PICO Holdings Inc.
Annual Report 2017

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_____________________FORM 10-Ký ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017OR¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _____ to _____Commission file number 033-36383PICO HOLDINGS, INC.(Exact Name of Registrant as Specified in Its Charter)Delaware(State or other jurisdiction of incorporation)94-2723335(IRS Employer Identification No.)7979 Ivanhoe Avenue, Suite 300 La Jolla, California 92037(Address of Principal Executive Offices, including Zip Code)Registrant’s Telephone Number, Including Area Code(888) 389-3222Securities Registered Pursuant to Section 12(b) of the Act:Title of Each ClassName of Each Exchange On Which RegisteredCommon Stock, Par Value $0.001NASDAQ 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 ýIndicate 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 ýIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 to be submitted and postedpursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes ý 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 best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company, ” and “Emerging Growth Company” in Rule 12b-2 of the Exchange Act (check one):Large accelerated filer ¨Accelerated filer ýNon-accelerated filer ¨Smaller reporting company ¨Non-accelerated filer ¨If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). Yes ¨ No ýAt June 30, 2017, the aggregate market value of shares of the registrant’s common stock held by non-affiliates of the registrant (based upon the closing sale price of such shares on theNASDAQ Global Select Market on June 30, 2017) was $404.9 million, which excludes shares of common stock held in treasury and shares held by executive officers, directors, andstockholders whose ownership exceeds 10% of the registrant’s common stock outstanding at June 30, 2017. This calculation does not reflect a determination that such persons aredeemed to be affiliates for any other purposes.On February 16, 2018, the registrant had 23,152,027 shares of common stock, $0.001 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 Regulation 14A in connection withthe registrant’s 2018 Annual Meeting of Shareholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Annual Report on Form 10-K.ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS Page No.PART IItem 1.BUSINESS 3Item 1A.RISK FACTORS 10Item 1B.UNRESOLVED STAFF COMMENTS 16Item 2.PROPERTIES 16Item 3.LEGAL PROCEEDINGS 16Item 4.MINE SAFETY DISCLOSURES 16 PART IIItem 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES 17Item 6.SELECTED FINANCIAL DATA 19Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 65Item 9A.CONTROLS AND PROCEDURES 65Item 9B.OTHER INFORMATION 67 PART IIIItem 10.DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 67Item 11.EXECUTIVE COMPENSATION 67Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS 67Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 67Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES 67 PART IVItem 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 68 SIGNATURES 702PART INote About “Forward-Looking Statements”This Annual Report on Form 10-K (including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) contains“forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995, regarding our business, financial condition, results ofoperations, and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipated developments, and otherinformation 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 not the exclusive means ofidentifying 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, unless otherwise required by law. Readers are urged to carefully review and consider the various disclosures made in this Annual Report onForm 10-K, and the other filings we may make from time to time with the SEC after the date of this report, which attempt to advise interested parties ofthe risks and uncertainties that may affect our business, financial condition, results of operations, and prospects.ITEM 1. BUSINESSIntroductionPICO Holdings, Inc. is a diversified holding company that was incorporated in 1981. In this Annual Report on Form 10-K, PICO and its subsidiaries arecollectively referred to as “PICO,” the “Company,” or by words such as “we,” “us,” and “our.”Our objective is to maximize long-term shareholder value. Currently, we believe the highest potential return to shareholders is from a return of capital. Aswe monetize assets, rather than reinvest the proceeds, we intend to return capital back to shareholders through a stock repurchase program or by other meanssuch as special dividends.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, aremade available free of charge on our web site (www.picoholdings.com) as soon as reasonably practicable after the reports are electronically filed or furnishedwith the SEC. Our website also contains other material about our Company. Information on our website is not incorporated by reference into this AnnualReport on Form 10-K. Our corporate office is located at 7979 Ivanhoe Avenue, Suite 300, La Jolla, California 92037, and our telephone number is (888) 389-3222.The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this AnnualReport on Form 10-K. Additional information regarding the performance of and recent developments in our operating segments is included in Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operations.Our BusinessWe are primarily focused on selling our existing water rights and storage credits that we own in Arizona, Colorado, Nevada and New Mexico. The long-term future demand for our existing water assets is driven by population and economic growth relative to currently available water supplies in thesouthwestern United States. We have developed sources of water for municipal and industrial use, either from existing supplies of water, such as water usedfor agricultural purposes, acquired unappropriated (previously unused) water, or discovered new water sources based on science and targeted exploration. Weare not a water utility, and do not currently intend to enter into regulated utility activities.3A water right is the legal right to divert water and put it to beneficial use. Water rights are real property rights which can be bought and sold and arecommonly measured in acre-feet (“AF”), which is a measure of the volume of water required to cover an area of one acre to a depth of one foot and is equal to325,850 gallons. The value of a water right depends on a number of factors, which may include location, the seniority of the right, whether or not the right istransferable, or if the water can be moved from one location to another. We believe we have purchased water rights at prices consistent with their then currentuse, which was typically agricultural in nature, with the expectation that the value would increase as we converted the water rights through the developmentprocess to a higher use, such as municipal and industrial use. We acquired and developed water resources with the expectation that such water resourceswould be the most competitive source of water (the most economical source of water supply) to support new growth in municipalities or new commercial andindustrial projects.Over the past six years, the population growth of these states also exceeded the national growth rate collectively and individually, with the exception ofNew Mexico. According to the Census Bureau’s estimate of state population changes for the period April 1, 2010 to July 1, 2017, Nevada’s growth rate was11.02%, Arizona 9.77%, Colorado 11.49%, and New Mexico 1.4%. These population growth statistics compare to the national total growth rate of 5.5% overthe same period.Historically, a significant portion of the Southwest’s water supplies have come from the Colorado River. The balance is provided by other surface rights,such as rivers and lakes, groundwater (water pumped from underground aquifers), and water previously stored in reservoirs or aquifers. Prolonged droughts(decreased snow pack runoff and the related decreased surface water) and rapid population growth in the past twenty years have exacerbated the region’sgeneral water scarcity.In December 2012, the U.S. Department of the Interior released a report titled: The Colorado River Basin Water Supply and Demand Study, examiningthe future water demands on the Colorado River Basin. The report projects water supply and demand imbalances throughout the Colorado River Basin andadjacent areas over the next 50 years. The average imbalance in future supply and demand is projected to be greater than 3.2 million acre-feet per year by2060. The study projects that the largest increase in demand will come from municipal and industrial users as a result of population growth. The ColoradoRiver Basin currently provides water to some 40 million people, and the study estimates that this number could nearly double to approximately 76.5 millionpeople by 2060, under a rapid growth scenario.Certain areas of the Southwest confronting long-term growth have insufficient known supplies of water to support their future economic and populationgrowth. The inefficient allocation of available water between agricultural users and municipal or industrial users, the lack of available known water suppliesin a particular location, or inadequate infrastructure to fully utilize or store existing and new water supplies provide opportunities for us to apply our waterresource development expertise.The development of our water assets required significant capital and expertise. A complete project, from acquisition, through development, permitting,and sale is typically a long-term endeavor. In the regions in which we operate, new housing, and commercial and industrial developments require an assured,or sustainable, water supply (for example, in Arizona, access to water supplies for at least 100 years is required) before a permit for the development will beissued.We have acquired or developed water rights and water related assets in Arizona, Idaho, Nevada, Colorado, and New Mexico. We also developed andoperated our own water storage facility near Phoenix, Arizona, utilize water storage capacity operated by third parties in Arizona, and “bank,” or store, waterwith municipalities in Nevada and New Mexico.We have also entered into “teaming” and joint resource development arrangements with third parties who have water assets but lack the capital orexpertise to commercially develop these assets. The first of these arrangements was a water delivery teaming agreement in southern Nevada with the LincolnCounty Water District (“Lincoln/Vidler”), which is developing water resources in Lincoln County, Nevada. In northern Nevada, we have also entered into ajoint development agreement with Carson City and Lyon County, Nevada to develop and provide water resources in Lyon County as well as a water bankingagreement with Washoe County in Reno, Nevada.4We generate revenues by:•selling our developed water rights to real estate developers, power generating facilities or other commercial and industrial users who must securerights to an assured, or sustainable, supply of water in order to receive permits for their development projects;•selling our developed water rights to water utilities, municipalities and other government agencies for their specific needs, including to supportpopulation growth;•selling our stored water to state agencies, commercial developers or municipalities that have either exhausted their existing water supplies or requirereserves for future water obligations, or, in instances where our water represents the most economical source of water, for their commercial projects orcommunities; and•leasing our water, or land.We owned the following significant water resource and water storage assets at December 31, 2017:Fish Springs RanchWe own a 51% membership interest in, and are the managing partner of, Fish Springs Ranch, LLC (“FSR”), which owns the Fish Springs Ranch and otherproperties totaling approximately 7,313 acres in Honey Lake Valley in Washoe County, approximately 40 miles north of Reno, Nevada. FSR also owns12,984 acre-feet of permitted water rights related to the properties of which 7,984 acre-feet are designated as water credits, transferable to other areas withinWashoe County (such as Reno and Sparks) to support community development. Although the additional 5,000 AF has been approved and permitted by theNevada State Engineer, existing federal rights of way will need to be updated before such water is transferable. To date, we have funded all of the operationalexpenses, development, and construction costs incurred in