonetizing the Phase 1 lots. Currently, we have no plans to complete any construction related to Phases 2 and 3 of East Garrison.The site is fully–entitled with environmental permits in place, a zoning ordinance approved, water allocated to the entire development and adevelopment agreement and a development and disposition agreement approved by the Monterey County Redevelopment Agency. We believe thecompletion of this entitlement process gives the project a competitive advantage as new supplies of finished lots are limited due to the difficulty of theentitlement process.Monterey County has a population of approximately 425,000. The County’s population is forecast to experience population growth over the next tenyears, growing to approximately 480,000 by 2020 (approximately 13% in total). Within the Monterey Region, which consists of Monterey and Santa CruzCounties, the employment base of approximately 270,000 workers, is spread across several industry segments. The largest industry segments in the MontereyRegion include first, Government, Health, Education, and Military, second Agriculture, and third Transportation Trade and Utilities. In December 2009, themedian price of a home in Monterey County was approximately $252,500 and the affordability index (a measure of the ability of first time homebuyers topurchase a home based on the median household income) is approximately 66% compared to 54% in 2008. Housing inventories in Monterey Countydeclined 62% during 2009. In December 2009, there was approximately only 2.9 months of housing inventory based on current sales levels compared to 7.7months in December 2008.Central Valley Region, CaliforniaFresno County is the tenth largest county in California and in 2009 had a population of over 940,000. The county’s population is expected to grow toapproximately 1.1 million by 2020 (a total of 18%). Fresno County is also one of the leading counties in the United States for agriculture production, with agross crop value exceeding $5.7 billion in 2008. The employment base in Fresno is approximately 370,000 spread across a diversified set of industries: thelargest of which are government, trade transportation and utilities, agriculture, and education and health services. As of December 2009, the median price ofa home in Fresno County was $151,000 (compared to $159,900 at December 2008) and the affordability index (a measure of the financial ability of U.S.families to buy a house based on the median household income) for first time homebuyers was 76% (compared to 67% in 2008). Housing inventories inFresno County declined 51% during 2009. In December 2009, there was approximately 3.3 months of housing inventory based on current sales levelscompared to 6.8 months in December 2008. 26 Throughout 2009, UCP continued the completion of required entitlements of UCP’s partially-entitled projects with the objective of owning fully–entitled residential development projects. In addition, during 2009, UCP sold 108 finished lots and seven homes for total sales proceeds of $8.9 million.INSURANCE OPERATIONS IN “RUN OFF”The operations of our insurance companies are in “run off,” which means handling and resolving claims on expired policies, but not writing newbusiness. Typically, most of the revenues of an insurance company in “run off” come from investment income (interest from fixed-income securities anddividends from stocks) earned on funds held as part of their insurance business. In addition, gains or losses are realized from the sale or impairment ofinvestments.In broad terms, our insurance companies hold cash and fixed-income securities corresponding to their loss reserves and state capital and depositrequirements, and the remainder of the portfolio is invested in small-capitalization value stocks in the U.S. and selected foreign markets. At December 31,2009, the investment portfolios of Physicians and Citation consisted of cash of $9.6 million, fixed-income securities with a market value of $15.3 million,and stocks with a market value of $110 million.We hold bonds issued by the U.S. Treasury and government-sponsored enterprises (namely Freddie Mac, FNMA, FHLB, and PEFCO) and State ofCalifornia general obligations municipal bonds only to the extent required for capital under state insurance codes, or as required for deposits or collateralwith state regulators. Otherwise, the bond portfolios currently consist of domestic investment-grade corporate issues and one New Zealand dollar-denominated corporate issue, with four or less years to maturity.At December 31, 2009, the insurance company bond portfolios consisted of:Issuer Fair ValueDecember 31, 2009 Percentage ofTotal Fair ValueU.S. Treasury $1,186,000 7.8%Government-sponsored enterprises 6,707,000 44.0%State of California general obligations 3,239,000 21.2%Domestic investment-grade corporate bonds 3,339,000 21.9%Foreign corporate bond (no credit rating) 780,000 5.1% $15,251,000 100.0%At December 31, 2009, the aggregate market value of Physicians’ and Citation’s bond portfolios ($15.3 million) was greater than amortized cost ($14.7million).To protect the capital value of our bond portfolio from a decline in value that could be brought on by higher interest rates in the medium term, our bondinvestments are concentrated in issues maturing in four years or less. At December 31, 2009, the duration of Physicians’ and Citation’s bond portfolios was2.6 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 ofbonds 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. Ifinterest rates increase, the market value of existing bonds will decline. During periods when market interest rates decline, the market value of existing bondsincreases. Typically, the longer the duration, the greater the sensitivity of the value of the bond portfolio to changes in interest rates. Duration of less thanfive years is generally regarded as medium term, and less than three years is generally regarded as short term.Our insurance companies principally hold their liquid funds in the Federated Government Obligations Money Market Fund (ticker: GOIXX). Due to thenature of the underlying debt securities which this money market fund holds, we do not anticipate any loss of principal. We do not own any preferred stock,mortgage-backed or asset-backed securities, collateralized debt obligations, auction-rate securities, or commercial paper, and we do not have any exposure tocredit default swaps.The equities component of the insurance company portfolios is concentrated in a limited number of asset-rich, small-capitalization value stocks. Thesepositions have been accumulated at a significant discount to our estimate of the private market value of each company’s underlying “hard” assets (land andother tangible assets). At December 31, 2009, investments in the U.S. comprised approximately 47% of the stock portfolio; Switzerland, 39%; and NewZealand and Australia, 13%. The PICO group began to invest in European companies in 1996, and in New Zealand and Australian companies in 2002. In particular, we have beenaccumulating shares in a number of undervalued asset-rich companies in Switzerland. Typically, we believe that these companies will benefit from pan-European and domestic consolidation. In some cases, we believe that corporate activity or conversion to international standards of accounting will make theunderlying value of the companies more visible.The fixed-income securities and common stocks in the insurance companies’ investment portfolios generated total returns of approximately 12% in2007, -41% in 2008, and 16% in 2009. 27 The equity portfolios of our insurance companies are managed on an absolute value basis, using an approach which investors refer to as “Graham andDodd”. Stocks are selected based on the investment fundamentals of the underlying company, which is our assessment of what the enterprise is worth, basedon the private market value of its assets, earnings, and cash flow. Typically, we buy stocks at a significant discount to our assessment of the value of thecompany’s “hard assets,” such as land, natural resources, or cash. We also own shares in operating companies, which are undervalued on the basis of theirearnings and cash flow, and whose businesses have special or unique characteristics. We invest with a patient, long-term orientation, with the intention ofholding a stock until fair and full value is realized. The gap between market price and intrinsic value may persist for several years, and we typically holdstocks for three to five years, or longer. In many cases, we only sell a stock when the company is acquired by a third party. During periods of weakness in thebroad stock market, the gap between market price and intrinsic value may widen, but we only sell the stock if it has reached our target, its fundamentals havedeteriorated, or other changes limit upside potential on a risk-adjusted basis.Over time, we expect the stocks in our insurance company portfolios to generate significantly higher returns than if we were to solely invest in fixed-income securities and cash and cash equivalents.During the “run off” process, the investment assets and investment income of a “run off” insurance company are expected to decline, as fixed-incomeinvestments mature or are sold to provide the funds to pay down the company’s claims reserves. However, from 2003 until 2007, the investment assets of theInsurance Operations in “Run Off” segment actually increased, as appreciation in stocks owned more than offset the maturity or sale of fixed-incomesecurities owned by Physicians and Citation to pay claims.The financial results of insurance companies in “run off” can be volatile if there is favorable or unfavorable development in their loss reserves. Changesin assumptions about future claim trends, and the cost of handling claims, can lead to significant increases and decreases in our loss reserves. When lossreserves are reduced, this is referred to as favorable development. If loss reserves are increased, the development is referred to as adverse or unfavorable.Physicians Insurance Company of OhioPhysicians wrote its last policy in 1995; however, claims can be filed until 2017 related to events which allegedly occurred during the period whenPhysicians provided coverage.By its nature, medical professional liability insurance involves a relatively small number (frequency) of relatively large (severity) claims. We havepurchased excess of loss reinsurance to limit our potential losses. The amount of risk we have retained on each claim varies depending on the accident yearbut, in general, we are liable for the first $1 million to $2 million per claim.Due to the long “tail” (the period of time between the occurrence of the alleged event giving rise to the claim, and the claim being reported to us) in themedical professional liability insurance business, it is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves. Our lossreserves 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, 2009, our medical professional liability reserves totaled $2.3 million, net of reinsurance (claims reserves which have been transferred tothe reinsurer), compared to $3.8 million net of reinsurance at December 31, 2008, and $6.5 million net of reinsurance at December 31, 2007.PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES December 31, 2009 2008 2007 Direct reserves$2,338,000 $3,834,000 $6,603,000 Ceded reserves (83,000)Net medical professional liability insurance reserves$2,338,000 $3,834,000 $6,520,000 At December 31, 2009, our direct reserves, or reserves before reinsurance, represented the independent actuary’s best estimate. We are continually reviewingour claims experience and projected claims trends in order to derive the most accurate estimate possible.At December 31, 2009, approximately $451,000, or 19% of our direct reserves, were case reserves, which are the loss reserves established when a claim isreported to us. Our provision for incurred but not reported claims (IBNR - which means the event giving rise to the claim has allegedly occurred, but theclaim has not been reported to us) was $854,000, or 37% of our direct reserves. The loss adjustment expense reserves, totaling $1 million, or 43% of directreserves, recognize the cost of handling claims over the next seven years while Physicians’ loss reserves run off. 28 Over the past three years, the trends in open claims and claims paid have been: Year Ended December 31, 2009 2008 2007 Open claims at the start of the year 10 12 18 New claims reported during the year 4 4 Claims closed during the year - 8 - 6 - 6 Open claims at the end of the year 6 10 12 Total claims closed during the year 8 6 6 Claims closed with no indemnity payment - 8 - 6 - 4 Claims closed with an indemnity payment 0 0 2 Total claims payments during the year $190,000 $315,000 $535,000 PHYSICIANS INSURANCE COMPANY OF OHIO - CHANGE IN LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Year Ended December 31, 2009 2008 2007 Beginning reserves $3,834,000 $6,520,000 $9,385,000 Loss and loss adjustment expense payments (190,000) (315,000) (535,000)Re-estimation of prior year loss reserves (1,306,000) (2,371,000) (2,330,000)Net medical professional liability insurance reserves $2,338,000 $3,834,000 $6,520,000 Re-estimation as a percentage of beginning reserves - 34.1% - 36.4% - 24.8% In 2009, claims and loss adjustment expense payments were $190,000, accounting for 13% of the net decrease in reserves. During 2009, Physicianscontinued to experience favorable trends in both the “frequency”, or number of claims, and the “severity”, or size of claims. Consequently, independentactuarial analysis of Physicians’ loss reserves concluded that Physicians’ reserves against claims were again greater than the actuary’s projections of futureclaims payments. Reserves were reduced in eight of Physicians’ 20 accident years from 1976 until 1996, increased in two accident years, and there was nochange in ten accident years. This resulted in a net reduction of $1.3 million, or approximately 34.1% of reserves at the start of the year. The net reduction inreserves was primarily due to a decrease in claims frequency, and was recorded in Physicians’ IBNR.In 2009, Physicians made a net indemnity payment of $1,000, which represents the indemnity portion of one claim. Total claims payments in 2009 wereless than anticipated. At December 31, 2009, the average case reserve per open claim was approximately $75,000. There were no changes in key actuarialassumptions in 2009. Such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, whichcould lead to further reserve adjustments, either increases or decreases, in future years. See “Critical Accounting Policies” and “Risk Factors”. In 2008, claims and loss adjustment expense payments were $315,000, accounting for 12% of the net decrease in reserves. During 2008, Physicianscontinued to experience favorable trends in both the “frequency” and the “severity” of claims. Independent actuarial analysis of Physicians’ loss reservesconcluded that Physicians’ reserves against claims were greater than the actuary’s projections of future claims payments. Reserves were reduced in eight ofPhysicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of $2.4 million, or approximately 36.4% of reserves at the start of theyear. The net reduction in reserves was primarily due to a decrease in claims frequency, and was recorded in Physicians’ reserve for IBNR.In 2008, Physicians made net indemnity payments of $138,000, which represents the indemnity portion of three claims. Total claims payments in 2008were less than anticipated. There were no changes in key actuarial assumption in 2008. In 2007, loss and loss adjustment expense payments were $535,000, accounting for 19% of the net decrease in reserves. During 2007, Physicianscontinued to experience favorable development in the “frequency” of claims and, to a lesser extent, the “severity” of claims. Independent actuarial analysisof Physicians’ loss reserves concluded that Physicians’ reserves against claims were greater than the actuary’s projections of future claimspayments. Reserves were reduced in 16 of Physicians’ 20 accident years from 1976 until 1996, resulting in a net reduction of $2.3 million, or approximately24.8% of reserves at the start of the year. The net reduction in reserves was primarily due to a decrease in claims frequency, and was recorded in Physicians’IBNR. In 2007, Physicians made $310,000 in net indemnity payments to close two cases, and total claims payments were less than anticipated. There were nochanges in key actuarial assumption in 2007. Since it is more than 14 years since Physicians wrote its last policy and the reserves for direct IBNR claims and IBNR loss adjustment expenses at December31, 2009, total approximately $1.7 million, it is conceivable that the Company will experience favorable development of reserves for reported losses, IBNRand loss adjustment expenses. However, there is less potential for favorable development in future years than there has been in the past, as Physicians’ claimcount shrinks. In addition, we caution (1) that claims can be reported until 2017, and (2) against over-emphasizing claim count statistics -- for example, thelast claims to be resolved in “run off” could be the most expense to resolve. 29 Citation Insurance CompanyProperty and Casualty Insurance Loss ReservesCitation went into “run off” from January 1, 2001. At December 31, 2009, after nine years of “run off,” Citation had $543,000 in property and casualtyinsurance loss and loss adjustment expense reserves, after reinsurance.Approximately 64% of Citation’s net property and casualty insurance reserves are related to one line of business, artisans/contractors liabilityinsurance. The remaining 36% is comprised of commercial property and casualty insurance reserves related to policies which expired in 2001. As a generalrule, 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 theaccident 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/contractorsbusiness was renewed after the merger. Artisans/contractors liability insurance has been a problematic line of business for all insurers who offered this type ofcoverage in California during the 1980’s and 1990’s. The nature of this line of business is that we received a large number (high frequency) of small (lowseverity) claims.Although Citation wrote its last artisans/contractors policy in 1995, and the statute of limitations in California is ten years, this can be extended in somesituations.Over the past three years, the trends in open claims and claims paid in the artisans/contractors line of business have been: Year Ended December 31, 2009 2008 2007 Open claims at the start of the year 11 39 78 New claims reported or claims re-opened during the year 7 18 31 Claims closed during the year - 13 - 46 - 70 Open claims at the end of the year 5 11 39 Total claims closed during the year 13 46 70 Claims closed with no payment - 10 - 24 - 30 Claims closed with LAE payment only (no indemnity payment) - 1 - 11 - 17 Claims closed with an indemnity payment 2 11 23 Due to the long “tail” (the period between the occurrence of the alleged event giving rise to the claim and the claim being reported to us) in theartisans/contractors line of business, it is difficult to accurately quantify future claims liabilities and establish appropriate loss reserves. Our loss reserves areregularly reviewed by management, and certified annually by an independent actuarial firm, as required by California state law. The independent actuaryanalyzes past, current, and projected claims trends for all active accident years, using several forecasting methods. The actuary believes this will result inmore 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 andcasualty loss reserves. In 2009, we increased reserves by $55,000, or approximately 8.5% of beginning reserves. In 2008, we reduced reserves by $2.3million, or 74.3% of beginning reserves, principally due to reduced frequency and reduced severity of claims, which led the actuary to conclude that the “runoff “of the artisans/contractors book of business will be completed sooner, and with lower claims and expense payments, than previously projected. We alsoreduced reserves by $1.2 million in 2007. Such actuarial analyses involves estimation of future trends in many factors which may vary significantly fromexpectation, which could lead to further reserve adjustments, either increases or decreases, in future years.Since Citation’s property and casualty insurance claims reserves are now only $543,000, there is clearly limited scope for favorable development infuture years.There were no changes in key actuarial assumptions during the three years ended December 31, 2009. See “Critical Accounting Policies” and “RiskFactors”.At December 31, 2009, Citation’s net property and casualty reserves were carried at $543,000, approximately equal to the actuary’s best estimate. 30 CITATION INSURANCE COMPANY - PROPERTY AND CASUALTY INSURANCE LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES December 31, 2009 2008 2007 Direct reserves $624,000 $741,000 $3,587,000 Ceded reserves (81,000) (96,000) (438,000) Net reserves $543,000 $645,000 $3,149,000 At December 31, 2009, $125,000 of Citation’s net property and casualty reserves (approximately 23%) were case reserves, $156,000 representedprovision for IBNR claims (29%), and the loss adjustment expense reserve was $262,000 (48%).CITATION INSURANCE COMPANY - CHANGE IN PROPERTY AND CASUALTY INSURANCE LOSS AND LOSS ADJUSTMENT EXPENSERESERVES Year Ended December 31, 2009 2008 2007 Beginning reserves $645,000 $3,149,000 $5,077,000 Loss and loss adjustment expense payments (157,000) (163,000) (695,000)Re-estimation of prior year loss reserves 55,000 (2,341,000) (1,233,000)Net property and casualty insurance reserves $543,000 $645,000 $3,149,000 Re-estimation as a percentage of beginning reserves + 8.5% - 74.3% - 24.3% Workers’ Compensation Loss ReservesUntil 1997, Citation was a direct writer of workers’ compensation insurance in California, Arizona, and Nevada. In 1997, Citation reinsured 100% of itsworkers’ 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 reinsuredwith 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 bookedthe losses reported by Fremont but recorded an equal and offsetting reinsurance recoverable from Fremont (as an admitted reinsurer) for all losses and lossadjustment expenses. This resulted in no net impact on Citation’s reserves and financial statements. In July 2003, the California Superior Court placed Fremont in liquidation. Since Fremont was in liquidation, it was no longer an admitted reinsurancecompany under the statutory basis of insurance accounting. Consequently, Citation reversed the reinsurance recoverable from Fremont of approximately$7.5 million in its financial statements 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. Webelieve 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. Since this bookof business is now more than 11 years old, the remaining claims tend to be severe, and likely to lead to claims payments for a prolonged period of time,although many have now exceeded the amount of risk we retain per claim, increasing the amount of reinsurance we can recover.Although the last of Citation’s workers’ compensation policies expired in 1998, new workers’ compensation claims can still be filed for events whichallegedly occurred during the term of the policy. The state statute of limitations is ten years, but claim filing periods may be extended in some circumstances.Over the past three years, the trends in open claims and claims paid in the workers’ compensation line of business have been: Year Ended December 31, 2009 2008 2007 Open claims at the start of the year 142 172 216 New claims reported during the year 5 17 22 Claims reopened during the year 21 0 10 Claims closed during the year - 48 - 47 - 76 Open claims at the end of the year 120 142 172 31 A significant number of the claims received in the past three years relate to asbestos. During 2009, all five new claims related to asbestos, and 25 of the120 open claims at December 31, 2009, were asbestos-related. Our actuaries expect the asbestos claims to develop in a different pattern to workers’compensation claims. Typically the asbestos claims are shared among numerous insurance carriers and result in a relatively small loss and loss adjustmentexpense payments. A $500,000 reserve for late reported asbestos claims was established in 2008, and this reserve stood at $475,000 at December 31, 2009.At December 31, 2009, Citation had workers’ compensation reserves of $21.2 million before reinsurance and $6.8 million after reinsurance. Citationpurchased 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 perclaim. The workers’ compensation reserves are reinsured with General Reinsurance Corporation, a subsidiary of Berkshire Hathaway, Inc.CITATION INSURANCE COMPANY - WORKERS’ COMPENSATION LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES December 31, 2009 2008 2007 Direct reserves $21,213,000 $23,198,000 $22,186,000 Ceded reserves (14,446,000) (15,781,000) (16,133,000) Net reserves $6,767,000 $7,417,000 $6,053,000 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” (the 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.Such actuarial analyses involves estimation of future trends in many factors which may vary significantly from expectation, which could lead to furtherreserve adjustments, either increases or decreases, in future years. Examples of future trends include claims, the cost of handling claims, and medical carecosts. See “Critical Accounting Policies” and “Risk Factors”.Following independent actuarial analysis at September 30, 2009, and December 31, 2009, Citation decreased its workers’ compensation net loss reservesby approximately $94,000, or 1.3% of the $7.4 million in net reserves at the start of 2009. Direct reserves were decreased by approximately $330,000, whichwas partially offset by a $236,000 decrease in the estimated reinsurance recoverable on our workers’ compensation loss reserves, resulting in a $94,000decrease in net loss reserves. Following independent actuarial analysis during 2008, Citation increased its workers’ compensation net loss reserves by $2.3 million, or 37.3% of the$6.1 million in net reserves at the start of 2008. Direct reserves were increased by approximately $3 million, which was partially offset by a $662,000increase in the estimated reinsurance recoverable on our workers’ compensation loss reserves, resulting in a $2.3 million increase in net loss reserves. Theincrease in reserves came after:·individual actuarial review of every open case; and·the creation of a new reserve of $500,000 for asbestos claims. Citation did not previously have a separate reserve for asbestos claims, but an increasingnumber of asbestos claims had been received in 2008 and recently preceding years. Typically, the asbestos claims are shared among numerousinsurance carriers, and Citation’s share of total settlements is less than 10%. The reserve reflects the actuary’s projection of an increased frequency oflow severity asbestos claims.Following independent actuarial analysis during 2007, Citation decreased its workers’ compensation net loss reserves by $39,000, compared to the $9.6million in net reserves at the start of 2007. Although direct reserves were increased by $3 million, primarily due to an increase in projected medical costs, thiswas more than offset by a $3 million increase in the estimated reinsurance recoverable on our workers’ compensation loss reserves and a reduction in accruedclaims payable.CITATION INSURANCE COMPANY - CHANGE IN WORKERS’ COMPENSATION LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Year Ended December 31, 2009 2008 2007 Beginning net reserves $7,417,000 $6,053,000 $9,649,000 Loss and loss adjustment expense payments (556,000) (891,000) (3,557,000)Re-estimation of prior year loss reserves (94,000) 2,255,000 (39,000) Net workers’ compensation insurance reserves $6,767,000 $7,417,000 $6,053,000 Re-estimation as a percentage of adjusted beginning reserves - 1.3% +37.3% - 0.4% Apart from the new reserve for late reported asbestos claims created in 2008 discussed above, there were no changes in key actuarial assumptions duringthe three years ended December 31, 2009.At December 31, 2009, Citation’s net workers’ compensation reserves were carried at $6.8 million, approximately equal to the actuary’s bestestimate. Approximately $1.4 million of Citation’s net workers’ compensation reserves (21%) were case reserves, $3.2 million represented provision forIBNR claims (47%), and the loss adjustment expense reserve was $2.2 million (33%).Until September 30, 2004, the workers’ compensation claims were handled by Fremont and then the California Insurance Guarantee Association. Sincethen, the workers’ compensation claims have been handled by a third-party administrator on Citation’s behalf. 32 CORPORATEUntil April 2008, the largest asset in this segment was a 22.5% shareholding in Jungfraubahn Holding AG, which was held by our wholly-owned Swisssubsidiary, Global Equity AG. Jungfraubahn is a publicly-traded company, listed on the Swiss Stock Exchange, which operates railway and related tourismand transport activities in the Swiss Alps. On April 22, 2008, Global Equity AG sold its interest in Jungfraubahn for net proceeds of CHF75.5 million, orapproximately US$75.3 million. The sale of Jungfraubahn resulted in a gain of $46.1 million before taxes in our consolidated statement of operations for2008. However, the sale only had a minimal effect on shareholders’ equity and book value per share, as most of the gain and related tax effects had alreadybeen recorded in previous accounting periods as a net unrealized gain, in the Other Comprehensive Income component of Shareholders’ Equity. Most of thesales proceeds were immediately converted into U.S. dollars, and later repatriated to the U.S. At December 31, 2009, the largest asset in this segment is cash and cash equivalents of $99.1 million. Our liquid funds are principally held in theFederated Government Obligations Money Market Fund (ticker: GOIXX). Due to the nature of the underlying debt securities which this money market fundholds, we do not anticipate any loss of principal. In addition, as a higher returning alternative to the money market fund, the parent company owns:·bonds issued by government-sponsored enterprises (specifically, Freddie Mac and FNMA) with a market value of $18 million at December 31,2009. We expect that these bonds will be called for redemption during 2010; and·two corporate bonds, with a combined market value of $2.8 million.From time to time, we make investments in small businesses, which are reported in the Corporate segment. At December 31, 2009, the only such businesswas spigit. spigit is a developer of social productivity software for enterprises, and has established a customer base that includes several companies in theFortune 2000. In October 2009, spigit received a $10 million equity investment from a global private equity firm. As a result of this transaction, the newinvestor now owns 46% of the outstanding voting shares of spigit, and our majority ownership was reduced to a 37% equity interest. The funds received byspigit are being used to continue spigit’s growth, by expanding its product development and sales and marketing efforts. Our investment in spigit is nowcarried in our consolidated financial statements as an unconsolidated affiliate, under the equity method.CRITICAL ACCOUNTING POLICIESThis section describes the most important accounting policies affecting the assets, liabilities, and results of our operations. Since the estimates,assumptions, and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, we considerthese to be our critical accounting policies:·How we determine the fair value and carrying value of our water assets, real estate assets, and investments in equity and debt securities;·How we estimate the claims reserves liabilities of our insurance companies; and·How we recognize revenue when we sell water assets and real estate assets, and calculate investment income from equity and debt securities.We believe that an understanding of these accounting policies will help the reader to analyze and interpret our financial statements.Our consolidated financial statements, and the accompanying notes, are prepared in accordance with generally accepted accounting principles in theU.S. Preparation of the consolidated financial statements in accordance with U.S. GAAP requires us to make estimates, using available data and ourjudgment, for things such as valuing assets, accruing liabilities, recognizing revenues, and estimating expenses. Due to the uncertainty inherent in thesematters, actual results could differ from the estimates we use in applying the critical accounting policies. We base our estimates on historical experience, andvarious other assumptions, which we believe to be reasonable under the circumstances.The following are the significant subjective estimates used in preparing our financial statements:1.Estimation of reserves in our insurance companiesAlthough we record reserves which management believes are adequate, the actual losses paid could be greater than the reserves we have established. Wemust estimate future claims and ensure that our loss reserves are adequate to pay those claims. This process requires us to make estimates about futureevents. Over the past three years, we have changed our assumptions used to determine our estimates. As we learn of new claims and close existing claims,estimates of projected claims payouts and reserves have changed which impacts the reserves. The accuracy of these estimates will not be known for manyyears. For example, part of our claims reserves cover “IBNR” claims (the event giving rise to the claim has occurred, but the claim has not been reported to usyet). In other words, in the case of IBNR claims, we must provide for claims which we do not know about yet.Estimates of our future claims obligations have been volatile:·our medical professional liability reserves, net of reinsurance, were reduced by $1.3 million in 2009, $2.4 million in 2008, and $2.3 million in 2007,after we concluded that Physicians’ claims reserves were greater than projected claims payments;·net of reinsurance, Citation’s property and casualty insurance loss reserves were increased by $55,000 in 2009, and decreased by $2.3 million in 2008and $1.2 million in 2007; and·net of reinsurance, Citation’s workers’ compensation loss reserves were decreased by $94,000 in 2009, compared to a $2.3 million increase in 2008 anda $39,000 decrease in 2007.There can be no assurance that our claims reserves will not increase or decrease in the future.In addition, we have to make judgments about the recoverability of reinsurance owed to us on the portion of our direct claims reserves which we havereinsured. At December 31, 2009, Citation had $15 million in reinsurance recoverable on its loss reserves and claims paid, and Physicians had no reinsurancerecoverable.See “Insurance Operations In Run Off” and “Regulatory Insurance Disclosure” in Item 7. 33 2.Carrying value of long-lived assetsOur principal long-lived assets are real estate and water assets owned by Vidler and its subsidiaries, and real estate assets owned by Nevada Land andUCP. At December 31, 2009, the total carrying value of real estate and water assets was $299.8 million, or approximately 44% of PICO’s total assets. Thesereal estate and water assets are carried at cost.We review our long-lived real estate assets as facts and circumstances change, or if there are indications of impairment present, to ensure that theestimated undiscounted future cash flows, excluding interest charges, from the use and eventual disposition of these assets will at least recover their carryingvalue. The cash flows are prepared at the lowest levels that are separate and independent of the cash flows from other assets. Our management, includingmanagement at each operating company, engages in a rigorous process to prepare and review the cash flow models which utilize the most recent informationavailable to us. However, the process inevitably involves the significant use of estimates and assumptions, especially the estimated current and futuredemand for these assets, the estimated future market values of our assets, the timing of the disposition of these assets, the ongoing cost of maintenance andimprovement of the assets, and the current and projected income being earned on the property and other uncertain future events. As a result, our estimateswill likely change from period to period. In addition, our estimates may change as unanticipated events transpire that would cause us to reconsider thecurrent and future use of the assets. In most cases, we have assumed sales of the related assets occurring over a two to seven year period and at current valuesfor the asset. We also assume the market absorption of the asset will take several years following the initial future sales. If we use different assumptions, if ourmanagement’s plans change, or if the conditions in future periods differ from our forecasts, our financial condition and results of operations could bematerially impacted. We may own properties, particularly those purchased in the last few years, where the current fair value is below our carrying value;however, on an undiscounted basis, management is projecting future cash flows in excess of the carrying value for all of our real estate assets. Accordingly,no impairment charges related to our real estate assets were recognized in the years ended December 31, 2009, 2008 or 2007.The impairment testing on our water resource assets, which consists primarily of certain of our water rights and the rights to use infrastructure to conveywater in Nevada, is assessed under a different methodology. Our water resources are infinite-lived intangible assets. Accordingly, our water resource assetsare not amortized (their value is not charged as an expense in our statement of operations over time) but the assets are carried at cost and reviewed forimpairment at least annually and more regularly if a specific event occurs or there are changes in circumstances that would suggest the asset may beimpaired. Such events or changes may include lawsuits, court decisions, regulatory mandates, and economic conditions including decreases in demand,changes in population, and increases or decreases in prices of similar assets. To calculate the fair value of these types of assets, we use a discounted cash flowmodel (the future net cash flows from the asset are forecast and then discounted back to a present value in today’s dollars using a risk-adjusted discount ratespecific to that project). Preparing these cash flow models involves significant assumptions about revenues and expenses as well as the specific risks inherentin the assets. If the carrying value exceeds the fair value, an impairment loss is recognized equal to the difference. Our management, including themanagement of the operating subsidiaries, conducts these extensive reviews utilizing the most recent information available to us; however, the reviewprocess inevitably involves the significant use of estimates and assumptions, especially the estimated current and future price and demand for these assets aswell as the market values of our water assets, the timing of the disposition of these assets, uncertain future events such as the rate of new development tocreate demand to utilize the water assets, and the ongoing cost of maintenance and improvement of the assets. In summary, the cash flow models for ourinfinite–lived intangible assets forecast initial sales to occur in approximately four years time at an increased rate until the assets are completely sold over asix-year period. We have assumed sale proceeds for the assets that are based on our estimates of the likely future sales price per acre–foot. These per unit saleprices are estimated based on the demand and supply fundamentals in the markets that these assets serve as well as an analysis of the replacement costs forthese assets. The discount rates we have used in our cash flow models start with a risk-free rate (based on the yield of a 10 year U.S. Treasury bond) and then arisk premium is added which is determined based on our assessment of the project specific risks. If we use different assumptions, if our management’s planschange, or if the conditions in future periods differ from our forecasts, our financial condition and results of operations could be materially impacted. We recorded an impairment charge in 2009. However, we determined that there were no impairment charges necessary in 2007 or 2008.2009 Event that Resulted in ImpairmentIn April 2009, we were awarded a much lesser amount of water from the Tule Desert groundwater basin by the Nevada State Engineer than weexpected. Accordingly, we compared the fair value of the water we were awarded to our carrying value in developing the water resource, and recorded thedifference as an impairment charge of $12.4 million in our statement of operations in the first quarter of 2009. See Tule Desert Groundwater Basin section inthe Water Resource and Water Storage segment of Item 7.At December 31, 2009, the present value of the forecast future cash flows for each of our water resource assets exceeds the water resource asset’s carryingvalue, so no further impairment charges were recognized in 2009.In our water resource and water storage business, we engage in project development. This can require cash outflows to drill wells to prove a “perennialyield”, or permanent supply, of water is available in situations where there is no guarantee that the project will ultimately be commercially viable. If wedetermine that it is probable that the project will be commercially viable, the costs of developing the asset are capitalized (recorded as an asset in our balancesheet, 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 realestate 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 (charged as an expense) in our income statement over time. 34 3.Accounting for investments and investments in unconsolidated affiliatesAt December 31, 2009, we owned equity securities with a carrying value of approximately $118.3 million, and an $8.9 million investment in anunconsolidated affiliate. Together, these investments account for approximately 19% of our total assets. The equity securities are primarily small-capitalization value stocks listed in the U.S., Switzerland, New Zealand, and Australia and the investment in spigit, an unconsolidated affiliate.Depending on the circumstances, and our judgment about the level of our involvement with the investee company, we apply one of two accountingpolicies: fair value accounting or equity accounting.All of our current available for sale investments are carried at fair value in our balance sheet, with unrealized gains or losses included in shareholders’equity. Until the investment is sold and a gain or loss is realized, the impacts that the investment will have on the statement of operations are:·dividends received are recorded as income; and·impairment charges for any unrealized losses deemed to be other-than-temporary.When we hold an investment where we have the ability to exercise significant influence over the company we have invested in, we would instead applythe equity method of accounting.Since October 2009, we have applied the equity method of accounting to our current 37% interest in spigit. Prior to October 2009, we held a majorityand controlling interest in spigit and we consolidated spigit in our group financial statements. After spigit ceased to be a consolidated subsidiary, we appliedthe equity method as we believe that we can exercise significant influence over the operating and financial policies of spigit. We apply the provisions of fairvalue accounting to all of our other debt and equity securities.During the period that we hold the investment, the equity method of accounting may have a different impact on our financial statements than fair valueaccounting would. The most significant difference between the two policies is that, under the equity method, we include our share of the unconsolidatedaffiliate’s earnings or losses in our statement of operations which also impacts the carrying value of the investment in the balance sheet. In addition, anydividends received from the affiliate would reduce the carrying value of the investment in our balance sheet. Under fair value accounting, the incomerecorded in the statement of operations is from dividend income, and other-than-temporary impairment charges, if applicable, would be reported as anexpense. For securities classified as available for sale, unrealized gains and losses, net of related deferred taxes, are included in comprehensive income or lossin the shareholders’ equity section of our balance sheet.The assessment of what constitutes the ability to exercise “significant influence” requires our management to make significant judgments about financialand operational control over the affiliate. 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 affiliate’s board of directors, transactions between us and the affiliate, the ability to obtain timely quarterlyfinancial information, and whether our management can influence the operating and financial policies of the affiliate company. When we conclude that wehave this kind of influence, we adopt the equity method and change all of our previously reported results to show the investment as if we had applied theequity method of accounting from the date of our first purchase.The use of fair value accounting or the equity method can result in significantly different carrying values at specific balance sheet dates, andcontributions to our statement of operations in any individual year during the course of the investment. The total impact of the investment on shareholders’equity over the entire life of the investment will be the same whichever method is adopted.When equity and debt securities where we apply fair value accounting are in an unrealized loss position, we regularly review whether the decline inmarket value is other-than-temporary. We also evaluate our equity method investment each year to determine if any other-than-temporary impairmentexists. In general, these reviews require management to consider several factors, including the extent and duration of the decline in market value of theinvestee, specific adverse conditions affecting the investee’s business and industry, the financial condition of the investee, and the long-term prospects of theinvestee. Accordingly, management has to make important assumptions regarding our intent and ability to hold the security, and our assessment of theoverall worth of the security. Risks and uncertainties in our methodology for reviewing unrealized losses for other-than-temporary declines include ourjudgments regarding the overall worth of the issuer and its long-term prospects, and our ability to obtain 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 in fact other-than-temporary, animpairment loss will be recorded. The other-than-temporary impairment charge on available for sale investments will have no impact on shareholders’ equityor book value per share, as the decline in market value will already have been recorded through shareholders’ equity. If we impair our equity methodinvestment, an impairment loss will impact shareholders’ equity. In both cases, there will be an impact on reported income before and after tax, and onearnings per share, due to recognition of the unrealized loss and related tax effects. When a charge for other-than-temporary impairment is recorded, our basisin the security is decreased. Consequently, if the market value of the security later recovers and we sell the security, a correspondingly greater gain will berecorded in the statement of operations.These accounting treatments for investments and investments in unconsolidated affiliates add volatility to our statements of operations.We recorded other-than-temporary impairment charges in our consolidated statements of operations of $18.8 million in 2009, $21.2 million in 2008, and$2 million in 2007 before income taxes. 35 4.Revenue recognitionSale of real estate and water assetsWe recognize revenue when:(a)there is a legally binding sale contract;(b)the profit is determinable (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 (we are not obliged to perform significant activities after the sale to earn the profit, meaning we havetransferred 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 fullyrecognize a sale are met, payments received from the buyer are recorded as a liability on our balance sheet, and no gain is recognized.Net investment income and realized gains or lossesWe recognize investment income from interest income and dividends as they are earned. Dividends are recorded as income on the date that the stocktrades “ex dividend” on the market where the stock is traded. Dividends with an “ex date” in one accounting period, but which are not paid until the nextaccounting period, are recorded as income on the “ex date”, in accordance with accrual accounting. In the case of bonds acquired at a cost other than parvalue, net investment income includes amortization of premium, or accretion of discount, on the level yield method.Realized investment gains and losses are included in revenues and can include any other-than-temporary impairment charges from declines in marketprices (as discussed above). The cost of investments sold is determined using an average cost basis, and sales are recorded on a trade date basis (the day onwhich the trade is executed).RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007Shareholders’ EquityAt December 31, 2009, PICO had shareholders’ equity of $582.6 million ($25.79 per share), compared to $477.7 million ($25.36 per share) at the end of2008, and $525.9 million ($27.92 per share) at the end of 2007. Book value per share increased by 1.7% in 2009 compared to a decrease of 9.2% in 2008 andan increase of 9.4% in 2007.As described in more detail below, the principal factors leading to the $104.9 million increase in shareholders’ equity during 2009 were:·the issuance of 3.75 million new common shares, at $27 per share, for net proceeds of $95.7 million;·an increase in net unrealized appreciation in available-for-sale investments after-tax of $14.3 million and an increase in foreign currency translation of$8.2 million; which was offset by;·a net loss of $18 million.The principal factors leading to the $48.2 million decrease in shareholders’ equity during 2008 were:·net income of $28.6 million; which was more than offset by;·a $70.9 million decrease in net unrealized appreciation in available-for-sale investments after-tax; and·a $10 million decrease in foreign currency translation, as foreign currencies where we hold investments depreciated relative to the U.S. dollar.Total Assets and LiabilitiesTotal assets at December 31, 2009, were $687.6 million, compared to $592.6 million at December 31, 2008. During 2009, total assets increased by $95million, principally due to the $95.7 million of net cash proceeds from the issuance of 3.75 million new common shares. During 2009, we purchased andcapitalized development costs of real estate and water assets amounting to $47.9 million. The acquisitions and expenditures were financed from the offeringproceeds and other existing cash resources prior to the offering in 2009 of approximately $42.6 million and from non–recourse debt financing of $5.3million.During 2009, total liabilities decreased by $7 million, from $114.9 million at December 31, 2008 to $107.9 million at December 31, 2009 as we paiddown total borrowings by a net $1.2 million and reserves for unpaid losses and loss adjustment reserves were reduced by $3.6 million due to claims paymentsand reserve development.Net Income (Loss)PICO reported a net loss of $18 million for 2009 ($0.86 per share), compared to net income of $28.6 million for 2008 ($1.52 per share), and a net loss of$1.3 million ($0.07 per share) in 2007. 