this partnership. Certain of the development and construction costs are treated as preferred capitalunder the partnership agreement which among other things, entitles us to receive interest on the initial balance of the preferred capital and the accumulatedinterest at the London Inter-Bank Offered Rate (“LIBOR”) plus 450 basis points. The preferred capital and accumulated interest is first in line to be paid outas the partnership generates sufficient revenue. At December 31, 2017 the balance in the preferred capital account including $75 million of accrued interest,was $169.6 million and the associated interest rate was 6.2%.During 2006, we started construction of a pipeline and an electrical substation to provide the power required to pump the water to the north valleysregion of Reno. In July 2008, we completed construction of and dedicated our pipeline and associated infrastructure to Washoe County, Nevada under theterms of an Infrastructure Dedication Agreement (“IDA”) between Washoe County and FSR. Under the provisions of the IDA, Washoe County is responsiblefor the operation and maintenance of the pipeline and we own the exclusive right to the capacity of the pipeline to allow for the sale of water for futureeconomic development in the north valley area of Reno. Our 7,984 acre-feet of water that has regulatory approval to be imported to the north valleys of Renois available for sale under a Water Banking Agreement entered into between FSR and Washoe County. Under the Water Banking Agreement, Washoe Countyholds our water rights in trust. We can sell our water credits to developers, who must then dedicate the water to the local water utility for service. In December2014, Washoe County Water Utilities merged with the Truckee Meadows Water Authority (“TMWA”), consolidating water supply service in WashoeCounty. Also effective at the end of 2014, FSR, Washoe County, and TMWA consented to the Assignment of the Water Banking Agreement and the IDA tothe Truckee Meadows Water Authority.Carson/LyonThe capital of Nevada, Carson City, and Lyon County are located in the western part of the state, close to Lake Tahoe and the border with California.While Carson City’s housing growth has been and is expected to be minimal due to land constraints, there is planned growth for the Dayton corridor, directlyeast of Carson City. The planned growth in this area is anticipated to be driven by the employment growth at the Tahoe Reno Industrial Center (“TRIC”) andthe construction of the extension of the USA Parkway, completed in August 2017, which connects Interstate route 80 to TRIC and the extension connectsInterstate route 80 and TRIC to U.S. route 50 near Silver Springs, Lyon County. There are currently few existing water sources to support future growth anddevelopment in the Dayton corridor area and we have worked with Carson City and Lyon County for several years on ways to deliver water to support thisexpected growth.We have development and improvement agreements with both Carson City and Lyon County to provide water resources for planned future growth inLyon County and to connect, or “intertie,” the municipal water systems of Carson City and Lyon County. The agreements allow for certain river water rightsowned or controlled by us to be conveyed for use in Lyon County. The agreements also allow us to bank water with Lyon County and authorize us to buildthe infrastructure to upgrade and inter-connect the Carson City and Lyon County water systems.5We own or control water rights consisting of both Carson River agriculture designated water rights and certain municipal and industrial designated waterrights. We anticipate that we will have up to 4,000 acre-feet available for municipal use in Lyon County for future development, if and when demand occurs,principally by means of delivery through the new infrastructure we constructed.Vidler Arizona Recharge FacilityWe built and received the necessary permits to operate a full-scale water “recharge” facility that allowed us to bank water underground in the HarquahalaValley, Arizona. “Recharge” is the process of placing water into storage underground. When needed, the water will be “recovered,” or removed from storage,by ground water wells. This stored water creates a long term storage credit (“LTSC”).We hold recharged Colorado River water at this facility, which is a primary source of water for the Lower 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 toPhoenix and Tucson. Our recharged water was purchased from surplus flows of CAP water. Proximity to the CAP provides a competitive advantage as itminimizes the cost of water conveyance of our LTSCs.Potential users include industrial companies, power-generating companies, developers, and local governmental political subdivisions in Arizona, andout-of-state users such as municipalities and water agencies in Nevada and California. The Arizona Water Banking Authority (“AWBA”) has theresponsibility for intrastate and interstate storage of water for governmental entities. To date, we have not stored water at the facility for any third party andthere is no longer excess water which can be banked.While Arizona was the only southwestern state with surplus flows of Colorado River water available for storage, there is little to no surplus flowsavailable to us as drought conditions have reduced the flow of the Colorado River and other water users have fully utilized their water allocations. In thefuture, we do not anticipate purchasing and storing surplus flows of Colorado River water and we have discontinued using the recharge element of the storagesite. At December 31, 2017, we had LTSCs of approximately 251,000 acre-feet of water in storage at the facility. To date, we have not generated any revenuefrom selling our stored water at this facility.Phoenix AMA Water StorageAs of December 31, 2017, we owned approximately 54,000 acre-feet of LTSCs stored in the Arizona Active Management Area (“AMA”), approximately44,000 acre-feet of which is in the Roosevelt Water Conservation District (“RWCD”). For the purposes of storing water, the RWCD is part of the PhoenixAMA, which corresponds to the Phoenix metropolitan area. Accordingly, water stored in the AMA may be recovered and used anywhere in the AMA andcould have a variety of uses for commercial developments within the Phoenix metropolitan area. All of the storage sites we utilize within the AMA areoperated by third parties.Harquahala Valley Ground Water BasinAny 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 water supply.Under Arizona law, the property and water rights in the Harquahala Valley are located in one of three areas in the state from which groundwater may bewithdrawn and transferred from a rural area to a metropolitan area. In July 1998, we were granted approval for the transportation of three acre-feet ofgroundwater per acre of previously irrigated ground, totaling 3,837 acre-feet of groundwater, from Harquahala Valley into the Phoenix-Scottsdalemetropolitan area. During 2011, we were granted approval for 9,877 acre-feet of groundwater, which included the prior 3,837 acre-feet awarded.At December 31, 2017, we own 1,926 acres of land and have the ability to utilize 6,040 acre-feet of groundwater for development within the HarquahalaBasin. The Analysis of Adequate Water Supply for the 6,040 acre-feet must be renewed before December 2021 in order to maintain these rights.In addition, the area in and around the Harquahala Valley appears to be a desirable area to site natural gas fired and solar power-generating plants. Thesite’s proximity to energy transmission lines and the high solarity in the region are strengths of the location. The water assets we own in this region couldpotentially provide a water source for energy plants that might be constructed in this area.6Lincoln County, Nevada Water Delivery and Teaming AgreementLincoln/Vidler entered into a water delivery teaming agreement to locate and develop water resources in Lincoln County, Nevada for planned projectsunder the County’s master plan. Under the agreement, proceeds from sales of water will be shared equally after Vidler is reimbursed for the expenses incurredin developing water resources in Lincoln County. Lincoln/Vidler has filed applications for more than 100,000 acre-feet of water rights with the intention ofsupplying water for residential, commercial, and industrial use, as contemplated by the county’s approved master plan. We believe that this is the only knownnew source of water for Lincoln County. Although it is uncertain, Vidler currently anticipates that over the long-term, up to 40,000 acre-feet of water rightswill ultimately be permitted from these applications, and put to use for planned projects in Lincoln County.Tule Desert Groundwater BasinLincoln/Vidler jointly filed permit applications in 1998 for approximately 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 awarded Lincoln/Vidler a permit for 2,100 acre-feet of waterrights, which Lincoln/Vidler subsequently sold in 2005, and ruled that an additional 7,240 acre-feet could be granted pending additional studies byLincoln/Vidler (the “2002 Ruling”). Subsequent to the 2002 Ruling and consistent with the Nevada State Engineer’s conditions, we completed theseadditional engineering and scientific studies.On April 15, 2010, Lincoln/Vidler and the Nevada State Engineer announced that we entered into a Settlement Agreement with respect to litigationbetween the parties regarding the amount of water to be permitted in the Tule Desert Groundwater Basin. The Settlement Agreement resulted in the grantingto Lincoln/Vidler of the original application of 7,240 acre-feet of water rights with an initial 2,900 acre-feet of water rights available for sale or lease byLincoln/Vidler. The balance of the water rights (4,340 acre-feet) is the subject of staged pumping and development over the next several years to furtherrefine the modeling of the basin and potential impacts, if any, from deep aquifer pumping in the remote, unpopulated desert valley in Lincoln County,Nevada.The Tule Desert Groundwater Basin water resources were developed by Lincoln/Vidler to support the Lincoln County Recreation, Conservation andDevelopment Act of 2004 (the “Land Act”) and Vidler’s proposed Toquop Power generation project, as discussed below. The water permitted under theSettlement Agreement is anticipated to provide sufficient water resources to support any development of the Toquop Power generation project and a portionof Land Act properties.Lincoln County Power Plant ProjectWe developed the Toquop Power project. We are finalizing the required studies and National Environmental Protection Act (“NEPA”) permits for theproject. We continue to engage in discussions with potential energy generation partners capable of building a power generation facility in Lincoln County.We own 100% of this power plant project, as it is not part of the Lincoln/Vidler teaming agreement.7Kane SpringsIn 2005, Lincoln/Vidler agreed to sell water to a developer of Coyote Springs, a new planned residential and commercial development 60 miles north ofLas Vegas, as and when supplies were permitted from Lincoln/Vidler’s existing applications in Kane Springs, Nevada. Lincoln/Vidler currently has priorityapplications for approximately 17,375 acre-feet of water in Kane Springs for which the Nevada State Engineer has requested additional data before making adetermination on the applications from this groundwater basin. The actual permits received may be for a lesser quantity, which cannot be accuratelypredicted.Currently, we have an option agreement with a developer to sell our remaining 500 acre-feet of water rights we own in this area at a price of $6,358 peracre-foot that is escalated at 7.5% per year from September 2017. The agreement expires in September 2019 and requires an annual option fee of $60,000 tomaintain the rights under the option. To date, the developer has made all required annual option payments.The following table summarizes our other water rights and real estate assets at December 31, 2017:Name and location of asset Brief description Present commercial useNevada: Truckee River Water Rights Approximately 299 acre-feet of Truckee River waterrights permitted for municipal use. Water rights are available to support developmentthrough sale, lease, or partnering arrangements.Dry Lake Vidler owns 595 acres of agricultural and ranch land inDry Lake Valley North. Lincoln/Vidler owns the 1,009acre-feet of permitted agricultural groundwater rightsassociated with the land.Located in Lincoln County. Water rights and land are available to supportdevelopment through sale, lease, or partneringarrangements.Muddy River 267 acre-feet of water rights.Located 35 miles east of Las Vegas. Currently leased to farmers in the Muddy RiverIrrigation Company.Dodge Flat 1,428 acre-feet of permitted municipal and industrialuse water rights, and 1,068 acres of land.Located in Washoe County, east of Reno. Water rights and land are currently under contract.In November 2014, we entered into an optionagreement with a solar developer for the potentialdevelopment of a solar power project of up to 180megawatts.Colorado: Tunnel Approximately 155 acre-feet of water rights.Located in Summit County (the Colorado Rockies),near Breckenridge. 