36 2009The $18 million net loss consisted primarily of:·loss before taxes and noncontrolling interests of $41 million; and·a $19.3 million benefit for income taxes. The effective tax rate for 2009 is 47%, which is higher than our federal corporate income tax rate of 35%. Thisdifference is due to a number of different factors including the reversal of previously accrued interest and penalties on uncertain tax positions and therecognition of book and tax differences arising from the sale or deconsolidation of certain subsidiaries.2008The $28.6 million net income consisted primarily of:·income before taxes and noncontrolling interests of $56.4 million; and·a $28.5 million provision for income taxes. The effective tax rate for 2008 is 51%, which is higher than our federal corporate income tax rate of 35%,principally due to the recognition of $2.8 million of income taxes on previously untaxed earnings and profits of our wholly-owned subsidiary GlobalEquity AG, and state taxes of $2.8 million. Other items reflected in the effective income tax rate include interest expense and penalties on uncertain taxpositions, and operating losses with no associated tax benefit from subsidiaries that are excluded from the consolidated federal income tax return andunable to use the losses on their own separate tax return.2007The $1.3 million net loss consisted of:·income before taxes and noncontrolling interests of $2 million; and·a $3.5 million provision for income taxes. The effective tax rate for 2007 is 176%, which is higher than our federal corporate income tax rate of 35%,principally due to state tax charges and operating losses with no associated tax benefit from subsidiaries that are excluded from the consolidated federalincome tax return and unable to use the losses on their own separate tax return.Noncontrolling InterestOn January 1, 2009, we adopted the new accounting pronouncement over noncontrolling interests in our consolidated financial statements. We addedback net losses to our consolidated statement of operations of $3.7 million in 2009, $733,000 in 2008, and $252,000 in 2007 which represent the interests ofnoncontrolling shareholders in the losses of our consolidated, but less than wholly owned, subsidiaries.Our most significant subsidiary that is not wholly owned is Fish Springs Ranch, LLC (“Fish Springs”). Most of the losses attributable to thenoncontrolling interests in our subsidiaries relate to our 49% partner’s share of the financing cost charged to Fish Springs by our wholly-owned subsidiary,Vidler, on expenditures incurred on the development of our water resources at Fish Springs Ranch.Comprehensive IncomeIn accordance with U.S. GAAP, we report comprehensive income as well as net income from the Consolidated Statement of Operations. Comprehensiveincome measures changes in shareholders’ equity, and includes unrealized items which are not recorded in the Consolidated Statement of Operations, forexample, foreign currency translation and the change in investment gains and losses on available-for-sale securities.Over the past three years, we have recorded:·comprehensive income of $4.5 million in 2009, consisting of a net loss of $18 million which was more than offset by net unrealized appreciation ininvestments of $14.3 million and an increase in foreign currency translation of $8.2 million;·a comprehensive loss of $52.3 million in 2008, consisting of a $70.9 million decrease in net unrealized appreciation in investments and a $10 millionnet decrease in foreign currency translation, which were partially offset by the year’s net income of $28.6 million; and·comprehensive income of $17.2 million in 2007, primarily consisting of a $16.3 million increase in net unrealized appreciation in investments and a$2.3 million net increase in foreign currency translation and partially offset by a net loss of $1.3 million. 37 Operating Revenues Year Ended December 31, 2009 2008 2007 Water Resource and Water Storage Operations $4,334,000 $11,272,000 $7,938,000 Real Estate Operations 12,436,000 5,470,000 13,479,000 Corporate 220,000 45,766,000 4,903,000 Insurance Operations in Run Off (958,000) (2,156,000) 7,609,000 Total Revenues $16,032,000 $60,352,000 $33,929,000 In 2009, total revenues were $16 million, compared to $60.4 million in 2008, and $33.9 million in 2007.In 2009, revenues decreased by $44.4 million from 2008. This was primarily due to:·a decline of $45.5 million in revenues generated by the Corporate segment. This decline resulted largely from a gain of $46.1 million in the Corporatesegment that was recognized in 2008 on the sale of our interest in Jungfraubahn Holding AG that was not repeated in 2009. In 2009, the Corporatesegment recognized a gain of $8.2 million on the deconsolidation of our former subsidiary, spigit, as well as a realized loss of $5.5 million on the sale ofour Canadian subsidiary, Global Equity Corporation;·a decline of $6.9 million in revenues generated by the Water Resource and Water Storage segment. This decline is largely due to a sale of our waterstorage facility in California in 2008 that generated revenues of $8.7 million that was not repeated in 2009. Our largest transaction in 2009 was for thesale of water in California which generated revenues of $3.1 million; and·an increase of $7 million in revenues generated by the Real Estate segment. This was largely due to our California real estate operations generating$8.9 million of revenues in 2009 compared to zero in 2008.In 2008, revenues increased by $26.4 million from 2007. This was primarily due to:·a $40.9 million year over year increase in Corporate segment revenues, principally resulting from a $46.1 million gain from the sale of our interest inJungfraubahn Holding AG;·Water Resource and Water Storage segment revenues increased $3.3 million year over year, principally due to an $8.7 million gain on the sale of ourwater storage facility in California;·a decrease of $8 million in Real Estate Operations, principally due to $7.2 million lower sales at Nevada Land; and·a decrease of $9.8 million in Insurance Operations in Run Off, primarily due to a $9.5 million unfavorable change in net realized investment gains(losses).Costs and ExpensesTotal costs and expenses in 2009 were $57.1 million, compared to $4 million in 2008, and $31.9 million in 2007. The increase in expenses of $53.1million in 2009 compared to 2008 is largely due to the due to the following factors:·In 2009, expenses included a $12.4 million charge for the impairment of our water assets in the Tule Desert Groundwater Basin in LincolnCounty. There were no impairment charges in 2008;·In addition, deferred compensation expense increased by $15.7 million in 2009 compared to 2008 as the fair value of deferred compensation assetsincreased during 2009;·In 2008, expenses were reduced by $15 million in foreign exchange gains while in 2009 the net foreign exchange effect was an expense of $193,000giving rise to an overall increase of $15.2 million in expenses in 2009 compared to 2008; and·Furthermore, our cost of sales for real estate increased by $5.6 million in 2009 compared to 2008 due largely to the increase in our California real estatetransactions in 2009. In 2007, the largest expense item was a $7.3 million charge to settle all outstanding claims and legal actions between Fish SpringsRanch and the Pyramid Lake Paiute Tribe. See Item 3, Legal Proceedings – Fish Springs Ranch, LLC Litigation. 38 Income (Loss) Before Income Taxes and Noncontrolling Interests Year Ended December 31, 2009 2008 2007 Water Resource and Water Storage Operations $(16,850,000) $4,185,000 $(5,283,000) Real Estate Operations (1,156,000) 366,000 8,109,000 Corporate (21,271,000) 53,324,000 (10,591,000)Insurance Operations in Run Off (1,742,000) (1,486,000) 9,779,000 Income (loss) before income taxes and noncontrolling interests $(41,019,000) $56,389,000 $2,014,000 In 2009, PICO recorded a net loss before income taxes and noncontrolling interests of $41 million, compared to net income of $56.4 million in2008. The $97.4 million year-over-year decrease primarily resulted from:·a $74.6 million lower contribution from the Corporate segment. This principally resulted from: a decrease of $44.8 million in net realized gains(losses) primarily represented by the $46.1 million realized gain before taxes on the sale of Jungfraubahn Holding AG in 2008, a decrease in foreignexchange gains of $15.2 million and an increase in deferred compensation expense of $15.7 million;·a $21 million lower contribution from the Water Resource and Water Storage segment. This was primarily due to an increased impairment charge of$12.4 million and a decrease of $6.9 million in revenues as noted above; and·a $1.5 million lower contribution from the Real Estate segment. This was due principally to an increase in revenues of $7 million from increased realestate sale activity in 2009 offset by an increase in the cost of sales of $5.6 million and an increase in operating expenses of $2.9 million.In 2008, PICO generated income before income taxes and noncontrolling interests of $56.4 million, compared to $2 million in 2007. The $54.4 millionyear over year increase resulted from:·a $63.9 million higher contribution from the Corporate segment. This principally resulted from an increase of $43.1 million in realized gains (losses),primarily represented by the $46.1 million realized gain on the sale of Jungfraubahn Holding AG, and a $13 million increase in foreign exchange gains;·a $9.5 million higher result from Water Resource and Water Storage Operations, primarily resulting from the $8.7 million gain on the sale of our waterstorage facility in California; which were partially offset by·an $11.3 million lower contribution from Insurance Operations in Run Off, primarily due to the $9.5 million year over year unfavorable change inrealized gains (losses); and·$7.7 million lower income from Real Estate Operations, primarily due to a year over year decrease of $5.2 million in gross margin on the sale of land atNevada Land, and a $1.7 million increase in overhead, primarily attributable to building the UCP business.Water Resource and Water Storage Operations Year Ended December 31, 2009 2008 2007 Revenues: Sale of real estate and water assets $3,203,000 $9,757,000 $41,000 Gain on release of restrictions on real estate 3,466,000 Net investment income 408,000 969,000 4,418,000 Other 723,000 546,000 13,000 Segment total revenues 4,334,000 11,272,000 7,938,000 Expenses: Cost of real estate and water assets (226,000) (235,000) (8,000)Impairment of water assets (12,378,000) Depreciation and amortization (1,076,000) (1,099,000) (1,042,000)Overhead (2,949,000) (3,041,000) (1,839,000)Project expenses (4,555,000) (2,712,000) (10,332,000)Segment total expenses (21,184,000) (7,087,000) (13,221,000)Income (loss) before income taxes and noncontrolling interests $(16,850,000) $4,185,000 $(5,283,000) 39 Over the past few years, several large sales of real estate and water assets have generated the bulk of Vidler’s revenues. Since the date of closinggenerally determines the accounting period in which the sales revenue and cost of sales are recorded, Vidler’s reported revenues and income fluctuate fromperiod to period, depending on the dates when specific transactions close. Consequently, sales of real estate and water assets in any one year are notnecessarily indicative of likely revenues in future years. In the following, gross margin is defined as revenue less cost of sales.Vidler generated total revenues of $4.3 million in 2009 compared to $11.3 million in 2008 and $7.9 million in 2007.In 2009, the most significant sale of real estate and water assets was our entire inventory of water in California (10,252 acre-feet) for $300 per acre-foot. This transaction contributed $3.1 million to total segment revenues.In July 2008, Vidler completed the sale of its remaining interest in the Semitropic Water Banking and Exchange Program in California, which comprised30,000 acre–feet of storage capacity, in a transaction with the San Diego County Water Authority. The sale generated cash proceeds of $11.7 million, and werecorded a net gain of $8.7 million, included in revenues from the sale of real estate and water assets, in 2008.Net investment income has largely been generated from the temporary investment of cash proceeds raised from common stock offerings by PICO in June2009 and February 2007. In aggregate, the stock offerings raised net proceeds of $195.8 million, some of which has been allocated to Vidler for existing andnew projects. As a result of expenditures on new acquisitions of real estate and water assets and related infrastructure in the southwestern U.S. throughout2007, 2008 and 2009, Vidler’s funds available for investment have declined, leading to a lower level of net investment income in 2009 ($408,000) comparedto 2008 ($969,000) and 2007 ($4.4 million).In 2007, a transaction between Vidler and an energy supply company concerning certain properties in Maricopa County and La Paz County, Arizonagenerated revenues of $3.5 million and a pre-tax gain of $3.5 million. The energy supply company purchased approximately 2,428 acres of real estate andrelated water assets from Vidler in 2001. At the time of the sale, Vidler recorded certain legal restrictions on both the surface and underground use of theproperties. During the third quarter of 2007, Vidler released and terminated the restrictions on the use of the 2,428 acres in Maricopa County, in exchange for503 acres of unencumbered real estate and water assets in La Paz County, Arizona. Vidler established the fair value of the real estate and water assetsacquired in the transaction at approximately $3.5 million.Total segment expenses, including the cost of real estate and water assets sold, were $21.2 million in 2009, $7.1 million in 2008, and $13.2 million in2007. For 2009, this represents an increase in total expenses of $14.1 million and $8 million compared to 2008 and 2007, respectively. The following itemsrepresent the most significant changes in expenses in 2009, 2008 and 2007.As noted above in the Tule Desert Groundwater Basin section of Item 7, in 2009 we were only awarded 396 acre–feet of water rights by the Nevada StateEngineer instead of the expected amount of 7,240 acre–feet. Due to this ruling in 2009, Vidler has written down the carrying value of these water rights totheir estimated recoverable value and recorded a loss on impairment of $12.4 million in 2009. There were no impairment charges recorded in 2008 and 2007.Overhead expenses consist of costs which are not related to the development of specific water assets, such as salaries and benefits, rent, and auditfees. Overhead expenses were $2.9 million in 2009, $3 million in 2008, and $1.8 million in 2007. Most of the overhead change from 2007 to 2008 was dueto an increase in staff costs as Vidler expanded its operations.Project expenses consist of costs related to the development of existing water resources, such as maintenance and professional fees. Project expenses areexpensed as appropriate under GAAP, and could fluctuate from period to period depending on activity with Vidler’s various water resource projects. Costsrelated to the development of water resources which meet the criteria to be recorded as assets in our financial statements are capitalized as part of the cost ofthe asset, and charged to cost of sales in the period that revenue is recognized. 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 a future municipal water supply for the north valleys of the Reno, Nevada area; and·the operation of our farm properties in Idaho and maintenance of the associated water rights; and·the exploration and drilling costs of Vidler’s water resource development project in New Mexico.Project expenses were $4.6 million in 2009, $2.7 million in 2008, and $10.3 million in 2007. The $7.6 million and $5.7 million increase in projectexpenses in 2007 compared to 2008 and 2009 respectively is due primarily to a $7.3 million expense recorded in 2007 relating to a settlement of alloutstanding claims and legal actions with the Pyramid Lake Paiute Tribe. See "Item 3. Legal Proceedings - Fish Springs Ranch, LLC Litigation". 40 The $7.3 million settlement expense accrued in 2007 consisted of:·a cash payment of $500,000, which was made in the second quarter of 2007;·the transfer of approximately 6,214 acres of land, with a fair value of $500,000 and a book value of $139,000, to the Tribe in the second quarter of2007;·a payment of $3.1 million in January 2008; and·a payment of $3.6 million due on the later of January 8, 2009 or the date that an Act of Congress ratifies the settlement agreement. If the payment ismade after January 8, 2009, interest will accrue at LIBOR from January 8, 2009. To date, no payment has been made as Congress has not yet ratified thesettlement agreement.The increase in project expenses of $1.9 million in 2009 compared to 2008 is largely due to expenditures, such as drilling and permit costs, toappropriate new water rights in New Mexico. This is a new project that commenced in 2009 and no corresponding expenditures were incurred in 2008 or2007. In addition, we have incurred increased legal costs in 2009 compared to 2008 and 2007 due to our legal appeals in state and federal court with respectto our Tule Desert Groundwater applications with the State Engineer of Nevada.Given the declines in real estate markets throughout the U.S in 2008 and 2009, we have reviewed the carrying value of certain of our real estate assetsnoting that the projected cash flows on an undiscounted basis exceeded the carrying value of the asset. Accordingly, no impairment losses were recorded inthe periods presented.Real Estate Operations Year Ended December 31, 2009 2008 2007 Revenues: Sale of real estate – Nevada Land $818,000 $2,297,000 $9,455,000 Sale of real estate - UCP 8,915,000 Net investment income 960,000 2,203,000 3,140,000 Other 1,743,000 970,000 884,000 Segment total revenues 12,436,000 5,470,000 13,479,000 Expenses: Cost of real estate – Nevada Land (232,000) (673,000) (2,676,000)Cost of real estate - UCP (6,090,000) Operating expenses (7,270,000) (4,431,000) (2,694,000)Segment total expenses (13,592,000) (5,104,000) (5,370,000)Income before income taxes and noncontrolling interests $(1,156,000) $366,000 $8,109,000 Currently our businesses in the Real Estate Operations segment are largely conducted through Nevada Land and its operations in Nevada and UCP andits operations in California.It can take a year or more to complete a land sale transaction, and the timing of land sales in any one year is unpredictable. Historically the level of landsales has fluctuated from year to year. Accordingly, it should not be assumed that the level of sales as reported will be maintained in future years.In 2009, Nevada Land recorded revenues of $818,000 from the sale of 6,630 acres of land. In 2008, Nevada Land recorded revenues of $2.3 million fromthe sale of 17,097 acres of land and in 2007 Nevada Land recorded revenues of $9.5 million from the sale of 95,538 acres of land.Net investment income, arising from interest on financed sales as well as interest earned on liquid funds, contributed $960,000 in 2009, compared to $2.2million in 2008 and $3.1 million in 2007. Net investment income declined in 2009 compared to 2008 and 2007 as interest rates on liquid funds declined in2009 and the principal on notes receivable from financed sales declined due repayments made throughout 2009. Other income in 2009 amounted to $1.7 million compared to $970,000 in 2008 and $884,000 in 2007. In 2009, $1 million of this other income arosefrom the sale of geothermal rights at Nevada Land. There was no corresponding income in 2008 and 2007. The balance of the remaining other income in2009, 2008 and 2007 arises from land leases, principally for grazing and mining use, and royalties primarily from geothermal agreements at Nevada Land.In the following, gross margin is defined as revenue less cost of sales, and gross margin percentage is defined as gross margin divided by revenues.In 2009, the gross margin on the sale of land at Nevada Land was $586,000 compared to $1.6 million in 2008 and $6.8 million in 2007. The grossmargin percentage earned on the sale of this land was 71.6 % in 2009, compared to 70.7 % in 2008 and 71.7% in 2007.In 2009, UCP sold 115 finished lots (including one model home and six partially completed homes) from four separate developments in and around theFresno metropolitan area and the Central Coast area of California. These sales generated segment revenues in 2009 of $8.9 million and contributed a grossmargin of $2.8 million (31.7%). The properties sold had been held for between one and two years.Segment operating expenses were $7.3 million in 2009, compared to $4.4 million in 2008 and $2.7 million in 2007. The increase in operating expensesin 2009 of $2.9 million and $4.6 million compared to 2008 and 2007 respectively is due primarily to the start-up of real estate operations of UCP inCalifornia which commenced in early 2008. The increased operating expenses in 2009 compared to 2008 primarily result from increased salaries andbenefits expense as UCP adds more staff to its business as well as increased carrying costs such as interest expense, property taxes and maintenance costs dueto the increased number of developments that UCP now owns. As of December 31, 2009, UCP owned 468 finished lots and 3,289 potential lots in variousstages of entitlement compared to 389 finished lots and 1,501 potential lots in various stages of entitlement as of December 31, 2008. There were no UCPoperating expenses in 2007 as its operations did not commence until early 2008. In addition, in 2009, operating expenses included a charge of $807,000which represented the complete write–off of a note connected to a property held by us for potential alternative energy development. There were nocorresponding charges in 2008 or 2007. 41 The $1.5 million decrease in segment income in 2009 compared to 2008 is largely due to the following combination of factors:·a $1 million lower gross margin from the sale of land at Nevada Land in 2009 compared to 2008. The lower gross margin in 2009 is due to the effect ofselling a lower volume of land (resulting in lower revenues) at a similar gross margin percentage. The volume of land at Nevada Land sold decreased61% year over year;·a $1 million increase in geothermal lease sale income in 2009;·an increase in gross margin of $2.8 million from land sales by UCP in 2009;·a decrease in investment income of $1.2 million in 2009; and·an increase in operating expenses of $2.9 million in 2009.The $7.7 million decrease in segment income from 2007 to 2008 is due primarily to the $5.2 million lower gross margin from the sale of former railroadland in 2008 compared to 2007, as well as the increase in operating expense in 2008 of $1.7 million due to the start up of UCP’s operations. The lower grossmargin from the sale of former railroad land in 2008 is due to the effect of selling a lower volume of land (resulting in lower revenues) at a similar grossmargin percentage. The volume of former railroad land sold decreased 82% year over year and land sales revenues were 76% lower year over year, but thegross margin percentage on land sales remained similar with a gross margin percentage of 70.6 % in 2008 compared to 71.7% in 2007.Given the declines in real estate markets throughout the U.S in 2009 and 2008, we have reviewed the carrying value of certain of our real estate assetsnoting that the projected cash flows on an undiscounted basis exceeded the carrying value of the asset. Accordingly, no impairment losses were recorded inthe periods presented.Corporate Year Ended December 31, 2009 2008 2007 Revenues: Net realized gain (loss) on sale or impairment of investments $(3,106,000) $41,717,000 $(1,426,000) Net investment income 2,003,000 3,760,000 6,025,000 Other 1,323,000 289,000 304,000 Segment total revenues 220,000 45,766,000 4,903,000 Recoveries (Expenses): Stock-based compensation expense (4,511,000) (3,989,000) (4,468,000) Deferred compensation (expense) benefit (5,495,000) 10,184,000 548,000 Net foreign exchange gain (loss) (193,000) 15,020,000 1,994,000 Other (11,292,000) (13,657,000) (13,568,000) Segment total recoveries (expenses) (21,491,000) 7,558,000 (15,494,000)Income (loss) before income taxes and noncontrolling interests $(21,271,000) $53,324,000 $(10,591,000)`This segment consists of cash and fixed-income securities, a 37% interest in spigit, and other parent company assets and liabilities. Typically, we investa portion of our liquid funds in high quality fixed-income securities as a higher returning alternative to money market funds, which currently yield onlynegligible returns.This segment also contains the deferred compensation assets held in trust for the benefit of several PICO officers and non-employee directors, as well asthe corresponding and offsetting deferred compensation liabilities. The officers concerned have deferred the majority of incentive compensation earned todate, and the proceeds from exercising Stock Appreciation Rights (“SAR”) in 2005. The investment income and realized gains (losses) from the deferredcompensation assets are recorded as revenues in the year that they are earned, and a corresponding and offsetting cost (benefit) is recorded as deferredcompensation expense (recovery). The change in net unrealized appreciation (depreciation) in the deferred compensation assets each year is not recorded inrevenues, but it is charged to compensation expense (recovery). Consequently, due to the (expenses) or recoveries of expenses recorded due to unrealizedappreciation or (depreciation), in any one year deferred compensation can have an effect on segment income (loss) and income (loss) before taxes andnoncontrolling interests in the statement of operations. However, once the deferred compensation has been distributed, over the lifetime of the assets, therevenues and deferred compensation expense offset, and there is no net effect on segment income (loss) and consolidated income (loss) before taxes andnoncontrolling interests.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 ofsecurities.At December 31, 2009, substantially all of the publicly-traded equity securities held in this segment are stocks held in deferred compensation investmentportfolios.The expenses recorded in this segment primarily consist of parent company costs which are not allocated to our other segments, for example, rent for ourhead office, any stock-based compensation cost, and deferred compensation expense. In any one year, Corporate segment expenses can be increased, orreduced, by one or more individually significant expense or benefit items which occur irregularly (for example, the recording of stock-based compensationexpense when SAR are granted and vest), or fluctuate from period to period (for example, foreign currency expense or benefit). Consequently, typicallyCorporate segment expenses are not directly comparable from year to year. 42 Sale of JungfraubahnUntil April 2008, the largest asset in this segment was a 22.5% shareholding in Jungfraubahn, held by our Swiss subsidiary, Global Equity AG. On April22, 2008, Global Equity AG sold its interest in Jungfraubahn for net proceeds of CHF75.5 million, or approximately US$75.3 million. The sale ofJungfraubahn added $46.1 million to segment income, but the sale only had a minimal effect on shareholders’ equity and book value per share, as most of thegain and related tax effects had already been recorded in previous accounting periods as a net unrealized gain, in the Other Comprehensive Incomecomponent of Shareholders’ Equity. Most of the sales proceeds were immediately converted into U.S. dollars and later repatriated to the U.S. Segment ResultThe Corporate segment recorded revenues of $220,000 in 2009, $45.8 million in 2008, and $4.9 million in 2007. These totals include revenues earnedon deferred compensation assets of negative $4.1 million in 2009, negative $2.2 million in 2008, and $1.6 million in 2007. In 2009, a $3.1 million net realized loss on the sale or impairment of holdings was recorded. This primarily consisted of:·an $8.2 million non-cash gain on the deconsolidation of spigit; which was more than offset by;·a $5.5 million net realized loss on the sale of our interest in Global Equity Corporation (“Global Equity”); and·a $5.8 million net realized loss on the sale or impairment of other holdings, principally stocks and bonds held in deferred compensation accounts.During 2009, two small businesses ceased to be consolidated subsidiaries:·in October 2009, spigit received a $10 million equity investment from a global private equity firm. As a result of this transaction, the new investor took46% ownership of the outstanding voting shares of spigit, our majority ownership was reduced to a 37% equity interest, and spigit ceased to be aconsolidated subsidiary. The transaction placed a fair value of $9.2 million on our reduced interest in spigit. In accordance with GAAP, we recorded anon-cash gain of $8.2 million on the deconsolidation of spigit.·during the fourth quarter of 2009, we sold our interest in Global Equity Corporation. Global Equity is a Canadian corporation which holds interests inproperty syndicates and partnerships which were formed in Canada. Although we reported a $5.5 million net realized loss on the sale of Global Equity,the transaction actually increased PICO’s Shareholders’ Equity by $1.1 million, as the sale resulted in a $6.6 million accumulated foreign exchange loss(which was already reflected in Shareholders’ Equity) being transferred from the Other Comprehensive Income portion of Shareholders’ Equity to theStatement of Operations.The $5.8 million net realized loss on the sale or impairment of other holdings primarily consisted of:·$2.1 million in provisions for other-than-temporary impairment of various stocks held in deferred compensation accounts, which were in an unrealizedloss position for most of 2009. Based on the extent and the duration of the unrealized losses, we determined that the declines in market value wereother-than-temporary. Consequently, we recorded a charge to reduce our basis in the stocks from original cost, or previously written-down basis, totheir market value on the date that the provision was recorded; and·$1.5 million in net realized gains on the disposal of bonds, which was more than offset by $5.2 million in provisions for other-than-temporaryimpairment of the bonds of three issuers held in deferred compensation accounts. After evidence emerged that full collection of the principal andinterest on bonds issued by these issuers was doubtful, we recorded provisions for other-than-temporary impairment, by writing the bonds down fromamortized cost to market value on the date that the provision was recorded. The market prices of these bonds have subsequently recoveredsignificantly.In 2008, a $41.7 million net realized gain on the sale or impairment of holdings was recorded. This principally consisted of the $46.1 million realizedgain on the sale of Jungfraubahn, which was partially offset by a $4.3 million net realized loss on the sale or impairment of holdings in deferredcompensation accounts. The $4.3 million net realized loss on the sale or impairment of holdings in deferred compensation accounts primarily consisted ofprovisions for other-than-temporary impairment of $2.7 million for various stocks, and $1.5 million for two bonds. In 2007, a net realized loss on the sale or impairment of holdings of $1.4 million was recorded, which reflected activity in deferred compensationaccounts. This principally consisted of $1.8 million in provisions for other-than-temporary impairment of two securities, which exceeded approximately$360,000 in gains on the sale of various holdings. In this segment, investment income includes interest on cash and short-term fixed-income securities, and dividends from partially ownedbusinesses. Investment income totaled $2 million in 2009, $3.8 million in 2008, and $6 million in 2007. Investment income fluctuates depending on thelevel of cash and temporary investments, the level of interest rates, and the dividends paid by partially-owned businesses. In 2007, investment incomeincludes a dividend of $1.4 million received from Jungfraubahn. The Corporate segment recorded expenses of $21.5 million in 2009, compared to a $7.6 million recovery of expenses in 2008, and segment expenses of$15.5 million in 2007. In 2009, we recorded a $277,000 Equity Share of Investee’s Net Loss, being our equity share of spigit’s net loss for the period that we accounted forspigit under the equity method (October 13, 2009 through December 31, 2009). As a result of these factors, the Corporate segment generated a loss of $21.3 million in 2009, income of $53.3 million in 2008, and a loss of $10.6 millionin 2007.In 2009, segment expenses of $21.5 million primarily consisted of:·deferred compensation expense of $5.5 million (see “Deferred Compensation Expense” below);·stock-based compensation expense of $4.5 million (see “Stock-Based Compensation Expense” below);·operating expenses of $2.7 million from spigit from January 1, 2009 until the date that spigit was deconsolidated; and·other parent company net overhead of approximately $8.6 million, including management incentive compensation expense of $900,000. 43 In 2008, the $7.6 million segment recovery of expenses primarily consisted of:·foreign currency gains of $15 million. These consist of the $11.8 million gain on the conversion of Jungfraubahn sale proceeds into U.S. dollars andthe $1.4 million gain on the Swiss Franc tax receivable discussed above, as well as a $1.8 million benefit from the effect of appreciation in the SwissFranc on the inter-company loan over 2008 (see “Foreign Exchange Gain (Loss)” below). These gains were recorded as reductions in expenses;·a $10.2 million recovery of deferred compensation expense, which reflects a decrease in deferred compensation liabilities resulting from a decrease inthe value of the related deferred compensation assets; which more than offset the following;·stock-based compensation expense of $4 million;·spigit operating expenses of $2.6 million;·HyperFeed litigation expenses of $1.1 million; and·other parent company net overhead of approximately $9.9 million.In 2007, segment expenses of $15.5 million primarily consisted of:·stock-based compensation expense of $ 4.5 million;·HyperFeed litigation expenses of $1.7 million;·the accrual of $1.5 million in incentive compensation, being a discretionary bonus awarded to our President and Chief Executive Officer;·spigit operating expenses of $1.4; and·other parent company overhead of $9 million.Segment expenses were reduced by:·a $2 million foreign exchange gain resulting from the effect of appreciation in the Swiss Franc on the inter-company loan during 2007; and·a $548,000 recovery of deferred compensation expense, which reflects a decrease in deferred compensation liabilities resulting from a decrease in thevalue of the related deferred compensation assets.Foreign Exchange Gain (Loss) The $193,000 Foreign Exchange loss recorded in this segment in 2009 consists of three separate foreign exchange effects.Inter-Company Loan PICO European Holdings, LLC (“PICO European”) holds a portfolio of interests in Swiss public companies. PICO European is a wholly-owned subsidiaryof Physicians Insurance Company of Ohio, and forms part of the Insurance Operations in “Run Off” segment. Part of PICO European’s funding comes from a loan from PICO Holdings, Inc., which is denominated in Swiss Francs. Since the U.S. dollar is the functionalcurrency for our financial reporting, under U.S. GAAP, we are required to record a benefit or expense through the statement of operations to reflect fluctuationin the exchange rate between the Swiss Franc and the U.S. dollar affecting the amount of the loan. We record an offsetting amount within OtherComprehensive Income, and, as a result, there is no net impact on consolidated shareholders’ equity. During accounting periods when the U.S. dollar depreciates relative to the Swiss Franc – such as the years 2009, 2008, and 2007 – under U.S. GAAP we arerequired to record a benefit through the statement of operations to reflect the fact that PICO European owes PICO Holdings, Inc. more U.S. dollars. In PICOEuropean’s financial statements, an equivalent debit is included in the foreign currency translation component of shareholders’ equity (since it owes PICOHoldings, Inc. more dollars); however, this does not go through the consolidated statement of operations. Consequently, we recorded benefits of $1 millionin 2009, $1.8 million in 2008, and $2 million in 2007, which reduced expenses in this segment. Conversely, during accounting periods when the U.S. dollar appreciates relative to the Swiss Franc, opposite entries are made and we record an expensethrough the statement of operations to reflect the fact that PICO European owes PICO Holdings, Inc. fewer U.S. dollars. In addition, PICO European has loans denominated in Swiss Francs from a Swiss bank. See Note 3 of Notes to Consolidated Financial Statements,“Borrowings”. Any currency effect on the amount of the bank loans is offset by a corresponding currency effect on the related investment assets, and doesnot form part of the foreign exchange benefit or expense recorded thorough the statement of operations discussed above. 44 U. S. dollars held by Global Equity AG Following the sale of Jungfraubahn in April 2008, Global Equity AG has held U.S. dollars for periods of time. There is a second foreign exchange item dueto the effect of fluctuation in the Swiss Franc-U.S. dollar exchange rate on the U.S. dollars held by Global Equity AG. Since the Swiss Franc is Global Equity AG’s functional currency for financial reporting, Global Equity AG is required to record a benefit or expensethrough the statement of operations to reflect fluctuation in the exchange rate between the Swiss Franc and the U.S. dollar affecting the U.S. dollars itholds. However, when Global Equity AG is consolidated into our group financial statements, we record an offsetting amount within Other ComprehensiveIncome, and, as a result, there is no net impact on consolidated shareholders’ equity. During accounting periods when the U.S. dollar appreciates relative to the Swiss Franc -- such as the last eight months of 2008 -- Global Equity AG recordsincome through the statement of operations to reflect the increase in value of the U.S. dollars it holds, when expressed in Swiss Francs. Conversely, during accounting periods when the U.S. dollar depreciates relative to the Swiss Franc -- such as 2009 -- Global Equity AG records an expensethrough the statement of operations to reflect the decrease in value of the U.S. dollars it holds, expressed in Swiss Francs. In 2009, a $60,000 exchange rate expense increased segment expenses. In 2008, we recorded an exchange rate benefit of $11.8 million, which reduced segment expenses. This arose because after we converted the Jungfraubahnsale proceeds in April, 2008 the U.S. dollar strengthened relative to the Swiss Franc during the remainder of the year.Swiss Franc Tax Receivable During 2008 and 2009, there was a third foreign exchange item due to the effect of fluctuation in the Swiss Franc-U.S. dollar exchange rate on a receivablefrom the Swiss tax authorities, which was denominated in Swiss Francs. Since the date that the Swiss Francs became receivable, the Swiss Franc hadappreciated relative to the U.S. dollar, increasing the receivable when expressed in U.S. dollars, being PICO Holdings’ functional currency for financialreporting. In 2008, we recorded a foreign exchange benefit of $1.4 million, being the difference between the receivable translated into U.S. dollars at the exchangerate on December 31, 2008, and the date that the Swiss Francs became receivable. In 2009, we recorded a foreign exchange expense of $1.1 million, being the difference between the receivable translated into U.S. dollars at the exchangerate on December 31, 2008, and the exchange rate when we converted the Swiss Francs received into U.S. dollars in April, 2009.Deferred Compensation Expense Deferred compensation can affect the statement of operations in individual accounting periods as investment income and realized gains (losses) on the saleor impairment of deferred compensation assets are recorded as revenues in this segment, and the change in deferred compensation payable, which fluctuatesin line with the market value of the deferred compensation assets, is recorded as an expense or recovery. During accounting periods when the market value of the deferred compensation payable increases, such as 2009, an expense is recorded in the Corporatesegment. Conversely, during accounting periods when the market value of the deferred compensation payable decreases, such as 2007 and 2008, a recoveryof deferred compensation expense is recorded, which reduces segment expenses. Consequently, we recorded deferred compensation expense of $5.5 million in 2009, compared to recoveries of deferred compensation expense of $10.2million in 2008, and $548,000 in 2007. It should be noted that once the deferred compensation has been distributed, over the lifetime of the assets, the revenues and deferred compensationexpense offset, and there is no net effect on segment income (loss) and consolidated income (loss) before taxes and noncontrolling interests. In other words,the participants bear the risk of the investment return on the deferred compensation assets, not us, similar to a defined contribution plan. 45 Stock-Based Compensation Expense The Stock-Based Compensation Expense recognized in this segment principally consists of costs related to SAR and Restricted Stock Units (“RSU”).SAR On December 8, 2005, our shareholders approved the PICO Holdings, Inc. 2005 Long-Term Incentive Plan (the “2005 Plan”). Under the 2005 Plan, whenthe holder exercises stock-settled SAR, the holder is issued new PICO common shares with a market value equal to the net in-the-money amount of theSAR. This is calculated as the total in-the-money spread amount, less applicable withholding taxes, divided by the last sale price of our common stock onthe NASDAQ Global Market on the date of exercise. On December 12, 2005, under the 2005 Plan, the Compensation Committee granted 2,185,965 stock-based SAR, with an exercise price of $33.76, tovarious officers, employees, and non-employee directors. Under new accounting provisions which became effective in 2006, since all of the stock-based SARgranted in 2005 were fully vested, no expense was recorded in 2007, 2008 and 2009 related to the SAR granted in 2005. During 2007, under the 2005 Plan, 486,470 stock-settled SAR were granted to four officers with an exercise price of $42.71, one-third vested immediatelyand the balance vested equally over two years, and 172,939 stock-settled SAR were granted to one officer with an exercise price of $44.69, one-third of whichvest equally over three years. The exercise price of the SAR was the last sale price for PICO common stock on the NASDAQ Global Market on the day theSAR were granted. The SAR expense for the 2007 grants was calculated based on the estimated fair value of the vested SAR as of the award date. In 2009, SAR expense of$2.8 million was recorded related to the SAR issued in 2007 which vested during 2009. In 2008, SAR expense of $4 million was recorded related to the SARissued in 2007 which vested during 2008. In 2007, SAR expense of $4.5 million was recorded related to the SAR issued in 2007 which vested during2007. See Note 1 of Notes To Consolidated Financial Statements, "Nature of Operations and Significant Accounting Policies”. At December 31, 2009, the exercise price of all granted SAR were higher than the closing PICO stock price ($32.73). There were no SAR grants in 2008 and 2009.RSU On March 3, 2009, under the 2005 Plan, the Compensation Committee granted 300,000 RSU to five of the Company’s officers. The RSU awards vest onMarch 3, 2012. If the officers are still employed by us on March 3, 2012, the officers will be issued one new share of PICO’s common stock for each RSU, lessthat number of shares of common stock equal in value to applicable withholding taxes. Compensation expense for the RSU grant is being recorded over the three-year vesting period. The RSU expense is calculated based on the estimated fairvalue of the RSU as of the award date, being $5.9 million, based on the closing sale price of PICO common stock on March 3, 2009 ($19.75). RSU expense of $1.6 million was recorded in 2009. We expect to record the remainder of the $4.3 million in compensation expense related to the RSUgranted in 2009 over the period until the RSU vest in March, 2012. Insurance Operations in “Run Off” Year Ended December 31, 2009 2008 2007 Revenues: Net investment income $2,568,000 $3,214,000 $3,457,000 Net realized gain (loss) on sale or impairment of investments (3,650,000) (5,480,000) 3,965,000 Other 124,000 110,000 187,000 Segment total revenues (charges) (958,000) (2,156,000) 7,609,000 Recoveries (Expenses): Underwriting (expenses)/recoveries (784,000) 670,000 2,170,000 Income (loss) before income taxes and noncontrolling interests $(1,742,000) $(1,486,000) $9,779,000 Revenues and results in this segment vary considerably from year to year and are not necessarily comparable from year to year, primarily due tofluctuations in net realized investment gains, and favorable or unfavorable development in our loss reserves. 46 Segment total revenues were negative $958,000 in 2009, negative $2.2 million in 2008, and $7.6 million in 2007. Net investment income was $2.6 million in 2009, compared to $3.2 million in 2008, and $3.5 million in 2007. Net investment income varies from year toyear, depending on the amount of cash and fixed-income securities in the portfolio, the prevailing level of interest rates, and the level of dividends paid onthe common stocks in the portfolio. Net realized gains (losses) on the sale or impairment of investments were a $3.7 million loss in 2009, a $5.5 million loss in 2008, and a $4 million gain in2007. The $3.7 million net realized investment loss recorded in 2009 principally consisted of $7.8 million in gains on the sale of various portfolio holdings,which were more than offset by provisions of $11.5 million for other-than-temporary impairment of various stocks. The stocks were in an unrealized lossposition for most of 2009. Based on the extent and the duration of the unrealized losses, we determined that the declines in market value are other-than-temporary. Consequently, we recorded a charge to reduce our basis in the stocks from original cost, or previously written-down basis, to their market value atDecember 31, 2009. The $5.5 million net realized investment loss recorded in 2008 principally consisted of $11.5 million in gains on the sale of various portfolio holdings,which were more than offset by provisions of $16 million for other-than-temporary impairment of various stocks and $1 million for permanent impairment ofa bond. The stocks were in an unrealized loss position for most of 2008. Based on the extent and the duration of the unrealized losses, we determined thatthe declines in market value are other-than-temporary, and recorded a charge to reduce our basis in the stocks from original cost, or previously written-downbasis, to their market value at December 31, 2008. The $4 million net realized investment gain recorded in 2007 consisted of $4.2 million in gains on the sale of various portfolio holdings, which werepartially offset by a $210,000 provision for other-than-temporary impairment of one stock. In 2009, the “run off” insurance companies recorded total segment operating expenses of $784,000 as regular loss and loss adjustment expense andoperating expenses exceeded the aggregate benefit of $1.3 million from favorable reserve development. See the Physicians and Citation sections of the“Company Summary, Recent Developments, and Future Outlook” portion of Item 7. In the preceding two years, in aggregate, the “run off” insurance companies recorded benefits from favorable reserve development, which exceeded regularloss and loss adjustment expense and operating expenses, resulting in total segment recoveries of $670,000 in 2008, and $2.2 million in 2007.LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007Cash Flow Our assets primarily consist of our operating subsidiaries, cash and cash equivalents, and holdings in publicly-traded securities in our insurance companiesand deferred compensation investment portfolios. On a consolidated basis, we had $154.5 million in cash and cash equivalents at December 31, 2009,compared to $96.3 million at December 31, 2008. In addition to cash and cash equivalents at December 31, 2009, the consolidated group held fixed-incomesecurities with a market value of $50.6 million, and equities with a market value of $127.2 million. The cash and cash equivalents, fixed-income securities, and publicly-traded equities held in each segment at December 31, 2009 are:·the Water Resource and Water Storage Operations segment holds cash of $1.1 million;·the Real Estate Operations segment holds cash of $44.7 million;·the Insurance in “Run Off” segment holds cash of $9.6 million, fixed-income securities with a market value of $15.3 million, and equities with a marketvalue of $110 million; and·the Corporate segment holds cash of $92.3 million and fixed-income securities with a market value of $20.7 million. In addition, cash of $6.9 million,fixed-income securities with a market value of $14.6 million, and equity securities with a market value of $8.1 million are held in deferredcompensation Rabbi Trusts within the Corporate segment, which will be used to pay the related and offsetting deferred compensation liabilities. Our liquid funds are principally held in the Federated Government Obligations Money Market Fund (ticker: GOIXX). Due to the nature of the underlyingdebt securities which this money market fund holds, we do not anticipate any loss of principal. Our cash flow position fluctuates depending on the requirements of our operating subsidiaries for capital, and activity in our insurance companyinvestment portfolios. Our primary sources of funds include cash balances, cash flow from operations, the sale of holdings, and the proceeds of borrowings orofferings of equity and debt. 47 In broad terms, the cash flow profile of our principal operating subsidiaries is:·As Vidler’s water assets are monetized, Vidler should generate free cash flow as receipts from the sale of real estate and water assets will have overtakenmaintenance capital expenditure, development costs, financing costs, and operating expenses;·Although UCP made some initial sales of lots during 2009, we are still acquiring finished and partially-developed residential lots in select Californiamarkets. During 2009, we acquired a defaulted note for $22.6 million. We foreclosed on the note as planned and, as a result, acquired 1,400 entitledresidential units on a 244-acre property (East Garrison) in Monterey County, California. Over the next two years, we plan to expend approximately $20million to complete the first phase of the development and to prepare other parts of the property for potential future development;·Nevada Land is actively selling real estate which has reached its highest and best use. Nevada Land’s principal sources of cash flow are the proceeds ofcash real estate sales and collections of principal and interest on sales contracts where Nevada Land has provided vendor financing. These receipts andother revenues exceed Nevada Land’s operating and development costs, so Nevada Land is generating positive cash flow; and·Investment income more than covers the operating expenses of the “run off” insurance companies, Physicians and Citation. The funds to pay claimscome from the maturity of fixed-income securities, the realization of fixed-income investments and stocks held in their investment portfolios, andrecoveries from reinsurance companies. The Departments of Insurance in Ohio and California prescribe minimum levels of capital and surplus for insurance companies, set guidelines for insurancecompany investments, and restrict the amount of profits which can be distributed as dividends. At December 31, 2009, the insurance companies had statutorysurplus of $70.9 million, of which $5.1 million could be distributed without regulatory approval. Typically, our insurance subsidiaries structure the maturity of fixed-income securities to match the projected pattern of claims payments. When interestrates are at very low levels, 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 $58.2 million net increase in cash and cash equivalents in 2009, compared to a $25.5million net increase in 2008, and a $65.8 million net decrease in 2007.Cash Flows From Operating Activities During 2009, operating activities used cash of $28.2 million, compared to cash used of $100.9 million in 2008, and $56.6 million in 2007. The most significant cash inflows from operating activities were:·in 2009, tax refunds of $26.5 million, and the cash proceeds of real estate and water assets sales by Vidler, UCP and Nevada Land, as well as paymentson notes related to sales in previous periods. In addition, cash flow was provided by investment income from the Insurance Operations in Run Offsegment and from liquid funds held in the other segments;·in 2008, cash land sales by Nevada Land and repayments on notes related to previous land sales, as well as investment income from the InsuranceOperations in Run-Off segment and from liquid funds held in the other segments; and·in 2007, sale of real estate by Nevada Land. In all three years, the principal operating cash outflows relate to the acquisition and development of real estate and water assets for future use, which isclassified as an operating cash flow since we are in the business of acquiring and developing real estate and water assets with a view to possible re-sale at anappropriate time in the future, claims payments by Physicians and Citation, overhead expenses, and taxes. In 2009, we paid a net $42.6 million to acquire and develop real estate and water assets for future development. In addition, we assumed $5.3 million ofdebt related to properties we acquired. This includes the purchase of the East Garrison note discussed above for $22.6 million. In addition, $2.1 million waspaid to two officers through a distribution of deferred compensation assets. In 2008, we used cash of $53.6 million to acquire and develop real estate and water assets, and in addition we assumed $14.4 million of debt related toproperties we acquired. We also paid $43.6 million in taxes, and we paid $11.5 million (and distributed $4.5 million in securities) to an officer who retiredand withdrew his deferred compensation assets. 