59 acre-feet of water leased under long term leases. 96acre-feet are available for sale or lease.New Mexico: Campbell Ranch Application for a new appropriation of 350 acre-feet ofground water. Vidler is in partnership with the landowner. The water rights would be used for a newresidential and commercial development.Located 25 miles east of Albuquerque. In November 2014, our application was denied by theNew Mexico State Engineer causing us to record animpairment loss of $3.5 million which reduced thecapitalized costs and other assets of this project to zero.We appealed this decision on November 19, 2014.Lower Rio Grande Basin Approximately 1,215 acre-feet of agricultural waterrights.Located in Dona Ana and Sierra Counties. Water is available for sale, lease or other partneringopportunities.In 2014, we entered into a long term lease for a portionof these water rights.Middle Rio Grande Basin Approximately 99 acre-feet of water rights permitted formunicipal use.Located in Santa Fe and Bernalillo Counties. Water is available for sale, lease, or other partneringopportunities.8We also own investments in small businesses which have typically been venture capital-type situations.The most significant at December 31, 2017 isMindjet Inc. (“Mindjet”), which is a privately held company located in San Francisco, California that provides software to help business innovation. Theinvestment is comprised of common and preferred stock and a convertible debt security. The investment is held at cost and included in investments in ourconsolidated financial statements while the outstanding loan balance is included in other assets. At December 31, 2017, we controlled 19.3% of the votingstock of the company and the carrying value of our total investment in Mindjet was $2.3 million, comprised of $1.3 million in preferred stock and a loan of$1 million.It is reasonably possible given the volatile nature of the software industry that circumstances may change in the future which could require us to recordimpairment losses on our investments included in this segment.EmployeesAt December 31, 2017, we had 21 employees.Executive OfficersThe executive officers of PICO are:Name Age PositionMaxim C. W. Webb 56 President, Chief Executive Officer and Chairman of the BoardJohn T. Perri 48 Chief Financial Officer and SecretaryMr. Webb has served as our President, Chief Executive Officer, and as a member of our board of directors since October 2016 and as Chairman of theBoard of Directors since December 2016. Mr. Webb has been an officer of Vidler Water Company, Inc. since 2001. He has served in various capacities sincejoining our company in 2001, including Chief Financial Officer, Treasurer, Executive Vice President and Secretary from 2001 to October 2016 and as adirector of UCP, Inc. from 2013 to 2017.Mr. Perri has served as our Chief Financial Officer and Secretary since October 2016. He has served in various capacities since joining our company in1998, including Vice President, Chief Accounting Officer from 2010 to October 2016, Financial Reporting Manager, Corporate Controller and VicePresident, Controller from 2003 to 2010.9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.* General economic conditions could have a material adverse effect on our financial results, financial condition and the demand for and the fair valueof our assets.Our operations are sensitive to the general economic conditions of the local markets in which are assets are located although international, national, andregional economic conditions may also impact our markets. General poor economic conditions and the resulting effect of non-existent or slow rates of growthin the markets in which we operate could have a material adverse effect on the demand for our water assets. These poor economic conditions include higherunemployment, inflation, deflation, decreases in consumer demand, changes in buying patterns, a weakened dollar, higher consumer debt levels, higherinterest rates, especially higher mortgage rates, and higher tax rates and other changes in tax laws or other economic factors that may affect commercial andresidential real estate development.Specifically, high national, regional, or local unemployment may arrest or delay any significant growth of the residential real estate markets in which weoperate, which could adversely affect the demand for our water assets. Any prolonged lack of demand for our water assets could have a significant adverseeffect on our revenues, results of operations, cash flows, and the return on our investment from these assets.Our future revenue is uncertain and depends on a number of factors that may make our revenue, profitability, cash flows, and the fair value of ourassets volatile.Our future revenue and profitability related to our water resource and water storage operations will primarily be dependent on our ability to develop andsell or lease our water assets. In light of the fact that our water resource and water storage operations represent the majority of our overall business at present,our long-term profitability and the fair value of the assets related to our water resource and water storage operations could be affected by various factors,including the drought in the southwest, regulatory approvals and permits associated with such assets, transportation arrangements, and changing technology.We may also encounter unforeseen technical or other difficulties which could result in cost increases with respect to our water resource and water storagedevelopment projects. Moreover, our profitability and the fair value of the assets related to our water resource and water storage operations is significantlyaffected by