48 Cash Flows From Investing Activities During 2009, investing activities used cash of $1.5 million, compared to $132.9 million of cash provided in 2008, and $111.9 million of cash used in2007. The most significant cash inflows and outflows from investing activities were:·in 2009, an $18.1 million net increase in fixed-income securities. We received cash of $4.3 million from the maturity or call of bonds, and usedapproximately $22.4 million to buy new bonds. This principally reflects the temporary investment of $19.1 million of the parent company’s liquidfunds in high quality fixed-income securities, and activity in our insurance company and deferred compensation investment portfolios. We alsogenerated $26 million from the sale of stocks, and used $9 million to buy new stocks in the insurance company investment portfolios and deferredcompensation accounts;·in 2008, the sale of equity securities provided net cash of $71.9 million, principally due to the sale of Jungfraubahn for approximately $75.3million. Excluding Jungfraubahn, we bought $26.3 million of equity securities, and sold $22.9 million, representing activity in our insurance anddeferred compensation portfolios. Proceeds from the maturity and call of bonds provided cash of $73.9 million, which primarily represented thematurity of temporary investments made with a portion of the proceeds of the February 2007 stock offering, and we used $9.3 million to buy newbonds. In addition, we received cash proceeds of $11.7 million from the sale of Semitropic; and·in 2007, a $46.6 million net increase in fixed-income securities, which represents the temporary investment of a portion of the proceeds of the February2007 stock offering. The principal use of investing cash was $48.1 million in outlays for property and equipment, primarily related to the Fish Springspipeline project. In addition, $16.2 million net was invested in stocks, primarily in the insurance company portfolios.Cash Flows From Financing Activities During 2009, financing activities provided cash of $84.8 million, compared to cash provided of $8.3 million in 2008 and $104.6 million in 2007. The most significant cash inflows and outflows from financing activities were:·in 2009, the sale of 3,750,000 newly-issued shares of PICO common stock at $27 per share in June 2009, for net cash proceeds of $95.7 million (afterdeducting approximately $5.5 million in underwriting commission and offering expenses). We also borrowed CHF5.8 million ($5.4 million) under ourSwiss Franc current account credit facility to purchase securities, and paid down the facility by CHF14.3 million ($13.4 million) with proceeds from thesale of securities. Also Vidler repaid $2.9 million in notes on ranch properties during 2009;·in 2008, an $8.2 million increase in Swiss Franc borrowings from our bank in Switzerland. This represented borrowings of CHF4.3 million (US$4million) on our current account facility, and the proceeds of an additional fixed advance of CHF4.5 million (US$4.2 million); and·in 2007, the sale of 2.8 million newly-issued shares of PICO common stock at $37 per share, for net cash proceeds of $100.1 million. In addition, therewas a $4.4 million tax benefit related to the exercise of SAR. We now have total borrowing capacity in Switzerland of CHF25 million (US$24 million), consisting of CHF20 million (US$19.3 million) of fixedadvances due for repayment in 2011 and 2014, and a CHF5 million (US$4.7 million) current account credit facility. At December 31, 2009, only the CHF20million (US$19.3 million) of fixed advances were outstanding. As a result of selling various stocks, we repaid the entire amount borrowed on the currentaccount credit facility during 2009. During 2009, PICO European extended two maturing fixed advances for an additional five years:·a fixed advance of CHF3 million maturing in February 2014, at a 3.81% interest rate; and·a fixed advance of CHF12.5 million maturing in May 2014, at a 3.72% interest rate. Our only other borrowings consist of $17.7 million in non-recourse notes payable on properties owned by UCP, and $4.2 million in non-recourse notespayable on two of Vidler’s ranch properties. We believe that our cash and cash equivalent balances, short-term investments, and cash flows are adequate to satisfy cash requirements for at least the next12 months. In addition, we could issue debt or equity securities under our shelf registration statement discussed below. Although we cannot accurately predict the effect of inflation on our operations, we do not believe that inflation has had a material impact on our netrevenues or results of operations, or is likely to in the foreseeable future. 49 Universal Shelf Registration Statement In November 2007, we filed a universal shelf registration statement with the SEC for the periodic offering and sale of up to $400 million of debt securities,common stock, and warrants, or any combination thereof, in one or more offerings, over a period of three years. The SEC declared the registration statementeffective on December 3, 2007. At the time of any such offering, we will establish the terms, including the pricing, and describe how the proceeds from the sale of any such securities willbe used. During 2009, we completed public offerings of PICO common stock of 3,055,556 shares on June 10, 2009, and 694,444 shares on June 15, 2009, each at aprice of $27 per share, under the universal shelf registration statement. The aggregate gross proceeds were approximately $101.2 million. While we have no current plans for the offer or sale of any such securities, the remaining capacity on the universal shelf registration statement provides uswith flexibility and control over the timing and size of any potential financing in response to both market and strategic opportunities.Commitments and Supplementary Disclosures1.At December 31, 2009:·We had no “off balance sheet” financing arrangements.·We have not provided any debt guarantees.·We have no commitments to provide additional collateral for financing arrangements. Our subsidiary PICO European Holdings, LLC has Swiss Francborrowings which partially finance some of their investments in European equities. The equities provide collateral for the borrowings. Aggregate Contractual Obligations: The following table provides a summary of our contractual cash obligations and other commitments and contingencies as of December 31, 2009. Payments Due by Period Contractual Obligations Less than1 year 1-3 years 3-5 years More than5 years Total Borrowings $2,958,186 $20,830,822 $17,431,506 $41,220,514 Interest on borrowings (1) 1,968,797 2,820,826 256,753 5,046,376 Operating leases 729,381 267,225 1,502 998,108 Expected claim payouts 3,879,244 8,654,734 4,477,920 $7,162,965 24,174,863 Other borrowings/obligations (primarily commitmentsfor water purchases for the Recharge Site and the amounts dueunder the Tribe settlement) 9,233,038 9,233,038 Total $18,768,646 $32,573,607 $22,167,681 $7,162,965 $80,672,899 In addition to the amounts shown in the table above, at December 31, 2009, we had recorded liabilities and potential interest of $3.4 million forunrecognized tax benefits in accordance with the guidance on uncertain tax positions. As of December 31, 2009, we believe that it is reasonably possiblethat $2.6 million of this amount may be decreased within the next 12 months as a result of statutes closing.(1) Represent interest costs on borrowings at December 31, 2009, for the terms of the debt. Interest cost beyond year one is not recorded in the accompanyingconsolidated financial statements. 2.Recent Accounting Pronouncements In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that is a revision to existing accounting guidancerelated to the transfers and servicing of financial assets and extinguishments of liabilities, and will require more information about transfers of financial assetsand where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purposeentity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This guidance is effective for interim and annualperiods beginning after November 15, 2009. The adoption of the new guidance is not expected to have a material impact on our consolidated financialstatements. 50 In June 2009, the FASB issued new accounting guidance that amends existing accounting guidance related to variable interest entities. The newguidance: (a) requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financialinterest in a variable interest entity, identifying the primary beneficiary of a variable interest entity; (b) requires ongoing reassessment of whether anenterprise is the primary beneficiary of a variable interest entity, rather than only when specific events occur; (c) eliminates the quantitative approachpreviously required for determining the primary beneficiary of a variable interest entity; (d) amends certain guidance for determining whether an entity is avariable interest entity; (e) adds an additional reconsideration event when changes in facts and circumstances pertinent to a variable interest entity occur; (f)eliminates the exception for troubled debt restructuring regarding variable interest entity reconsideration; and (g) requires advanced disclosures that willprovide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The new guidance iseffective for the first annual reporting period that begins after November 15, 2009. Earlier adoption is prohibited. The adoption of the new guidance is notexpected to have a material impact on our consolidated financial statements.REGULATORY INSURANCE DISCLOSURESLiabilities for Unpaid Loss and Loss Adjustment Expenses Loss reserves are estimates of what an insurer expects to pay claimants (“loss expense”), as well as legal, investigative, and claims administrative costs(“loss adjustment expenses”). Our insurance subsidiaries are required to maintain reserves for the payment of estimated losses and loss adjustment expensesfor both reported claims, and claims where the event giving rise to a claim has allegedly occurred but the claim has not been reported to us yet (“IBNR”). Theultimate liabilities may be materially higher or lower than our current reserve estimates. Liabilities for unpaid loss and loss adjustment expenses areestimated based on actual and industry experience, and assumptions and projections as to claims frequency, claims severity, inflationary trends, andsettlement payments. These estimates may vary from the eventual outcome. The inherent uncertainty in estimating reserves is particularly extreme for lines of business in which both reported and paid losses develop over anextended period of time. Several or more years may pass between the occurrence of the event giving rise to a medical professional liability insurance orcasualty loss or workers’ compensation claim, the reporting of the claim, and the final payment of the claim, if any. Reserves for reported claims are established on a case-by-case basis (“case reserves”). Loss and loss adjustment expense reserves for IBNR claims areestimated 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 theadequacy of loss reserves. We review and adjust our IBNR claims reserves regularly. Physicians and Citation had direct reserves (liabilities for unpaid losses and loss adjustment expenses before reinsurance reserves, which reduce our netunpaid losses and loss adjustment expenses) of $24.2 million at December 31, 2009, $27.8 million at December 31, 2008, and $32.4 million at December 31,2007. The payment of claims reduced direct reserves (before reinsurance) by $2 million in 2009, $1.4 million in 2008, and $4.8 million in 2007. Although the reserves of each insurance company are certified annually by independent actuaries as required by state law, significant fluctuations inreserve levels can occur, based upon a number of variables used in actuarial projections of ultimate incurred losses and loss adjustmentexpenses. Adjustments to prior year loss reserves, principally due to favorable reserve development, reduced liabilities for unpaid loss and loss adjustmentexpenses by $1.3 million in 2009, $2.5 million in 2008, and $3.6 million in 2007. See Note 10 of Notes to PICO’s Consolidated Financial Statements,“Reserves for Unpaid Loss and Loss Adjustment Expenses” and the Insurance Operations in “Run Off” portion of Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operation” for additional information regarding reserve changes.ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT The following table presents the development of balance sheet liabilities for 1999 through 2009 for medical professional liability insurance, and allproperty and casualty and workers’ compensation lines of business. The table excludes reserves for other lines of business that Physicians ceased writing in1989, which are immaterial. Until 2000, Physicians reduced its medical professional liability insurance reserves by a discount to reflect the time value of money. The “Net liability asoriginally estimated” line shows the estimated liability for unpaid losses and loss adjustment expenses recorded at the balance sheet date, before discountingin years prior to 2000, for each indicated year. The “Gross liability as originally estimated” line represents the estimated amounts of losses and lossadjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, on an undiscounted basis, including IBNR losses. 51 The decrease or increase recorded each year includes all changes in amounts for prior periods made in the current year. For example, the amount ofreserve deficiency or redundancy related to a loss settled in 2002, but incurred in 1999, will be included in the decrease or increase amount for 1999, 2000,and 2001. Conditions and trends that have led to changes in the liability in the past may not necessarily occur in the future. For example, in several differentyears Physicians “commuted” (canceled) reinsurance contracts, and reversed the effect of the reinsurance contracts in its financial statements. Thissignificantly increased the estimate of net reserves for prior years by reducing the amount of loss and loss adjustment expense reserves recoverable fromreinsurance for those years. Accordingly, future increases or decreases cannot necessarily be extrapolated from this table.The development table above differs from the development tables displayed in the Annual Statements of Physicians and Citation filed with theDepartments of Insurance in their home states. The development tables in the Annual Statements (Schedule P, Part-2) are prepared on the statutory basis ofaccounting, and exclude unallocated loss adjustment expenses that are included in the development table above, which is prepared on a GAAP basis. 52 Loss Reserve Experience The inherent uncertainty in estimating loss reserves is greater for some lines of insurance than others, and depends on the length of the reporting “tail”associated with the particular insurance product (the period of time between the occurrence of the event giving rise to a claim, and the reporting of the claimto the insurer), historical development in claims, the historical information available during the estimation process, the impact of changing regulations andlegal precedents on open claims, and reinsurance, among other things. Since medical professional liability insurance, commercial casualty, and workers’compensation claims may not be fully paid for many years, estimating reserves for claims in these lines of business can be more uncertain than estimatingreserves in other lines of insurance. As a result, precise reserve estimates cannot be made for several years after the accident year for which reserves areinitially established. Our insurance subsidiaries have established reserves based on actuarial estimates that we believe are adequate to meet the ultimate cost of losses arisingfrom claims. However, it has been, and will continue to be, necessary for our insurance subsidiaries to review and make appropriate adjustments to reservesfor claims and expenses for settling claims. Our insurance companies have recorded income from favorable reserve development in 2009, 2008, and 2007;however, if our reserves prove to be inadequate in future, our insurance companies would have to adjust their reserves and record a charge against income,which could have an adverse effect on our 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 2009, 2008, and 2007 is set out in Note 11 of Notesto Consolidated Financial Statements, “Reserves for Unpaid Loss and Loss Adjustment Expenses”.Reinsurance All of our insurance subsidiaries seek to minimize the losses which could arise from significant individual claims and other events that cause unfavorableunderwriting results, by reinsuring certain levels of risk with other insurance carriers. Various reinsurance treaties are in place to limit our exposurelevels. See Note 9 of Notes to Consolidated Financial Statements, “Reinsurance”. In the event that reinsurers are unable to meet their obligations under thereinsurance agreements, our insurance subsidiaries are contingently liable in respect of the amounts covered by the reinsurance contracts.Medical Professional Liability Insurance through Physicians Insurance Company of Ohio On August 28, 1995, Physicians sold its professional liability insurance business and related liability insurance business for physicians and other healthcare providers to Mutual Assurance, Inc. (“Mutual Assurance”). In July 1995, Physicians and Mutual Assurance entered into a reinsurance treaty under which Mutual Assurance agreed to assume all risks attaching afterJuly 15, 1995, under medical professional liability insurance policies issued or renewed by Physicians for physicians, surgeons, nurses, and other health careproviders; dental practitioner professional liability insurance policies including corporate and professional premises liability coverage; and relatedcommercial general liability insurance policies issued by Physicians, net of applicable reinsurance. During the last two and a half accident years that Physicians wrote business (July 1, 1993 to December 31, 1995), Physicians ceded reinsurance contracts(transferred claims risk) to Odyssey America Reinsurance Corporation, a subsidiary of Odyssey Re Holdings Corp. (rated “A” by A. M. Best Company), andProAssurance Indemnity Company, Inc. (formerly The Medical Assurance Company, Inc.), a wholly-owned subsidiary of ProAssurance Corporation (rated“A” by A. M. Best Company). Physicians retained all risks up to $200,000 per occurrence. All risks above $200,000, up to policy limits of $5 million, wereautomatically transferred to the reinsurers, subject to the specific terms and conditions of the various reinsurance agreements. Should any reinsurer be unableto meet its contractual obligations, Physicians remains contingently liable to policyholders for the amounts covered by the reinsurance contracts. Prior to July 1, 1993, Physicians ceded a portion of the risk it wrote, under numerous reinsurance treaties at various retentions and risk limits. Property and Casualty Insurance through Citation Insurance Company For the property business, Citation has reinsurance providing coverage of $6 million, for amounts in excess of $150,000 per claim. For the casualtybusiness, excluding umbrella coverage, Citation has reinsurance providing coverage of $6 million, for amounts in excess of $150,000 per claim. Umbrellacoverage was reinsured for $2 million, for amounts in excess of $100,000 per claim. The catastrophe treaties for 1998 and subsequent years providedcoverage of 95% of $14 million, for amounts in excess of $1 million per claim. The reinsurance was placed with various reinsurers. Citation’s last property and casualty insurance policies expired in December 2001, so it does not require reinsurance from 2002 on for these lines ofbusiness. If the reinsurers are “not admitted” for regulatory purposes, Citation has to maintain sufficient collateral with approved financial institutions to secureceded paid losses and outstanding reserves. 53 See Note 9 of Notes to Consolidated Financial Statements, “Reinsurance” for reinsurance recoverable concentration for all property and casualty lines ofbusiness as of December 31, 2009. In the event that reinsurers are unable to meet their obligations under the reinsurance agreements, Citation remainscontingently liable for the amounts covered by the reinsurance contracts. Workers’ Compensation Insurance through Citation Insurance Company Claims and Liabilities Related to the Insolvency of Fremont Indemnity Company In 1997, Citation ceded its California workers’ compensation insurance liabilities to a subsidiary company, Citation National Insurance Company(“CNIC”), and sold CNIC to Fremont on or about June 30, 1997. The transaction was approved by the California Department of Insurance (the “CaliforniaDepartment”), and all administrative services relating to these liabilities were transferred to Fremont. On or about December 31, 1997, with CaliforniaDepartment approval, CNIC merged with and into Fremont. Accordingly, from January 1, 1998, Fremont was both the reinsurer and the administrator of theCalifornia workers’ compensation business ceded by Citation. From June 30, 1997 (the date on which Citation ceded its workers’ compensation insurance liabilities) through July 2, 2003 (the date on which Fremontwas placed in liquidation), Fremont maintained a workers’ compensation insurance securities deposit with the California Department for the benefit ofclaimants under workers’ compensation insurance policies issued, or assumed, by Fremont. After Fremont posted the portion of the total deposit related toCitation’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 Conservationover Fremont, and appointed the California Department of Insurance Commissioner (the “Commissioner”) as the conservator. Under this order, theCommissioner was authorized to take possession of all of Fremont’s assets, including its rights in the deposit for Citation’s insureds. On July 2, 2003, theLiquidation Court entered an Order appointing the Commissioner as the liquidator of Fremont’s estate. Since Fremont had been placed in liquidation, Citation concluded that it was no longer entitled to take a reinsurance credit for the deposit for Citation’sinsureds under the statutory basis of accounting. Consequently, Citation reversed the $7.5 million reinsurance recoverable from Fremont in its June 30, 2003financial statements prepared on both the statutory and U.S. GAAP basis of accounting. In June 2004, Citation filed litigation against the California Department in the Superior Court of California to recover its workers’ compensation trustdeposits held by Fremont prior to Fremont’s liquidation. In September 2004, the Superior Court ruled against Citation’s action. As a result, Citation did notreceive any distribution from the California Insurance Guarantee Association, or Fremont, and did not receive any credit for the deposit held by Fremont forCitation’s insureds. Given the potential cost and the apparent limited prospect of obtaining relief, Citation decided not to appeal. Reinsurance Agreements on Workers’ Compensation Insurance Liabilities In addition to the reinsurance agreements with Fremont described above, Citation has reinsurance coverage for its workers’ compensation insuranceliabilities for the policy years 1986 to 1997 with General Reinsurance Corporation (rated “A++” by A. M. Best Company), a wholly-owned subsidiary ofBerkshire Hathaway, Inc. Citation has retained the first $150,000 of risk on policies issued in 1986 and 1987; $200,000 for policy years 1988 and 1989; and$250,000 for policy years 1990 through to 1997. For policy years 1983 to 1985, partial reinsurance exists and is administered through Guy Carpenter Company as broker. These treaties are for losses inexcess of $75,000 for 1983 and 1984, and $100,000 for 1985. The subscriptions on these treaties are for 30%, 35%, and 52.5% for the respective treaty years. See Note 9 of Notes to Consolidated Financial Statements, “Reinsurance”, for the reinsurance recoverable concentration for Citation’s workers’compensation line of business as of December 31, 2009. In the event that reinsurers are unable to meet their obligations under the reinsurance agreements,Citation remains contingently liable for the amounts covered by the reinsurance contracts. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our balance sheets include a significant amount of assets and liabilities whose fair value are subject to market risk. Market risk is the risk of loss arisingfrom adverse changes in market interest rates or prices. We currently have interest rate risk as it relates to fixed maturity securities, equity price risk as itrelates to marketable equity securities, and foreign currency risk as it relates to investments denominated in foreign currencies. Generally, our borrowings areshort to medium term in nature and therefore approximate fair value. At December 31, 2009, we had $50.6 million of fixed maturity securities, $118.3million of marketable equity securities that were subject to market risk, of which $58 million were denominated in foreign currencies, primarily SwissFrancs. Our investment strategy is to manage the duration of the portfolio relative to the duration of the liabilities while managing interest rate risk. We use two models to report the sensitivity of our assets and liabilities subject to the above risks. For fixed maturity securities we use duration modeling tocalculate changes in fair value. The model calculates the price of a fixed maturity assuming a theoretical 100 basis point increase in interest rates andcompares that to the actual quoted price of the security. At December 31, 2009, the model calculated a loss in fair value of $2.6 million. For our marketableequity securities, we use a hypothetical 20% decrease in the fair value to analyze the sensitivity of our market risk assets and liabilities. For investmentsdenominated in foreign currencies, we use a hypothetical 20% decrease in the local currency of that investment. The actual results may differ from thehypothetical results assumed in this disclosure due to possible actions we may take to mitigate adverse changes in fair value and because the fair value ofsecurities may be affected by credit concerns of the issuer, prepayment rates, liquidity, and other general market conditions. The hypothetical 20% decreasein fair value of our marketable equity securities would produce a loss in fair value of $23.7 million that would impact the unrealized appreciation inshareholders’ equity, before the related tax effect. The hypothetical 20% decrease in the local currency of our foreign denominated investments wouldproduce a loss of $7.7 million that would impact the foreign currency translation in shareholders’ equity. 54 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009 and the Report of theRegistered Independent Public Accounting Firm is included in this report as listed in the index.SELECTED QUARTERLY FINANCIAL DATASummarized unaudited quarterly financial data (in thousands, except share and per share amounts) for 2009 and 2008 are shown below. Inmanagement’s opinion, the interim financial statements from which the following data has been derived contain all adjustments necessary for a fairpresentation of results for such interim periods and are of a normal recurring nature. Three Months Ended March 31, June 30, September 30, December 31, 2009 2009 2009 2009 Net investment income and net realized gain (loss) $(11,175) $3,102 $ (569) $7,825 Sale of real estate and water assets $310 $ 4,958 $ 536 $ 7,132 Total revenues (charges) $ (10,325) $ 9,000 $ 965 $ 16,393 Gross profit $ 230 $ 3,538 $ 229 $ 2,391 Net income (loss) attributable to PICO Holdings, Inc. $ (18,506) $ (2,358) $ (1,824) $ 4,653 Net income (loss) per common share: Basic $(0.98) $(0.12) $(0.08) $0.21 Diluted $(0.98) $(0.12) $(0.08) $0.20 Three Months Ended March 31, June 30, September 30, December 31, 2008 2008 2008 2008 Net investment income and net realized gain (loss) $3,499 $52,684 $ 286 $ (10,095) Sale of real estate and water assets $ 494 $ 811 $ 430 $ 1,602 Total revenues (charges) $ 4,477 $ 53,923 $ 9,832 $ (7,881)Gross profit $ 345 $ 639 $ 285 $ 1,161 Net income (loss) attributable to PICO Holdings, Inc. $ (1,647) $ 28,243 $ 533 $ 1,502 Net income (loss) per common share: Basic $(0.09) $1.50 $0.03 $0. 08 Diluted $(0.09) $1.49 $0.02 $0. 08 55 PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2009 AND 2008AND FOR EACH OF THETHREE YEARS IN THE PERIODENDED DECEMBER 31, 2009INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm57Consolidated Balance Sheets as of December 31, 2009 and 200858Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 200759Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2009, 2008, and 200760Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 200761Notes to Consolidated Financial Statements65-86 56 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PICO Holdings, Inc.PICO Holdings, Inc.La Jolla, CA We have audited the accompanying consolidated balance sheets of PICO Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and2008, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three yearsin the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility isto express an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of PICO Holdings, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2009, in conformity with accounting principles generally accepted in the United States of America.As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of accounting guidance for uncertain tax positions nowcodified as Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes, effective January 1, 2007.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal controlover financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report, dated February 26, 2010, expressed an unqualified opinion on the Company'sinternal control over financial reporting./s/ DELOITTE & TOUCHE LLP San Diego, CAFebruary 26, 2010 57 PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember 31, 2009 and 2008ASSETS 2009 2008 Available for Sale Investments Fixed maturities $50,575,026 $29,058,562 Equity securities 118,326,742 120,358,461 Total available for sale investments 168,901,768 149,417,023 Investment in unconsolidated affiliate 8,884,229 Total investments 177,785,997 149,417,023 Cash and cash equivalents 154,544,814 96,316,018 Notes and other receivables, net 15,411,728 24,352,367 Reinsurance receivables 15,012,695 16,373,132 Real estate and water assets 299,833,320 271,714,300 Property and equipment, net 1,328,136 1,512,370 Net deferred income taxes 11,165,246 25,274,232 Federal, foreign and state income taxes 8,879,341 4,519,920 Other assets 3,655,346 3,154,434 Total assets $687,616,623 $592,633,796 LIABILITIES AND SHAREHOLDERS' EQUITY Reserves for unpaid losses and loss adjustment expenses $24,174,863 $27,773,320 Deferred compensation 31,144,366 27,744,528 Other liabilities 11,381,689 16,988,040 Borrowings 41,220,514 42,381,718 Total liabilities 107,921,432 114,887,606 Commitments and Contingencies (Notes 10 - 15) SHAREHOLDERS' EQUITY Common stock, $.001 par value; authorized 100,000,000; 27,020,473 issued and 22,595,678 outstanding at December31, 2009 and 23,265,187 issued and 18,840,392 outstanding at December 31, 2008 27,020 23,265 Additional paid-in capital 539,791,922 439,381,715 Accumulated other comprehensive income (loss) 21,094,385 (1,423,863)Retained earnings 100,001,801 118,036,716 Less treasury stock, at cost (common shares: 4,424,795 in 2009 and 2008) (78,271,643) (78,271,643)Total PICO Holdings Inc. shareholders’ equity 582,643,485 477,746,190 Noncontrolling interest in subsidiaries (2,948,294) Total shareholders’ equity 579,695,191 477,746,190 Total liabilities and shareholders' equity $687,616,623 $592,633,796 The accompanying notes are an integral part of the consolidated financial statements. 58 PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFor the years ended December 31, 2009, 2008 and 2007 2009 2008 2007 Revenues: Sale of real estate and water assets $12,935,660 $3,337,460 $9,496,156 Net investment income 5,938,571 10,145,430 17,039,800 Net realized gain (loss) on sale and impairment of investments (6,755,637) 36,227,458 2,747,958 Gain on sale of water storage 8,716,082 Other 3,913,399 1,925,110 4,644,834 Total revenues 16,031,993 60,351,540 33,928,748 Costs and expenses: Operating and other costs 36,929,488 4,250,234 31,725,964 Impairment loss on real estate and water assets 12,378,000 Cost of real estate and water assets sold 6,547,671 908,186 2,684,183 Loss and loss adjustment recovery (1,344,669) (2,456,386) (3,601,091) Depreciation and amortization 1,289,819 1,260,471 1,106,027 Interest 1,250,946 Total costs and expenses 57,051,255 3,962,505 31,915,083 Income (loss) before income taxes and noncontrolling interest (41,019,262) 56,389,035 2,013,665 Provision (benefit) for federal, foreign and state income taxes (19,260,625) 28,491,016 3,535,699 Net income (loss) (21,758,637) 27,898,019 (1,522,034) Net loss attributable to noncontrolling interest 3,723,722 732,954 252,307 Net income (loss) attributable to PICO Holdings, Inc. $(18,034,915) $28,630,973 $(1,269,727) Net income (loss) per common share – basic: $(0.86) $1.52 $(0.07) Weighted average shares outstanding 20,926,769 18,835,002 18,321,449 Net income (loss) per common share – diluted: $(0.86) $1.52 $(0.07) Weighted average shares outstanding 20,926,769 18,861,853 18,321,449 The accompanying notes are an integral part of the consolidated financial statements. 59 PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)For the year ended December 31, 2007 Total ComprehensiveIncomeAttributable toPICOHoldings, Inc. RetainedEarnings AccumulatedOtherComprehensiveIncome (Loss) CommonStock Paid-inCapital TreasuryStock NoncontrollingInterestBeginning balance,January 1, 2007$405,227,299 $90,968,815 $60,950,679 $20,307 $331,582,308 $(78,294,810) Impact of adoptingaccountingfor uncertain tax positions (293,345) (293,345) Common stock offering,net of $4.3 million ofexpenses 100,141,935 2,823 100,139,112 Changes in ownership ofnoncontrolling interest 413,110 $413,110Stock-based compensationexpense 4,468,334 4,468,334 Exercise of stock-settledstock appreciation rights,net of excesstax benefits of $4.4 million (972,078) 129 (972,207) Disposition of treasurystock from deferredcompensation plans 29,392 17,811 11,581 Comprehensive income: Net loss (1,522,034)$(1, 269,727) (1,269,727) (252,307)Other comprehensiveincome net of tax: Unrealized gains onsecurities, net ofdeferred tax of$7.7 million andreclassificationadjustment of $2.5million 16,263,071 16,263,071 16,263,071 Foreign currencytranslation 2,255,688 2,255,688 2,255,688 Other comprehensiveincome 18,518,759 18,518,759 Comprehensive income 16,996,725 $17,249,032 Ending balance,December 31, 2007$526,011,372 $89,405,743 $79,469,438 $23,259 $435,235,358 $(78,283,229) $160,803The accompanying notes are an integral part of the consolidated financial statements 60 PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)For the year ended December 31, 2008 Total ComprehensiveLossAttributable toPICO Holdings,Inc. RetainedEarningsAccumulatedOtherComprehensiveIncome (Loss) CommonStockPaid-inCapital TreasuryStock NoncontrollingInterest Beginning balance,December 31, 2007$526,011,372 $89,405,743$79,469,438 $23,259$435,235,358 $(78,283,229)$ 160,803 Changes in ownership ofnoncontrolling interest 572,151 572,151 Issuance of restrictedPICO stock 157,206 4 157,202 Stock-based compensationexpense 3,988,596 3,988,596 Exercise of stock-settledstock appreciation rights, net of excess taxbenefits of $62,000 (16,227) 2 (16,229) Sale of treasury stock fromdeferred compensationplans 28,374 16,788 11,586 Comprehensive Loss: Net income 27,898,019 $28,630,973 28,630,973 (732,954)Other comprehensiveloss net of tax: Unrealized losses onsecurities, net ofdeferred tax of $42.5million andreclassificationadjustment of $54.2million (70,889,523) (70,889,523) (70,889,523) Foreign currencytranslation (10,003,778) (10,003,778) (10,003,778) Other Comprehensive loss (80,893,301) (80,893,301) Comprehensive loss (52,995,282) $(52,262,328) Ending balance,December 31, 2008$477,746,190 $118,036,716$(1,423,863) $23,265$439,381,715 $(78,271,643) The accompanying notes are an integral part of the consolidated financial statements 61 PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)For the year ended December 31, 2009 Total ComprehensiveIncomeAttributable toPICO Holdings,Inc. RetainedEarnings AccumulatedOtherComprehensiveIncome (Loss) CommonStock Paid-inCapital TreasuryStock NoncontrollingInterest Beginning balance,December 31, 2008 $477,746,190 $118,036,716 $(1,423,863) $23,265 $439,381,715 $(78,271,643) Changes in ownership ofnoncontrolling Interest 947,120 171,692 $775,428 Common stock offering, netof $5.4 million of expenses 95,731,035 3,750 95,727,285 Restricted stock awards 83,765 5 83,760 Stock based compensationexpense 4,427,470 4,427,470 Comprehensive income: Net loss (21,758,637) $(18,034,915) (18,034,915) (3,723,722)Othercomprehensive income,net of tax: Unrealized gains onsecurities,net of deferred incometax of $10.5 million andreclassificationadjustment of$5.1 million 14,285,601 14,285,601 14,285,601 Foreign currencytranslation 8,232,647 8,232,647 8,232,647 Othercomprehensive Income 22,518,248 22,518,248 Comprehensive income 759,611 $4,483,333 Ending balance,December 31, 2009 $579,695,191 $100,001,801 $21,094,385 $27,020 $539,791,922 $(78,271,643) $(2,948,294) The accompanying notes are an integral part of the consolidated financial statements 62 PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31, 2009, 2008 and 2007 2009 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(21,758,637) $27,898,019 $(1,522,034)Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision (benefit) for deferred income taxes 1,465,598 2,676,025 (6,592,013)Depreciation and amortization 1,725,522 1,354,352 1,634,698 Bad debt expense 806,721 Stock based compensation expense (including restricted stock awards) 4,511,235 4,156,960 4,468,334 (Gain) loss on sale or impairment of investments 6,755,637 (36,227,458) (2,747,958)Impairment losses on intangible assets 12,378,000 Gain on sale of water storage (8,716,082) Gain on non-monetary exchange (3,466,402)Changes in assets and liabilities, net of effects of acquisitions: Notes and other receivables 10,704,535 (7,233,633) 25,633 Real estate and water assets (35,776,657) (53,571,725) (30,596,350)Federal, foreign and state income taxes (4,267,863) (7,667,886) 3,923,893 Other assets (684,812) 937,460 (1,073,719)Unpaid losses and loss adjustment expenses (3,598,457) (4,602,698) (8,707,283)Deferred compensation 3,399,838 (20,300,776) 2,770,191 Other liabilities (5,666,126) (1,209,451) (10,881,075)Excess tax benefits from stock based payment arrangements (62,153) (4,426,789)All other operating activities 1,783,465 1,703,066 572,974 Cash used in operating activities (28,222,001) (100,865,980) (56,617,900) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of available for sale investments: Fixed maturities 2,743,176 10,714,552 Equity securities 26,015,429 98,190,571 10,410,021 Proceeds from maturity of available for sale investments 1,531,200 63,192,968 83,603,560 Purchases of available for sale investments: Fixed maturities (22,337,363) (9,294,830) (130,220,057)Equity securities (8,980,439) (26,322,941) (26,628,779)Real estate and water asset capital expenditure (242,076) (14,634,706) (48,141,339)Proceeds on the sale of water storage 11,749,900 All other investing activities (207,813) (680,264) (959,092)Cash provided by (used in) investing activities (1,477,886) 132,915,250 (111,935,686) 63 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of expenses 95,731,035 100,141,935 Proceeds from bank and other borrowings 5,417,365 8,240,668 Repayment of bank and other borrowings (16,303,277) Excess tax benefits from stock based payment arrangements 62,153 4,426,789 Sale of PICO stock (from deferred compensation plans) 28,374 29,392 Cash provided by financing activities 84,845,123 8,331,195 104,598,116 Effect of exchange rate changes on cash 3,083,560 (14,855,472) (1,875,083)Net increase (decrease) in cash and cash equivalents 58,228,796 25,524,993 (65,830,553)Cash and cash equivalents, beginning of year 96,316,018 70,791,025 136,621,578 Cash and cash equivalents, end of year $154,544,814 $96,316,018 $70,791,025 Supplemental disclosure of cash flow information: Cash paid during the year for: (Refund) payment of federal, foreign and state income taxes $(26,536,621) $43,585,667 $6,229,674 Interest paid, net of amounts capitalized $967,390 Non-cash investing and financing activities: Distribution of debt and equity securities to settle deferred compensation liability $4,500,930 Construction in progress costs incurred but not paid $457,372 $7,905,643 Mortgage incurred to purchase real estate $5,255,100 $14,398,255 $5,180,000 Accrued withholding taxes recorded on additional paid in capital related to stock appreciationrights exercised $78,380 $5,398,767 The accompanying notes are an integral part of the consolidated financial statements 64 PICO HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS_______________1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Organization and Operations:PICO Holdings, Inc., together with its subsidiaries (collectively, “PICO” or the “Company”), is a diversified holding company.Currently PICO’s major activities include:·Owning and developing water resources and water storage operations in the southwestern United States;·Owning and developing real estate primarily in Nevada and California;·Acquiring and financing businesses; and·“Running off” insurance loss reserves. The following are the Company’s significant operating subsidiaries as of December 31, 2009. All subsidiaries are wholly-owned except where indicated: Vidler Water Company, Inc. (“Vidler”). Vidler is a Nevada corporation. Vidler’s business involves identifying end users, namely water utilities,municipalities or developers, in the Southwestern United States, who require water, and then locating a source and supplying the demand, either by utilizingthe company’s own assets or securing other sources of supply. These assets comprise water resources in the states of Colorado, Arizona, Idaho and Nevada,and a water storage facility in Arizona. Nevada Land and Resource Company, LLC (“Nevada Land”). Nevada Land is a Nevada limited liability company. Nevada Land’s business includesselling and developing real estate, water and geothermal rights, and leasing property. UCP, LLC (“UCP”). UCP is a Delaware limited liability company which owns and develops real estate in and around the Central Valley and Central Coastof California. UCP’s business is to acquire and develop residential lots, primarily in California. Citation Insurance Company (“Citation”). Citation is a California-domiciled insurance company licensed to write commercial property and casualtyinsurance 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 paying off claimsarising from historical business and selling investments when funds are needed to pay such 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 anagreement with Mutual Assurance, Inc. pursuant to which Physicians sold its recurring MPL insurance business to Mutual Assurance, Inc. The company is in“run off.” This means that it is paying off claims arising from historical business and selling investments when funds are needed to pay such claims.Investment in Unconsolidated Affiliate: 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,but not control, over the investee are accounted for under the equity method of accounting. Accordingly, the Company’s share of the income or loss of theaffiliate is included in PICO’s consolidated results. Currently, the Company owns 37% of the voting stock in spigit, Inc. (“spigit”), a privately held companythat develops social productivity software. In the fourth quarter of 2009, the Company’s ownership in spigit declined from 74% to 37% due to the sale ofnewly-issued shares by spigit to unrelated third parties, and as a result, spigit was deconsolidated and is reported using the equity method of accounting fromthe transaction date forward. See Note 2 for additional information.Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned and controlledsubsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.GAAP”). Intercompany balances and transactions have been eliminated in consolidation. Noncontrolling Interests: As of January 1, 2009, the Company reports the results of its consolidated subsidiaries that are less than wholly-owned as noncontrolling interest in theaccompanying consolidated financial statements. This new guidance clarifies the accounting for noncontrolling interests and establishes accounting andreporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. In the statement of operations, theincome or loss attributable to the noncontrolling interest is reported separately and the accumulated income or loss attributable to the noncontrollinginterest, along with any changes in ownership of the subsidiary, is reported within shareholders’ equity. There were no noncontrolling interests in theCompany’s consolidated balance sheet at December 31, 2008 to be reclassified to the shareholders’ equity section as of January 1, 2009. However, for 2009,the Company recorded noncontrolling interests in losses of its less than wholly owned subsidiaries of $3.7 million. Most of these noncontrolling interestswere previously reduced to zero and consequently under previous accounting guidance such additional losses were not recorded. The Company adjusted thenoncontrolling interest of $733,000 and $252,000 for 2008 and 2007, respectively, for the retrospective adoption of the new guidance. For the year endedDecember 31, 2009, the Company’s primary subsidiary included within noncontrolling interest is a 49% interest in Fish Springs Ranch, LLC. For the yearsended December 31, 2008 and 2007, the primary subsidiary that was reported as noncontrolling interest was spigit. 65 Use of Estimates in Preparation of Financial Statements: The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues andexpenses for each reporting period. The significant estimates made in the preparation of the Company’s consolidated financial statements relate to theassessment of other-than-temporary impairments, application of the equity method of accounting, unpaid losses and loss adjustment expenses, reinsurancereceivables, notes and other receivables, real estate and water assets, deferred income taxes, stock-based compensation and contingent liabilities. Whilemanagement believes that the carrying value of such assets and liabilities are appropriate as of December 31, 2009 and December 31, 2008, it is reasonablypossible 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 recognition on the sale of real estate and water assets conforms with accounting literature related to the sale of real estate, and is recognized in fullwhen (a) there is a legally binding sale contract; (b) the profit is determinable (the collectability of the sales price is reasonably assured, or any amount thatwill not be collectible can be estimated); (c) the earnings process is virtually complete (the Company is not obligated to perform significant activities afterthe 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 isadequate 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 theconditions to recognize full profit are met.Other Revenues: Included in other revenues for the year ended December 31, 2009, is the sale of geothermal rights of $1 million. Included in other revenues for the yearended December 31, 2007 is a $3.5 million gain recorded as a result of a non-monetary exchange transaction whereby the Company released and terminatedlegal use restrictions on real estate previously sold, in exchange for real estate and water assets.Cost of Real Estate and Water Assets: Cost of real estate and water assets sold includes direct costs of acquisition of the asset, less any impairment charges previously recorded against the asset,any development costs incurred to get the asset ready for use and any capitalized interest costs incurred during the development period.Operating and Other Costs: The Company reported a foreign currency loss of $200,000 in 2009 and gains of $15 million and $2 million in 2008 and 2007, respectively. In each year,the total gain included a foreign currency transaction gain resulting from a Swiss Franc denominated loan from PICO Holdings to one of itssubsidiaries. During 2008 only, the Company also reported an $11.8 million foreign currency gain within one of its wholly owned foreign subsidiaries inSwitzerland that had invested in U.S. currency. Such gain was the result of the appreciation of the U.S. dollar compared to the Swiss Franc. Available for Sale Investments: The Company’s investment portfolio at December 31, 2009 and 2008 is comprised of investments with fixed maturities, including U.S. government bonds,government sponsored enterprise bonds, and domestic and foreign corporate bonds and marketable equity securities. The Company classifies allinvestments, notwithstanding investments in unconsolidated affiliates, as available for sale. Such investments are reported at fair value, with unrealizedgains and losses, net of tax effects, recorded in accumulated other comprehensive income. Other-than-temporary impairment: All of the Company’s investments are subject to a periodic impairment review. The Company recognizes an impairment charge when a decline in the fairvalue of its investments below the cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary on anequity security included the length of time and extent to which the investments fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell thesecurity and whether or not the Company will be required to sell the security before the recovery of its amortized cost. If a security is impaired and continuesto decline in value, additional impairment charges are recorded in the period of the decline if deemed other-than-temporary. Subsequent recoveries of suchsecurities are reported as an unrealized gain and part of other comprehensive results in future periods. Any subsequent gains on impaired securities arerecognized only when sold. Impairment charges of $18.8 million, $21.2 million, and $2 million are included in realized losses for the years ended December31, 2009, 2008 and 2007, respectively, related to various securities where the unrealized losses had been deemed other-than-temporary. 66 Net investment income includes amortization of premium and accretion of discount on the level yield method relating to bonds acquired at other than parvalue. Realized investment gains and losses are included in revenues. The cost of any equity security sold is determined using an average cost basis and forbonds, specific identification. Sales and purchases of investments are recorded on the trade date. The Company has subsidiaries and acquires equity securities in the U.S. and abroad. Approximately $58 million and $64.5 million of the Company’savailable for sale investments at December 31, 2009, and 2008, respectively, were invested internationally. The Company’s most significant foreigncurrency 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: Real estate and water assets include the cost of water rights, water storage, real estate, including raw land and real estate being developed and any realestate improvements. Additional costs to develop or otherwise get real estate and water assets ready for their intended use are capitalized. These coststypically include legal fees, engineering, consulting, direct cost of drilling or construction and any interest cost capitalized on qualifying assets during thedevelopment period. The Company expenses all maintenance and repair costs on real estate and water assets. The types of costs capitalized are consistentacross periods presented; however, real estate development costs have increased during 2009 due to increased development activities. Water rights consist ofvarious water interests acquired or developed independently or in conjunction with the acquisition of real estate. When applicable, water rights and realestate consist of an allocation of the original purchase price based on their relative fair values and include costs directly related to the acquisition. Waterstorage typically includes the cost of the real estate and direct construction costs to build the site. Real estate being developed includes the original purchaseprice of the land and any development costs incurred to get the asset ready for its intended use. Amortization of real estate improvements is computed on thestraight-line method over the estimated useful lives of the improvements ranging from 5 to 15 years. All real estate and tangible water assets are classified as held and used until management commits to a plan to sell the assets, the asset is available for salein its present condition, is being actively marketed for sale, and it is probable that the asset will be sold within the next year. At December 31, 2009 and2008, the Company had real estate of $4.8 million and zero, respectively, classified as held for sale.Intangible Assets: The Company’s intangible assets consist primarily of certain water rights and the exclusive rights to use infrastructure to convey water that the Companypreviously constructed prior to dedicating the infrastructure to various municipalities that have indefinite useful lives and are therefore notamortized. Intangible assets with indefinite lives are tested for impairment at least annually, or more frequently if events or changes in circumstances indicatethat the asset may be impaired, by comparing the fair value of the assets to their carrying amounts. If the carrying value of an indefinite-lived intangible assetexceeds its fair value, an impairment loss is recognized in an amount equal to the excess. The Company completes its annual review in the fourth quarter ofeach year by calculating the fair value of the intangible assets using discounted cash flow models. During 2009, the Company recorded impairment chargesof $12.4 million. No impairment charges were recorded during the two years ended December 31, 2008 or 2007. See Note 4 for additional information. Impairment of Long-Lived Assets: The Company records an impairment charge when the condition exists where the carrying amount of a long-lived asset (asset group) is not recoverable andexceeds its fair value. Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding interest charges, for thelowest 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. TheCompany prepares and analyzes cash flows at appropriate levels of grouped assets. If the events or circumstances indicate that the remaining balance may beimpaired, such impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using theestimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective long-lived asset. Noimpairment charges were recorded during the three years ended December 31, 2009, 2008 or 2007.Notes and Other Receivables: Notes and other receivables include installment notes from the sale of real estate and water assets. These notes generally have terms ranging from three toten years, with interest rates from 8% to 10%. The Company records a provision for doubtful accounts to allow for any specific accounts which may beunrecoverable and is based upon an analysis of the Company's prior collection experience, customer creditworthiness, and current economic trends. The noteterms are typically non-recourse which allows the Company to recover the underlying property if and when a buyer defaults. No significant provision for baddebts was required during the three years ended December 31, 2009.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 livesof the assets. Buildings and leasehold improvements are depreciated over the shorter of the useful life or lease term and range from 15-20 years, officefurniture and fixtures are generally depreciated over seven years, and computer equipment is depreciated over three years. Maintenance and repairs arecharged to expense as incurred, while significant improvements are capitalized. Gains or losses on the sale of property and equipment are included in otherrevenues. 67 Reinsurance: The Company records all reinsurance assets and liabilities on a gross basis, including amounts due from reinsurers and amounts paid to reinsurers relatingto the unexpired portion of reinsured contracts. Unpaid Losses and Loss Adjustment Expenses: Reserves for MPL and property and casualty and workers’ compensation insurance unpaid losses and loss adjustment expenses include amountsdetermined on the basis of actuarial estimates of ultimate claim settlements, which include estimates of individual reported claims and estimates of incurredbut not reported claims. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and updated based oncurrent circumstances, and any adjustments are reflected in current operations.Accounting for Income Taxes: The Company’s provision for income tax expense includes federal, foreign and state income taxes currently payable and those deferred because oftemporary differences between the income tax and financial reporting bases of the assets and liabilities. The liability method of accounting for income taxesalso 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 isenacted. In assessing the realization of deferred income taxes, management considers whether it is more likely than not that any deferred income tax assets will berealized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the period in whichtemporary 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 valuationallowance is recorded. The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not to be sustained uponaudit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company adopted the guidance on accounting for uncertain tax positions on January 1, 2007. As a result, the Company recognized a $293,000increase in the liability for unrecognized income tax benefits through opening retained earnings. At the adoption date of January 1, 2007, the Companyprovided for $3.5 million of unrecognized tax benefits, $2.5 million of which would affect the effective tax rate if recognized. The Company recognizes any interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2009, the Company had$791,000 accrued for interest and no penalties associated with uncertain tax positions. The Company reported an income tax benefit of $19.3 million in 2009 and income tax expense of $28.5 million, and $3.5 million during the years endedDecember 31, 2008 and 2007, respectively. The effective income tax rate in 2009, 2008 and 2007 is 47%, 51% and 176%, respectively. The effective taxrate differs from the statutory rate in 2009 primarily due to a basis difference from the sale of the Company’s wholly owned subsidiary, Global EquityCorporation and a basis difference on the deconsolidation of spigit. In addition, in each of the three years ending December 31, 2009, the effective incometax rate differs from the U.S. federal rate due to the recognition or reversal of interest expense and penalties on uncertain tax positions, operating losseswithout any associated tax benefit from subsidiaries that are excluded from the consolidated federal income tax return, certain non-deductible compensationexpense, and state income tax charges. The Worker, Homeownership, and Business Assistance Act of 2009 (HR 3845) was signed into law on November 6, 2009. This legislation allowsbusinesses with net operating losses (“NOLs”) for 2008 or 2009 to carry back those losses for up to five years to recover tax liabilities assessed in these priorperiods. As a result of this recently enacted legislation, the Company expects to realize a tax refund of approximately $12.3 million.Stock-Based Compensation: Stock-based compensation expense is measured at the grant date based on the fair values of the awards and is recognized as expense over the period inwhich the share-based compensation vests. At December 31, 2009, the Company had one stock-based payment arrangement outstanding: 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 toPICO 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 forthe issuance of incentive stock options, non-statutory stock options, free-standing stock-settled stock appreciation rights (“SAR”), restricted stock awards(“RSA”), performance shares, performance units, restricted stock units (“RSU”), deferred compensation awards and other stock-based awards. The 2005 Planallows for broker assisted cashless exercises and net-settlement of income taxes and employee withholding taxes. Upon exercise of a SAR and RSU, theemployee will receive newly issued shares of PICO Holdings, Inc. common stock with a fair value equal to the in-the-money value of the award, less thatnumber of shares equal to the value of applicable United States federal, state and local withholding and income taxes (however, the holder of an RSU canelect to pay withholding taxes in cash).Deferred Compensation: The Company reports the investment returns generated in the deferred compensation accounts within revenues in the Company’s financial statements (witha corresponding increase in the trust assets). An expense is recorded within the caption, “Operating and other costs” for increases in the market value of theassets held with a corresponding increase in the deferred compensation liability (except in the case of shares of PICO Holdings, Inc. common stock, which isreported at its cost in treasury stock). In the event the trust assets decline in value, the Company will reverse previously expensed compensation. 68 At December 31, 2009, and December 31, 2008, the Company had $31.1 million and $27.7 million, respectively, recorded as deferred compensationpayable to various members of management and certain non-employee members of the Board of Directors of the Company. The assets of the plan are held inRabbi Trust accounts. Such trusts hold various investments that are consistent with the Company’s investment policy. The investments are held in separateaccounts, accounted for as available for sale investments, and are reported in the accompanying condensed consolidated balance sheets within the line item“Investments.” Assets of the trust will be distributed according to predetermined payout elections established by each employee or members of the Board ofDirectors. The deferred compensation liability increased during 2009 primarily due to increases in the fair value of the invested assets offset by distributions of $2.1million to various participants. Included in operating and other costs in the accompanying consolidated statements of operations for the year endedDecember 31, 2009, is compensation expense of $5.5 million. For the years ended December 31, 2008, and 2007, the Company reported a recovery indeferred compensation expense of $10.2 million and $548,000, respectively. Comprehensive Income: Other comprehensive income or loss includes foreign currency translation and unrealized holding gains and losses, net of taxes on available for saleinvestments. The components are as follows: December 31, 2009 2008 Net unrealized gain on securities $25,852,577 $11,566,976 Foreign currency translation (4,758,192) (12,990,839) Accumulated other comprehensive income (loss) $21,094,385 $(1,423,863) The accumulated balance is net of deferred income tax liabilities of $9.8 million and deferred tax assets of $1.7 million at December 31, 2009, and 2008,respectively.Earnings per Share: Basic earnings or loss per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. Dilutedearnings or loss per share is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to includeadditional shares from the assumed exercise of any common stock equivalents using the treasury method, if dilutive. The Company’s free-standing SAR andRSU are considered common stock equivalents for this purpose. The number of additional shares related to these common stock equivalents is calculatedusing the treasury stock method. For the years ended December 31, 2009, and 2007, the Company’s stock-settled SAR and RSU (in 2009 only) were excluded from the diluted per sharecalculation because their effect on earnings per share was anti-dilutive. For the year ended December 31, 2008, the Company’s in-the-money stock-settledSAR were included in the diluted per share calculation using the treasury stock method (659,409 SAR were excluded because they were out-of-the-money). 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 ontranslation are reflected within accumulated other comprehensive income or loss. Realized foreign currency gains or losses are reported within the statementof operations.Recently Issued Accounting Pronouncements: In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that is a revision to existing accounting guidancerelated to the transfers and servicing of financial assets and extinguishments of liabilities, and will require more information about transfers of financial assetsand exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements forderecognizing financial assets, and requires additional disclosure. This guidance is effective for interim and annual periods beginning after November 15,2009. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements. In June 2009, the FASB issued new accounting guidance that amends existing accounting guidance related to variable interest entities. The newguidance: (a) requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financialinterest in a variable interest entity, identifying the primary beneficiary of a variable interest entity; (b) requires ongoing reassessment of whether anenterprise is the primary beneficiary of a variable interest entity, rather than only when specific events occur; (c) eliminates the quantitative approachpreviously required for determining the primary beneficiary of a variable interest entity; (d) amends certain guidance for determining whether an entity is avariable interest entity; (e) adds an additional reconsideration event when changes in facts and circumstances pertinent to a variable interest entity occur; (f)eliminates the exception for troubled debt restructuring regarding variable interest entity reconsideration; and (g) requires advanced disclosures that willprovide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The new guidance iseffective for the first annual reporting period that begins after November 15, 2009. Earlier adoption is prohibited. The adoption of the new guidance is notexpected to have a material impact on the Company’s consolidated financial statements. 69 2.INVESTMENTS At December 31, the cost and carrying value of its available for sale investments were as follows:2009:Cost Gross UnrealizedGains Gross UnrealizedLosses Carrying Value Fixed maturities: U.S. Treasury securities $1,105,848 $80,418 $1,186,266 Municipal bonds 3,174,739 64,031 3,238,770 Corporate bonds 21,217,517 2,278,020 $ (2,224,316) 21,271,221 Government sponsored enterprises 24,763,730 328,854 (213,815) 24,878,769 50,261,834 2,751,323 (2,438,131) 50,575,026 Marketable equity securities 81,935,407 37,008,958 (617,623) 118,326,742 Total $132,197,241 $39,760,281 $(3,055,754) $168,901,768 2008:Cost Gross UnrealizedGains Gross UnrealizedLosses Carrying Value Fixed maturities: U.S. Treasury securities $1,110,327 $111,407 $1,221,734 Municipal bonds 2,137,003 $(8,523) 2,128,480 Corporate bonds 25,627,851 34,460 (7,822,451) 17,839,860 Government sponsored enterprises 7,442,611 425,877 7,868,488 36,317,792 571,744 (7,830,974) 29,058,562 Marketable equity securities 102,322,281 27,348,470 (9,312,290) 120,358,461 Total $138,640,073 $27,920,214 $(17,143,264) $149,417,023 The amortized cost and carrying value of investments in fixed maturities at December 31, 2009, by contractual maturity, are shown below. Expectedmaturity dates may differ from contractual maturity dates because borrowers may have the right to call or prepay obligations with or without call orprepayment penalties. Amortized Carrying Cost Value Due in one year or less $3,002,700 $4,698,858 Due after one year through five years 23,979,889 22,961,818 Due after five years 23,279,245 22,914,350 $50,261,834 $50,575,026 Net investment income is as follows for each of the years ended December 31: 2009 2008 2007 Investment income: Fixed maturities $2,175,209 $2,618,183 $3,952,102 Equity securities 2,478,825 2,965,296 4,202,648 Other, primarily cash balances 1,509,033 4,823,212 9,034,590 Total investment income 6,163,067 10,406,691 17,189,340 Investment expenses (224,496) (261,261) (149,540) Net investment income $5,938,571 $10,145,430 $17,039,800 70 Pre-tax net realized gain or loss on investments is as follows for each of the years ended December 31: 2009 2008 2007 Gross realized gains: Fixed maturities $1,534,728 $52,280 $561 Equity securities and other investments 16,572,846 58,246,969 4,726,158 Total gain 18,107,574 58,299,249 4,726,719 Gross realized losses: Fixed maturities (5,225,452) (3,119,497) (1,603,852) Equity securities and other investments (19,637,759) (18,952,294) (374,909)Total loss (24,863,211) (22,071,791) (1,978,761)Net realized gain (loss) $(6,755,637) $36,227,458 $2,747,958 Realized Gains Included in realized gains for 2009 is a gain of $8.2 million gain recorded on the deconsolidation of one of the Company’s consolidated subsidiaries,spigit (see Investment in Unconsolidated Affiliate, below). During 2008, the Company sold its interest in Jungfraubahn Holding AG for $75.3 millionresulting in pre-tax realized gain of $46.1 million. During 2007, the Company realized gains in several domestic and foreign securities recording $4.7million in gains including a gain on the sale of Amalgamated Holdings Limited of $1.5 million.Realized Losses Included in realized losses are impairment charges on securities. During 2009, 2008 and 2007, the Company recorded other-than-temporary impairmentsof $18.8 million, $21.2 million and $2 million, respectively, on debt and equity securities to recognize what are expected to be other-than-temporarydeclines in value. In addition, during 2009, the Company sold Global Equity Corporation, a previously consolidated subsidiary, which held investments inCanadian real estate partnerships, and reported a loss on the sale of $5.5 million. The majority of the reported loss results from accumulated foreign currencyadjustments of $6.6 million that were part of the carrying value of the subsidiary. Such adjustments were previously recorded in other comprehensiveincome. The following table summarizes the market value of those investments in an unrealized loss position for periods less than and greater than 12 months: 2009 2008 Less than 12 monthsFair Value Gross UnrealizedLoss Fair Value Gross UnrealizedLoss Fixed maturities: Municipal bonds $2,128,480 $8,523 Corporate bonds $779,417 $10,399 5,290,363 1,586,298 Government sponsored enterprises 17,960,579 213,816 18,739,996 224,215 7,418,843 1,594,821 Marketable equity securities 5,589,971 488,523 40,880,566 9,290,041 Total $24,329,967 $712,738 $ 48,299,409 $10,884,862 2009 2008 Greater than 12 monthsFair Value Gross UnrealizedLoss Fair Value Gross UnrealizedLoss Fixed maturities: Corporate bonds $ 9,510,246 $ 2,213,916 $ 10,044,022 $ 6,236,152 Marketable equity securities 1,345,288 129,100 160,430 22,250 Total $10,855,534 $2,343,016 $10,204,452 $6,258,402 71 Marketable equity securities: The Company’s investments in marketable equity securities totaled $118.3 million at December 31, 2009, and principallyconsist of common stock of publicly traded small-capitalization companies in the U.S. and selected foreign markets. Equities are researched, and selected forpurchase, on a case by case basis depending on the fundamental characteristics of the individual security. The gross unrealized gains and losses on equitysecurities, after recognition of other-than-temporary impairment losses, were $37 million and $618,000, respectively, at December 31, 2009 and $27.3million and $9.3 million, respectively, at December 31, 2008. The Company reviewed its equity securities in an unrealized loss position, and concluded thatthese investments were not other-than-temporarily impaired as the declines were not of sufficient duration and severity, and publicly-available financialinformation did not indicate impairment. The primary cause of the losses is due to the recent overall market decline. During the years ended December 31,2009, 2008 and 2007, the Company recorded $13.6 million, $18.7 million and $375,000, respectively, of other-than-temporary impairment charges onmarketable equity securities. Corporate Bonds and U.S. Treasury Obligations: At December 31, 2009, the Company’s bond portfolio consisted of $21.3 million of publicly tradedcorporate bonds, $1.2 million U.S. Treasury obligations, $24.9 million of government sponsored enterprise bonds and $3.2 million of municipal bonds. TheU.S. Treasury and government sponsored enterprise bonds are typically held to meet state regulatory capital and deposit requirements. The majority of theremainder of the bond portfolio consists primarily of corporate bonds, which are researched, and selected for purchase, on a case-by-case basis depending onthe maturity and yield-to-maturity of the bond available for purchase, and an analysis of the fundamental characteristics of the issuer. The total bondportfolio had gross unrealized gains and losses of $2.8 million and $2.4 million, respectively, at December 31, 2009, and gross unrealized gains and losses of$572,000 and $7.8 million, respectively, at December 31, 2008. The Company does not consider the unrealized losses on the bond portfolio to be other-than-temporarily impaired because the Company intends to hold, and will not be required to sell, these particular securities, and the Company expects torecover the entire amortized cost basis. The Company believes that the unrealized losses are primarily attributable to the reduced availability of creditthroughout the U.S. economy, which is affecting the market prices of all bonds other than those issued by the U.S. Treasury, as well as deterioration of theunderlying issuer of certain bonds held by the Company. During 2009, the Company recorded impairment charges of $5.2 million, on corporate bonds dueto deterioration of the underlying issuer’s financial condition. During 2008 and 2007, the Company recorded impairment charges of $2.5 million and $1.6million, respectively, on corporate bonds due to deterioration of the underlying issuer’s financial condition.Fair Value Measurements: The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at December 31, 2009 and2008, by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in itsentirety requires judgment and considers factors specific to the asset or liability: At December 31, 2009: Assets Quoted PricesIn ActiveMarkets forIdenticalAssets (Level1) Significant OtherObservableInputs (Level 2)SignificantUnobservableInputs (Level 3) Balance atDecember 31,2009 Available for sale investments (A) $168,901,768 $168,901, 768 Liabilities Deferred compensation (B) $31,144,366 $31,144,366 At December 31, 2008: Assets Quoted PricesIn ActiveMarkets forIdenticalAssets (Level1) SignificantOtherObservableInputs (Level2) SignificantUnobservableInputs (Level3) Balance atDecember 31,2008 Available for sale investments (A) $144,469,682 535,895 $2,998,055 $148,003,632 Liabilities Deferred compensation (B) $27,744,528 $27,744,528 (A) Where there are quoted market prices that are readily available in an active market, securities are classified as Level 1 of the valuation hierarchy. Level 1marketable equity securities are valued using quoted market prices multiplied by the number of shares owned and debt securities are valued using a marketquote in an active market. Level 2 available for sale investments include securities where the markets are not active, that is where there are few transactions,or the prices are not current or the price quotations vary substantially over time. Level 3 available for sale investments include securities where valuation isbased on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. This includes certainpricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. (B) Deferred compensation plans are compensation plans directed by the Company and structured as Rabbi Trusts for certain executives and non-employeedirectors. The investment assets of the Rabbi Trust are valued using quoted market prices multiplied by the number of shares held in each trust accountincluding the shares of PICO Holdings, Inc. common stock held in the trusts. The related deferred compensation liability represents the fair value of theinvestment assets. 72 The following table is a reconciliation of the beginning and ending balance of Level 3 assets held by the Company at December 31, 2009. During 2009,the single equity security that comprised the entire beginning balance in Level 3 was transferred to Level 1 once the issuer completed an initial publicoffering and its securities began trading on a U.S. stock exchange.Asset Description Fair Value atBeginning ofPeriod Unrealized GainIncluded in Income AccumulatedOtherComprehensiveIncome Purchases, Sales, andIssuances Transfers Out Fair Value at End ofPeriodAvailable for saleinvestments $2,998,055 $5,895,529 $(8,893,584) The following table sets forth the Company’s non-financial assets that were measured at fair value on a non-recurring basis for the nine months endedDecember 31, 2009, by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowestlevel of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair valuemeasurement in its entirety requires judgment and considers factors specific to the asset:Asset DescriptionQuoted Prices In Active Marketsfor Identical Assets (Level 1) SignificantOtherObservableInputs (Level2) Significant Unobservable Inputs(Level 3) TotalGain/(Loss) (A) Intangible asset (applications for water rights) $3,953,033 $(12,378,000)(B) Investment in unconsolidated affiliate $9,161,715 $8,181,296 (A) As of March 31, 2009, the Company had a non-recurring fair value measurement for an intangible asset with a carrying amount of $16.4 million that waswritten down to its implied fair value of $4 million, resulting in an impairment charge of $12.4 million, which was included in earnings for 2009. Theimplied fair value was estimated as the revenues the Company estimated it will receive on the sale of the intangible asset.(B) During the fourth quarter of 2009, the Company had a non-recurring fair value measurement for spigit, a consolidated subsidiary that was deconsolidatedwhen the Company’s voting ownership was diluted from 74% to 37% after a new investor purchased newly-issued shares of spigit for $10 million. Thetransaction resulted in a gain of approximately $8.2 million before income taxes, which is included in the caption, net realized gain (loss) on sale andimpairment of investments, in the accompanying consolidated statements of operations. The fair value was based upon the price paid by the newinvestor.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 estimatethat fair value:--Cash and Cash Equivalents: Carrying amounts for these items approximate fair value because of the short maturity of these instruments. The majorityof the Company’s cash is held in the Federated Government Obligations Money Market.--Investments in fixed maturities and equity securities: Fair values are estimated based on quoted market prices, or dealer quotes for the actual orcomparable securities. Fair value for equity securities that do not have a readily determinable fair value is estimated based on the value of theunderlying common stock. The Company regularly evaluates the carrying value of securities to determine whether there has been any diminution invalue that is other-than-temporary.--Borrowings: Carrying amounts for these items approximates fair value because they are based on current interest rates. The table below presents the carrying values and estimated fair values for certain of the Company’s financial instruments at December 31, 2009. December 31, 2009 CarryingAmount Estimated FairValue Financial assets: Cash and cash equivalents $154,544,814 $154,544,814 Investments with fixed maturities $50,575,026 $50,575,026 Equity securities $118,326,742 $118,326,742 Notes and other receivables, net $15,411,728 $ 15,411,728 Reinsurance receivables $15,012,695 $15,012,695 Financial liabilities: Borrowings $41,220,514 $41,220,514 73 Investment in Unconsolidated Affiliate: At the beginning of 2009, PICO owned 61% of the outstanding voting shares of spigit. Based on the majority ownership, PICO consolidated the results ofspigit. During 2009, PICO’s voting ownership increased to 74% through two transactions. In the fourth quarter of 2009, spigit received $10 million from aglobal private equity firm. The new investor now owns 46% of the outstanding voting shares of spigit and the Company’s voting ownership was reduced to37%. As a result of spigit issuing additional voting shares, the Company no longer has a controlling financial interest in spigit. Consequently, during 2009, theCompany deconsolidated spigit and changed its accounting from consolidation to the equity method of accounting from the transaction dateforward. During the fourth quarter of 2009, the Company recorded a gain on deconsolidation of approximately $8.2 million before income taxes, which isincluded in the caption, net realized gain (loss) on sale and impairment of investments, in the accompanying consolidated statements of operations. The Company’s share of the loss of spigit for the period from deconsolidation to the end of 2009 was $277,000. At December 31, 2009, the carrying valueof the investment is $8.9 million.3.BORROWINGS: At December 31, 2009, a PICO subsidiary had four loan facilities with a Swiss bank for a maximum of $24 million (25 million CHF) used to finance thepurchase of investment securities in Switzerland. The loan facilities may be cancelled immediately by either party by written notice and do not impose anyfinancial or operational restrictions on the Company. The total Swiss borrowings bear interest at a weighted average of 4% and are collateralized by theCompany’s Swiss investments. At December 31, 2009, the Company’s total mortgage debt of $21.9 million has a weighted average interest rate of 6% and is due at various dates between2010 and 2014. During 2009, the Company financed the purchase of real estate with $5.3 million of mortgage debt at a weighted annual interest rate of 6%. The Company capitalized $863,000 and $1.2 million of interest in 2009 and 2008, respectively, related to construction and real estate development costs. 2009 2008 Swiss Borrowings: 4.43% fixed due in 2011 $4,346,566 $4,219,409 3.72% fixed due in 2014 12,073,795 3.81% fixed due in 2014 2,897,711 4.19% fixed due in 2009 2,812,940 3.98% fixed due in 2009 11,720,581 4.87% floating due on demand 4,030,532 Mortgage Borrowings: 6.50% fixed payment due in 2009 and 2010 2,590,000 5,180,000 8.00% fixed due in equal annual installments from 2009 to 2013 1,659,086 2,000,000 4.00% fixed due in 2011 7,079,070 7,079,070 12.00% fixed due in 2011 1,604,186 1,604,186 6.25% fixed due in 2011 3,715,000 3,715,000 6.00% fixed due in 2012 2,795,100 6.00% fixed due in 2014 2,460,000 Other Borrowings: 6.00% fixed due on demand 20,000 $41,220,514 $42,381,718 The Company’s future minimum principal debt repayments for the years ending December 31 are as follows:Year 2010 $2,958,186 2011 17,142,462 2012 3,224,552 2013 463,808 2014 17,431,506 Total $41,220,514 74 4.REAL ESTATE AND WATER ASSETS: The cost assigned to the various components of real estate and water assets at December 31, is as follows: 2009 2008 Real estate$127,530,016 $93,999,364 Real estate improvements, net of accumulated amortization of $6.5 million in 2009 and $5.6 million in 2008 10,450,408 11,029,152 Water and water rights 60,738,916 65,813,882 Pipeline rights and water credits at Fish Springs 101,113,980 100,871,902 $299,833,320 $271,714,300 In 1998, Lincoln County, Nevada and Vidler (“Lincoln/Vidler”) jointly filed for 14,000 acre-feet of water rights for industrial use from the Tule DesertGroundwater Basin in Lincoln County, Nevada. In November 2002, the Nevada State Engineer granted and permitted an application for 2,100 acre-feet ofwater rights – which Lincoln/Vidler subsequently sold in 2005 - and ruled that an additional 7,240 acre-feet could be granted pending additional studies byLincoln/Vidler. From 2005 through 2008, Vidler conducted additional studies and incurred and capitalized approximately $16.4 million, collecting data and drilling aseries of production and monitoring wells to obtain the requisite evidence to support the applications. Once completed, Vidler submitted the data to theState Engineer for final ruling. On April 29, 2009, the Nevada State Engineer issued its ruling and granted Vidler only 396 acre-feet of additional water rights. While the Company hasappealed the decision, given the current market value of these water rights, the Company determined it would recover approximately $4 million of the totalcapitalized cost incurred to date. Consequently, an impairment loss of approximately $12.4 million was recorded during 2009. The Company did not identify any other impairment indicators on its real estate or water assets during the year ended December 31, 2009, 2008 or 2007. The construction of a pipeline from Fish Springs Ranch in northern Nevada to the north valleys of Reno, Nevada was completed in 2008. The pipeline wasdedicated to Washoe County in June 2008; consequently, the Company does not own the pipeline nor does it have the obligation of maintenance andoperating costs associated with the pipeline. After the dedication, the Company owns the exclusive right to use the pipeline. At December 31, 2009, pipeline rights and water credits at Fish Springs Ranch included $92.7 million of direct construction costs, $6.4 million for the7,987 acre-feet of water credits and $2 million of capitalized interest. As the Company sells water credits to end users, the costs of the pipeline rights will bereported as cost of water sold. No water credits were sold during 2009. During 2008, the Company sold 12.8 acre-feet of water credits for $577,000 andreported cost of water sold of $158,000. The final regulatory approval required for the pipeline project was a Record of Decision (“ROD”) for a right of way, which was granted on May 31,2006. Subsequently, there were two protests against the ROD, and the matter was appealed and subsequently dismissed. However, in October 2006, oneprotestant, the Pyramid Lake Paiute Tribe (the “Tribe”), filed an action with the U.S. District Court against the Bureau of Land Management and U.S.Department of the Interior. The Tribe asserted that the exportation of 8,000 acre-feet of water per year from Fish Springs would negatively impact their waterrights located in a basin within the boundaries of the Tribe reservation. The Company was able to reach a $7.3 million financial settlement with the Tribethat ended the dispute in September 2007. The settlement agreement is pending ratification by the United States Congress. The Tribe initiated several legal actions to assert their claims and to stop construction of the pipeline. While the Company believed the claims werewithout merit, the Tribe’s legal actions might have caused significant delays to the completion of the construction of the pipeline. To avoid future delays,Fish Springs and the Tribe entered into negotiations to settle all outstanding claims and legal actions. On May 30, 2007, the parties signed an agreement thatresolved all of the Tribe’s claims. The amounts payable to the Tribe as a result of the settlement agreement are predominately attributable to settlement of theclaims rather than the acquisition of additional water rights or other assets. The settlement obligated Fish Springs to:·pay $500,000 upon signing of agreement;·transfer 6,214 acres of real estate Fish Springs owns (fair value of $500,000 and a book value of $139,000);·pay $3.1 million on January 8, 2008; and·pay $3.6 million on the later of January 8, 2009, or the date the United States Congress ratifies the settlement agreement. Interest accrues at the LondonInter-Bank Rate (“LIBOR”) from January 8, 2009, if the payment is made after that date. There is 13,000 acre-feet per-year of permitted water rights at Fish Springs Ranch. The existing permit allows up to 8,000 acre-feet of water per year to beexported to support the development in the Reno area. The settlement agreement also provides that, in exchange for the Tribe agreeing to not oppose allpermitting activities for the pumping and export of groundwater in excess of 8,000 acre-feet of water per year, Fish Springs will pay the Tribe 12% of thegross sales price for each acre-foot of additional water that Fish Springs sells in excess of 8,000 acre-feet per year, up to 13,000 acre-feet per year. Theobligation to expense and pay the 12% fee is due only if and when the Company sells water in excess of 8,000 acre-feet, accordingly, Fish Springs Ranch willrecord the liability for such amounts as they become due upon the sale of any such excess water. Currently Fish Springs does not have regulatory approval toexport any water in excess of 8,000 acre-feet per year from Fish Springs Ranch to support further development in northern Reno, and it is uncertain whethersuch regulatory approval will be granted in the future. 75 Consequently, for the year ended December 31, 2007, the Company accrued settlement expense of $7.3 million. In January 2008, the Company paid $3.1million to the Tribe and at December 31, 2009, had an accrued liability of $3.6 million for the balance owed. In 2008, the Company sold its interest in the Semitropic Water Storage Facility (but still owned water held in the facility). Net proceeds to the Companywere $11.7 million resulting in a gain of $8.7 million before income taxes. During 2009, the Company sold the remaining 10,252 acre-feet of water held atSemitropic for $3.1 million. For the three years ended December 31, 2009, amortization of leasehold improvements was $852,000, $902,000 and $851,000, respectively.5.NOTES AND OTHER RECEIVABLES:Notes and other receivables consisted of the following at December 31: 2009 2008 Notes receivable $10,343,760 $11,121,764 Interest receivable 1,053,955 984,619 Other receivables 4,014,013 12,245,984 $15,411,728 $24,352,367 Notes and other receivables include amounts due for the sale of real estate and water assets. These notes generally have terms ranging from three to tenyears, with interest rates from 8% to 10%. The Company records a provision for doubtful accounts to allow for any specific accounts which may beunrecoverable and is based upon an analysis of the Company's prior collection experience, customer creditworthiness, and current economic trends. Thenotes are typically secured by the asset which allows the Company to recover the underlying property if and when a buyer defaults. No significant provisionfor bad debts was required on any installment notes from the sale of real estate and water assets during the three years ended December 31, 2009. At December 31, 2008, other receivables include a $10.2 million receivable from a third party for potential tax liabilities. During 2009, the Companyreversed the tax liabilities and related receivable as a result of an income tax statute expiring. 6.FEDERAL, FOREIGN AND STATE INCOME TAX: The Company and its U.S. subsidiaries file a consolidated federal income tax return. Non-U.S. subsidiaries file tax returns in various foreign countries andcompanies that are less than 80% owned file separate federal income tax returns. Deferred income taxes reflect the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 2009 2008 Deferred tax assets: Deferred compensation $12,579,517 $6,968,887 Basis difference on investment 1,100,381 1,816,373 Impairment charges on securities 11,011,727 9,608,437 Impairment charges on water assets 4,647,459 Net operating losses 2,254,228 1,325,112 Legal settlement expense 1,351,660 1,260,000 Excess tax basis in subsidiary 4,219,575 Accumulated foreign currency translation adjustments 2,337,178 3,308,326 Unearned revenue 543,144 1,995,976 Employee benefits, including stock-based compensation 6,033,618 4,115,964 Other 3,195,229 6,530,633 Total deferred tax assets 45,054,141 41,149,283 Deferred tax liabilities: Unrealized appreciation on securities 12,153,784 1,622,410 Revaluation of real estate and water assets 5,101,807 4,761,461 Foreign receivables 3,716,941 3,364,641 Real estate installment sales 3,918,205 3,469,044 Excess tax basis in subsidiary 2,262,005 Other 2,686,365 1,332,383 Total deferred tax liabilities 29,839,107 14,549,939 Valuation allowance (4,049,788) (1,325,112) Net deferred income tax asset (liability) $11,165,246 $25,274,232 Deferred tax assets and liabilities and federal income tax expense in future years can be significantly affected by changes in circumstances that wouldinfluence management’s conclusions as to the ultimate realization of deferred tax assets. 76 As of December 31, 2009, the Company has state loss carry-forwards of $40.6 million that will begin to expire in 2015. A valuation allowance has beenestablished to offset state deferred tax assets as the Company cannot conclude that it more likely than not that future taxable income in the relevant taxingjurisdictions will be sufficient to realize the related income tax benefits for the these assets. Pre-tax income (loss) from continuing operations for the years ended December 31, was under the following jurisdictions: 2009 2008 2007 United States$(40,800,551) $(7,352,018) $2,110,723 Foreign (218,711) 63,741,053 (97,058) Total$(41,019,262) $56,389,035 $2,013,665 Income tax expense (benefit) from continuing operations for each of the years ended December 31 consists of the following: 2009 2008 2007 Current tax expense (benefit): United States Federal and state$(20,633,829)$13,754,797 $10,407,829 Foreign (92,394) 12,060,194 (280,117) (20,726,223) 25,814,991 10,127,712 Deferred tax expense (benefit): United States Federal and state 703,790 2,679,940 (6,591,909)Foreign 761,808 (3,915) (104) 1,465,598 2,676,025 (6,592,013) Total income tax provision (benefit)$(19,260,625)$28,491,016 $3,535,699 The difference between income taxes provided at the Company’s federal statutory rate and effective tax rate is as follows: 2009 2008 2007 Federal income tax provision at statutory rate $(14,356,741) $19,736,162 $704,783 Change in valuation allowance 3,248,908 833,516 455,426 State taxes, net of federal benefit (5,209,176) 2,774,181 383,379 Change in liability for uncertain tax positions (2,475,791) 1,720,329 350,526 Previously untaxed earnings and profits from foreign subsidiaries (1,709,694) 2,773,286 Basis difference on sale of subsidiary 2,401,696 Deferred Compensation – amounts no longer subject to §162(m) (2,000,000) Other 840,173 653,542 1,641,585 Total income tax provision $(19,260,625) $28,491,016 $3,535,699 The following table summarizes the activity related to the unrecognized tax benefits: 2009 2008 2007 Balance at beginning of year $12,608,476 $3,277,654 $3,277,654 Additions for tax positions related to the current year 9,330,822 Reductions due to expiration of assessment period (10,016,523) Balance at end of year $2,591,953 $12,608,476 $3,277,654 Included in the balance of unrecognized tax benefits at December 31, 2009, is $1.7 million of tax benefit that, if recognized, would affect the effective taxrate. The Company recognizes any interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2009, the Companyhad accrued approximately $791,000 in interest and no penalties associated with uncertain tax positions. The decrease in balance on unrecognized taxbenefits was primarily as a result of the statute closing on a tax liability for a subsidiary in receivership. The Company reversed the $10.2 million receivablefrom a third party, which would have offset any potential tax liabilities related to the subsidiary. As of December 31, 2009, the Company believes that it isreasonably possible that $2 million of the unrecognized tax benefit for various state income tax issues may be decreased within the next 12 months as a resultof statutes closing. The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2009, the Company’sstatute is open from 2006 forward for federal and from 2003 forward for state tax purposes. 77 On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009, was signed into law and includes a provision that will allowmost businesses an election to increase the NOL carry back period from two years under current law to as much as five years for NOLs generated in 2008 or2009. The Company anticipates that this election will benefit the Company by allowing it to carry back the Company’s NOLs that were generated in 2009and obtain refunds of taxes paid in the newly included carry back years. The tax net operating loss as of December 31, 2009, would generate refunds fromcarry back of approximately $12.3 million.7.PROPERTY AND EQUIPMENT: The major classifications of the Company’s fixed assets are as follows at December 31: 2009 2008 Office furniture, fixtures and equipment $3,808,640 $3,921,822 Building and leasehold improvements 705,128 668,834 4,513,768 4,590,656 Accumulated depreciation (3,185,632) (3,078,286)Property and equipment, net $1,328,136 $1,512,370 Depreciation expense was $373,000, $358,000 and $155,000 for the year ended December 31, 2009, 2008, and 2007, respectively. 8.SHAREHOLDERS’ EQUITY: The Company completed public offerings of its common stock of 3,055,556 shares on June 10, 2009, and 694,444 shares on June 15, 2009, each at a priceof $27 per share. The aggregate net proceeds from the offerings were approximately $95.7 million, after deducting $5.5 million in underwriting commissionand offering expenses. The offerings were made pursuant to the Company’s universal shelf registration statement on Form S-3 that was declared effective onDecember 3, 2007. In February 2007, the Company completed a public offering of 2,823,000 shares of newly issued common stock to institutional investors at a price of $37per share. After placement costs, the net proceeds to the Company were approximately $100.1 million. The Company filed a registration statement on FormS-3 to register the shares, which became effective in April 2007.Long Term Incentive Plan As described in Note 1, the 2005 Plan was adopted by the Board of Directors and approved by shareholders on December 8, 2005. The 2005 Plan providesfor 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 stockare issuable under the 2005 Plan, and it provides for the issuance of incentive stock options, non-statutory stock options, free-standing stock-settled SAR,restricted stock awards (RSA), performance shares, performance units, restricted stock units (RSU), deferred compensation awards and other stock-basedawards. Restricted Stock Unit Awards (RSU) Granted in 2009: On March 3, 2009, as part of the Board of Directors’ annual review of compensation, the Company issued 300,000 RSU to certain officers of theCompany. These awards entitle the recipient, who must be continuously employed by the Company until the vesting date, which is March 3, 2012, the rightto receive one share of PICO common stock with no monetary payment required. RSU do not vote and are not entitled to receive dividends. The total fairvalue of the awards was $5.9 million based on the Company’s closing stock price on the date of grant. This compensation expense will be recognized ratablyover the vesting period of three years. The Company recorded $1.6 million of compensation expense for these awards during 2009. No compensationexpense for RSU was recorded during 2008 or 2007. Restricted Stock Awards (RSA) Granted in 2009: During 2009, as part of a duly adopted revised director annual compensation program established in 2008, the Company issued 5,286 RSA to the non-employee members of the Board of Directors of the Company that vest in one year. Until vested, the shares are held in escrow, however, the shares can bevoted and the holder is entitled to dividends, if any. The total fair value of the awards was $153,000 based on the Company’s closing stock price on the dateof grant and is recognized over the vesting period of the award, which began in the second quarter of 2009. A summary of RSA and RSU awards under the Plan is as follows:Outstanding at January 1, 2009 (all RSA) 4,200 Granted (RSU – expected to vest in March 2012) 300,000 Granted (RSA – expected to vest in May and August 2010) 5,286 Total RSA and RSU Outstanding at December 31, 2009 309,486 At December 31, 2009, there was $4.3 million of unrecognized compensation cost related to unvested RSU and RSA that is expected to be recognized overthe next two years.Stock-Settled Stock Appreciation Right: On December 12, 2005, the Company granted 2,185,965 stock-settled SAR at an exercise price of $33.76 per share (being the market value of PICO stockat the date of grant) that vested on that date. During 2007, the Company granted 659,409 SAR in five separate grants to various members ofmanagement. Four of the awards totaling 486,470 SAR were granted on August 2, 2007, at a strike price equal to the closing market price of PICO commonstock on that day of $42.71. These awards vested 33% on the date of grant and vested one third on each anniversary thereafter. The other award was grantedon September 4, 2007, with a strike price equal to the closing market price of PICO common stock on that day of $44.69. This award vested 33% onSeptember 4, 2008 and one third on each anniversary thereafter.  78 Upon exercise, the Company will issue newly issued shares equal to the in-the-money value of the exercised SAR, net of the applicable federal, state andlocal taxes withheld. There were no Stock-Settled Stock Appreciation Rights granted in 2009 or 2008. Compensation cost recognized for these awards during the three years ended December 31, 2009 was $2.8 million and $4 million and $4.5 million,respectively. The total income tax benefit recognized in the statement of operations was $1 million and $1.4 million and $1.6 million in 2009, 2008 and2007, respectively. The fair value of each award was estimated on the grant date using a Black-Scholes option pricing model that uses various assumptions and estimates tocalculate a fair value as described below. Expected volatility is based on the actual trading volatility of the Company’s common stock. The Company uses historical experience to estimateexpected forfeitures and estimated terms. The expected term of a SAR grant represents the period of time that the SAR is expected to be outstanding. Therisk-free rate is the U.S. Treasury Bond yield that corresponds to the expected term of each SAR grant. Expected dividend yield is zero as the Company hasnot and does not foresee paying a dividend in the future. Forfeitures are estimated to be zero based on the strike price and expected holding period of theSAR. The Company applied the guidance of Staff Accounting Bulletin No. 110 in estimating the expected term of the SAR. Expected volatility29% — 31%Expected term7 yearsRisk-free rate4.3% — 4.7%Expected dividend yield0%Expected forfeiture rate0% Stock-Settled Stock Appreciation Rights Exercised: No SAR were exercised during 2009. During 2008, 12,000 SAR were exercised at a market price of $46.58 resulting in the issuance of 1,620 newly-issuedcommon shares. During 2007, 838,356 SAR were exercised at a market price of $47.54 resulting in the issuance of 129,444 newly-issued commonshares. The intrinsic value of the award was $11.6 million which represented an income tax deduction for the Company. No compensation cost was recordedfor these options as they were fully vested at December 31, 2006. However, in 2007, the Company recorded $4.4 million in excess tax benefits directly toshareholders’ equity along with the corresponding employee withholding tax liability of $5.6 million, for a net reduction of additional paid in capital of$972,000. A summary of SAR activity is as follows: SAR WeightedAverageExercise Price WeightedAverageContractualTerm RemainingOutstanding at January 1, 20091,995,018 $36.89 Granted Exercised Outstanding at December 31, 20091,995,018 $36.89 6.5 yearsVested and exercisable at December 31, 20091,937,372 $36.66 6.5 years At December 31, 2009, none of the outstanding SAR were in-the-money. A summary of the status of the Company’s unvested SAR as of December 31, 2009, and changes during the year then ended is as follows: SAR WeightedAverage GrantDate FairValue Unvested at January 1, 2009275,828 $18.31 Granted Vested218,182 18.14 Unvested at December 31, 2009 (expected to vest in 2010)57,646 $18.93 At December 31, 2009, there was $727,000 of unrecognized compensation cost related to unvested SAR that is expected to be recognized during 2010. 