changes in the market price of water. Future sales and prices of water may fluctuate widely as demand is affected by climatic, economic,demographic and technological factors as well as the relative strength of the residential, commercial, financial, and industrial real estate markets.Additionally, to the extent that we possess junior or conditional water rights, during extreme climatic conditions, such as periods of low flow or drought, ourwater rights could be subordinated to superior water rights holders. The factors described above are not within our control.One or more of the above factors in one or more of our operating segments could impact our revenue and profitability, negatively affect our financialcondition and cash flows, cause our results of operations to be volatile, and could negatively impact our rate of return on our water assets and cause us todivest such assets for less than our intended return on our investment.10* A downturn in the homebuilding and land development sectors in our markets would materially adversely affect our business, results of operations,and the demand for and the fair value of our assets.The homebuilding industry experienced a significant and sustained downturn in recent years having been impacted by factors that include, but are notlimited to, weak general economic and employment growth, a lack of consumer confidence, large supplies of resale and foreclosed homes, a significantnumber of homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home, and tight lending standards andpractices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home. These factors resulted in an industry-wideweakness in demand for new homes and caused a material adverse effect on the growth of the local economies and the homebuilding industry in thesouthwestern United States (“U.S.”) markets where a substantial amount of our water assets are located, including the states of Nevada, Arizona, Colorado,and New Mexico. The continuation of the recent improvement in residential and commercial real estate development process and activity is essential for ourability to generate operating income in our water resource and water storage business. We are unable to predict whether and to what extent this recovery willcontinue or its timing. Any future slow-down in real estate and homebuilding activity could adversely impact various development projects within themarkets in which our water assets are located and this could materially affect the demand for and the fair value of these assets and our ability to monetizethese assets. Declines and weak conditions in the U.S. housing market have reduced our revenues and created losses in our water resource and water storage,and land development and homebuilding businesses in prior years and could do so in the future. Additionally, the recent tax law changes limiting, amongother things, deductibility of mortgage interest and of state and local income taxes may have an impact on the national housing market and in the markets inwhich we operate, although the Nevada market may be less impacted due to the lack of a state income tax.We may not be able to realize the anticipated value of our water assets in our projected time frame, if at all.We expect that the current rate of growth of the economy will continue to have an impact on real estate market fundamentals. Depending on how marketsperform both in the short and long-term, the state of the economy, both nationally and locally in the markets where our assets are concentrated, could result ina decline in the value of our existing water assets, or result in our having to retain such assets for longer than we initially expected, which would negativelyimpact our rate of return on our water assets, cause us to divest such assets for less than our intended return on investment, or cause us to incur impairments onthe book values of such assets to estimated fair value. Such events would adversely impact our financial condition, results of operations and cash flows.The fair values of our water assets are linked to growth factors concerning the local markets in which our assets are concentrated and may be impactedby broader economic issues.Both the demand for, and fair value of, our water assets are significantly affected by the growth in population and the general state of the local economieswhere our real estate and water assets are located. The local economies where our real estate and water assets are located, primarily in Arizona and northernNevada, but also in Colorado and New Mexico, may be affected by factors such as the local level of employment, the availability and cost of financing forreal estate development transactions, and affordability of housing. The unemployment rate in these states, as well as issues related to the credit markets, mayprolong a slowdown of the local economies where our real estate and water assets are located. This could materially and adversely affect the demand for, andthe fair value of, our real estate and water assets and, consequently, adversely affect our growth and revenues, results of operations, cash flows and the returnon our investment from these assets.The fair values of our water assets may decrease which could adversely affect our results of operations with losses from asset impairments.The fair value of our water resource and water storage assets depends on market conditions. We acquired water resources and land for expansion into newmarkets and for replacement of inventory and expansion within our current markets. The valuation of real estate and water assets is inherently subjective andbased on the individual characteristics of each asset. Factors such as changes in regulatory requirements and applicable laws, political conditions, thecondition of financial markets, local and national economic conditions, change in efficiencies of water use, the financial condition of customers, potentiallyadverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainties. In addition, our valuations are made on the basis ofassumptions that may not prove to reflect economic or demographic reality. If population growth and, as a result, water and/or housing demand in ourmarkets fails to meet our expectations when we acquired our real estate and water assets, our profitability may be adversely affected and we may not be ableto recover our costs when we sell our real estate and water assets. We regularly review the value of our water assets. These reviews have resulted in recordingsignificant impairment losses in prior years to our water resource assets. Such impairments have adversely affected our results of operations and our financialcondition in those years.11If future market conditions adversely impact the anticipated timing of and amount of sales of our water assets we may be required to record furthersignificant impairments to the carrying value of our water assets, which would adversely affect our results of operations and our financial condition.