79 9.REINSURANCE:In the normal course of business, the Company’s insurance subsidiaries have entered into various reinsurance contracts with unrelated reinsurers. TheCompany’s insurance subsidiaries participate in such agreements for the purpose of limiting their loss exposure and diversifying risk. Reinsurance contractsdo not relieve the Company’s insurance subsidiaries from their obligations to policyholders. All reinsurance assets and liabilities are shown on a gross basisin the accompanying consolidated financial statements. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liabilityassociated with the reinsured policy. Such amounts are included in “reinsurance receivables” in the consolidated balance sheets at December 31 as follows: 2009 2008Estimated reinsurance recoverable on: Unpaid losses and loss adjustment expense $14,526,642 $15,877,372 Reinsurance recoverable on paid losses and loss expenses 486,053 495,760 Reinsurance receivables $15,012,695 $16,373,132 Unsecured reinsurance risk is concentrated in the companies shown in the table below along with their AM Best Rating. The Company remainscontingently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements inforce. CONCENTRATION OF REINSURANCE AT DECEMBER 31, 2009 ReportedClaims UnreportedClaims ReinsurerBalances General Reinsurance (A++) $6,826,502 $7,592,574 $14,419,076 Swiss Reinsurance America Corp (A+) 71,069 201,928 272,997 All others 109,392 211,230 320,622 $7,006,963 $8,005,732 $15,012,695 The following is the net effect of reinsurance activity on the consolidated financial statements for each of the years ended December 31 for losses andloss adjustment expenses recovered: 2009 2008 2007 Direct$(1,596,375)$(2,069,991) $(2,323,098) Assumed (145,487) Ceded 251,706 (240,908) (1,277,993) $(1,344,669)$(2,456,386) $(3,601,091) 10.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’sestimate of ultimate losses and loss adjustment expenses and fall within an actuarially determined range of reasonably expected ultimate unpaid losses andloss 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 significantlyfrom the eventual outcome. In management’s judgment, information currently available has been appropriately considered in estimating the loss reservesand reinsurance recoverable of the insurance subsidiaries. Management prepares its statutory financial statements of Physicians in accordance with accounting practices prescribed or permitted by the OhioDepartment of Insurance. Conversely, management prepares its statutory financial statements for Citation in accordance with accounting practices prescribedor permitted by the California Department of Insurance. Prescribed statutory accounting practices include guidelines contained in various publications of theNational Association of Insurance Commissioners, as well as state laws, regulations, and general administrative rules. Permitted statutory accountingpractices encompass all accounting practices not so prescribed. The prescribed accounting practices of the Ohio Department of Insurance do not allow fordiscounting of claim liabilities. Activity in the reserve for unpaid claims and claim adjustment expenses was as follows for each of the years ended December31: 80 2009 2008 2007 Balance at January 1$27,773,320 $32,376,018 $41,083,301 Less reinsurance recoverable (15,877,372) (16,653,254) (16,972,280)Net balance at January 1 11,895,948 15,722,764 24,111,021 Incurred loss and loss adjustment recovery for prior accident year claims (1,344,669) (2,456,386) (3,601,091)Payments for claims occurring during prior accident years (903,058) (1,370,430) (4,787,166)Net change for the year (2,247,727) (3,826,816) (8,388,257)Net balance at December 31 9,648,221 11,895,948 15,722,764 Plus reinsurance recoverable 14,526,642 15,877,372 16,653,254 Balance at December 31$24,174,863 $27,773,320 $32,376,018 Physicians reported positive development of $1.3 million, $2.4 million and $2.3 million, during the three years ended December 31, 2009, respectively inits medical professional line of business. There were no significant changes in reserves within Citation during 2009. In 2008, Citation’s property andcasualty line reported positive development of $2.3 million offset by adverse development in its workers’ compensation line of $2.3 million. In 2007,Citation’s property and casualty and workers’ compensation lines of business reported positive development of $1.2 million.11.EMPLOYEE BENEFITS, COMPENSATION AND INCENTIVE PLAN: For the year ended December 31, 2009, the Company recorded $900,000 in incentive awards payable to certain members of management in accordancewith 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 theCompany. No bonuses were earned or awarded during 2008 for any of the officers of PICO Holdings. For the year ended December 31, 2007, the Company’sCompensation Committee approved a $1.5 million discretionary bonus to PICO’s President and CEO. No other bonuses were earned or awarded for 2007. For the year ended December 31, 2008, $195,000 in incentive awards were recorded for certain management of Vidler based on the combined net income ofVidler and Nevada Land in accordance with such bonus plan. No such bonuses were earned in 2009 or 2007. PICO maintains a 401(k) defined contribution plan covering substantially all employees of the Company. Matching contributions are based on apercentage of employee compensation. In addition, the Company may make a discretionary profit sharing contribution at the end of the Plan’s fiscal yearwithin limits established by the Employee Retirement Income Securities Act. Total contribution expense for the years ended December 31, 2009, 2008 and2007 was $519,000, $468,000 and $420,000, respectively. 12.REGULATORY MATTERS: The regulations of the Departments of Insurance in the states where the Company’s insurance subsidiaries are domiciled generally restrict the ability ofinsurance companies to pay dividends or make other distributions. Based upon statutory financial statements filed with the insurance departments as ofDecember 31, 2009, $5.1 million was available for distribution by the Company’s wholly owned insurance subsidiaries to the parent company without theprior approval of the Department of Insurance in the states in which the Company’s insurance subsidiaries are domiciled. At December 31, 2009, the totalstatutory surplus in the insurance companies that would require Department of Insurance approval before distribution was $65.8 million.13.COMMITMENTS AND CONTINGENCIES: The Company leases some of its offices under non-cancelable operating leases that expire at various dates through 2014. Rent expense for the years endedDecember 31, 2009, 2008 and 2007 for office space was $788,000, $670,000 and $454,000, respectively. Future minimum payments under all operating leases for the years ending December 31 are as follows:2010 $729,3812011 180,1712012 77,9062013 9,1482014 1,502Total $998,108 The Company is subject to various litigation matters that arise in the ordinary course of its business. Certain of the Company’s insurance subsidiaries arefrequently a party in claims proceedings and actions regarding insurance coverage, all of which are considered routine and incidental to the Company’sbusiness. Based upon information presently available, management is of the opinion that resolution of such litigation will not likely have a material adverseeffect on the consolidated financial position, results of operations or cash flows of the Company. Neither PICO nor its subsidiaries are parties to anypotentially material pending legal proceedings other than the following. 81 Exegy Litigation: HyperFeed Technologies, Inc. (“HyperFeed”), previously PICO’s majority-owned subsidiary, was a provider of enterprise-wide ticker plant and transactiontechnology software and service that enabled financial institutions to process and use high performance exchange data with Smart Order Routing and otherapplications. During 2006, PICO and HyperFeed negotiated a business combination with Exegy Incorporated (“Exegy”). On August 25, 2006, PICO,HyperFeed, and Exegy entered into a contribution agreement, pursuant to which the common stock of HyperFeed owned by PICO would have beencontributed to Exegy in exchange for Exegy’s issuance of certain Exegy stock to PICO. However, in a letter dated November 7, 2006, Exegy informed PICOand HyperFeed that it was terminating the agreement. In connection with the termination of the contribution agreement, the parties filed certainlawsuits. Immediately thereafter, HyperFeed filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The lawsuit filed by Exegy against PICO and HyperFeed sought monetary damages and declaratory judgment that Exegy’s purported November 7, 2006termination of the August 25, 2006 contribution agreement was valid. The lawsuit filed by PICO and HyperFeed against Exegy alleged that Exegy’stermination of the contribution agreement was wrongful and in bad faith. Both cases were consolidated in the United States Bankruptcy Court, District ofDelaware. During 2009, as part of a global resolution of the HyperFeed bankruptcy estate, the parties reached an agreement to resolve both lawsuits. The settlementagreement was submitted to the Bankruptcy Court for approval, and on September 10, 2009, the Bankruptcy Court issued an order approving theagreement. The settlement fully resolves all outstanding litigation among PICO, HyperFeed, and Exegy relating to the termination of the contributionagreement and the failed business combination. Concurrent with the order approving the settlement, the bankruptcy proceedings for HyperFeed werecompleted and the company was dissolved. The settlement did not have a material impact on the Company’s consolidated financial statements.Fish Springs Ranch, LLC: In 2006, the Company started construction of a pipeline from Fish Springs in northern Nevada to the north valleys of Reno, Nevada. The final regulatoryapproval required for the pipeline project was a Record of Decision (“ROD”) for a right of way, which was granted on May 31, 2006. Subsequently, therewere two protests against the ROD, and the matter was appealed and subsequently dismissed. However, in October 2006, one protestant, the Pyramid LakePaiute Tribe (the “Tribe”), filed an action with the United States District Court against the Bureau of Land Management and United States Department of theInterior. The Tribe asserted that the exportation of 8,000 acre-feet of water per year from Fish Springs would negatively impact their water rights located in abasin within the boundaries of the Tribe reservation. The Company was able to reach a $7.3 million financial settlement with the Tribe that ended thedispute in September 2007. The settlement agreement is pending ratification by the United States Congress. Tule Desert Action to Reverse Ruling: On May 27, 2009, Lincoln/Vidler filed a joint complaint against the Nevada State Engineer in the Seventh Judicial District Court of the State ofNevada. On July 21, 2009, Lincoln/Vidler filed an additional United States federal complaint against two individuals in their official capacities as theNevada State Engineer and the Acting Nevada State Engineer in the United States District Court for the District of Nevada. As previously disclosed, inNovember 2002, the Nevada State Engineer awarded Lincoln/Vidler a joint permit for 2,100 acre-feet of municipal and industrial use water rights from theTule Desert Groundwater Basin in Lincoln County, Nevada, and ruled that an additional 7,240 acre-feet could be granted pending additional studies byLincoln/Vidler. Lincoln/Vidler conducted those additional engineering and scientific studies. The results of those studies supported the 2002 ruling andwere consistent with the potential drawdown of 7,240 acre-feet of water. As required by the 2002 ruling, in 2008, Lincoln/Vidler submitted these studies to the Nevada State Engineer. In April 2009, the Nevada State Engineerruled that it would permit the appropriation of a total of 2,500 acre-feet, including the 2,100 acre-feet previously awarded in November 2002. Accordingly,the 2009 ruling granted Lincoln/Vidler 396 acre-feet of additional permitted water rights instead of the 7,240 acre-feet of water rights that could have beengranted pursuant to the 2002 ruling. Lincoln/Vidler is seeking the reversal of the Nevada State Engineer’s 2009 ruling and the grant of a permit for anadditional 7,240 acre-feet of water rights. At a hearing held on July 24, 2009, the District Court Judge ruled in favor of Lincoln/Vidler, allowing discovery on various alleged improprieties by theState Engineers. Discovery has been ongoing since August, 2009, in accordance with such District Court’s order. At this time, the Company is unable toreasonably predict an outcome or estimate a range, if any, of any award or grant of relief. 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 resolution of such litigation will not likely have a material adverse effect on the consolidated financial position, results ofoperations or cash flows of the Company.14.RELATED-PARTY TRANSACTIONS: On December 23, 2008, Mr. John R. Hart, President and CEO, and the Company entered into an amendment of Mr. Hart’s May 7, 2007 employmentagreement, effective January 1, 2009. The December 23, 2008 amendment was entered based on the requirements of Section 409A of the United StatesInternal Revenue Code of 1986, as amended. On May 7, 2007, Mr. Hart entered into a new employment agreement with the Company. It superseded and replaced his previous employment agreementwhich was effective January 1, 2006. The May 7, 2007 employment agreement, which expires on December 31, 2012, provides for an initial base salary in2007 of $1.2 million, subject to an annual cost of living adjustment each year during the term of the employment agreement as determined by theCompensation Committee. In 2008, Mr. Hart’s base salary was increased by $500,000, after applying the cost of living adjustment, to $1.7 million inaccordance with the terms of the May 7, 2007 employment agreement. The May 7, 2007 employment agreement does not contain a change in control clause. 82 Mr. Hart’s May 7, 2007 employment agreement provides for an annual incentive award based on the growth in book value per share during the fiscal year,above a threshold. The threshold above which an incentive award is earned is 80% of the S&P 500 annualized total return for the five previous years (but notless than zero). If the increase in book value per share exceeds this threshold the incentive award is equal to 7.5% of such excess multiplied by the number ofshares outstanding at the beginning of the fiscal year. For 2009, the growth in book value per share exceeded the threshold and an incentive award of$509,000 was accrued in the accompanying consolidated financial statements. For 2008, the growth in book value per share did not exceed the thresholdand an incentive award was not earned. In 2007, the Compensation Committee awarded Mr. Hart a one-time discretionary cash bonus of $1.5 million forassuming and fulfilling significantly increased responsibilities due to Mr. Ronald Langley’s retirement as Executive Chairman on December 31, 2007. During its review of the compensation arrangements of the Company’s executive officers in 2009, the Compensation Committee determined that it was inthe Company’s best interests for retention purposes to enter into employment agreements with each of Messrs. Richard H. Sharpe, Maxim C.W. Webb andDamian C. Georgino. Prior to 2009, the general policy was not to offer employment agreements to any named executive officer other than the President andCEO, Mr. John Hart, who was determined to be uniquely critical to our success. The Company entered into these employment agreements because it wasdetermined to be important for retention purposes to formalize the compensation and severance arrangements for these executive officers, which hadpreviously been determined in a largely discretionary manner. The employment agreements entitled officers, Messrs. Sharpe, M. Webb and Georgino to receive 80,000 restricted stock units under the 2005Plan. Officers, Messrs. R. Webb and J. Perri were also granted 30,000 restricted stock units each during 2009 pursuant to the 2005 Plan. The total fair valueof the awards was $5.9 million based on the Company’s closing stock price on the date of grant. This compensation expense will be recognized ratably overthe vesting period of three years. The Compensation Committee determined to grant this amount of equity awards to these executive officers because itdetermined that the overall 2008 compensation of these executive officers was below market and the Company’s targeted levels. The CompensationCommittee also wanted to increase the equity holdings of these executive officers and further align their interests with those of our shareholders, which waswhy the primary increase in the 2009 compensation amounts for these executives was in the form of additional equity awards. The Company’s President andCEO, Mr. Hart, did not receive any restricted stock unit awards during 2009 because his overall 2008 compensation was generally consistent with ourtargeted levels. In March 2000, an investment partnership, PICO Equity Investors, L.P., acquired 3,333,333 shares of PICO common stock for approximately $50 million incash. PICO Equity Investors, L.P. an entity managed by PICO Equity Investors Management, LLC, and owned by three of PICO’s current Directors, namelyMr. John Weil, Mr. Ronald Langley and Mr. John Hart, exercised all voting and investment decisions with respect to these shares. These Directors were notpaid any compensation for the management of either entity. PICO used the $49.8 million net proceeds received from the partnership to develop existingwater and water storage assets, acquire additional water assets, acquire investments, and for general working capital needs. During 2009, PICO EquityInvestors L.P. completed the final distribution of its 3,333,265 PICO common shares to its limited partner and 68 shares of our common stock were distributedto PICO Equity Investors Management, LLC, the general partner, and, thereafter, nearly equally to the three PICO Directors noted above, as a return of theirinvestment. As a result, PICO Equity Investors, L.P. and PICO Equity Investors Management, LLC were liquidated in 2009. The Company has agreements with its President and CEO, and certain other officers and non-employee Directors, to defer compensation into Rabbi Trustaccounts held in the name of the Company. The total value of the deferred compensation obligation is $31.1 million and is included in accompanyingconsolidated balance sheet at December 31, 2009, which includes $1 million of PICO stock with the balance in various publicly traded equities andbonds. Within these accounts at December 31, 2009, the following officers and non-employee Directors are the beneficiaries of the following number ofPICO common shares: Mr. John Hart owns 19,940 PICO shares; Mr. John Weil owns 8,084 PICO shares; and Mr. Carlos Campbell owns 2,644 PICOshares. The trustee for the accounts is Union Bank. The accounts are subject to the claims of outside creditors, and the shares of PICO common stock held inthe accounts are reported as treasury stock in the consolidated financial statements. During 2009, each returning non-employee Director of the Company received 700 shares of restricted common stock of the Company for a total of 4,200shares. The new non-employee Board members each received 543 shares of restricted common stock. The awards vest one year from the date of grant, in Mayand August 2010. The awards were valued using the closing price of the common stock on the date of grant resulting in total compensation expense of$153,000 that will be amortized over the vesting period. 15.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 thecompanies are licensed to operate and file financial statements using statutory accounting practices prescribed or permitted by the respective Departments ofInsurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well asstate laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not soprescribed. 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 certainagents’ balances and office furniture and equipment).(2)Equity in net income of subsidiaries and affiliates is credited directly to shareholders’ equity for statutory accounting purposes.(3)Fixed maturity securities are carried at amortized cost.(4)Loss and loss adjustment expense reserves and unearned premiums are reported net of the impact of reinsurance for statutory accounting purposes. 83 Policyholders’ surplus and net income for the Company’s insurance subsidiaries reported on a statutory basis as of and for each of the three years endedDecember 31, 2009: 2009 2008 2007 Physicians Insurance Company of Ohio:(Unaudited) Policyholders’ surplus$50,822,989 $43,749,365 $80,257,090 Statutory net income (loss)$(4,301,529) $(6,303,194) $3,795,340 Citation Insurance Company: Policyholders’ surplus$20,108,876 $15,242,226 $25,143,218 Statutory net income (loss)$(1,199,806) $(3,787,721) $2,858,624 Both Citation and Physicians meet the minimum risk based capital requirements under the applicable insurance regulations. 16.SEGMENT REPORTING: PICO Holdings, Inc. is a diversified holding company. The goal of the Company is to build and operate businesses where significant value can be createdfrom the development of unique assets, and to acquire businesses which have been identified as undervalued and where its participation can aid in therecognition of the business’s fair value. The Company accounts for its segments consistent with the significant accounting policies described in Note 1. Currently, the major businesses that constitute operating and reportable segments are owning and developing water resources and water storage operationsthrough Vidler; owning and developing real estate and the related mineral, water and geothermal rights through Nevada Land and UCP; “running off” theproperty and casualty and workers’ compensation loss reserves of Citation and the medical professional liability loss reserves of Physicians; and theacquisition and financing of businesses. Segment performance is measured by revenues and segment profit before income tax. In addition, assets identifiable with segments are disclosed as well ascapital expenditures, and depreciation and amortization. The Company has operations and investments both in the U.S. and abroad. Information bygeographic region is based upon the location of the subsidiary. Consequently, international revenues in the segment information by significant geographicregion are revenues earned by the foreign subsidiary.Water Resources and Water Storage Operations Vidler is engaged in the following water resources and water storage activities:·The development of water for end-users in the southwestern United States, namely water utilities, municipalities, developers, or industrialusers. Typically, the source of water is from identifying and developing a new water supply, or a change in the use of an existing water supply fromagricultural to municipal and industrial; and·The construction and development of water storage facilities for the purchase and recharge of water for resale in future periods, and distributioninfrastructure to more efficiently use existing and new supplies of water.Real Estate Operations PICO is engaged in real estate development and related mineral, geothermal and water rights operations through its subsidiaries Nevada Land and UCP inNevada and California. Revenue is generated by sale of real estate, and leasing for grazing, agricultural and other uses. Revenue is also generated from thedevelopment of water, geothermal and mineral rights in the form of outright sales and royalty agreements.Insurance Operations in Run Off This segment is composed of Physicians and Citation. In this segment, revenues come from investment holdings of the insurance companies. Investmentsdirectly related to the insurance operations are included within those segments. As expected during run-off, the majority of revenues is net investmentincome and realized gains. Until 1995, Physicians and its subsidiaries wrote medical professional liability insurance, primarily in the state of Ohio. The Company ceased writing newbusiness and is in “run off.” Run off means that the company is processing claims arising from historical business, and selling investments when funds areneeded to pay claims. Citation wrote commercial property and casualty insurance in California and Arizona and workers’ compensation insurance inCalifornia. Citation ceded all its workers’ compensation business in 1997, and ceased writing property and casualty business in December 2000 and is alsoin run off.Corporate This segment consists of cash and fixed-income securities, a 37% equity interest in spigit, deferred compensation assets and liabilities held in trust for thebenefit of several officers and non-employee directors of the Company, and other parent company assets and liabilities. 84 The Company seeks to acquire businesses and interests in businesses which are undervalued based on fundamental analysis -- that is, the assessment ofwhat the business is worth, based on the private market value of its assets, earnings, and cash flow. Typically, the business will be generating free cash flowand have a low level of debt, or, alternatively, strong interest coverage ratios or the ability to realize surplus assets. As well as being undervalued, thebusiness must have special qualities such as unique assets, a potential catalyst for change, or be in an industry with attractive economics. The Company alsoacquires businesses and interests in businesses where there is significant unrecognized value in land and other tangible assets. Segment information by major operating segment follows: Real EstateOperations WaterResources andWater StorageOperations InsuranceOperations inRun Off Corporate Consolidated 2009 Total revenues (charges) $12,435,718 $4,334,190 $(957,837) $219,922 $16,031,993 Net investment income 960,154 408,086 2,567,621 2,002,710 5,938,571 Depreciation and amortization 43,399 1,076,430 2,757 167,233 1,289,819 Income (loss) before income taxes and noncontrolling interest (1,156,098) (16,850,291) (1,741,576) (21,271,297) (41,019,262)Total assets 149,217,191 207,565,121 161,688,938 169,145,373 687,616,623 Capital expenditure 60,872 325,456 20,947 42,614 449,889 2008 Total revenues (charges) $5,470,434 $11,271,926 $(2,156,834) $45,766,014 $60,351,540 Net investment income 2,203,265 968,680 3,213,661 3,759,824 10,145,430 Depreciation and amortization 20,211 1,098,538 1,029 140,693 1,260,471 Income (loss) before income taxes and noncontrolling interest 365,758 4,184,616 (1,485,856) 53,324,517 56,389,035 Total assets 97,592,062 225,870,410 157,186,357 111,984,967 592,633,796 Capital expenditure 81,680 15,039,386 228,904 15,349,970 2007 Total revenues $13,479,254 $7,937,461 $7,609,014 $4,903,019 $33,928,748 Net investment income 3,139,791 4,417,871 3,457,187 6,024,951 17,039,800 Depreciation and amortization 18,364 1,042,388 1,598 43,677 1,106,027 Income (loss) before income taxes and noncontrolling interest 8,108,724 (5,283,264) 9,779,300 (10,591,095) 2,013,665 Total assets 83,750,531 231,863,512 221,348,861 139,379,376 676,342,280 Capital expenditure 10,370 48,670,231 301,481 48,982,082 Segment information by significant geographic region: United States Europe Consolidated 2009 Total revenues $16,013,199 $18,794 $16,031,993 Net investment income 5,933,401 5,170 5,938,571 Loss before income taxes and noncontrolling interest (40,866,513) (152,749) (41,019,262)Long-lived assets 301,161,456 301,161,456 2008 Total revenues $11,222,981 $49,128,559 $60,351,540 Net investment income 9,045,735 1,099,695 10,145,430 Income (loss) before income taxes and noncontrolling interest (3,645,458) 60,034,493 56,389,035 Long-lived assets 273,226,670 273,226,670 2007 Total revenues $32,341,826 $1,586,922 $33,928,748 Net investment income 15,493,618 1,546,182 17,039,800 Income before income taxes and noncontrolling interest 1,876,937 136,728 2,013,665 Long-lived assets 201,818,186 201,818,186 85 17.SUBSEQUENT EVENTS: In January 2010, the Company acquired 100% of a company whose primary asset is approximately 126,000 acre–feet of stored water (“net rechargecredits”) in the Roosevelt Water Conservation District (“RWCD”) for $15.8 million. For the purposes of storing water, the RWCD is part of the Phoenix,Arizona Active Management Area (which corresponds to the Phoenix metropolitan area). Accordingly, this stored water may be recovered and usedanywhere in the Phoenix Active Management Area and could have a variety of uses for commercial developments within the Phoenix metropolitan area.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. The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files orsubmits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Theseinclude controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with theparticipation of the Chief Executive and Chief Financial Officers, evaluated the effectiveness of the Company’s disclosure controls and procedures as ofDecember 31, 2009. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were effective as of December 31, 2009 at the reasonable assurance level. Management’s Annual Report on Internal Control over Financial Reporting. Management of the Company is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control overfinancial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes of accounting principles generally accepted in the United States. Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assuranceof achieving their control objectives. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteriaset forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on thisevaluation, management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2009, theCompany’s internal control over financial reporting was effective. Deloitte & Touche LLP, the independent registered public accounting firm who audited the Company’s consolidated financial statements included in thisForm 10-K, has issued a report on the Company’s internal control over financial reporting, which is included herein. Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2009, that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. 86 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PICO Holdings, Inc.PICO Holdings, Inc.La Jolla, CA We have audited the internal control over financial reporting of PICO Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2009, based oncriteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. TheCompany's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on 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 thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principalfinancial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America (“generally accepted accounting principles”). A company's internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely 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 ofcontrols, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on thecriteria 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 financialstatements as of and for the year ended December 31, 2009 of the Company and our report dated February26, 2010 expressed an unqualified opinion on thosefinancial statements and included an explanatory paragraph relating to the adoption of the provisions of accounting guidance for uncertain tax positionsnow codified as Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes, effective January 1,2007. /s/ DELOITTE & TOUCHE LLP San Diego, CAFebruary 26, 2010 87 ITEM 9B.OTHER INFORMATION None.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item regarding directors will be set forth in the section headed “Election of Directors” in our definitive proxy statementwith respect to our 2010 annual meeting of shareholders, to be filed on or before April 30, 2010 and is incorporated herein by reference. The informationrequired by this item regarding the Company’s code of ethics will be set forth in the section headed “Code Of Ethics” in our definitive 2010 proxy statementand is incorporated herein by reference. Information regarding executive officers is set forth in Item 1 of Part 1 of this Report under the caption “ExecutiveOfficers.”ITEM 11.EXECUTIVE COMPENSATION The information required by this item will be set forth in the section headed “Executive Compensation” in our 2010 definitive proxy statement and isincorporated herein by reference.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDERMATTERS The information required by this item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in our2010 definitive proxy statement and is incorporated herein by reference.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item will be set forth in the section headed “Certain Relationships and Related Transactions” and “CompensationCommittee, Interlocks and Insider Participation” in our definitive 2010 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 2010 proxy statementand is incorporated herein by reference.PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) FINANCIAL SCHEDULES AND EXHIBITS. 1.Financial Statement Schedules. Schedules are omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because theinformation required is included in the consolidated financial statements or notes thereto. 88 2.ExhibitsExhibitNumber Description 3(i) Amended and Restated Articles of Incorporation of PICO. (1)3(ii) Amended and Restated By-laws of PICO. (2) 4.1 Form of Indenture relating to Debt Securities. (3) 10.1† PICO Holdings, Inc. 2005 Long-Term Incentive Plan. (4) 10.2† Form of Restricted Stock Units Agreement. (5) 10.3† Form of Notice of Grant of Restricted Stock Units. (5) 10.4† Form of Restricted Stock Award Grant for Directors. (6) 10.5† Trust for PICO Deferred Holdings, LLC Executive Deferred Compensation dated November 25, 2008 between PICO Deferred Holdings, LLCand Union Bank of California, N.A. relating to a Deferred Compensation Plan originally established in December 31, 1997. 10.6† Trust for PICO Deferred Holdings, LLC Executive Deferred Compensation dated November 25, 2008 between PICO Deferred Holdings, LLCand Union Bank of California, N.A. relating to a Deferred Compensation Plan originally established in December 7, 2004. 10.7† Trust for PICO Deferred Holdings, LLC Non-Employee Director Deferred Compensation dated November 25, 2008 between PICO DeferredHoldings, LLC and Union Bank of California, N.A. relating to a Deferred Compensation Plan originally established in September 25, 2001. 10.8† PICO Deferred Holdings, LLC Deferred Compensation Plan. 10.9† Employment Agreement dated May 7, 2007, by and between PICO Holdings, Inc. and John R. Hart. (7) 10.10† Amendment to Employment Agreement, effective as of January 1, 2009, by and between PICO Holdings, Inc. and John R. Hart. (8) 10.11† Amendment to PICO Holdings, Inc. 2005 Long-Term Incentive Plan 2009 Restricted Stock Unit Award Agreement, dated as of April 2, 2009by and between the Company and W. Raymond Webb. (9) 10.12† Employment Agreement, dated March 3, 2009, by and between PICO Holdings, Inc. and Richard H. Sharpe. (5) 10.13† Employment Agreement, dated March 3, 2009, by and between PICO Holdings, Inc. and Maxim C.W. Webb. (5) 10.14† Employment Agreement, dated March 3, 2009, by and between PICO Holdings, Inc. and Damian C. Georgino. (5) 10.15† Infrastructure Dedication Agreement between Fish Springs Ranch, LLC, and Washoe County, Nevada. (10) 21.1 Subsidiaries of PICO Holdings, Inc. 23.1 Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP. 23.2 Consent of Daniel B. Stephens and Associates, Inc. 23.3 Consent of Peter A. Mock, Ph.D., R.G.P.H. 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 Actof 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 Actof 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). † Indicates compensatory plan, contract or arrangement in which directors or executive officers may participate. (1)Incorporated by reference to with the Quarterly Report on Form 10-Q filed with the SEC on November 7, 2007. (2)Incorporated by reference to Form 8-K filed with the SEC on May 19, 2009. (3)Incorporated by reference to Form S-3 filed with the SEC on November 20, 2007. (4)Incorporated by reference to Proxy Statement for Special Meeting of Shareholders on December 8, 2005, dated November 8, 2005, and filedwith the SEC on November 8, 2005. (5)Incorporated by reference to Form 8-K filed with the SEC on March 9, 2009. (6)Incorporated by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 6, 2009. (7)Incorporated by reference to Form 8-K filed with the SEC on May 9, 2007. (8)Incorporated by reference to the Annual Report filed on Form 10-K with the SEC on March 2, 2009. (9)Incorporated by reference to Form 8-K filed with the SEC on April 7, 2009. (10)Incorporated by reference to the Quarterly Report filed on Form 10-Q with the SEC on November 7, 2007. 89 SIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized.Date: February 26, 2010PICO Holdings, Inc. By: /s/ John R. HartJohn R. HartChief Executive OfficerPresident and DirectorPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on February 26, 2010 by the following personsin the capacities indicated./s/ John D. WeilChairman of the BoardJohn D. Weil /s/ John R. HartChief Executive Officer, President and DirectorJohn R. Hart(Principal Executive Officer) /s/ Maxim C. W. WebbChief Financial Officer and TreasurerMaxim C. W. Webb(Chief Accounting Officer) /s/ Carlos C. CampbellDirectorCarlos C. Campbell /s/ S. Walter Foulkrod, III, Esq.DirectorS. Walter Foulkrod, III, Esq. /s/ Ronald LangleyDirectorRonald Langley /s/ Kristina M. LeslieDirectorKristina M. Leslie /s/ Richard D. Ruppert, MDDirectorRichard D. Ruppert, MD /s/ Kenneth J. SlepickaDirectorKenneth J. Slepicka /s/ Julie H. Sullivan, Ph.D.DirectorJulie H. Sullivan, Ph.D. TRUST FORPICO DEFERRED HOLDINGS, LLCEXECUTIVE DEFERRED COMPENSATIONThis Agreement made this 25th day of November, 2008, by and between PICO Deferred Holdings, LLC (“PICO”) and Union Bank of California, N.A.(“Trustee”);WHEREAS, PICO Holdings, Inc., which is the sole owner of PICO, and certain of its affiliates have entered into deferred compensation arrangements(“Deferral Agreements”) with certain of their executive management employees;WHEREAS, PICO and certain of its affiliates have incurred or expect to incur liability to pay deferred compensation under the terms of the DeferralAgreements;WHEREAS, effective September 30, 2006, PICO assumed sponsorship of the December 31, 1997 deferred compensation plan from PICO Holdings,Inc. along with all liabilities to provide benefit payments to participants and beneficiaries thereunder, although PICO Holdings, Inc. remained and remains aparticipating employer;WHEREAS, PICO wishes to establish a Trust (“Trust”) and to contribute to the Trust assets that, shall be held therein, subject to the claims ofcreditors in the event of Insolvency (as herein defined) of PICO or any affiliate, until paid to employees and their beneficiaries in such manner and at suchtimes as specified in the Deferral Agreements;WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the DeferralAgreements as unfunded agreements maintained for the purpose of providing deferred compensation for a select group of management or highlycompensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974;WHEREAS, PICO wishes to appoint Trustee, and Trustee wishes to accept appointment, as the successor Trustee to Huntington National Bank, N.A.;WHEREAS, it is the intention of PICO to hold assets in this Trust to provide a source of funds to assist it in the meeting of the liabilities under theDeferral Agreements;NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:Section 1. ESTABLISHMENT OF TRUST.(a) PICO hereby deposits with Trustee in Trust the cash sum of $100.00, which shall become the principal of the Trust to be held, administered anddisposed of by Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall initially be, revocable by PICO. The Trust shall become irrevocable upon a Change of Control of PICO, asdefined herein. For purposes of this Trust, Change of Control shall be deemed to have occurred in the reasonable discretion of the Board of Directors inconsideration of the following guidelines: (i) any person (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) is or becomes thebeneficial owner (as defined in Rule 13 d-3 under the Exchange Act), directly or indirectly of securities of PICO representing thirty percent (30%) or more ofPICO’s outstanding securities; or (ii)individuals who are members of PICO’s Board of Directors on the date hereof (the “Incumbent Board”) cease for anyreason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by avote of at least two-thirds of the directors comprising the Incumbent Board, or whose nomination for election by the stockholders of PICO was approved bythe nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board. (c) The Trust is intended to be a grantor trust, of which PICO and any affiliate participating in the Plan, are the grantors, within the meaning ofsubpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of PICO and shall be used exclusively forthe uses and purposes of paying amounts due under the Deferral Agreements and general creditors as herein set forth. Employees entering into DeferralAgreements and their beneficiaries shall have no preferred claim on, or any beneficial-ownership interest in, any assets of the Trust. Any rights created underthe Deferral Agreements and this Trust Agreement shall be mere unsecured contractual rights of employees and their beneficiaries against PICO or anyaffiliate. Any assets held by the Trust will be subject to the claims of the general creditors of PICO and any affiliate (to the extent of each entity’sproportionate interest in the Trust) under federal and state law in the event of Insolvency, as set forth in Section 3(a) herein. (e) Within thirty (30) days after the initial establishment of the Trust, PICO and its affiliates shall deposit into the Trust cash in an amount equal tothe total amount deferred under all Deferral Arrangements with employees from the effective date of such Deferral Agreements to the date of establishment ofthe Trust. In addition, within fifteen (15) days after each subsequent calendar month following the establishment of this Trust, PICO (and any participatingaffiliate) shall be required to deposit into the Trust cash in an amount equal to the amount deferred from all employees’ Deferral Agreements for suchmonth. PICO in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in Trust with Trustee. Upon aChange of Control PICO shall as soon as possible but in no event later than thirty (30) days following the Change of Control make an irrevocablecontribution to the Trust in an amount that is sufficient to pay each employee the amount (as adjusted for earnings and losses) to which he or she would beentitled pursuant to the terms of the employee’s Deferral Agreement as of the date of the Change of Control. Notwithstanding anything herein to thecontrary, the Trustee shall have no authority or obligation to enforce the collection of any contribution or transfer to the Trust. (f) Signing Authority; Trustee’s Reliance. The PICO shall certify in writing to the Trustee the names and specimen signatures of all those who areauthorized to act as or on behalf of PICO (“Authorized Person”), and those names and specimen signatures shall be updated as necessary by a duly authorizedofficer of PICO. The PICO shall promptly notify the Trustee if any person so designated is no longer authorized to act on its behalf. Until the Trusteereceives written notice that an Authorized Person is no longer authorized to act on behalf of PICO, the Trustee may continue to rely on PICO’s designation ofsuch person.   Section 2. PAYMENTS TO EXECUTIVE EMPLOYEES AND THEIR BENEFICIARIES.(a) PICO shall deliver to Trustee a schedule (the “Payment Schedule”) that indicates the amounts payable in respect of each employee, and thatcontains such other instructions as to enable, the Trustee to make any distributions to each employee as required under his or her Deferral Agreement. Exceptas otherwise provided herein, Trustee shall make payments in accordance with such Payment Schedule. No set-off from any amounts payable to an employeehereunder shall be permitted without the employee’s written consent. No changes shall be made by PICO to the Payment Schedule without the writtenconsent of the affected employee (except for a change permitted under an employee’s Deferral Agreement or a change to an immediate lump sum payment ofall remaining benefits upon termination of all Deferral Agreements). (b) Tax Payments and Reporting. PICO and not the Trustee shall be responsible for all calculations and payment of income tax, inheritance, estate,or other taxes, and all income tax reporting in connection with the Trust and any contributions thereto and distributions therefrom, as well as all earnings andgains or losses of the Trust. Unless otherwise agreed in writing by the parties, the Trustee shall prepare annually the grantor tax advice information letter forthe Trust and promptly provide it to PICO for use in preparing its corporate income tax return. With respect to the payments to Participants, the Trustee shallwithhold the appropriate federal, state and local taxes required to be withheld and shall properly report and remit such payments to the proper taxingauthorities only to the extent directed by PICO and agreed to by the Trustee. PICO agrees to indemnify and defend Trustee against any liability for any taxes,interest or penalties resulting from or relating to the Trust. (c) The entitlement of an employee or his or her beneficiaries to deferred amounts under the employee’s Deferral Agreement shall be certified by theCompensation Committee of the Board of Directors of PICO or such party as it shall designate and any claim for such benefits shall be considered andreviewed under the procedures set out in the Deferral Agreement. (d) PICO (or any affiliate) may make payment of deferred compensation directly to employees or their beneficiaries as they become due under theterms of the Deferral Agreements, PICO shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable toemployees or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits inaccordance with the terms of any Deferral Agreement, PICO shall make the balance of each such payment in accordance with the terms of the DeferralAgreement. Trustee shall notify PICO where principal and earnings are not sufficient. Section 3.TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN PICO IS INSOLVENT.(a) Trustee shall cease payment of benefits to all employees and their beneficiaries if PICO or any other affiliate participating in the Trust isInsolvent. “Insolvent” for purposes of this Trust Agreement shall mean if (i) an entity is unable to pay its debts as they become due, or (ii) an entity is subjectto a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section l(d) hereof, the principal and income of the Trust shall be subject toclaims of general creditors of PICO and any participating affiliate under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of PICO and any participating affiliate shall have the duty to inform Trustee inwriting of such entity’s Insolvency. If a person claiming to be a creditor of PICO or a participating affiliate alleges in writing to Trustee that such entity hasbecome Insolvent, Trustee shall determine whether such entity is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits toemployees and beneficiaries. (2) Unless Trustee has actual knowledge of the Insolvency of PICO or any participating affiliate, or has received notice from any of suchentities or from a person claiming to be a creditor alleging that any of such entities is Insolvent, Trustee shall have no duty to inquire whether the entity isInsolvent. Trustee may in all events rely on such evidence concerning the entity’s solvency as may be furnished to Trustee and that provides Trustee with areasonable basis for making a determination concerning the entity’s solvency. (3) If at any time Trustee has determined that PICO or a participating affiliate is Insolvent, Trustee shall discontinue payments to employeesor their beneficiaries and shall hold the assets of the Trust for the benefit of such entity’s general creditors. The Trust assets set aside for the benefit of theInsolvent entity’s general creditors shall not exceed the Insolvent entity’s proportionate interest in the Trust. The Insolvent entity’s proportionate interest inthe Trust shall be determined in accordance with the ratio of Trust assets held for the benefit of the Insolvent entity’s employees to the total assets of theTrust. Nothing in this Trust Agreement shall in any way diminish any rights of employees or their beneficiaries to pursue their rights as general creditors ofthe Insolvent entity with respect to benefits due under the Deferral Agreement or otherwise. (4) Trustee shall resume the payment of benefits to employees or their beneficiaries in accordance with Section 2 of this Trust Agreementonly after Trustee has determined that PICO and/or the participating affiliate (as applicable) are not Insolvent (or are no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof andsubsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to employeesor their beneficiaries under the terms of the Deferral Agreements for the period of such discontinuance, less the aggregate amount of any payments made toemployees or their beneficiaries by PICO (or any affiliate) in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. PAYMENTS TO PICO.Except as provided in Section 3 hereof after the Trust has become irrevocable, PICO shall have no right or power to direct Trustee to retain to PICOor to divert to others any of the Trust assets before all payment of benefits have been made to employees and their beneficiaries pursuant to the terms of theDeferral Agreement. Notwithstanding the preceding sentence, the Trustee may reimburse PICO (or any affiliate) for benefits paid directly by PICO (or anyaffiliate) to employees and beneficiaries.Section 5. INVESTMENT AUTHORITY.PICO shall provide investment direction to the Trustee. All rights associated with assets of the Trust shall be exercised by Trustee or the persondesignated by Trustee, and shall in no event be exercisable by or rest with employees. Notwithstanding the preceding sentence, PICO may permit employeeswho have entered into Deferral Agreements to select specific investments for such deferred amounts, subject to its approval in accord with the attachedExhibit A. Trustee shall be notified if such delegation of investment direction has been made to the employees. In the event that PICO (or its designee) shallfail to provide investment direction, Trustee shall invest the assets of the Trust in federally insured savings accounts or certificates of deposits (in amountsnot in excess of insured limits) or in a money market mutual fund.Section 6. CHANGE IN CONTROL.Upon a Change in Control, the Trustee shall become responsible for maintaining a separate Account for each Participant under the Plan based uponsegregating the Accounts using PICO’s latest statements of value for each Participant’s Account. The Trustee shall thereafter periodically adjust suchAccounts pursuant to the procedures described in the Plan. The Trustee may appoint a third-party administrator to maintain such Accounts. The full expenseincurred by the Trustee in maintaining such Accounts shall be reimbursed to the Trustee out of Trust assets. PICO shall reimburse the Trust for such expense,provided, however, that the Trustee shall have no duty to enforce the Employer’s obligation for such reimbursement.Upon and following a Change in Control, the Trustee shall have full responsibility for the investment and reinvestment of all Trust assets except forEmployer Securities and insurance contracts, and PICO’s powers to invest, manage and control such assets, including the power to appoint InvestmentManagers and issue investment guidelines with respect to the Trust, shall be limited to Employer Securities and insurance contracts. The Trustee may, in itssole discretion, appoint one or more Investment Managers with respect to the Trust or any part thereof and may establish and issue to such InvestmentManagers investment guidelines.Section 7. DISPOSITION OF INCOME.During the term of this Trust, all of the income received by the Trust shall be accumulated in the Trust.Section 8. ACCOUNTING BY TRUSTEE.Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including suchspecific records as shall be agreed upon in writing between PICO and Trustee. Within thirty (30) days following the close of each calendar year and withinthirty (30) days after the removal or resignation of the Trustee, Trustee shall deliver to PICO a written account of its administration of the Trust during suchyear or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, income, receipts,disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceedsof such purchases or sales, and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal orresignation, as the case may be. Upon the expiration of such period, the account shall be deemed approved by the PICO, except with respect to any act ortransaction as to which the PICO files a written objection with the Trustee within such thirty-day period. Nothing in this Section 8 is intended to deprivePICO of any rights to which it may be entitled by law. With respect to the written account statement, the Trustee shall correct any error it has made to theextent such error occurred within the applicable statue of limitations period. If such error is discovered more than sixty days after the end of an accountingperiod and beyond the timeframe for electronic records retention or for ability to reconcile balances on the Trustee’s trust accounting system, the correctionof such error may be reflected on a trust accounting statement subsequent to the statement for the period in which the error occurred.Notwithstanding anything herein to the contrary, the Trustee shall have no duty or responsibility to obtain valuations of any assets of the Trust Fund, thevalue of which is not readily determinable on an established market. PICO shall bear sole responsibility for determining said valuations and shall beresponsible for providing said valuations to the Trustee in a timely manner. The Trustee may conclusively rely on such valuations provided by PICO andshall be indemnified and held harmless by PICO with respect to such reliance.Notwithstanding anything herein to the contrary, the Trustee shall accept the unit price provided periodically by PICO: for the PICO Holdings, Inc. IncomeOriented Investments Unit Fund, the PICO Holdings, Inc. Value Stocks Unit Fund and any other unitized fund invested covered under this TrustAgreement. The Trustee may conclusively rely on such unit prices provided by PICO and shall be indemnified and held harmless by PICO with respect tosuch reliance. The Trustee shall not be required to certify the accuracy of the unit prices on any financial statement.Section 9. RESPONSIBILITY OF TRUSTEE.(a) Trustee shall act with the care, skill prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacityand familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur noliability to any person for any action taken pursuant to a direction, request or approval given by PICO which is contemplated by, and in conformity with, theterms of this Trust and is given in writing by PICO. In the event of a dispute between PICO and a party, Trustee may apply, at the expense of the Trust, to acourt of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes or defends any litigation or threatened litigation arising in connection with this Trust, PICO agrees to indemnify Trusteeagainst Trustee’s costs, expenses and liabilities (including without limitation, attorneys’ fees and expenses) relating thereto and to be primarily liable forsuch payments. If PICO does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from theTrust. Notwithstanding the preceding sentences, in no event shall PICO indemnify Trustee (nor shall any payments be made from the Trust on behalf ofTrustee) if the Trustee is determined to have acted negligently in carrying out its duties with respect to the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for PICO generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any ofits duties or obligations hereunder. Trustee shall pay, from the Trust, the fees and expenses relating to hiring of such agents, accountants and otherprofession. Reasonable and customary expenses may be incurred by Trustee without approval. (e) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided,however, that if an balance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of an insurance policy other than theTrust, to assign such policy (as distinct from conversion of such policy to a different form) other than to a successor Trustee, or to loan to any person theproceeds of any borrowing against such policy. (f) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power thatcould give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure andAdministrative Regulations promulgated pursuant to the Internal Revenue Code. (g) To invest funds in any type of interest-bearing account including, without limitation, time certificates of deposit or interest-bearing accountsissued by UNION BANK OF CALIFORNIA, N.A. To use other services or facilities provided by the UnionBanCal Corporation (UNBC), its subsidiaries oraffiliates, including but not limited to Union Bank of California, N.A. (Bank), to the extent allowed by applicable law and regulation. Such services mayinclude but are not limited to (1) the placing of orders for the purchase, exchange, investment or reinvestment of securities through any brokerage serviceconducted by, and (2) the purchase of units of any registered investment company managed or advised by Bank, UNBC, or their subsidiaries or affiliatesand/or for which Bank, UNBC or their subsidiaries or affiliates act as custodian or provide other services for a fee, including, without limitation, theHighMark Group of mutual funds. The parties hereby acknowledge that the Bank may receive fees for such services in addition to the fees payable under thisAgreement. Fee schedules for additional services shall be delivered to the appropriate party in advance of the provisions of such services. Independentfiduciary approval of compensation being paid to the Bank will be sought in advance to the extent required under applicable law and regulation. If UnionBank of California, N.A. does not have investment discretion, the services referred to above, as well as any additional services, shall be utilized only upon theappropriate direction of an authorized party. (h) To cause all or any part of the Trust to be held in the name of the Trustee (which is such instance need not disclose its fiduciary capacity), or, aspermitted by law, in the name of any nominee, including the nominee name of any depository, and to acquire for the Trust any investment in bearer form; butthe books and records of the Trust shall at all times show that all such investments are a part of the Trust and the Trustee shall hold evidences of title to allsuch investments as are available; (i) To serve as custodian with respect to the Trust assets, to hold assets or to hold eligible assets at the Depository Trust Company or otherdepository; (j) To permit such inspections of documents at the principal office of the Trustee as are required by law, subpoena or demand by United States orstate agency during normal business hours of the Trustee; (k) To seek written instructions from PICO on any matter and await written instructions without incurring any liability. If at any time PICO shouldfail to give directions to the Trustee, the Trustee may act in the manner that in its discretion it deems advisable under the circumstances for carrying out thepurposes of this Trust. Such actions shall be conclusive on PICO and the Participants on any matter if written notice of the proposed action is given to PICOfive (5) days prior to the action being taken, and the Trustee receives no response; (l) To impose a reasonable charge to cover the cost of furnishing to Participants statements or documents; (m) To act upon proper written directions of PICO or any Participant, as applicable, including directions given by photostatic teletransmission usingfacsimile signature. If oral instructions are given, to act upon those in Trustee’s discretion prior to receipt of written instructions. Trustee’s recording or lackof recording of any such oral instructions taken in Trustee’s ordinary course of business shall constitute conclusive proof of Trustee’s receipt or non-receipt ofthe oral instructions; (n) To pay from the Trust the expenses reasonably incurred in the administration of the Trust; (o) To maintain insurance for such purposes, in such amounts and with such companies as PICO shall elect, including insurance to cover liability orlosses occurring by reason of the acts or omissions of fiduciaries (but only if such insurance permits recourse by the insurer against he fiduciary in the case ofa breach of a fiduciary obligation by such fiduciary); (p) As directed by PICO to cause the benefits provided under the Plan to be paid directly to the persons entitled thereto under the Plan, and in theamounts and at the times and in the manner specified by the Plan, and to charge such payments against the Trust and Accounts with respect to which suchbenefits are payable; (q) To exercise and perform any and all of the other powers and duties specified in this Trust Agreement or the Plans; and in addition to the powerslisted herein, to do all other acts necessary or desirable for the proper administration of the Trust, as though the absolute owner thereof. Section 10. COMPENSATION AND EXPENSES OF TRUSTEE.PICO shall pay all administrative and Trustee’s fees and approved expenses relating to the operation of the Trust. If not so paid, the fees andexpenses shall be paid from the Trust. However, all brokerage commissions shall be charged to the employee’s account for whom the trade was made.Section 11. RESIGNATION AND REMOVAL OF TRUSTEE.(a) Trustee may resign at any time by written notice to PICO, which shall be effective thirty (30) days after receipt of such notice unless PICO andTrustee agree otherwise. (b) Trustee may be removed by PICO on thirty (30) days notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successorTrustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, and upon receipt by the Trustee of allproper documentation unless PICO extends the time limit. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 12 hereof, by the effective date of resignation orremoval under paragraph(s) (a) or (b) of this Section. If no successor Trustee is designated within thirty (30) days of notice of the Trustee’s resignation orremoval, then the chief executive officer and chief financial officer of PICO are hereby designated as the successor Co-Trustees. Further, if no suchappointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trusteein connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 12. APPOINTMENT OF SUCCESSOR.(a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, PICO may appoint any third party, such as a bank trust departmentor other party that may be granted trustee powers under state law, as a successor to replace Trustee upon resignation or removal. Notwithstanding thepreceding sentence, if the Trustee resigns or is, removed within one (1) year after a Change in Control of PICO, the Trustee shall select the SuccessorTrustee. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee,including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by PICO or the successorTrustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee. The successor Trustee shall not be responsible for and PICOshall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other pastevent, or any condition existing at the time it becomes successor’ Trustee. Notwithstanding the preceding sentence, this indemnification shall not includeliability resulting from actions or inactions of the successor Trustee after it becomes aware (or should have become aware) of any past event or othercondition that requires corrective action on the part of the successor Trustee. Section 13. AMENDMENT OR TERMINATION.(a) This Trust Agreement may be amended by a written instrument executed by Trustee and PICO. Notwithstanding the foregoing, no suchamendment shall conflict with the terms of the Deferral Agreement or shall make the Trust revocable after it has become irrevocable in accordance withSection I (b) hereof. In addition, no such amendment shall alter the terms of the Trust relating to the special requirements imposed hereunder on or after aChange of Control of PICO without the written approval of employees who have entered into Deferral Agreements. (b) The Trust shall not terminate until the date on which employees and their beneficiaries are no longer entitled to benefits pursuant to the terms oftheir Deferral Agreements. Upon termination of the Trust, any sets remaining in the Trust after distribution of all benefits to employees’ beneficiaries shall bereturned to PICO. Section 14. MISCELLANEOUS.(a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating theremaining provisions hereof.(b) Benefits payable to employees and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity),alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.(c) This Trust Agreement shall be governed by and construed in accordance with the laws of California.Section 15. EFFECTIVE DATEThe effective date of this Trust Agreement shall be November 25, 2008.IN WITNESS WHEREOF, executed as of the Effective Date by: “PICO” PICO DEFERRED HOLDINGS, LLC By: /s/ James F. MosierJames F. Mosier, SecretaryDated: November 25, 2008 By: /s/ Richard H. SharpeRichard H. Sharpe, PresidentDated: December 3, 2008 “TRUSTEE” UNION BANK OF CALIFORNIA, N.A. By: /s/ John FultonJohn Fulton, Vice PresidentDated: November 25, 2008 By: /s/ Jane L. ErwinJane L. Erwin, VP and Trust OfficerDated: November 25, 2008  EXHIBIT ANone TRUST FORPICO DEFERRED HOLDINGS, LLCEXECUTIVE DEFERRED COMPENSATIONThis Agreement made this 25th day of November, 2008, by and between PICO Deferred Holdings, LLC (“PICO”) and Union Bank of California, N.A.(“Trustee”);WHEREAS, PICO Holdings, Inc., which is the sole owner of PICO, and certain of its affiliates have entered into deferred compensation arrangements(“Deferral Agreements”) with certain of their executive management employees;WHEREAS, PICO and certain of its affiliates have incurred or expect to incur liability to pay deferred compensation under the terms of the DeferralAgreements;WHEREAS, effective September 30, 2006, PICO assumed sponsorship of the December 7, 2004 deferred compensation plan from PICO Holdings,Inc. along with all liabilities to provide benefit payments to participants and beneficiaries thereunder, although PICO Holdings, Inc. remained and remains aparticipating employer;WHEREAS, PICO wishes to establish a Trust (“Trust”) and to contribute to the Trust assets that, shall be held therein, subject to the claims ofcreditors in the event of Insolvency (as herein defined) of PICO or any affiliate, until paid to employees and their beneficiaries in such manner and at suchtimes as specified in the Deferral Agreements;WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the DeferralAgreements as unfunded agreements maintained for the purpose of providing deferred compensation for a select group of management or highlycompensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974;WHEREAS, PICO wishes to appoint Trustee, and Trustee wishes to accept appointment, as the successor Trustee to Huntington National Bank, N.A.;WHEREAS, it is the intention of PICO to hold assets in this Trust to provide a source of funds to assist it in the meeting of the liabilities under theDeferral Agreements;NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:Section 1. ESTABLISHMENT OF TRUST.(a) PICO hereby deposits with Trustee in Trust the cash sum of $100.00, which shall become the principal of the Trust to be held, administered anddisposed of by Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall initially be, revocable by PICO. The Trust shall become irrevocable upon a Change of Control of PICO, asdefined herein. For purposes of this Trust, Change of Control shall be deemed to have occurred in the reasonable discretion of the Board of Directors inconsideration of the following guidelines: (i) any person (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) is or becomes thebeneficial owner (as defined in Rule 13 d-3 under the Exchange Act), directly or indirectly of securities of PICO representing thirty percent (30%) or more ofPICO’s outstanding securities; or (ii)individuals who are members of PICO’s Board of Directors on the date hereof (the “Incumbent Board”) cease for anyreason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by avote of at least two-thirds of the directors comprising the Incumbent Board, or whose nomination for election by the stockholders of PICO was approved bythe nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board. (c) The Trust is intended to be a grantor trust, of which PICO and any affiliate participating in the Plan, are the grantors, within the meaning ofsubpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of PICO and shall be used exclusively forthe uses and purposes of paying amounts due under the Deferral Agreements and general creditors as herein set forth. Employees entering into DeferralAgreements and their beneficiaries shall have no preferred claim on, or any beneficial-ownership interest in, any assets of the Trust. Any rights created underthe Deferral Agreements and this Trust Agreement shall be mere unsecured contractual rights of employees and their beneficiaries against PICO or anyaffiliate. Any assets held by the Trust will be subject to the claims of the general creditors of PICO and any affiliate (to the extent of each entity’sproportionate interest in the Trust) under federal and state law in the event of Insolvency, as set forth in Section 3(a) herein. (e) Within thirty (30) days after the initial establishment of the Trust, PICO and its affiliates shall deposit into the Trust cash in an amount equal tothe total amount deferred under all Deferral Arrangements with employees from the effective date of such Deferral Agreements to the date of establishment ofthe Trust. In addition, within fifteen (15) days after each subsequent calendar month following the establishment of this Trust, PICO (and any participatingaffiliate) shall be required to deposit into the Trust cash in an amount equal to the amount deferred from all employees’ Deferral Agreements for suchmonth. PICO in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in Trust with Trustee. Upon aChange of Control PICO shall as soon as possible but in no event later than thirty (30) days following the Change of Control make an irrevocablecontribution to the Trust in an amount that is sufficient to pay each employee the amount (as adjusted for earnings and losses) to which he or she would beentitled pursuant to the terms of the employee’s Deferral Agreement as of the date of the Change of Control. Notwithstanding anything herein to thecontrary, the Trustee shall have no authority or obligation to enforce the collection of any contribution or transfer to the Trust. (f) Signing Authority; Trustee’s Reliance. The PICO shall certify in writing to the Trustee the names and specimen signatures of all those who areauthorized to act as or on behalf of PICO (“Authorized Person”), and those names and specimen signatures shall be updated as necessary by a duly authorizedofficer of PICO. The PICO shall promptly notify the Trustee if any person so designated is no longer authorized to act on its behalf. Until the Trusteereceives written notice that an Authorized Person is no longer authorized to act on behalf of PICO, the Trustee may continue to rely on PICO’s designation ofsuch person.   Section 2. PAYMENTS TO EXECUTIVE EMPLOYEES AND THEIR BENEFICIARIES.(a) PICO shall deliver to Trustee a schedule (the “Payment Schedule”) that indicates the amounts payable in respect of each employee, and thatcontains such other instructions as to enable, the Trustee to make any distributions to each employee as required under his or her Deferral Agreement. Exceptas otherwise provided herein, Trustee shall make payments in accordance with such Payment Schedule. No set-off from any amounts payable to an employeehereunder shall be permitted without the employee’s written consent. No changes shall be made by PICO to the Payment Schedule without the writtenconsent of the affected employee (except for a change permitted under an employee’s Deferral Agreement or a change to an immediate lump sum payment ofall remaining benefits upon termination of all Deferral Agreements). (b) Tax Payments and Reporting. PICO and not the Trustee shall be responsible for all calculations and payment of income tax, inheritance, estate,or other taxes, and all income tax reporting in connection with the Trust and any contributions thereto and distributions therefrom, as well as all earnings andgains or losses of the Trust. Unless otherwise agreed in writing by the parties, the Trustee shall prepare annually the grantor tax advice information letter forthe Trust and promptly provide it to PICO for use in preparing its corporate income tax return. With respect to the payments to Participants, the Trustee shallwithhold the appropriate federal, state and local taxes required to be withheld and shall properly report and remit such payments to the proper taxingauthorities only to the extent directed by PICO and agreed to by the Trustee. PICO agrees to indemnify and defend Trustee against any liability for any taxes,interest or penalties resulting from or relating to the Trust. (c) The entitlement of an employee or his or her beneficiaries to deferred amounts under the employee’s Deferral Agreement shall be certified by theCompensation Committee of the Board of Directors of PICO or such party as it shall designate and any claim for such benefits shall be considered andreviewed under the procedures set out in the Deferral Agreement. (d) PICO (or any affiliate) may make payment of deferred compensation directly to employees or their beneficiaries as they become due under theterms of the Deferral Agreements, PICO shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable toemployees or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits inaccordance with the terms of any Deferral Agreement, PICO shall make the balance of each such payment in accordance with the terms of the DeferralAgreement. Trustee shall notify PICO where principal and earnings are not sufficient. Section 3.TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN PICO IS INSOLVENT.(a) Trustee shall cease payment of benefits to all employees and their beneficiaries if PICO or any other affiliate participating in the Trust isInsolvent. “Insolvent” for purposes of this Trust Agreement shall mean if (i) an entity is unable to pay its debts as they become due, or (ii) an entity is subjectto a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section l(d) hereof, the principal and income of the Trust shall be subject toclaims of general creditors of PICO and any participating affiliate under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of PICO and any participating affiliate shall have the duty to inform Trustee inwriting of such entity’s Insolvency. If a person claiming to be a creditor of PICO or a participating affiliate alleges in writing to Trustee that such entity hasbecome Insolvent, Trustee shall determine whether such entity is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits toemployees and beneficiaries. (2) Unless Trustee has actual knowledge of the Insolvency of PICO or any participating affiliate, or has received notice from any of suchentities or from a person claiming to be a creditor alleging that any of such entities is Insolvent, Trustee shall have no duty to inquire whether the entity isInsolvent. Trustee may in all events rely on such evidence concerning the entity’s solvency as may be furnished to Trustee and that provides Trustee with areasonable basis for making a determination concerning the entity’s solvency. (3) If at any time Trustee has determined that PICO or a participating affiliate is Insolvent, Trustee shall discontinue payments to employeesor their beneficiaries and shall hold the assets of the Trust for the benefit of such entity’s general creditors. The Trust assets set aside for the benefit of theInsolvent entity’s general creditors shall not exceed the Insolvent entity’s proportionate interest in the Trust. The Insolvent entity’s proportionate interest inthe Trust shall be determined in accordance with the ratio of Trust assets held for the benefit of the Insolvent entity’s employees to the total assets of theTrust. Nothing in this Trust Agreement shall in any way diminish any rights of employees or their beneficiaries to pursue their rights as general creditors ofthe Insolvent entity with respect to benefits due under the Deferral Agreement or otherwise. (4) Trustee shall resume the payment of benefits to employees or their beneficiaries in accordance with Section 2 of this Trust Agreementonly after Trustee has determined that PICO and/or the participating affiliate (as applicable) are not Insolvent (or are no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof andsubsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to employeesor their beneficiaries under the terms of the Deferral Agreements for the period of such discontinuance, less the aggregate amount of any payments made toemployees or their beneficiaries by PICO (or any affiliate) in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. PAYMENTS TO PICO.Except as provided in Section 3 hereof after the Trust has become irrevocable, PICO shall have no right or power to direct Trustee to retain to PICOor to divert to others any of the Trust assets before all payment of benefits have been made to employees and their beneficiaries pursuant to the terms of theDeferral Agreement. Notwithstanding the preceding sentence, the Trustee may reimburse PICO (or any affiliate) for benefits paid directly by PICO (or anyaffiliate) to employees and beneficiaries.Section 5. INVESTMENT AUTHORITY.PICO shall provide investment direction to the Trustee. All rights associated with assets of the Trust shall be exercised by Trustee or the persondesignated by Trustee, and shall in no event be exercisable by or rest with employees. Notwithstanding the preceding sentence, PICO may permit employeeswho have entered into Deferral Agreements to select specific investments for such deferred amounts, subject to its approval in accord with the attachedExhibit A. Trustee shall be notified if such delegation of investment direction has been made to the employees. In the event that PICO (or its designee) shallfail to provide investment direction, Trustee shall invest the assets of the Trust in federally insured savings accounts or certificates of deposits (in amountsnot in excess of insured limits) or in a money market mutual fund.Section 6. CHANGE IN CONTROL.Upon a Change in Control, the Trustee shall become responsible for maintaining a separate Account for each Participant under the Plan based uponsegregating the Accounts using PICO’s latest statements of value for each Participant’s Account. The Trustee shall thereafter periodically adjust suchAccounts pursuant to the procedures described in the Plan. The Trustee may appoint a third-party administrator to maintain such Accounts. The full expenseincurred by the Trustee in maintaining such Accounts shall be reimbursed to the Trustee out of Trust assets. PICO shall reimburse the Trust for such expense,provided, however, that the Trustee shall have no duty to enforce the Employer’s obligation for such reimbursement.Upon and following a Change in Control, the Trustee shall have full responsibility for the investment and reinvestment of all Trust assets except forEmployer Securities and insurance contracts, and PICO’s powers to invest, manage and control such assets, including the power to appoint InvestmentManagers and issue investment guidelines with respect to the Trust, shall be limited to Employer Securities and insurance contracts. The Trustee may, in itssole discretion, appoint one or more Investment Managers with respect to the Trust or any part thereof and may establish and issue to such InvestmentManagers investment guidelines.Section 7. DISPOSITION OF INCOME.During the term of this Trust, all of the income received by the Trust shall be accumulated in the Trust.Section 8. ACCOUNTING BY TRUSTEE.Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including suchspecific records as shall be agreed upon in writing between PICO and Trustee. Within thirty (30) days following the close of each calendar year and withinthirty (30) days after the removal or resignation of the Trustee, Trustee shall deliver to PICO a written account of its administration of the Trust during suchyear or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, income, receipts,disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceedsof such purchases or sales, and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal orresignation, as the case may be. Upon the expiration of such period, the account shall be deemed approved by the PICO, except with respect to any act ortransaction as to which the PICO files a written objection with the Trustee within such thirty-day period. Nothing in this Section 8 is intended to deprivePICO of any rights to which it may be entitled by law. With respect to the written account statement, the Trustee shall correct any error it has made to theextent such error occurred within the applicable statue of limitations period. If such error is discovered more than sixty days after the end of an accountingperiod and beyond the timeframe for electronic records retention or for ability to reconcile balances on the Trustee’s trust accounting system, the correctionof such error may be reflected on a trust accounting statement subsequent to the statement for the period in which the error occurred.Notwithstanding anything herein to the contrary, the Trustee shall have no duty or responsibility to obtain valuations of any assets of the Trust Fund, thevalue of which is not readily determinable on an established market. PICO shall bear sole responsibility for determining said valuations and shall beresponsible for providing said valuations to the Trustee in a timely manner. The Trustee may conclusively rely on such valuations provided by PICO andshall be indemnified and held harmless by PICO with respect to such reliance.Notwithstanding anything herein to the contrary, the Trustee shall accept the unit price provided periodically by PICO: for the PICO Holdings, Inc. IncomeOriented Investments Unit Fund, the PICO Holdings, Inc. Value Stocks Unit Fund and any other unitized fund invested covered under this TrustAgreement. The Trustee may conclusively rely on such unit prices provided by PICO and shall be indemnified and held harmless by PICO with respect tosuch reliance. The Trustee shall not be required to certify the accuracy of the unit prices on any financial statement.Section 9. RESPONSIBILITY OF TRUSTEE.(a) Trustee shall act with the care, skill prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacityand familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur noliability to any person for any action taken pursuant to a direction, request or approval given by PICO which is contemplated by, and in conformity with, theterms of this Trust and is given in writing by PICO. In the event of a dispute between PICO and a party, Trustee may apply, at the expense of the Trust, to acourt of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes or defends any litigation or threatened litigation arising in connection with this Trust, PICO agrees to indemnify Trusteeagainst Trustee’s costs, expenses and liabilities (including without limitation, attorneys’ fees and expenses) relating thereto and to be primarily liable forsuch payments. If PICO does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from theTrust. Notwithstanding the preceding sentences, in no event shall PICO indemnify Trustee (nor shall any payments be made from the Trust on behalf ofTrustee) if the Trustee is determined to have acted negligently in carrying out its duties with respect to the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for PICO generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any ofits duties or obligations hereunder. Trustee shall pay from the Trust, the fees and expenses relating to hiring of such agents, accountants and otherprofession. Reasonable and customary expenses may be incurred by Trustee without approval. (e) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided,however, that if an balance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of an insurance policy other than theTrust, to assign such policy (as distinct from conversion of such policy to a different form) other than to a successor Trustee, or to loan to any person theproceeds of any borrowing against such policy. (f) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power thatcould give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure andAdministrative Regulations promulgated pursuant to the Internal Revenue Code. (g) To invest funds in any type of interest-bearing account including, without limitation, time certificates of deposit or interest-bearing accountsissued by UNION BANK OF CALIFORNIA, N.A. To use other services or facilities provided by the UnionBanCal Corporation (UNBC), its subsidiaries oraffiliates, including but not limited to Union Bank of California, N.A. (Bank), to the extent allowed by applicable law and regulation. Such services mayinclude but are not limited to (1) the placing of orders for the purchase, exchange, investment or reinvestment of securities through any brokerage serviceconducted by, and (2) the purchase of units of any registered investment company managed or advised by Bank, UNBC, or their subsidiaries or affiliatesand/or for which Bank, UNBC or their subsidiaries or affiliates act as custodian or provide other services for a fee, including, without limitation, theHighMark Group of mutual funds. The parties hereby acknowledge that the Bank may receive fees for such services in addition to the fees payable under thisAgreement. Fee schedules for additional services shall be delivered to the appropriate party in advance of the provisions of such services. Independentfiduciary approval of compensation being paid to the Bank will be sought in advance to the extent required under applicable law and regulation. If UnionBank of California, N.A. does not have investment discretion, the services referred to above, as well as any additional services, shall be utilized only upon theappropriate direction of an authorized party. (h) To cause all or any part of the Trust to be held in the name of the Trustee (which is such instance need not disclose its fiduciary capacity), or, aspermitted by law, in the name of any nominee, including the nominee name of any depository, and to acquire for the Trust any investment in bearer form; butthe books and records of the Trust shall at all times show that all such investments are a part of the Trust and the Trustee shall hold evidences of title to allsuch investments as are available; (i) To serve as custodian with respect to the Trust assets, to hold assets or to hold eligible assets at the Depository Trust Company or otherdepository; (j) To permit such inspections of documents at the principal office of the Trustee as are required by law, subpoena or demand by United States orstate agency during normal business hours of the Trustee; (k) To seek written instructions from PICO on any matter and await written instructions without incurring any liability. If at any time PICO shouldfail to give directions to the Trustee, the Trustee may act in the manner that in its discretion it deems advisable under the circumstances for carrying out thepurposes of this Trust. Such actions shall be conclusive on PICO and the Participants on any matter if written notice of the proposed action is given to PICOfive (5) days prior to the action being taken, and the Trustee receives no response; (l) To impose a reasonable charge to cover the cost of furnishing to Participants statements or documents; (m) To act upon proper written directions of PICO or any Participant, as applicable, including directions given by photostatic teletransmission usingfacsimile signature. If oral instructions are given, to act upon those in Trustee’s discretion prior to receipt of written instructions. Trustee’s recording or lackof recording of any such oral instructions taken in Trustee’s ordinary course of business shall constitute conclusive proof of Trustee’s receipt or non-receipt ofthe oral instructions; (n) To pay from the Trust the expenses reasonably incurred in the administration of the Trust; (o) To maintain insurance for such purposes, in such amounts and with such companies as PICO shall elect, including insurance to cover liability orlosses occurring by reason of the acts or omissions of fiduciaries (but only if such insurance permits recourse by the insurer against he fiduciary in the case ofa breach of a fiduciary obligation by such fiduciary); (p) As directed by PICO to cause the benefits provided under the Plan to be paid directly to the persons entitled thereto under the Plan, and in theamounts and at the times and in the manner specified by the Plan, and to charge such payments against the Trust and Accounts with respect to which suchbenefits are payable; (q) To exercise and perform any and all of the other powers and duties specified in this Trust Agreement or the Plans; and in addition to the powerslisted herein, to do all other acts necessary or desirable for the proper administration of the Trust, as though the absolute owner thereof. Section 10. COMPENSATION AND EXPENSES OF TRUSTEE.PICO shall pay all administrative and Trustee’s fees and approved expenses relating to the operation of the Trust. If not so paid, the fees andexpenses shall be paid from the Trust. However, all brokerage commissions shall be charged to the employee’s account for whom the trade was made.Section 11. RESIGNATION AND REMOVAL OF TRUSTEE.(a) Trustee may resign at any time by written notice to PICO, which shall be effective thirty (30) days after receipt of such notice unless PICO andTrustee agree otherwise. (b) Trustee may be removed by PICO on thirty (30) days notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successorTrustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, and upon receipt by the Trustee of allproper documentation unless PICO extends the time limit. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 12 hereof, by the effective date of resignation orremoval under paragraph(s) (a) or (b) of this Section. If no successor Trustee is designated within thirty (30) days of notice of the Trustee’s resignation orremoval, then the chief executive officer and chief financial officer of PICO are hereby designated as the successor Co-Trustees. Further, if no suchappointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses ofTrustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 12. APPOINTMENT OF SUCCESSOR.(a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, PICO may appoint any third party, such as a bank trust departmentor other party that may be granted trustee powers under state law, as a successor to replace Trustee upon resignation or removal. Notwithstanding thepreceding sentence, if the Trustee resigns or is, removed within one (1) year after a Change in Control of PICO, the Trustee shall select the SuccessorTrustee. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee,including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by PICO or the successorTrustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee. The successor Trustee shall not be responsible for and PICOshall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other pastevent, or any condition existing at the time it becomes successor’ Trustee. Notwithstanding the preceding sentence, this indemnification shall not includeliability resulting from actions or inactions of the successor Trustee after it becomes aware (or should have become aware) of any past event or othercondition that requires corrective action on the part of the successor Trustee. Section 13. AMENDMENT OR TERMINATION.(a) This Trust Agreement may be amended by a written instrument executed by Trustee and PICO. Notwithstanding the foregoing, no suchamendment shall conflict with the terms of the Deferral Agreement or shall make the Trust revocable after it has become irrevocable in accordance withSection I (b) hereof. In addition, no such amendment shall alter the terms of the Trust relating to the special requirements imposed hereunder on or after aChange of Control of PICO without the written approval of employees who have entered into Deferral Agreements. (b) The Trust shall not terminate until the date on which employees and their beneficiaries are no longer entitled to benefits pursuant to the terms oftheir Deferral Agreements. Upon termination of the Trust, any sets remaining in the Trust after distribution of all benefits to employees’ beneficiaries shall bereturned to PICO. Section 14. MISCELLANEOUS.(a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating theremaining provisions hereof.(b) Benefits payable to employees and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity),alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.(c) This Trust Agreement shall be governed by and construed in accordance with the laws of California.Section 15. EFFECTIVE DATEThe effective date of this Trust Agreement shall be November 25, 2008.IN WITNESS WHEREOF, executed as of the Effective Date by: “PICO” PICO DEFERRED HOLDINGS, LLC By: /s/ James F. MosierJames F. Mosier, SecretaryDated: November 25, 2008 By: /s/ Richard H. SharpeRichard H. Sharpe, PresidentDated: December 3, 2008 “TRUSTEE” UNION BANK OF CALIFORNIA, N.A. By: /s/ John FultonJohn Fulton, Vice PresidentDated: November 25, 2008 By: /s/ Katherine M. OlsonKatherine M. Olson, VP and Trust OfficerDated: November 25, 2008  Exhibit ANone TRUST FORPICO DEFERRED HOLDINGS, LLCNON-EMPLOYEE DIRECTOR DEFERRED COMPENSATIONThis Agreement made this 25th day of November, 2008, by and between PICO Deferred Holdings, LLC (“PICO”) and Union Bank of California, N.A.(“Trustee”);WHEREAS, PICO Holdings, Inc., which is the sole owner of PICO, and certain of its affiliates have entered into deferred compensation arrangements(“Deferral Agreements”) with certain of their non-employee directors;WHEREAS, PICO and certain of its affiliates have incurred or expect to incur liability to pay deferred compensation under the terms of the DeferralAgreements;WHEREAS, effective September 30, 2006, PICO assumed sponsorship of the September 25, 2001 deferred compensation plan from PICO Holdings,Inc. along with all liabilities to provide benefit payments to participants and beneficiaries thereunder, although PICO Holdings, Inc. remained and remains aparticipating employer;WHEREAS, PICO wishes to establish a Trust (“Trust”) and to contribute to the Trust assets that, shall be held therein, subject to the claims ofcreditors in the event of Insolvency (as herein defined) of PICO or any affiliate, until paid to non-employee directors and their beneficiaries in such mannerand at such times as specified in the Deferral Agreements;WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the DeferralAgreements as unfunded agreements maintained for the purpose of providing deferred compensation for a select group of management or highlycompensated non-employee directors for purposes of Title I of the Employee Retirement Income Security Act of 1974;WHEREAS, PICO wishes to appoint Trustee, and Trustee wishes to accept appointment, as the successor Trustee to Huntington National Bank, N.A.;WHEREAS, it is the intention of PICO to hold assets in this Trust to provide a source of funds to assist it in the meeting of the liabilities under theDeferral Agreements;NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:Section 1. ESTABLISHMENT OF TRUST.(a) PICO hereby deposits with Trustee in Trust the cash sum of $100.00, which shall become the principal of the Trust to be held, administered anddisposed of by Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall initially be, revocable by PICO. The Trust shall become irrevocable upon a Change of Control of PICO, asdefined herein. For purposes of this Trust, Change of Control shall be deemed to have occurred in the reasonable discretion of the Board of Directors inconsideration of the following guidelines: (i) any person (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) is or becomes thebeneficial owner (as defined in Rule 13 d-3 under the Exchange Act), directly or indirectly of securities of PICO representing thirty percent (30%) or more ofPICO’s outstanding securities; or (ii) individuals who are members of PICO’s Board of Directors on the date hereof (the “Incumbent Board”) cease for anyreason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by avote of at least two-thirds of the directors comprising the Incumbent Board, or whose nomination for election by the stockholders of PICO was approved bythe nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board. (c) The Trust is intended to be a grantor trust, of which PICO and any affiliate participating in the Plan, are the grantors, within the meaning ofsubpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of PICO and shall be used exclusively forthe uses and purposes of paying amounts due under the Deferral Agreements and general creditors as herein set forth. Non-employee directors entering intoDeferral Agreements and their beneficiaries shall have no preferred claim on, or any beneficial-ownership interest in, any assets of the Trust. Any rightscreated under the Deferral Agreements and this Trust Agreement shall be mere unsecured contractual rights of non-employee directors and their beneficiariesagainst PICO or any affiliate. Any assets held by the Trust will be subject to the claims of the general creditors of PICO and any affiliate (to the extent of eachentity’s proportionate interest in the Trust) under federal and state law in the event of Insolvency, as set forth in Section 3(a) herein. (e) Within thirty (30) days after the initial establishment of the Trust, PICO and its affiliates shall deposit into the Trust cash in an amount equal tothe total amount deferred under all Deferral Arrangements with non-employee directors from the effective date of such Deferral Agreements to the date ofestablishment of the Trust. In addition, within fifteen (15) days after each subsequent calendar month following the establishment of this Trust, PICO (andany participating affiliate) shall be required to deposit into the Trust cash in an amount equal to the amount deferred from all non-employee directors’Deferral Agreements for such month. PICO in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property inTrust with Trustee. Upon a Change of Control PICO shall as soon as possible but in no event later than thirty (30) days following the Change of Controlmake an irrevocable contribution to the Trust in an amount that is sufficient to pay each non-employee director the amount (as adjusted for earnings andlosses) to which he or she would be entitled pursuant to the terms of the non-employee director’s Deferral Agreement as of the date of the Change ofControl. Notwithstanding anything herein to the contrary, the Trustee shall have no authority or obligation to enforce the collection of any contribution ortransfer to the Trust. (f) Signing Authority; Trustee’s Reliance. The PICO shall certify in writing to the Trustee the names and specimen signatures of all those who areauthorized to act as or on behalf of PICO (“Authorized Person”), and those names and specimen signatures shall be updated as necessary by a duly authorizedofficer of PICO. The PICO shall promptly notify the Trustee if any person so designated is no longer authorized to act on its behalf. Until the Trusteereceives written notice that an Authorized Person is no longer authorized to act on behalf of PICO, the Trustee may continue to rely on PICO’s designation ofsuch person.   Section 2.PAYMENTS TO EXECUTIVE NON-EMPLOYEE DIRECTORS AND THEIR BENEFICIARIES.(a) PICO shall deliver to Trustee a schedule (the “Payment Schedule”) that indicates the amounts payable in respect of each non-employee director,and that contains such other instructions as to enable, the Trustee to make any distributions to each non-employee director as required under his or herDeferral Agreement. Except as otherwise provided herein, Trustee shall make payments in accordance with such Payment Schedule. No set-off from anyamounts payable to a non-employee director hereunder shall be permitted without the non-employee director’s written consent. No changes shall be made byPICO to the Payment Schedule without the written consent of the affected non-employee director (except for a change permitted under a non-employeedirector’s Deferral Agreement or a change to an immediate lump sum payment of all remaining benefits upon termination of all Deferral Agreements). (b) Tax Payments and Reporting. PICO and not the Trustee shall be responsible for all calculations and payment of income tax, inheritance, estate,or other taxes, and all income tax reporting in connection with the Trust and any contributions thereto and distributions therefrom, as well as all earnings andgains or losses of the Trust. Unless otherwise agreed in writing by the parties, the Trustee shall prepare annually the grantor tax advice information letter forthe Trust and promptly provide it to PICO for use in preparing its corporate income tax return. With respect to the payments to Participants, the Trustee shallwithhold the appropriate federal, state and local taxes required to be withheld and shall properly report and remit such payments to the proper taxingauthorities only to the extent directed by PICO and agreed to by the Trustee. PICO agrees to indemnify and defend Trustee against any liability for any taxes,interest or penalties resulting from or relating to the Trust. (c) The entitlement of an non-employee director or his or her beneficiaries to deferred amounts under the non-employee director’s DeferralAgreement shall be certified by the Compensation Committee of the Board of Directors of PICO or such party as it shall designate and any claim for suchbenefits shall be considered and reviewed under the procedures set out in the Deferral Agreement. (d) PICO (or any affiliate) may make payment of deferred compensation directly to non-employee directors or their beneficiaries as they become dueunder the terms of the Deferral Agreements, PICO shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts arepayable to non-employee directors or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to makepayments of benefits in accordance with the terms of any Deferral Agreement, PICO shall make the balance of each such payment in accordance with theterms of the Deferral Agreement. Trustee shall notify PICO where principal and earnings are not sufficient. Section 3.TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN PICO IS INSOLVENT.(a) Trustee shall cease payment of benefits to all non-employee directors and their beneficiaries if PICO or any other affiliate participating in theTrust is Insolvent. “Insolvent” for purposes of this Trust Agreement shall mean if (i) an entity is unable to pay its debts as they become due, or (ii) an entity issubject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section l(d) hereof, the principal and income of the Trust shall be subject toclaims of general creditors of PICO and any participating affiliate under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of PICO and any participating affiliate shall have the duty to inform Trustee inwriting of such entity’s Insolvency. If a person claiming to be a creditor of PICO or a participating affiliate alleges in writing to Trustee that such entity hasbecome Insolvent, Trustee shall determine whether such entity is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits tonon-employee directors and beneficiaries. (2) Unless Trustee has actual knowledge of the Insolvency of PICO or any participating affiliate, or has received notice from any of suchentities or from a person claiming to be a creditor alleging that any of such entities is Insolvent, Trustee shall have no duty to inquire whether the entity isInsolvent. Trustee may in all events rely on such evidence concerning the entity’s solvency as may be furnished to Trustee and that provides Trustee with areasonable basis for making a determination concerning the entity’s solvency. (3) If at any time Trustee has determined that PICO or a participating affiliate is Insolvent, Trustee shall discontinue payments to non-employee directors or their beneficiaries and shall hold the assets of the Trust for the benefit of such entity’s general creditors. The Trust assets set aside forthe benefit of the Insolvent entity’s general creditors shall not exceed the Insolvent entity’s proportionate interest in the Trust. The Insolvent entity’sproportionate interest in the Trust shall be determined in accordance with the ratio of Trust assets held for the benefit of the Insolvent entity’s non-employeedirectors to the total assets of the Trust. Nothing in this Trust Agreement shall in any way diminish any rights of non-employee directors or their beneficiariesto pursue their rights as general creditors of the Insolvent entity with respect to benefits due under the Deferral Agreement or otherwise. (4) Trustee shall resume the payment of benefits to non-employee directors or their beneficiaries in accordance with Section 2 of this TrustAgreement only after Trustee has determined that PICO and/or the participating affiliate (as applicable) are not Insolvent (or are no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof andsubsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to non-employee directors or their beneficiaries under the terms of the Deferral Agreements for the period of such discontinuance, less the aggregate amount of anypayments made to non-employee directors or their beneficiaries by PICO (or any affiliate) in lieu of the payments provided for hereunder during any suchperiod of discontinuance. Section 4. PAYMENTS TO PICO.Except as provided in Section 3 hereof after the Trust has become irrevocable, PICO shall have no right or power to direct Trustee to retain to PICOor to divert to others any of the Trust assets before all payment of benefits have been made to non-employee directors and their beneficiaries pursuant to theterms of the Deferral Agreement. Notwithstanding the preceding sentence, the Trustee may reimburse PICO (or any affiliate) for benefits paid directly byPICO (or any affiliate) to non-employee directors and beneficiaries.Section 5. INVESTMENT AUTHORITY.PICO shall provide investment direction to the Trustee. All rights associated with assets of the Trust shall be exercised by Trustee or the persondesignated by Trustee, and shall in no event be exercisable by or rest with non-employee directors. Notwithstanding the preceding sentence, PICO maypermit non-employee directors who have entered into Deferral Agreements to select specific investments for such deferred amounts, subject to its approval inaccord with the attached Exhibit A. Trustee shall be notified if such delegation of investment direction has been made to the non-employee directors. In theevent that PICO (or its designee) shall fail to provide investment direction, Trustee shall invest the assets of the Trust in federally insured savings accounts orcertificates of deposits (in amounts not in excess of insured limits) or in a money market mutual fund.Section 6. CHANGE IN CONTROL.Upon a Change in Control, the Trustee shall become responsible for maintaining a separate Account for each Participant under the Plan based uponsegregating the Accounts using PICO’s latest statements of value for each Participant’s Account. The Trustee shall thereafter periodically adjust suchAccounts pursuant to the procedures described in the Plan. The Trustee may appoint a third-party administrator to maintain such Accounts. The full expenseincurred by the Trustee in maintaining such Accounts shall be reimbursed to the Trustee out of Trust assets. PICO shall reimburse the Trust for such expense,provided, however, that the Trustee shall have no duty to enforce the Employer’s obligation for such reimbursement.Upon and following a Change in Control, the Trustee shall have full responsibility for the investment and reinvestment of all Trust assets except forEmployer Securities and insurance contracts, and PICO’s powers to invest, manage and control such assets, including the power to appoint InvestmentManagers and issue investment guidelines with respect to the Trust, shall be limited to Employer Securities and insurance contracts. The Trustee may, in itssole discretion, appoint one or more Investment Managers with respect to the Trust or any part thereof and may establish and issue to such InvestmentManagers investment guidelines.Section 7. DISPOSITION OF INCOME.During the term of this Trust, all of the income received by the Trust shall be accumulated in the Trust.Section 8. ACCOUNTING BY TRUSTEE.Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including suchspecific records as shall be agreed upon in writing between PICO and Trustee. Within thirty (30) days following the close of each calendar year and withinthirty (30) days after the removal or resignation of the Trustee, Trustee shall deliver to PICO a written account of its administration of the Trust during suchyear or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, income, receipts,disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceedsof such purchases or sales, and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal orresignation, as the case may be. Upon the expiration of such period, the account shall be deemed approved by the PICO, except with respect to any act ortransaction as to which the PICO files a written objection with the Trustee within such thirty-day period. Nothing in this Section 8 is intended to deprivePICO of any rights to which it may be entitled by law. With respect to the written account statement, the Trustee shall correct any error it has made to theextent such error occurred within the applicable statue of limitations period. If such error is discovered more than sixty days after the end of an accountingperiod and beyond the timeframe for electronic records retention or for ability to reconcile balances on the Trustee’s trust accounting system, the correctionof such error may be reflected on a trust accounting statement subsequent to the statement for the period in which the error occurred.Notwithstanding anything herein to the contrary, the Trustee shall have no duty or responsibility to obtain valuations of any assets of the Trust Fund, thevalue of which is not readily determinable on an established market. PICO shall bear sole responsibility for determining said valuations and shall beresponsible for providing said valuations to the Trustee in a timely manner. The Trustee may conclusively rely on such valuations provided by PICO andshall be indemnified and held harmless by PICO with respect to such reliance.Notwithstanding anything herein to the contrary, the Trustee shall accept the unit price provided periodically by PICO: for the PICO Holdings, Inc. IncomeOriented Investments Unit Fund, the PICO Holdings, Inc. Value Stocks Unit Fund and any other unitized fund invested covered under this TrustAgreement. The Trustee may conclusively rely on such unit prices provided by PICO and shall be indemnified and held harmless by PICO with respect tosuch reliance. The Trustee shall not be required to certify the accuracy of the unit prices on any financial statement.Section 9. RESPONSIBILITY OF TRUSTEE.(a) Trustee shall act with the care, skill prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacityand familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur noliability to any person for any action taken pursuant to a direction, request or approval given by PICO which is contemplated by, and in conformity with, theterms of this Trust and is given in writing by PICO. In the event of a dispute between PICO and a party, Trustee may apply, at the expense of the Trust, to acourt of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes or defends any litigation or threatened litigation arising in connection with this Trust, PICO agrees to indemnify Trusteeagainst Trustee’s costs, expenses and liabilities (including without limitation, attorneys’ fees and expenses) relating thereto and to be primarily liable forsuch payments. If PICO does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from theTrust. Notwithstanding the preceding sentences, in no event shall PICO indemnify Trustee (nor shall any payments be made from the Trust on behalf ofTrustee) if the Trustee is determined to have acted negligently in carrying out its duties with respect to the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for PICO generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any ofits duties or obligations hereunder. Trustee shall pay, from the Trust, the fees and expenses relating to hiring of such agents, accountants and otherprofession. Reasonable and customary expenses may be incurred by Trustee without approval. (e) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided,however, that if an balance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of an insurance policy other than theTrust, to assign such policy (as distinct from conversion of such policy to a different form) other than to a successor Trustee, or to loan to any person theproceeds of any borrowing against such policy. (f) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power thatcould give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure andAdministrative Regulations promulgated pursuant to the Internal Revenue Code. (g) To invest funds in any type of interest-bearing account including, without limitation, time certificates of deposit or interest-bearing accountsissued by UNION BANK OF CALIFORNIA, N.A. To use other services or facilities provided by the UnionBanCal Corporation (UNBC), its subsidiaries oraffiliates, including but not limited to Union Bank of California, N.A. (Bank), to the extent allowed by applicable law and regulation. Such services mayinclude but are not limited to (1) the placing of orders for the purchase, exchange, investment or reinvestment of securities through any brokerage serviceconducted by, and (2) the purchase of units of any registered investment company managed or advised by Bank, UNBC, or their subsidiaries or affiliatesand/or for which Bank, UNBC or their subsidiaries or affiliates act as custodian or provide other services for a fee, including, without limitation, theHighMark Group of mutual funds. The parties hereby acknowledge that the Bank may receive fees for such services in addition to the fees payable under thisAgreement. Fee schedules for additional services shall be delivered to the appropriate party in advance of the provisions of such services. Independentfiduciary approval of compensation being paid to the Bank will be sought in advance to the extent required under applicable law and regulation. If UnionBank of California, N.A. does not have investment discretion, the services referred to above, as well as any additional services, shall be utilized only upon theappropriate direction of an authorized party. (h) To cause all or any part of the Trust to be held in the name of the Trustee (which is such instance need not disclose its fiduciary capacity), or, aspermitted by law, in the name of any nominee, including the nominee name of any depository, and to acquire for the Trust any investment in bearer form; butthe books and records of the Trust shall at all times show that all such investments are a part of the Trust and the Trustee shall hold evidences of title to allsuch investments as are available; (i) To serve as custodian with respect to the Trust assets, to hold assets or to hold eligible assets at the Depository Trust Company or otherdepository; (j) To permit such inspections of documents at the principal office of the Trustee as are required by law, subpoena or demand by United States orstate agency during normal business hours of the Trustee; (k) To seek written instructions from PICO on any matter and await written instructions without incurring any liability. If at any time PICO shouldfail to give directions to the Trustee, the Trustee may act in the manner that in its discretion it deems advisable under the circumstances for carrying out thepurposes of this Trust. Such actions shall be conclusive on PICO and the Participants on any matter if written notice of the proposed action is given to PICOfive (5) days prior to the action being taken, and the Trustee receives no response; (l) To impose a reasonable charge to cover the cost of furnishing to Participants statements or documents; (m) To act upon proper written directions of PICO or any Participant, as applicable, including directions given by photostatic teletransmission usingfacsimile signature. If oral instructions are given, to act upon those in Trustee’s discretion prior to receipt of written instructions. Trustee’s recording or lackof recording of any such oral instructions taken in Trustee’s ordinary course of business shall constitute conclusive proof of Trustee’s receipt or non-receipt ofthe oral instructions; (n) To pay from the Trust the expenses reasonably incurred in the administration of the Trust; (o) To maintain insurance for such purposes, in such amounts and with such companies as PICO shall elect, including insurance to cover liability orlosses occurring by reason of the acts or omissions of fiduciaries (but only if such insurance permits recourse by the insurer against he fiduciary in the case ofa breach of a fiduciary obligation by such fiduciary); (p) As directed by PICO to cause the benefits provided under the Plan to be paid directly to the persons entitled thereto under the Plan, and in theamounts and at the times and in the manner specified by the Plan, and to charge such payments against the Trust and Accounts with respect to which suchbenefits are payable; (q) To exercise and perform any and all of the other powers and duties specified in this Trust Agreement or the Plans; and in addition to the powerslisted herein, to do all other acts necessary or desirable for the proper administration of the Trust, as though the absolute owner thereof. Section 10. COMPENSATION AND EXPENSES OF TRUSTEE.PICO shall pay all administrative and Trustee’s fees and approved expenses relating to the operation of the Trust. If not so paid, the fees andexpenses shall be paid from the Trust. However, all brokerage commissions shall be charged to the non-employee director’s account for whom the trade wasmade.Section 11. RESIGNATION AND REMOVAL OF TRUSTEE.(a) Trustee may resign at any time by written notice to PICO, which shall be effective thirty (30) days after receipt of such notice unless PICO andTrustee agree otherwise. (b) Trustee may be removed by PICO on thirty (30) days notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successorTrustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, and upon receipt by the Trustee of allproper documentation unless PICO extends the time limit. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 12 hereof, by the effective date of resignation orremoval under paragraph(s) (a) or (b) of this Section. Further, if no successor Trustee is designated within thirty (30) days of notice of the Trustee’sresignation or removal, then the chief executive officer and chief financial officer of PICO are hereby designated as the successor Co-Trustees. Further, if nosuch appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses ofTrustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 12. APPOINTMENT OF SUCCESSOR.(a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, PICO may appoint any third party, such as a bank trust departmentor other party that may be granted trustee powers under state law, as a successor to replace Trustee upon resignation or removal. Notwithstanding thepreceding sentence, if the Trustee resigns or is, removed within one (1) year after a Change in Control of PICO, the Trustee shall select the SuccessorTrustee. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee,including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by PICO or the successorTrustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee. The successor Trustee shall not be responsible for and PICOshall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other pastevent, or any condition existing at the time it becomes successor’ Trustee. Notwithstanding the preceding sentence, this indemnification shall not includeliability resulting from actions or inactions of the successor Trustee after it becomes aware (or should have become aware) of any past event or othercondition that requires corrective action on the part of the successor Trustee. Section 13. AMENDMENT OR TERMINATION.(a) This Trust Agreement may be amended by a written instrument executed by Trustee and PICO. Notwithstanding the foregoing, no suchamendment shall conflict with the terms of the Deferral Agreement or shall make the Trust revocable after it has become irrevocable in accordance withSection I (b) hereof. In addition, no such amendment shall alter the terms of the Trust relating to the special requirements imposed hereunder on or after aChange of Control of PICO without the written approval of non-employee directors who have entered into Deferral Agreements. (b) The Trust shall not terminate until the date on which non-employee directors and their beneficiaries are no longer entitled to benefits pursuant tothe terms of their Deferral Agreements. Upon termination of the Trust, any sets remaining in the Trust after distribution of all benefits to non-employeedirectors’ beneficiaries shall be returned to PICO. Section 14. MISCELLANEOUS.(a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating theremaining provisions hereof.(b) Benefits payable to non-employee directors and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law orin equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.(c) This Trust Agreement shall be governed by and construed in accordance with the laws of California.  Section 15. EFFECTIVE DATEThe effective date of this Trust Agreement shall be November 25, 2008.IN WITNESS WHEREOF, executed as of the Effective Date by: “PICO” PICO DEFERRED HOLDINGS, LLC By: /s/ James F. MosierJames F. Mosier, SecretaryDated: November 25, 2008 By: /s/ Richard H. SharpeRichard H. Sharpe, PresidentDated: December 3, 2008 “TRUSTEE” UNION BANK OF CALIFORNIA, N.A. By: /s/ John FultonJohn Fulton, Vice PresidentDated: November 25, 2008 By: /s/ Jane L. ErwinJane L. Erwin, VP and Trust OfficerDated: November 25, 2008  Exhibit ANone ______________________________________________________________________________ PICO DEFERRED HOLDINGS, LLCDEFERRED COMPENSATION PLAN EFFECTIVE AS OF JANUARY 1, 2009 ______________________________________________________________________________ WEST\21629892.2328146-151900  TABLE OF CONTENTS Page ARTICLE IDEFINITIONS 1 1.1Account 1 1.2Affiliate 1 1.3Aggregated Plan 1 1.4Beneficiary 2 1.5Benefit Benchmarks 2 1.6Board 2 1.7Change in Control Event 2 1.8Code 5 1.9Compensation 6 1.10Compensation Deferral Agreement 6 1.11Compensation Deferrals 6 1.12Corporate Dissolution 6 1.13Distributable Event 6 1.14Domestic Partner 6 1.15Domestic Relations Order 6 1.16Effective Date 6 1.17Eligible Individual 6 1.18ERISA 7 1.19Income Inclusion Under Code § 409A 7 1.20Interim Distribution Date 7 1.21Investment Credits and Debits 7 1.22Nonqualified Deferred Compensation Plan 7 1.23Participant 7 1.24Performance-Based Compensation 7 1.25Plan 8 1.26Plan Administrator 8 1.27Plan Sponsor 8 1.28Plan Termination Following a Change in Control Event 8 1.29Plan Termination Following a Corporate Dissolution 8 1.30Plan Termination in Connection with Termination of Certain Similar Arrangements 8 1.31Regular Salary 8 1.32Separation from Service 8 1.33Specified Employee 9 1.34Spouse 10 1.35Taxable Year 10 1.36Trust 10 1.37Trustee 10 1.38Unforeseeable Emergency 10 1.39Valuation Date 10 ARTICLE IIELIGIBILITY AND PARTICIPATION 10 2.1Eligibility 10 2.2Participation 10 2.3Compensation Deferral Agreement 10 2.4Subsequent Changes in Time and Form of Payment 12 2.5Establishing a Reserve for Plan Liabilities 12 ARTICLE IIIPARTICIPANT ACCOUNTS AND REPORTS 12 3.1Establishment of Accounts 12 3.2Account Maintenance 13 3.3Investment Credits and Debits 13 3.4Participant Statements 14 ARTICLE IVWITHHOLDING OF TAXES 14 4.1Withholding from Compensation 14 4.2Withholding from Benefit Distributions 14 ARTICLE VVESTING 14 5.1Vesting 14 ARTICLE VIPAYMENTS 15 6.1Benefits 15 6.2Separation from Service Payment 15 6.3Death Benefit 15 6.4Domestic Relations Order Payment 15 6.5Unforeseeable Emergency Distribution 16 6.6Election to Receive Interim Distributions 16 6.7Payment upon Income Inclusion Under § 409A 16 6.8Permissible Delay in Payments 16 6.9Beneficiary Designation 17 6.10Claims Procedure 18 ARTICLE VIICANCELLATION OF DEFERRALS 21 7.1Unforeseeable Emergency 21 ARTICLE VIIIARTICLE VIII PLAN ADMINISTRATION 22 8.1Appointment 22 8.2Duties of Plan Administrator 22 8.3Plan Sponsor 22 8.4Administrative Fees and Expenses 22 8.5Plan Administration and Interpretation 23 8.6Powers, Duties, Procedures 23 8.7Information 23 8.8Indemnification of Plan Administrator 23 8.9Plan Administration Following a Change in Control Event 23 ARTICLE IXTRUST FUND 24 9.1Trust 24 9.2Unfunded Plan 24 9.3Assignment and Alienation 24 ARTICLE XAMENDMENT AND PLAN TERMINATION 24 10.1Amendment 24 10.2Plan Termination 24 10.3Plan Termination Following a Change in Control Event 25 10.4Plan Termination Following a Corporate Dissolution 25 10.5Plan Termination in Connection with Termination of Certain Similar Arrangements 26 10.6Effect of Payment 26 ARTICLE XIMISCELLANEOUS 26 11.1Total Agreement 26 11.2Employment Rights 27 11.3Non-Assignability 27 11.4Binding Agreement 27 11.5Receipt and Release 27 11.6Furnishing Information 27 11.7Compliance with Code § 409A 27 11.8Insurance 28 11.9Governing Law 28 11.10Headings and Subheadings 28WEST\21629892.2328146-151900  PICO DEFERRED HOLDINGS, LLCDEFERRED COMPENSATION PLANWhereas, PICO Holdings, Inc., a diversified holding company formed under the laws of the state of California, (“PICO”) established a nonqualified deferredcompensation plan as of December, 2004 to reflect certain deferral arrangements with certain executive management employees, and with certainnonemployee directors (the “Plan”); Whereby effective September 30, 2006, the Board of Directors of PICO transferred sponsorship of the Plan to Pico Deferred Holdings, LLC (the “PlanSponsor”); Whereby, effective January 1, 2009, PICO hereby amends and restates the Plan to comply with Section 409A of the Internal Revenue Code of 1986, asamended (Code Section 409A”); Whereby, the Plan is intended to be “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferredcompensation for a select group of management or highly compensated employees” within the meaning of ERISA §§201(2) and 301(a)(3), is intended tocomply with the requirements of Code §409A and the regulations and binding guidance issued thereunder to avoid adverse tax consequences and shall beinterpreted and administered to the extent possible in a manner consistent with that intent; and, Whereby, Participants in the Plan shall have no right, either directly or indirectly, to anticipate, sell, assign or otherwise transfer any benefit accrued under thePlan. In addition, no Participant shall have any interest in any assets set aside as a source of funds to satisfy benefit obligations under the Plan. Participantsshall have the status of general unsecured creditors of the Plan Sponsor, and the Plan shall constitute an unsecured promise by the Plan Sponsor to makebenefit payments in the future. Now therefore, the Company hereby amends and restates the Plan in its entirety, as follows: ARTICLE I DEFINITIONS 1.1 Account The bookkeeping account established for each Participant to record his or her benefit under the Plan. 1.2 Affiliate Any corporation or business entity that would be considered a single employer with the Plan Sponsor pursuant to Code §§ 414(b) or 414(c). 1.3 Aggregated Plan A nonqualified deferred compensation plan that is required to be aggregated and treated with the Plan as a single plan under Code§ 409A. 1.4 Beneficiary An individual, individuals, trust or other entity designated by the Participant to receive his or her benefit in the event of theParticipant’s death. If more than one Beneficiary survives the Participant, the Participant’s benefit shall be divided equally among all suchBeneficiaries, unless otherwise provided in the Beneficiary Designation form. Nothing herein shall prevent the Participant from designating primaryand contingent Beneficiaries. 1.5 Benefit Benchmarks Hypothetical investment funds or benchmarks made available to Participants by the Plan Administrator for purposes of valuingbenefits under the Plan. 1.6 Board The Board of Directors of PICO or the Plan Sponsor, as applicable, or similar governing body if such Plan Sponsor has no Board of Directors. 1.7 Change in Control Event A Change in Ownership, Change in Effective Control or Change in Ownership of a Substantial Portion of Assets, aselected by the Plan Sponsor of a corporation identified in Section 1.8(e). (a) Change in Effective Control of the Corporation (i) Notwithstanding that a corporation has not undergone a Change in Ownership, a Change in Effective Control occurs on the datethat either: (1) any one person or Persons Acting as a Group, acquires (or has acquired during the 12-month period ending on the date ofthe most recent acquisition by such person or Persons Acting as a Group) ownership of stock of the corporation possessing30 percent or more of the total voting power of the stock of such corporation; or (2) a majority of members of the corporation’s board of directors is replaced during any 12-month period by directors whoseappointment or election is not endorsed by a majority of the members of the corporation’s board of directors prior to thedate of the appointment or election, provided that for purposes of this Section 1.8(a)(i)(2) the term corporation referssolely to the relevant corporation identified in Section 1.8(e) for which no other corporation is a majority shareholder forpurposes of that section. In the absence of an event described in Section 1.8(a)(i)(1) or Section 1.8(a)(i)(2) a Change in Effective Control will not have occurred. (ii) A Change in Effective Control may occur in any transaction in which either of the two corporations involved in the transaction hasa Change in Ownership or a Change in Ownership of a Substantial Portion of Assets. (iii) If any one person or Persons Acting as a Group, is considered to effectively control a corporation (within the meaning of thisSection 1.8(a)), the acquisition of additional control of the corporation by the same person or Persons Acting as a Group is notconsidered to cause a Change in Effective Control (or to cause a Change in Ownership within the meaning of Section 1.8(b)). (b) Change in the Ownership of the Corporation. A Change in Ownership occurs on the date that any one person or Persons Acting as a Group,acquires ownership of stock of the corporation that, together with stock held by such person or Persons Acting as a Group, constitutes morethan 50 percent of the total fair market value or total voting power of the stock of such corporation. However, if any one person or PersonsActing as a Group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of acorporation, the acquisition of additional stock by the same person or Persons Acting as a Group is not considered to cause a Change inOwnership (or to cause a Change in Effective Control). An increase in the percentage of stock owned by any one person or Persons Actingas a Group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisitionof stock for purposes of a Change in Ownership. A Change in Ownership applies only when there is a transfer of stock of a corporation (orissuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. (c) Change in the Ownership of a Substantial Portion of a Corporation’s Assets (i) A Change in Ownership of a Substantial Portion of Assets occurs on the date that any one person or Persons Acting as a Groupacquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or PersonsActing as a Group) assets from the corporation that have a total gross fair market value equal to or more than 40 percent of the totalgross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose,gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determinedwithout regard to any liabilities associated with such assets. (ii) There is no Change in Ownership of a Substantial Portion of Assets when there is a transfer to an entity that is controlled by theshareholders of the transferring corporation immediately after the transfer, as provided in this Section 1.8(c)(ii). A transfer of assetsby a corporation is not treated as a change in the ownership of such assets if the assets are transferred to: (1) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock; (2) an entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by thecorporation; (3) a person or Persons Acting as a Group, that owns, directly or indirectly, 50 percent or more of the total value or votingpower of all the outstanding stock of the corporation; or (4) an entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a persondescribed in Section 1.8(c)(ii)(c.). For purposes of this Section 1.8(c)(ii) and except as otherwise provided, a person’s status is determined immediately after the transfer of the assets. (d) Persons Acting as a Group (i) With regards to Change in the Ownership, persons will not be considered to be acting as a group solely because they purchase orown stock of the same corporation at the same time, or as a result of the same public offering. However, persons will be consideredto be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stockor similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter intoa merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as agroup with other shareholders only with respect to the ownership in that corporation before the transaction giving rise to thechange and not with respect to the ownership interest in the other corporation. (ii) With regards to Change in Effective Control, persons will not be considered to be acting as a group solely because they purchaseor own stock of the same corporation at the same time, or as a result of the same public offering. However, persons will beconsidered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase oracquisition of stock or similar business transaction with the corporation. If a person, including an entity, owns stock in bothcorporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder isconsidered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporationbefore the transaction giving rise to the change and not with respect to the ownership interest in the other corporation. (iii) With regards to Change in Ownership of a Substantial Portion of Assets, persons will not be considered to be acting as a groupsolely because they purchase assets of the same corporation at the same time. However, persons will be considered to be acting as agroup if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of assets or similarbusiness transaction with the corporation. If a person, including an entity shareholder owns stock in both corporations that enterinto a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting asa group with other shareholders in a corporation only to the extent of the ownership in that corporation before the transactiongiving rise to the change and not with respect to the ownership interest in the other corporation. (e) To constitute a Change in Control Event as to a Participant, the Change in Control Event must relate to: (i) the corporation with respect to which the Participant is an Eligible Individual at the time of the Change in Control Event; (ii) the corporation that is liable for the payment of the Account (or all corporations liable for the payment if more than onecorporation is liable) but only if either the Participant’s benefits under the Plan are attributable to the performance of services bythe Participant for such corporation (or corporations) or there is a bona fide business purpose for such corporation or corporationsto be liable for such payment and, in either case, no significant purpose in making such corporation or corporations liable for suchpayment is the avoidance of Federal income tax; or (iii) a corporation that is a majority shareholder of a corporation identified in Sections 1.8(e)(i) or 1.8(e)(ii), or any corporation in achain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in acorporation identified in Section 1.8(e)(i) or Section 1.8(e)(ii). With regard to a relevant corporation, a majority shareholder is ashareholder owning more than 50% of the total fair market value and total voting power of such corporation. (f) Stock Ownership. For the purposes of this Section 1.8, ownership of stock will be determined by the application of Code §318(a). Stockunderlying a vested option is considered owned by the individual who holds the vested option (and the stock underlying an unvestedoption is not considered owned by the individual who holds the unvested option). For purposes of the preceding sentence, however, if avested option is exercisable for stock that is not substantially vested (as defined by Treasury Regulation §§ 1.83-3(b) and (j)), the stockunderlying the option is not treated as owned by the individual who holds the option. In addition, mutual and cooperative corporations aretreated as having stock for purposes of this Section 1.8(f). 1.8 Code The Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection of the Code includes reference toany comparable or succeeding provisions of any legislation which amends, supplements or replaces such section or subsection. 1.9 Compensation Shall mean a Participant’s Regular Salary, bonuses, Performance-Based Compensation, and director fees, as applicable. 1.10 Compensation Deferral Agreement The written agreement between an Eligible Individual and the Plan Sponsor to defer receipt by the EligibleIndividual of Compensation. Such agreement shall state the deferral amount or percentage of Compensation to be withheld from the EligibleIndividual’s Compensation and shall state the date on which the agreement is effective, as provided at Section 2.3. 1.11 Compensation Deferrals That portion of a Participant’s Compensation which is deferred under the terms of this Plan. 1.12 Corporate Dissolution A corporate dissolution taxed pursuant to Code §331 or with the approval of a bankruptcy court pursuant to section 503(b)(1)(A) of title 11, United States Code. 1.13 Distributable Event The events entitling a Participant or Beneficiary to a payment of benefits under the Plan, which shall be: Separation fromService; death; the occurrence of an Interim Distribution Date; the occurrence of an Unforeseeable Emergency; Plan Termination Following aChange of Control Event, if applicable; Plan Termination Following a Corporate Dissolution; Plan Termination in Connection with Termination ofCertain Similar Arrangements; Domestic Relations Order; and Income Inclusion Under Code § 409A. 1.14 Domestic Partner The Plan Administrator in its sole discretion shall determine whether an individual meets the requirements of a Domestic Partnerand shall have the right to request documentary proof of the existence of a Domestic Partner relationship, which proof may include, but is notlimited to, a joint checking account, a joint mortgage or lease, driver’s licenses showing the same address, the registration of a domestic partnershipor civil union in states that recognize such relationships or such other proof as the Plan Administrator may determine. 1.15 Domestic Relations Order Any judgment, decree or order (including approval of a property settlement agreement) which relates to the provision ofchild support, alimony payments or marital property rights to a Spouse, former Spouse, child or other dependent of a Participant and is madepursuant to a State domestic relations law (including a community property law). 1.16 Effective Date The Effective Date of the restatement of this Plan shall be January 1, 2009. 1.17 Eligible Individual Any common-law employee or non-employee director who provides services to the Plan Sponsor and is designated by the PlanSponsor as eligible to participate in the Plan in accordance with Section 2.1. Only those individuals who are part of a select group of management orhighly compensated individuals, as determined by PICO or the Plan Sponsor in its sole discretion, may be designated as Eligible Individuals underthe Plan. 1.18 ERISA The Employee Retirement Income Security Act of 1974, as amended. Reference to any section or subsection of ERISA includes reference toany comparable or succeeding provisions of any legislation which amends, supplements or replaces such section or subsection. 1.19 Income Inclusion Under Code § 409A Shall have the meaning set forth in Section 6.9. 1.20 Interim Distribution Date Shall be a date that is prior to the Participant’s Separation from Service elected by the Participant to receive a distributionfrom the Plan 1.21 Investment Credits and Debits Bookkeeping adjustments to Participants’ Accounts to reflect the hypothetical interest, earnings, appreciation, lossesand depreciation that would be accrued or realized if assets equal to the value of such Accounts were invested in accordance with such Participants’Benefit Benchmarks. 1.22 Nonqualified Deferred Compensation Plan A pension plan, within the meaning of ERISA §201(2), the purpose of which is to permit a select groupof management or highly compensated Eligible Individuals to defer receipt of a portion of their Compensation to a future date. 1.23 Participant An Eligible Individual who is currently deferring a portion of his or her Compensation under this Plan, or an Eligible Individual orformer Eligible Individual who is still entitled to the payment of benefits under the Plan. 1.24 Performance-Based Compensation Compensation, the amount of which, or entitlement to which, is contingent on the satisfaction of pre-establishedorganizational or individual performance criteria relating to a performance period of at least 12 consecutive months. Organizational or individualperformance criteria are considered pre-established if established in writing by no later than 90 days after the commencement of the period of serviceto which the criteria relates, provided that the outcome is substantially uncertain at the time the criteria are established. Performance-BasedCompensation does not include any amount, or portion of any amount, that will be paid either regardless of performance or based upon a level ofperformance that is substantially certain to be met at the time the criteria is established. If payments are based upon the satisfaction of subjectivecriteria, the subjective performance criteria must be bona fide and relate to the performance of the Participant, a group that includes the Participant ora business unit for which the Participant provides services, and the determination that any subjective performance criteria have been met must not bemade by the Participant, a family member of the Participant or a person under the effective control of the Participant or a family member of theParticipant or where any amount of the compensation of the person making such determination is effectively controlled in whole or in part by theParticipant or family member of the Participant. Compensation determined by reference to the value of the Plan Sponsor or an Affiliate, or the stockof the Plan Sponsor or an Affiliate, shall be Performance Based Compensation only as provided under Code § 409A and the regulations and bindingguidance issued thereunder. Performance Based Compensation shall include but not be limited to annual incentive awards granted a Participant. 1.25 Plan The Nonqualified Deferred Compensation Plan established by the Plan Sponsor under the terms of this Plan Document. 1.26 Plan Administrator The individual(s) or committee appointed by the Plan Sponsor to administer the Plan as provided herein. If no suchappointment is made, the Chief Executive Officer of the Plan Sponsor (or the most senior officer of such Plan Sponsor if the Plan Sponsor does nothave a Chief Executive Officer) shall serve as the Plan Administrator. In no event shall a Plan Administrator who is a Participant be permitted tomake decisions regarding his or her benefits under this Plan; rather, such decisions shall be made by the other members of any committee appointedto act as the Plan Administrator or, if no such committee has been appointed, the most senior officer of the Plan whose benefits are not at issue in thedecision. If a Change in Control Event occurs with respect to the Plan Sponsor or PICO, the existing Plan Administrator shall be removed, and a newPlan Administrator shall be appointed as provided in Section 8.9. 1.27 Plan Sponsor PICO Deferred Holdings, LLC, or any successor thereto, or any other entity appointed by PICO. The term Plan Sponsor shall alsoinclude, where appropriate, any entity affiliated with the Plan Sponsor which adopts the Plan with the consent of the Plan Sponsor. Only the PlanSponsor or PICO shall have the power to amend this Plan, appoint the Plan Administrator, or exercise any of the powers described in Section 8.3hereof. 1.28 Plan Termination Following a Change in Control Event Shall have the meaning set forth in Section 10.3. 1.29 Plan Termination Following a Corporate Dissolution Shall have the meaning set forth in Section 10.4. 1.30 Plan Termination in Connection with Termination of Certain Similar Arrangements Shall have the meaning set forth in Section 10.5. 1.31 Regular Salary The Participant’s gross income paid by the Plan Sponsor during the Taxable Year as reportable on Internal Revenue Service FormW-2, including amounts excludible from gross income that are contributed by the Participant on a pre-tax basis to a salary reduction retirement orwelfare plan (including amounts contributed to this Plan), but excluding bonuses, Performance-Based Compensation, director fees, or any otherirregular payments. 1.32 Separation from Service A Participant shall have a Separation from Service under the circumstances described below. (a) Employees A Participant who is a common law employee has a Separation from Service if the Participant voluntarily or involuntarilyterminates employment with the Plan Sponsor and all Affiliates, for any reason other than Disability or death. A termination of employmentoccurs if the facts and circumstances indicate that the Plan Sponsor and the Participant reasonably anticipate that no further services will beperformed after a certain date or that the level of bona fide services the Participant will perform after such date (whether as an employee oran independent contractor) will decrease to no more than 20 percent of the average level of bona fide services performed (whether as anemployee or an independent contractor) over the immediately preceding 36-month period (or the full period of services if the Participanthas been providing services for less than 36 months). Notwithstanding the foregoing, the employment relationship is treated as continuingwhile the Participant is on military leave, sick leave or other bona fide leave of absence if the period of leave does not exceed 6 months, orif longer, so long as the Participant retains the right to reemployment with the Plan Sponsor or an Affiliate under an applicable statute orcontract. When a leave of absence is due to any medically determinable physical or mental impairment that can be expected to result indeath or to last for a period of at least 6 months and such impairment causes the Participant to be unable to perform the duties of his or herposition or any substantially similar position, a 29-month period of absence shall be substituted for the 6-month period above. (b) Directors Except as otherwise provided hereunder, a Participant who is a member of the Board shall be considered to be an IndependentContractor for purposes of determining whether the Participant has had a Separation from Service. (c) Dual Status If a Participant provides services to the Plan Sponsor and any Affiliates as an employee and as an independent contractor, theParticipant must have a Separation from Service with the Plan Sponsor and all Affiliates both as an employee and an independent contractorto have a Separation from Service. Notwithstanding the foregoing, if a Participant provides services to the Plan Sponsor and any Affiliatesas an employee and as a director, (1) the services provided as a director are not taken into account in determining whether the Participanthas a Separation from Service as an employee under the Plan if the Participant participates in the Plan as an employee, provided theParticipant does not participate in any other nonqualified deferred compensation plan as a director that is aggregated with the Plan underCode §409A, and (2) the services provided as an employee are not taken into account in determining whether the Participant has aSeparation from Service as a director under the Plan if the Participant participates in the Plan as a director, provided the Participant does notparticipate in any other nonqualified deferred compensation plan as an employee that is aggregated with the Plan under Code §409A. 1.33 Specified Employee A key employee (as defined in Code § 416(i) without regard to paragraph (5) thereof) of a Plan Sponsor or its Affiliates, anystock of which is publicly traded on an established securities market or otherwise. A Participant is a key employee if the Participant meets therequirements of Code §416(i)(1)(A)(i), (ii) or (iii) (applied in accordance with the regulations thereunder and disregarding Code §416(i)(5)) at anytime during the 12-month period ending each December 31. If a Participant is a key employee at any time during the 12-month period ending onsuch December 31, the Participant is treated as a Specified Employee for the 12-month period beginning on the following April 1. Whether anystock of a Plan Sponsor or its Affiliates is publicly traded on an established securities market or otherwise must be determined as of the date of theParticipant’s Separation from Service. 1.34 Spouse The individual to whom a Participant is married, or was married in the case of a deceased Participant who was married at the time of his or herdeath. 1.35 Taxable Year The 12-consecutive-month period beginning each January 1 and ending each December 31. 1.36 Trust The agreement, if any, between the Plan Sponsor and the Trustee under which assets may be delivered by the Plan Sponsor to the Trustee tooffset liabilities assumed by the Plan Sponsor under the Plan. Any assets held under the terms of the Trust shall be the exclusive property of the PlanSponsor and shall be subject to the creditor claims of the Plan Sponsor with respect to whom such Trust has been established. Participants shall haveno right, secured or unsecured, to any assets held under the terms of the Trust. 1.37 Trustee The institution named by the Plan Sponsor in the Trust agreement, if any, and any corporation which succeeds the Trustee by merger or byacquisition of assets or operation of law. 1.38 Unforeseeable Emergency A severe financial hardship to the Participant resulting from an illness or accident of the Participant or the Participant’sSpouse, Beneficiary or dependent (as defined in Code §152 without regard to §§ 152(b)(1), (b)(2) and (d)(1)(B)), loss of the Participant’s propertydue to casualty or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. 1.39 Valuation Date The date on which Participant Accounts under the Plan are valued. The Valuation Date shall be each business day of the TaxableYear on which the New York Stock Exchange and, if a Trust has been established in connection with the Plan, the Trustee are open for business. ARTICLE II ELIGIBILITY AND PARTICIPATION 2.1 Eligibility The Plan Sponsor will designate those persons who shall be considered Eligible Individuals under the Plan. 2.2 Participation The Plan Administrator shall provide written notification to each Eligible Individual of his or her eligibility to participate in the Plan. 2.3 Compensation Deferral Agreement In order to defer Compensation under the Plan for a given Taxable Year, an Eligible Individual must enter into a Compensation Deferral Agreement with the Plan Sponsor authorizing the deferral of all or part of the Participant’s Compensationfor such Taxable Year. The Compensation Deferral Agreement shall also specify the method of payment for benefits under the Plan and any InterimDistribution Date that shall apply with respect to amounts credited to the Participant’s Account for such Taxable Year. Upon receipt of a properly completed and executed Compensation Deferral Agreement, the Plan Administrator shall notify the Plan Sponsor to withhold thatportion of the Participant’s Compensation specified in the Agreement. The Compensation Deferral Agreement shall remain in effect for the duration of the Taxable Year to which it relates. Except as provided below, a Compensation Deferral Agreement must be completed and returned to the Plan Sponsor prior to the first day of the Taxable Yearin which services are performed for the Compensation deferred and shall be irrevocable except as otherwise provided hereunder. (a) Initial Eligibility If an individual becomes an Eligible Individual on a date other than the first day of a Taxable Year and such individualhas not at any time been eligible to participate in the Plan or any Aggregated Plan, the Compensation Deferral Agreement may becompleted and returned to the Plan Sponsor within 30 days after the Effective Date or within 30 days after the Eligible Individual’s initialeligibility date. In no event shall a Participant be permitted to defer Compensation with respect to services performed before the date onwhich the Compensation Deferral Agreement is signed by the Participant and accepted by the Plan Administrator. (b) Former Participants With No Account Balance If an Eligible Individual who is a former Participant has been paid all amounts deferredunder the Plan and any Aggregated Plan and, on and before the date of the last payment, is not eligible to continue (or elect to continue) toparticipate in the Plan or any Aggregated Plan for periods after the last payment (other than through an election of a different time and formof payment with respect to the amounts paid), the Eligible Individual may be treated as initially eligible to participate in the Plan pursuantto subsection (a) above as of the first date following such last payment that the Eligible Individual again becomes eligible to participate inthe Plan. (c) Participants Ineligible for Two Years If an Eligible Individual who is a Participant or former Participant ceases being eligible to participatein the Plan and any Aggregated Plan, regardless of whether all amounts deferred under such plans have been paid, and subsequentlybecomes eligible to participate in the Plan again, the Eligible Individual may be treated as being initially eligible to participate in the Planpursuant to subsection (a) above if the Eligible Individual has not been eligible to participate in the Plan or an Aggregated Plan (other thanthrough the accrual of earnings) at any time during the twenty-four (24) month period ending on the date the Eligible Individual againbecomes eligible to participate in the Plan. (d) Performance-Based Compensation A Compensation Deferral Agreement with respect to Performance-Based Compensation may becompleted and returned to the Plan Sponsor no later than the date that is six months before the end of the performance period to which thePerformance-Based Compensation relates, provided the Participant performs services continuously from the later of the beginning of theperformance period or the date upon which the performance criteria are established through the date upon which the Participant makes aninitial deferral election, and further provided that in no event may an election to defer Performance-Based Compensation be made withrespect to Compensation that has become readily ascertainable. 2.4 Subsequent Changes in Time and Form of Payment A Participant may elect to change the time or form of payment of amounts distributable upon aSeparation from Service or elect to change the time of payment of amounts distributable upon an Interim Distribution Date, provided, however, thatany such election shall be effective only if: (a) the election does not accelerate the time or schedule of any payment within the meaning of Code § 409A; (b) the election does not take effect until at least twelve 12 months after the date on which the election is made; (c) the first payment with respect to which such election is made is deferred for a period of 5 years from the date such payment would otherwisehave been made; and (d) for a change to a payment made upon an Interim Distribution Date, such election is made at least 12 months before such InterimDistribution Date. The Plan Administrator shall have sole and absolute discretion to decide whether such a request shall be approved but may approve no more than one suchrequest for any Participant with respect to any Compensation Deferral or Matching or Discretionary Credit. 