* The majority of our remaining assets and operations consist of our existing water resource and water storage operations that are concentrated in alimited number of assets and markets, making our cash flows, profitability and the fair value of those assets difficult to predict and vulnerable toconditions and fluctuations in a limited number of local economies.We anticipate that a significant amount of our water resource and water storage revenue, results of operations and cash flows will come from a limitednumber of assets, which primarily consist of our water rights in Nevada and our water storage operations in Arizona. Our two most significant assets are ourwater storage operations in Arizona and our water rights to serve the north valleys area of Reno, Nevada. As a result of this concentration, we expect ourinvested capital and results of operations will be vulnerable to the conditions and fluctuations in these local economies, along with changes in local andregional government land use, zoning, permitting approvals and other regulatory action.Our Arizona Recharge Facility is one of the few private sector water storage sites in Arizona. At December 31, 2017, we had approximately 251,000 acre-feet of water stored at the facility. In addition, we had approximately 53,800 acre-feet of water stored in the Phoenix Active Management Area atDecember 31, 2017. We have not stored any water on behalf of any customers and as of December 31, 2017, had not generated any material revenue from therecharge facility. We cannot be certain that we will ultimately be able to sell all of the stored water at a price sufficient to provide an adequate economicprofit, if at all.We constructed a pipeline approximately 35 miles long to deliver water from Fish Springs Ranch to the north valleys area of Reno, Nevada. As ofDecember 31, 2017, the total cost of the pipeline project, including our water credits (net of impairment losses incurred to date) carried on our balance sheetwas approximately $83.9 million. To date, we have sold only a small amount of the water credits and we cannot provide any assurance that the sales prices wemay obtain in the future will provide an adequate economic return, if at all. Any prolonged weak demand or lack of permitting approvals for new homes,residential and commercial development, and, as a result, for our assets in Nevada and Arizona, would have a material adverse effect on our future revenues,results of operations, cash flows, and the return on our investment from those assets. Demand for these water credits is anticipated to primarily come from bothlocal and national developers planning to construct new projects in the north valleys area of Reno, Nevada. The success of these projects is dependent onnumerous factors beyond our control, including local government approvals, employment growth in the greater Reno area, and the ability of the developersto finance these projects.We may suffer uninsured losses or suffer material losses in excess of insurance limits.We could suffer physical damage to any of our assets at one or more of our different businesses and liabilities resulting in losses that may not be fullyrecoverable by insurance. In addition, certain types of risks, such as personal injury claims, may be, or may become in the future, either uninsurable or noteconomically insurable, or may not be currently or in the future covered by our insurance policies or otherwise be subject to significant deductibles or limits.Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles, we could sustain financial loss or lose capital invested in theaffected asset(s) as well as anticipated future income from that asset. In addition, we could be liable to repair damage or meet liabilities caused by risks thatare uninsured or subject to deductibles.We may not receive all of the permitted water rights we expect from the water rights applications we have filed in Nevada and New Mexico.We have filed certain water rights applications in Nevada and New Mexico. In Nevada this is primarily as part of the water teaming agreement withLincoln County. We deploy the capital required to enable the filed applications to be converted into permitted water rights over time as and when we deemappropriate or as otherwise required. We only expend capital in those areas where our initial investigations lead us to believe that we can obtain a sufficientvolume of water to provide an adequate economic return on the capital employed in the project. These capital expenditures largely consist of drilling andengineering costs for water production, costs of monitoring wells, legal and consulting costs for hearings with the State Engineer, and other compliance costs.Until the State Engineer in the relevant state permits the water rights we are applying for, we cannot provide any assurance that we will be awarded all of thewater that we expect based on the results of our drilling and our legal position and it may be a considerable period of time before we are able to ascertain thefinal volume of water rights, if any, that will be permitted by the State Engineers. Any significant reduction in the volume of water awarded to us from ouroriginal base expectation of the amount of water that may be permitted may result in the write down of capitalized costs which could adversely affect thereturn on our investment from those assets, our revenues, results of operations, and cash flows.12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 (as measured in acre-feet) of water we anticipate from water rights applications and ourpermitted water rights. The water and water rights held by us and the transferability of these rights to other uses, persons, and places of use are governed bythe laws concerning water rights in the states of Arizona, Colorado, 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 a result, the volume of water anticipated from the water rights applications or permitted rights may not in every case represent a reliable, firm annualyield of water, but in some cases describe the face amount of the water right claims or management’s best estimate of such entitlement. Additionally, we mayface legal restrictions on the sale or transfer of some of our water assets, which may affect their commercial value. If the volume of water yielded from ourwater rights applications is less than our expectations, or we are unable to transfer or sell our water assets, we may lose some or all of our anticipated returns,which may adversely affect our revenues, profitability and cash flows.