2.5 Establishing a Reserve for Plan Liabilities The Plan Sponsor may, but is not required to, establish one or more Trusts to which the Plan Sponsormay transfer such assets as the Plan Sponsor determines in its sole discretion to assist in meeting its obligations under the Plan. Any such assets shallbe the property of the Plan Sponsor and remain subject to the claims of the Plan Sponsor’s creditors, to the extent provided under any Trustestablished with respect to such Plan Sponsor. The Trustee shall have no duty to determine whether the amounts forwarded by the Plan Sponsor arethe correct amount or that they have been transmitted in a timely manner. ARTICLE III PARTICIPANT ACCOUNTS AND REPORTS 3.1 Establishment of Accounts The Plan Administrator shall establish and maintain individual recordkeeping accounts and subaccounts, as applicable,on behalf of each Participant for purposes of determining each Participant’s benefits under the Plan. A Participant’s Account does not represent theParticipant’s ownership of, or any ownership interest in, any assets which may be set aside to satisfy the Plan Sponsor’s obligations under the Plan. 3.2 Account Maintenance As of each Valuation Date, the Plan Administrator shall credit each Participant’s Account with the following: (a) An amount equal to any Compensation Deferrals made by the Participant since the last Valuation Date; (b) An amount equal to deemed Investment Credits under Section 3.3 below since the last Valuation Date. As of each Valuation Date, the PlanAdministrator shall debit each Participant’s Account with the following: (c) An amount equal to any distributions from the Plan to the Participant or Beneficiary since the last Valuation Date; and (d) An amount equal to deemed Investment Debits under Section 3.3 below since the last Valuation Date; and (e) An amount equal to any forfeitures incurred by the Participant since the last Valuation Date. 3.3 Investment Credits and Debits The Accounts of Participants shall be adjusted for Investment Credits and Debits in accordance with this Section 3.3. Participants shall have the right to specify one or more Benefit Benchmarks in which their Compensation Deferrals shall be deemed to be invested. TheBenefit Benchmarks shall be utilized solely for purposes of adjusting their Accounts in accordance with procedures adopted by the Plan Administrator. ThePlan Administrator shall provide the Participant with a list of the available Benefit Benchmarks. From time to time, in the sole discretion of the PlanAdministrator, the Benefit Benchmarks available within the Plan may be revised. All Benefit Benchmark selections must be denominated in wholepercentages unless the Plan Administrator determines that lower increments are acceptable. A Participant may make changes in the manner in which futureCompensation Deferrals are deemed to be invested among the various Benefit Benchmarks within the Plan in accordance with procedures established by thePlan Administrator. A Participant may re-direct the manner in which earlier Compensation Deferrals, as well as any appreciation (or depreciation) to-date, aredeemed to be invested among the Benefit Benchmarks available in the Plan in accordance with procedures established by the Plan Administrator. As of each Valuation Date, the Plan Administrator shall adjust the Account of each Participant for interest, earnings or appreciation (less losses anddepreciation) with respect to the then balance of the Participant’s Account equal to the actual results of the Participant’s deemed Benefit Benchmarkelections. All notional acquisitions and dispositions of Benefit Benchmarks which occur within a Participant’s Account, pursuant to the terms of the Plan, shall bedeemed to occur at such times as the Plan Administrator shall determine to be administratively feasible in its sole discretion and the Participant’s Accountshall be adjusted accordingly. Accordingly, if a distribution or reallocation must occur pursuant to the terms of the Plan and all or some portion of theAccount must be valued in connection with such distribution or reallocation (to reflect Investment Credits and Debits), the Plan Administrator may in its solediscretion, unless otherwise provided for in the Plan, select a date or dates which shall be used for valuation purposes. Notwithstanding anything to the contrary, any Investment Credits or Debits made to any Participant’s Account following a Plan Termination or a Change inControl Event shall be made in a manner no less favorable to Participants than the practices and procedures employed under the Plan, or as otherwise ineffect, as of the date of the Plan Termination or the Change in Control Event. Notwithstanding the Participant’s deemed Benefit Benchmark elections under the Plan, the Plan Sponsor shall be under no obligation to actually invest anyamounts in such manner, or in any manner, and such Benefit Benchmark elections shall be used solely to determine the amounts by which the Participant’sAccount shall be adjusted under this Article III. 3.4 Participant Statements The Plan Administrator shall provide each Participant with a statement showing the credits and debits from his or herAccount during the period from the last statement date. Such statement shall be provided to Participants as soon as administratively feasiblefollowing the end of each Taxable Year and on such other dates as agreed to by the Plan Sponsor and the party maintaining Participant records. ARTICLE IV WITHHOLDING OF TAXES 4.1 Withholding from Compensation For any Taxable Year in which Compensation Deferrals are made to or vested within the Plan (as applicable), thePlan Sponsor shall withhold the Participant’s share of income, FICA and other employment taxes from the portion of the Participant’s Compensationnot deferred. If deemed appropriate by the Plan Sponsor, all or any portion of a benefit under the Plan may be distributed in certain instances wherenecessary to facilitate compliance with applicable withholding requirements to the extent such distribution would not result in adverse taxconsequences under Code § 409A. The amount of any such distribution shall not exceed the amount necessary to comply with applicablewithholding requirements. 4.2 Withholding from Benefit Distributions The Plan Sponsor (or the Trustee of the Trust, as applicable) shall withhold from any payments made to aParticipant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Plan Sponsor, inconnection with such payments, in amounts and in a manner to be determined in the sole discretion of the Plan Sponsor. ARTICLE V VESTING 5.1 Vesting A Participant shall be immediately vested in (i.e., shall have a non-forfeitable right to) all Compensation Deferrals credited to his or herAccount, including any Investment Credits or Debits associated therewith. ARTICLE VI PAYMENTS 6.1 Benefits Except as otherwise provided under the Plan, a Participant’s or Beneficiary’s benefit payable under the Plan shall be the value of theParticipant’s vested Account at the time a Distributable Event occurs with respect to such Participant or Beneficiary. In no event, will a Participant’sright to a benefit under this Plan give such Participant a secured right or claim on any assets set aside by the Plan Sponsor to meet its obligationsunder the Plan. All payments from the Plan shall be subject to applicable tax withholding and shall commence (or be fully paid, in the event a lumpsum form of distribution was selected) no later than ninety (90) days after the occurrence of the Distributable Event, except as otherwise providedherein. 6.2 Separation from Service Payment In the event of a Participant’s Separation from Service, the Participant’s vested Account shall be paid in the formof a cash lump sum or, if elected by the Participant, in annual cash payments (over a period of two(2), five (5), or ten (10) years). For purposes ofCode § 409A, installment payments shall be treated as a single payment. If applicable, the initial installment shall be based on the value of theParticipant’s vested Account, measured on the date of his or her Separation from Service, and shall be equal to 1/n (where ‘n’ is equal to the totalnumber of annual benefit payments not yet distributed). Subsequent installment payments shall be computed in a consistent fashion, with themeasurement date being the anniversary of the original measurement date. Election of the form of the Separation from Service Payment must beprovided to the Plan Administrator at the time the Participant first enters into a Compensation Deferral Agreement. Notwithstanding the foregoing, a distribution resulting from a Separation from Service by a Participant who is a Specified Employee on the date ofSeparation from Service shall be made within the ninety (90) days following the date that is 6 months after the Separation from Service or, if earlier, withinthe ninety (90) days following the death of the Specified Employee. The first payment made following the 6-month period described in the precedingsentence shall include all payments that otherwise would have been made after Separation from Service but for the delay required by this paragraph. 6.3 Death Benefit In the event of the Participant’s death, whether before or after the Participant has otherwise incurred a Distributable Event orcommenced receiving payments from the Plan, the Participant’s Beneficiary shall receive the balance of the Participant’s vested Account in a singlelump-sum cash payment. 6.4 Domestic Relations Order Payment If it is necessary to satisfy a Domestic Relations Order, whether before or after the Participant has otherwiseincurred a Distributable Event or commenced receiving payments from the Plan, the Plan Administrator shall pay to the Spouse, former Spouse,child, or other dependent of the Participant, as specified in the Domestic Relations Order, the amount from the Participant’s vested Account requiredto fulfill the Domestic Relations Order. The Plan Administrator shall have complete discretion to determine whether the circumstances of theParticipant meet the requirements for a Domestic Relations Order Payment under this Section. If the request for a payment due to a DomesticRelations Order is approved, the distribution shall be made at such time and in such form as shall be necessary to satisfy the Domestic RelationsOrder. 6.5 Unforeseeable Emergency Distribution If a Participant has an Unforeseeable Emergency, as defined herein, the Plan Administrator may pay to theParticipant that portion of his or her vested Account which the Plan Administrator determines is reasonably necessary to satisfy the emergency. Theamounts distributed to the Participant as a result of an Unforeseeable Emergency may not exceed the amounts reasonably necessary to satisfy suchemergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to whichsuch hardship is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant’s assets (tothe extent the liquidation of such assets would not itself cause severe financial hardship) or by cancellation of Compensation Deferrals pursuant toSection 7.1. A Participant requesting an Unforeseeable Emergency Distribution shall apply for the payment in writing on a form approved by thePlan Administrator and shall provide such additional information as the Plan Administrator may require. The Plan Administrator shall have completediscretion to determine whether the financial hardship of the Participant constitutes an Unforeseeable Emergency under the Plan. If, subject to thesole discretion of the Plan Administrator, the request for a withdrawal is approved, the distribution shall be made within ninety (90) days after thedate of approval by the Plan Administrator. 6.6 Election to Receive Interim Distributions A Participant may make an election, at the time he or she files a Compensation Deferral Agreement for agiven Taxable Year, to have those Compensation Deferrals to which the agreement relates paid to him or her at an Interim Distribution Datedesignated by the Participant. Such Compensation Deferrals, adjusted to reflect Investment Credits and Debits, shall be payable in a single cashlump sum, or an installment payment commencing, within ninety (90) days after an applicable Interim Distribution Date. The Participant’s selectionof an Interim Distribution Date is irrevocable, except as provided in Section 2.4, and must comply with the definition of Interim Distribution Dateunder Section 1.25. Notwithstanding a Participant’s advance election to designate Interim Distribution Dates, the amounts which would otherwisebe subject to such Interim Distribution Dates shall be distributable upon a Distributable Event pursuant to the Plan, if such Distributable Eventoccurs prior to an applicable Interim Distribution Date. 6.7 Payment upon Income Inclusion Under § 409A If the Plan Administrator determines at any time that the Plan fails to meet the requirements of Code§ 409A with respect to a Participant, the Plan Administrator shall distribute to the Participant the amount from the Participant’s vested Account thatis required to be included in income as a result of such failure in a single lump-sum payment. 6.8 Permissible Delay in Payments A payment may be delayed beyond the distribution date otherwise provided for under the Plan in one or more of thecircumstances below (a) Subject to Code § 162(m) A payment, including any portion thereof, will be delayed when the Plan Sponsor reasonably anticipates that itsdeduction with respect to such payment otherwise would be eliminated by application of Code § 162(m), provided that the payment ismade either during the Participant’s first Taxable Year in which the Plan Sponsor reasonably anticipates (or should reasonably anticipate)that if the payment is made during such year the deduction of such payment will not be barred by Code § 162(m) or during the periodbeginning with the date of the Participant’s Separation from Service and ending on the later of the last day of the Plan Sponsor’s taxableyear in which the Participant has a Separation from Service or the 15th day of the third month following the Participant’s Separation fromService, and provided further that when any scheduled payment to a Participant in the Plan Sponsor’s taxable year is delayed in accordancewith this Section, all scheduled payments to such Participant that could be delayed in accordance with this Section are also delayed. Whena payment is delayed to a date on or after the Participant’s Separation from Service, the payment shall be treated as a payment upon aSeparation from Service and, in the case of a Specified Employee, the date that is 6 months after a Participant’s Separation from Service issubstituted for any reference to a Participant’s Separation from Service in the foregoing provisions of this Section. (b) Violation of Federal Securities Laws or Other Applicable Law A payment will be delayed when the Plan Sponsor reasonably anticipatesthat the making of the payment will violate Federal securities laws or other applicable law, provided that the payment will be made at theearliest date at which the Plan Sponsor reasonably anticipates that the making of the payment will not cause such violation. The making ofa payment that would cause inclusion in gross income or the application of any penalty provision or other provision of the Code is nottreated as a violation of applicable law. 6.9 Beneficiary Designation A Participant shall have the right to designate a Beneficiary and to amend or revoke such designation at any time inwriting. Such designation, amendment or revocation shall be effective upon receipt by the Plan Administrator. If the Beneficiary is a minor orincompetent, benefits may be paid to a legal guardian, trustee, or other proper representative of the Beneficiary, and such payment shall completelydischarge the Plan Sponsor and the Plan of all further obligations hereunder. If no Beneficiary designation is made, or if the Beneficiary designation is held invalid, or if no Beneficiary survives the Participant and benefits aredetermined to be payable following the Participant’s death, the Plan Administrator shall direct that payment of benefits be made to the person or persons inthe first of the below categories in which there is a survivor. The categories of successor beneficiaries, in order, are as follows: (a) Participant’s Spouse; (b) Participant’s Domestic Partner (c) Participant’s descendants, per stirpes (eligible descendants shall be determined by the intestacy laws of the state in which the decedent wasdomiciled); (d) Participant’s parents; (e) Participant’s brothers and sisters (including step brothers and step sisters); and (f) Participant’s estate. 6.10 Claims Procedure All claims for benefits under the Plan, and all questions regarding the operation of the Plan, shall be submitted to the PlanAdministrator in writing. The Plan Administrator has complete discretion and authority to interpret and construe any provision of the Plan, and itsdecisions regarding claims for benefits hereunder are final and binding. (a) Presentation of Claim. Any Participant, Beneficiary or person claiming benefits under the Plan (such Participant, Beneficiary or otherperson being referred to below as a “Claimant”) may deliver to the Plan Administrator a written claim for a determination with respect tobenefits distributable to such Claimant from the Plan. The claim must state with particularity the determination desired by the Claimant. Any claim by a Participant that a payment made under the Plan is less than the amount to which the Participant is entitled must be made in writing pursuantto the foregoing provisions of this Section within 180 days after the date of such payment. Notwithstanding any other provision of the Plan, a Participantshall forfeit all rights to any amounts claimed if the Participant fails to make claim as provided in the preceding sentence. (b) Notification of Decision The Plan Administrator shall consider a Claimant’s claim within a reasonable time, and shall notify the Claimantin writing: (i) that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or (ii) that the Plan Administrator has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, andsuch notice must set forth in a manner calculated to be understood by the Claimant: (1) the specific reason(s) for the denial of the claim, or any part of it; (2) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (3) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanationof why such material or information is necessary; (4) a description of the claim review procedure set forth in Section 6.12(c) below, including information regarding anyapplicable time limits and a statement regarding the Claimant’s right to bring an action under ERISA §502(a) followingan adverse determination on review; and (5) if the decision involved the Disability of the Participant, information regarding whether an internal rule or procedure wasrelied upon in making its decision and that the Claimant can request a copy of such rule or procedure, free of charge, uponrequest. The Plan Administrator will notify the Claimant of an adverse decision within ninety (90) days after the date the claim was received, unless the PlanAdministrator determines there are special circumstances that require an extension of time in which to make a decision. If an extension of time is needed, thePlan Administrator shall notify the Claimant of the extension before the expiration of the original 90-day period. The notice will include a description of thespecial circumstances requiring an extension of time and an estimate of the date it expects a decision to be made. The extension shall not exceed anadditional 90-day period. If the adverse decision relates to a claim involving the Disability of the Participant, the Plan Administrator will notify the Claimant of an adverse decisionwithin forty-five (45) days after the date the claim was received, unless the Plan Administrator determines that matters beyond its control require an extensionof time in which to make a decision. If an extension of time is needed, the Plan Administrator shall notify the Claimant of the extension before the expirationof the original 45-day period. The notice will include a description of the circumstances necessitating the extension and an estimate of the date it expects adecision to be made. The extension shall not exceed an additional 30-day period unless, within the 30-day period the Plan Administrator again determinesthat more time is needed due to matters beyond its control, in which case notice of the need for not more than an additional thirty (30) days is provided to theClaimant before the first 30-day period expires. The notice will include a description of the circumstances requiring the extension and an estimate of the dateit expects a decision to be made. Any extension notice will include information regarding the standards on which a determination of Disability will be made,the outstanding issues which prevent a decision from being made, and any additional information which is needed in order to reach a decision. The Claimantwill have forty-five (45) days to supply any additional information. If the Plan Administrator notifies the Claimant of the need for an extension of time to make a decision regarding his or her claim in accordance with thisSection 6.12(b), and the extension is needed due to the Claimant’s failure to provide information necessary to decide the claim, the period of time in whichthe Plan Administrator must make a decision does not include the time between the date the notice of the extension was sent to the Claimant and the date theClaimant responds to the request for additional information. (c) Review of a Denied Claim Within sixty (60) days after receiving a notice from the Plan Administrator that a claim has been denied, inwhole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Plan Administrator a written request for areview of the denial of the claim. During the 60-day review period, the Claimant (or the Claimant’s duly authorized representative): (i) may review relevant documents; (ii) may submit written comments or other documents relating to the claim; (iii) may request access to and copies of all relevant documents, free of charge; (iv) may request a hearing, which the Plan Administrator, in its sole discretion, may grant. The Plan Administrator will consider all documents and other information submitted by the Claimant in reviewing its previous decision, includingdocuments not available to or considered by it during its initial determination. If the appeal relates to a determination of the Plan Administrator involving the Disability of the Participant, the Claimant will have one-hundred-eighty (180)days following receipt of a denial to file a written request for review. In such event, no deference shall be given to the initial benefit determination, and thereview shall be conducted by an appropriate fiduciary who is someone other than the individual who made the initial determination or a subordinate of suchindividual. If the initial determination was based in whole or in part on a medical judgment, the reviewer shall consult with an appropriately trained andexperienced health care professional, and shall disclose the identity of any experts who provided advice with regard to the initial decision. The health careprofessional whose advice is sought during the appeal process will not be an individual who was consulted during the initial determination, nor asubordinate of such an individual. (d) Decision on Review The Plan Administrator shall render its decision on review promptly, and not later than sixty (60) days after the filingof a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which casethe Plan Administrator’s decision must be rendered within one-hundred-twenty (120) days after such date. If an extension of time is needed,the Plan Administrator shall notify the Claimant of the extension before the expiration of the original 60-day period. The notice willinclude a description of the circumstances requiring the extension and an estimate of the date it expects a decision to be made. Suchdecision must be written in a manner calculated to be understood by the Claimant, and if the decision on review is adverse it must contain: (i) specific reasons for the decision; (ii) specific reference(s) to the pertinent Plan provisions upon which the decision was based; (iii) a statement that the Claimant may receive, upon request and free of charge, access to and copies of relevant documents andinformation; (iv) a statement describing any voluntary appeal procedures under the Plan and the Claimant’s right to bring an action under ERISA§502(a); (v) if the decision involved the Disability of the Participant, information regarding whether an internal rule or procedure was reliedupon in making its decision and that the Claimant can request a copy of such rule or procedure, free of charge, upon request; (vi) if the decision involved the Disability of the Participant, a statement that the Claimant and the Plan may have other voluntaryalternative dispute resolution options, such as mediation, and that the Claimant may find out what options are available bycontacting the local U.S. Department of Labor Office and the state insurance regulatory agency; and (vii) such other matters as the Plan Administrator deems relevant. If the appeal involves the Disability of the Participant, the decision of the Plan Administrator will be made within forty-five (45) days after the filing of thewritten request for review, unless special circumstances require additional time, in which case the Plan Administrator’s decision will be made within ninety(90) days after the date the request was filed. If an extension of time is needed, the Plan Administrator shall notify the Claimant of the extension before theexpiration of the original 45-day period. The notice will include a description of the circumstances requiring the extension and an estimate of the date itexpects a decision to be made. If the Plan Administrator notifies the Claimant of the need for an extension of time to make a decision regarding his or her appeal in accordance with thisSection 6.12(d), and the extension is needed due to the Claimant’s failure to provide information necessary to decide the appeal, the period of time in whichthe Plan Administrator must make a decision does not include the time between the date the notice of the extension was sent to the Claimant and the date theClaimant responds to the request for additional information. ARTICLE VII CANCELLATION OF DEFERRALS 7.1 Unforeseeable Emergency If a Participant has an Unforeseeable Emergency, as defined herein, the Plan Administrator may cancel all futureCompensation Deferrals pertaining to Compensation not yet earned and required to be made pursuant to the Participant’s current CompensationDeferral Agreement if reasonably necessary to satisfy the Participant’s financial hardship subject to the standards and requirements for anUnforeseeable Emergency Distribution set forth in Section 6.5. If a Participant receives a hardship distribution from a qualified plan of the PlanSponsor pursuant to Code § 401(k)(2)(B)(IV), the Plan Administrator shall cancel all future Compensation Deferrals pertaining to Compensation notyet earned and required to be made pursuant to the Participant’s current Compensation Deferral Agreement, and the Participant will be prohibitedfrom making Compensation Deferrals under the Plan for at least six (6) months after receipt of the hardship distribution or such longer period as maybe prescribed by the qualified plan. ARTICLE VIII ARTICLE VIII PLAN ADMINISTRATION 8.1 Appointment The Plan Administrator shall serve at the pleasure of the Plan Sponsor, who shall have the right to remove the Plan Administrator atany time upon thirty (30) days’ written notice. The Plan Administrator shall have the right to resign upon thirty (30) days’ written notice to the PlanSponsor. 8.2 Duties of Plan Administrator The Plan Administrator shall be responsible to perform all administrative functions of the Plan. These duties includebut are not limited to: (a) Communicating with Participants in connection with their rights and benefits under the Plan; (b) Reviewing Benefit Benchmark elections received from Participants; (c) Arranging for the payment of taxes (including income tax withholding), expenses and benefit payments to Participants under the Plan; (d) Filing any returns and reports due with respect to the Plan; (e) Interpreting and construing Plan provisions and settling claims for Plan benefits; and (f) Serving as the Plan’s designated representative for the service of notices, reports, claims or legal process. 8.3 Plan Sponsor The Plan Sponsor has sole responsibility for the establishment and maintenance of the Plan. The Plan Sponsor through its Board shallhave the power and authority to appoint the Plan Administrator, Trustee and any other professionals as may be required for the administration of thePlan. The Plan Sponsor shall also have the right to remove any individual or party appointed to perform administrative, investment, fiduciary orother functions under the Plan. The Plan Sponsor may delegate any of its powers to the Plan Administrator, Board member or a committee of theBoard. 8.4 Administrative Fees and Expenses All reasonable costs, charges and expenses incurred by the Plan Administrator or the Trustee in connection withthe administration of the Plan or the Trust shall be paid by the Plan Sponsor. If not so paid, such costs, charges and expenses shall be charged to theTrust, if any, established in connection with the Plan. The Trustee shall be specifically authorized to charge its fees and expenses directly to theTrust. If the Trust has insufficient liquid assets to cover the applicable fees, the Trustee shall have the right to liquidate assets held in the Trust to payany fees or expenses due. Notwithstanding the foregoing, no Compensation other than reimbursement for expenses shall be paid to a PlanAdministrator who is an employee of the Plan Sponsor. 8.5 Plan Administration and Interpretation The Plan Administrator shall have complete discretionary control and authority to determine the rights andbenefits and all claims, demands and actions arising out of the provisions of the Plan or any Participant, Beneficiary, deceased Participant, or otherperson having or claiming to have any interest under the Plan. The Plan Administrator shall have complete discretion to interpret the Plan and todecide all matters under the Plan. Such interpretation and decision shall be final, conclusive, and binding on all Participants and any personclaiming under or through any Participant. Any individual serving as Plan Administrator who is a Participant will not vote or act on any matterrelating solely to himself or herself. When making a determination or calculation, the Plan Administrator shall be entitled to rely on informationfurnished by a Participant, a Beneficiary, the Plan Sponsor, or other party. The Plan Administrator shall have the responsibility for complying withany reporting and disclosure requirements of ERISA. 8.6 Powers, Duties, Procedures The Plan Administrator shall have such powers and duties, may adopt such rules, may act in accordance with suchprocedures, may appoint such officers or agents, may delegate such powers and duties, may receive such reimbursement and compensation, and shallfollow such claims and appeal procedures with respect to the Plan as it may establish, each consistently with the terms of the Plan. 8.7 Information To enable the Plan Administrator to perform its functions, the Plan Sponsor shall supply full and timely information to the PlanAdministrator on all matters relating to the Compensation of Participants, their employment, retirement, death, Separation from Service, and suchother pertinent facts as the Plan Administrator may require. 8.8 Indemnification of Plan Administrator The Plan Sponsor agrees to indemnify and to defend to the fullest extent permitted by law any officer(s),employee(s) or Board members who serve as Plan Administrator (including any such individual who formerly served as Plan Administrator) againstall liabilities, damages, costs and expenses (including reasonable attorneys’ fees and amounts paid in settlement of any claims approved by the PlanSponsor) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith. 8.9 Plan Administration Following a Change in Control Event Notwithstanding anything to the contrary in this Article VIII or elsewhere in the Plan orTrust, upon a Change in Control Event with respect to the Plan Sponsor or PICO the individual serving as Chief Executive Officer of such PlanSponsor immediately prior to such Change in Control Event who is also a Participant in the Plan, or if the Plan Sponsor has no Chief ExecutiveOfficer who is also a Participant in the Plan, the Plan Sponsor’s most senior officer who is also a Participant in the Plan, shall have the right toappoint an individual, third party or committee to serve as Plan Administrator. Such appointment shall be made in writing and copies thereof shallbe delivered to the Board, to the existing Plan Administrator, to the Trustee, and to all Plan Participants. The Trustee and all other service providersshall be entitled to rely fully on instructions received from the successor Plan Administrator and shall be indemnified to the fullest extent permittedby law for acting in accordance with the proper instructions of the successor Plan Administrator. ARTICLE IX TRUST FUND 9.1 Trust The Plan Sponsor may establish a Trust for the purpose of accumulating assets which may, but need not be used, by the Plan Sponsor to satisfysome or all of its financial obligations to provide benefits to Participants under this Plan. Any trust created under this Section 9.1 shall be domiciledin the United States of America, and no assets of the Plan shall be held or transferred outside the United States. All assets held in the Trust shallremain the exclusive property of the Plan Sponsor and shall be available to pay creditor claims of the Plan Sponsor in the event of insolvency, to theextent provided under any Trust established with respect to such Plan Sponsor. The assets held in Trust shall be administered in accordance with theterms of the separate Trust Agreement between the Trustee and the Plan Sponsor. 9.2 Unfunded Plan In no event will the assets accumulated by the Plan Sponsor in the Trust be construed as creating a funded Plan under the applicableprovisions of ERISA or the Code, or under the provisions of any other applicable statute or regulation. Any funds set aside by the Plan Sponsor inTrust shall be administered in accordance with the terms of the Trust. 9.3 Assignment and Alienation No Participant or Beneficiary of a deceased Participant shall have the right to anticipate, assign, transfer, sell, mortgage,pledge or hypothecate any benefit under this Plan. The Plan Administrator shall not recognize any attempt by a third party to attach, garnish or levyupon any benefit under the Plan except as may be required by law. ARTICLE X AMENDMENT AND PLAN TERMINATION 10.1 Amendment The Plan Sponsor or PICO shall have the right to amend this Plan without the consent of any Participant or Beneficiary hereunder,provided that no such amendment shall have the effect of reducing any of the vested benefits to which a Participant or Beneficiary has accrued aright as of the effective date of the amendment. Notwithstanding the foregoing, the Plan Sponsor shall have the right to amend this Plan in anymanner whatsoever without the consent of any Participant or Beneficiary to comply with the requirements of Code §409A and any binding guidancethereunder to avoid adverse tax consequences even if such amendment has the affect of reducing a vested benefit or existing right of a Participant orBeneficiary hereunder. 10.2 Plan Termination The Plan Sponsor may terminate or discontinue the Plan in whole or in part at any time. No further Compensation Deferrals shallbe permitted after the Taxable Year in which the Plan Termination occurs, except that the Plan Sponsor shall be responsible to pay any benefitattributable to vested amounts credited to the Participant’s Account as of the effective date of termination (following any adjustments to suchAccounts in accordance with Article III hereof). If the Plan is terminated in accordance with this Section 10.2, the Plan Administrator shall makedistribution of the Participant’s vested benefit upon the occurrence of a Distributable Event with respect to a Participant. A Participant’s vestedbenefit shall be adjusted to reflect Investment Credits and Debits for all Valuation Dates between Plan Termination and the occurrence of aParticipant’s Distributable Event. 10.3 Plan Termination Following a Change in Control Event If, within the 30 days preceding or the 12 months following a Change in Control Event,the Plan Sponsor takes irrevocable action to terminate the Plan, the Plan will be terminated and liquidated with respect to the Participants of each corporation that experienced the Change in Control Event. The Plan will beterminated under this Section 10.3 only if all other arrangements sponsored by the Plan Sponsor experiencing the Change in Control Event that would beaggregated with the Plan as a single plan under Code § 409A are also terminated, so all participants under such aggregated arrangements are required toreceive all amounts of compensation deferred under the terminated arrangements within 12 months after the date the Plan Sponsor takes all necessary actionto terminate the Plan and the other arrangements. For purposes of this Section 10.3, when the Change of Control Event results from an asset purchasetransaction, the applicable Plan Sponsor with the discretion to terminate the Plan and the other arrangements is the Plan Sponsor that is primarily liableimmediately after the transaction for the payment of deferred compensation. Upon a Plan Termination Following a Change in Control Event, no furtherCompensation Deferrals shall be made, and the Plan Administrator shall be responsible to pay any benefit attributable to vested amounts credited to theParticipant’s Account as soon as practicable following date on which the Plan Sponsor irrevocably takes all necessary action to terminate the Plan (followingany final adjustments to such Accounts in accordance with Article III hereof), but not later than 12 months following such date. 10.4 Plan Termination Following a Corporate Dissolution The Plan Sponsor in its discretion may terminate and liquidate the Plan and make thepayments provided below within 12 months after a Corporate Dissolution provided that the value of the Participants’ vested benefits is included inthe Participants’ gross incomes in the latest of the following years (or, if earlier, the year in which the amount is actually or constructively received): (a) the calendar year in which the Plan Termination occurs; (b) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (c) the first calendar year in which the payment is administratively practicable. Upon a Plan Termination Following a Corporate Dissolution, no further Compensation Deferrals shall be made, and the Plan Administrator shall beresponsible to pay any benefit attributable to vested amounts credited to the Participant’s Account as of the effective date of termination (following any finaladjustments to such Accounts in accordance with Article III hereof). 10.5 Plan Termination in Connection with Termination of Certain Similar Arrangements The Plan Sponsor in its discretion may terminate the Plan andmake the distribution provided below provided that (a) the termination does not occur proximate to a downturn in the financial health of the Plan Sponsor and its Affiliates; (b) the Plan Sponsor terminates all other arrangements that would be aggregated with the Plan as a single plan under Code § 409A if the sameParticipant had deferrals of compensation under all of the other arrangements; (c) no payments in liquidation of the Plan are made within 12 months after the date the Plan Sponsor takes all necessary action to irrevocablyterminate the Plan, other than payments that would be payable under the terms of the Plan if action to terminate the Plan had not occurred; (d) all payments are made within 24 months after the date the Plan Sponsor takes all necessary action to irrevocably terminate the Plan; and (e) neither the Plan Sponsor nor any Affiliate adopts a new plan that would be aggregated with any terminated plan or arrangement under thedefinition of what constitutes a plan for purposes of Code §409A if the same Participant participated in both arrangements, at any timewithin 3 years following the date the Plan Sponsor takes all necessary action to irrevocably terminate the Plan. Upon a Plan Termination in Connection with the Termination of Certain Similar Arrangements, no further Employer Discretionary Credits or EmployerMatching Credits shall be made, and no further Compensation Deferrals shall be made after the Taxable Year in which the Plan Termination in Connectionwith the Termination of Certain Similar Arrangements occurs. The Plan Administrator shall be responsible to pay any benefit attributable to vested amountscredited to the Participant’s Account as soon as practicable after distributions are permissible under Code § 409A (following any final adjustments to suchAccounts in accordance with Article III hereof). 10.6 Effect of Payment The full payment of the balance of a Participant’s vested Account under the provisions of the Plan shall completely discharge allobligations to a Participant and his designated Beneficiaries under this Plan and each of the Participant’s Compensation Deferral Agreements shallterminate. ARTICLE XI MISCELLANEOUS 11.1 Total Agreement This Plan document and the Compensation Deferral Agreement, Beneficiary designation and other administration forms shallconstitute the total agreement or contract between the Plan Sponsor and the Participant regarding the Plan. No oral statement regarding the Plan maybe relied upon by a Participant or Beneficiary. The Plan Sponsor or Plan Administrator shall have the right to establish such procedures as arenecessary for the administration or operation of the Plan or Trust, and such procedures shall also be considered a part of the Plan unless clearlycontrary to the express provisions thereof. 11.2 Employment Rights Neither the establishment of this Plan nor any modification thereof, nor the creation of any Trust or Account, nor the payment ofany benefits, shall be construed as giving a Participant or other person a right to employment with the Plan Sponsor or any Affiliate or any otherlegal or equitable right against the Plan Sponsor of any Affiliate except as provided in the Plan. In no event shall the terms of employment of anyEligible Individual be modified or in any way be affected by the Plan. 11.3 Non-Assignability None of the benefits, payments, proceeds or claims of any Participant or Beneficiary shall be subject to attachment orgarnishment or other legal process by any creditor of such Participant or Beneficiary, nor shall any Participant or Beneficiary have the right toalienate, commute, pledge, encumber or assign any of the benefits or payments or proceeds which he or she may expect to receive, contingently orotherwise under the Plan. 11.4 Binding Agreement Any action with respect to the Plan taken by the Plan Administrator or the Plan Sponsor or the Trustee or any action authorizedby or taken at the direction of the Plan Administrator, the Plan Sponsor or other authorized party shall be conclusive upon all Participants andBeneficiaries entitled to benefits under the Plan. 11.5 Receipt and Release Any payment to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be infull satisfaction of all claims against the Plan Sponsor, the Plan Administrator and the Trustee under the Plan, and the Plan Administrator may requiresuch Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. If any Participant orBeneficiary is determined by the Plan Administrator to be incompetent by reason of physical or mental disability (including not being the age ofmajority) to give a valid receipt and release, the Plan Administrator may cause payment or payments becoming due to such person to be made to alegal guardian, trustee, or other proper representative of the Participant or Beneficiary without responsibility on the part of the Plan Administrator,the Plan Sponsor or the Trustee to follow the application of such funds. 11.6 Furnishing Information A Participant or Beneficiary will cooperate with the Plan Administrator or any representative thereof by furnishing any andall information requested by the Plan Administrator and take such other actions as may be requested in order to facilitate the administration of thePlan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Plan Administrator may deemnecessary. 11.7 Compliance with Code § 409A Notwithstanding any provision of the Plan to the contrary, all provisions of the Plan will be interpreted and appliedto comply with the requirements of Code §409A and any regulations and applicable binding guidance so as to avoid adverse tax consequences. Noprovision of the Plan, however, is intended or shall be interpreted to create any right with respect to the tax treatment of the amounts paid or payablehereunder, and neither the Plan Sponsor nor any Affiliate shall under any circumstances have any liability to a Participant or Beneficiary for anytaxes, penalties or interest due on amounts paid or payable under the Plan, including taxes, penalties or interest imposed under Code § 409A. 11.8 Insurance The Plan Sponsors, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procureinsurance on the life of the Participant, in such amounts and in such forms as they may choose. The Plan Sponsors or the trustee of the Trust, as thecase may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy orpolicies, and at the request of the Plan Sponsor shall submit to medical examinations and supply such information and execute such documents asmay be required by the insurance company or companies to which the Plan Sponsor have applied for insurance. 11.9 Governing Law Construction, validity and administration of this Plan shall be governed by applicable Federal law and applicable state law ofCalifornia, without regard to the conflict of law provisions of such state law. If any provision shall be held by a court of competent jurisdiction to beinvalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 11.10 Headings and Subheadings Headings and subheadings in this Plan are inserted for convenience only and are not to be considered in theinterpretation of the provisions hereof. IN WITNESS WHEREOF, PICO Deferred Holdings, LLC has adopted the amendment and restatement of this Plan as of the Effective Date in accordance withthe resolutions of the Compensation Committee o f he Board of Directors of PICO Holdings Inc. attached hereto. WEST\21629892.2 328146-151900   SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1Name of Subsidiary Jurisdiction of Incorporation/Organization Fish Springs Ranch, LLC NevadaNevada Land and Resource Company, LLC NevadaNevada Land and Resource Holdings, Inc. NevadaPhysicians Insurance Company of Ohio OhioPICO Deferred Holdings, LLC DelawareRaven Investment Holdings, Inc. DelawareUCP, LLC DelawareVidler Water Company, Inc. Nevada Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-147547, 333-141321, 333-134296, and 333-125362 on Form S-3and Registration Statement No. 333-142848 on Form S-8 of our reports dated February 26, 2010, relating to the financial statements of PICO Holdings, Inc.and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes and explanatory paragraph relating to the adoption of theprovisions of accounting guidance for uncertain tax positions now codified as Financial Accounting Standards Board (FASB) Accounting StandardsCodification (ASC) Topic 740, Income Taxes, effective January 1, 2007) and the effectiveness of the Company's internal control over financial reporting,appearing in this Annual Report on Form 10-K of PICO Holdings, Inc. and subsidiaries for the year ended December 31, 2009. Deloitte & Touche LLP By:/s/ Deloitte & Touch LLPSan Diego, CAFebruary 26, 2010 Exhibit 23.2CONSENT OF EXPERTWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-125362, No. 333-134296, No. 333-141321 and No. 333-147547) and Form S-8 (No. 333-142848) of PICO Holdings, Inc. (the “Company”) of the findings in our reports dated January 2008 andApril 2008, with respect to the Mean Annual Recharge for the Tule Desert Hydrographic Basin, Lincoln County, Nevada appearing in “Item 3. LegalProceedings” under the caption “Tule Desert Action to Reverse Ruling” and in “Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations” under the caption “Tule Desert Groundwater Basin” of the Company’s Annual Report on Form 10-K. We hereby consent to allreferences to such reports in such Annual Report on Form 10-K and we hereby consent to all references to such reports in each such Registration Statement,and further consent to Daniel B. Stephens and Associates, Inc. being named as an expert in each such Registration Statement and in each Prospectus to whichany such Registration Statement relates.Daniel B. Stephens and Associates, Inc.By: /s/Daniel B. StephensName: Daniel B. StephensTitle: Chairman of Board of DirectorsAlbuquerque, NMFebruary 26, 2010Exhibit 23.3CONSENT OF EXPERTI hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-125362, No. 333-134296, No. 333-141321and No. 333-147547) and Form S-8 (No. 333-142848) of PICO Holdings, Inc. (the “Company”) of the findings in my report, Projections of GroundwaterImpacts in Response to Proposed Pumping from Beneath the Tule Desert in Southeastern Nevada Using MODFLOW-2000, dated June 24, 2008, with respectto the estimated availability of groundwater in the Tule Desert Groundwater Basin appearing in “Item 3. Legal Proceedings” under the caption “Tule DesertAction to Reverse Ruling” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption“Tule Desert Groundwater Basin” of the Company’s Annual Report on Form 10-K. I hereby consent to all references to such report in such Annual Report onForm 10-K and I hereby consent to all references to such report in each such Registration Statement, and further consent to being named as an expert in eachsuch Registration Statement and in each Prospectus to which any such Registration Statement relates.Signed:Peter A. Mock, Ph.D., R.G., P.H.Signed: /s/ Peter A. MockParadise Valley, ArizonaFebruary 26, 2010 Exhibit 31.1CERTIFICATION 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 2002I, John R. Hart, certify that:1. I have reviewed this annual report on Form 10-K of PICO Holdings, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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 theregistrant 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 thoseentities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.Date: February 26, 2010/s/ John R. HartJohn R. HartPresident and Chief Executive OfficerExhibit 31.2CERTIFICATION 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 2002I, Maxim C. W. Webb, certify that:1. I have reviewed this annual report on Form 10-K of PICO Holdings, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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 theregistrant 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 thoseentities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.Date: February 26, 2010/s/ Maxim C. W. WebbMaxim C.W. WebbChief Financial Officer Exhibit 32.1CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO18 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, 2009, as filed withthe 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: February 26, 2010/s/ John R. HartJohn R. HartPresident and Chief Executive Officer Exhibit 32.2CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO18 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, 2009, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Maxim C. W. Webb, Chief Financial Officer of the Company, certify, pursuantto 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: February 26, 2010/s/ Maxim C. W. WebbMaxim C.W. WebbChief Financial Officer

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