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 and cash flows.Our sale of water assets may be subject to environmental regulations which would impact our revenues, profitability, and cash flows.The quality of the water assets we lease or sell may be subject to regulation by the United States Environmental Protection Agency acting pursuant to theUnited States Safe Drinking Water Act along with other federal, state and local regulations. While environmental regulations may not directly affect us, theregulations regarding the quality of water distributed affects our intended customers and may, therefore, depending on the quality of our water, impact theprice and terms upon which we may in the future sell our water assets. If we need to reduce the price of our water assets in order to make a sale to our intendedcustomers, our balance sheet, return on investment, results of operations and financial condition could suffer.Our water assets may be impacted by legal and political opposition in certain locations.The water assets we hold and the transferability of these assets and rights to other uses, persons, or places of use are governed by the laws and regulationsconcerning water rights in the states of Arizona, Nevada, Colorado and New Mexico and may be directly or indirectly affected by other federal, state andlocal laws and regulations related to water and land use. Our development and sale of water assets is subject to the risks of delay associated with receiving allnecessary regulatory approvals and permits. Additionally, the transfer of water resources from one use to another may affect the economic base or impactother issues of a community including development, and will, in some instances, be met with local opposition. Moreover, municipalities who will likelyregulate the use of any water we might sell to them in order to manage growth could create additional requirements that we must satisfy to sell and conveywater assets.If we are unable to effectively transfer, sell and convey water resources, our ability to monetize these assets will suffer and our return on investment,revenues and financial condition would decline.If our businesses or investments otherwise fail or decline in value, our financial condition and the return on our investment could suffer.Historically, we have acquired and invested in businesses and assets that we believed were undervalued or that would benefit from additional capital,restructuring of operations, strategic initiatives, or improved competitiveness through operational efficiencies. If any previously 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 operationsand cash flows. If we are not successful managing our previous acquisitions and investments, our business, financial condition, results of operations and cashflows could be materially affected. Such business failures, declines in fair values, and/or failure to manage acquisitions or investments, could result in anegative return on equity. We could also lose part or all of our capital in these businesses and experience reductions in our net income, cash flows, assets andequity.13Future dispositions of our businesses, assets, operations and investments, if unsuccessful, could reduce the value of our common shares. Any futuredispositions may result in significant changes in the composition of our assets and liabilities. Consequently, our financial condition, results of operations andthe trading price of our common shares may be affected by factors different from those historically affecting our financial condition, results of operations andtrading price at the present time.* We may need additional capital in the future to fund our business and financing may not be available on favorable terms, if at all, or without dilutionto our shareholders.We currently anticipate that our available capital resources and operating cash flows 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 ourbusiness. We may raise additional funds through public or private debt, equity or hybrid securities financings, including, without limitation, through theissuance of securities.We may experience difficulty in raising necessary capital in view of the recent volatility in the capital markets and increases in the cost of finance,especially for a small capitalization company like ours. Increasingly stringent rating standards could make it more difficult for us to obtain financing. If weraise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantlydiluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing shareholders. Indebtedness would result inincreased debt service obligations and could result in operating and financing covenants that would restrict our operations. The additional financing we mayneed may not be available to us, or on favorable terms. If adequate funds are not available or are not available on acceptable terms, if and when needed, ourability to fund our operations or otherwise execute our strategic plan would be significantly limited. In any such case, our business, operating results orfinancial condition could be materially adversely affected.* Our ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.Under Section 382 of the Internal Revenue Code of 1986, as amended, if our Company undergoes an “ownership change” (generally defined as a greaterthan 50% change (by value) in our equity ownership over a three year period), the ability to use our pre-change net operating loss carryforwards and otherpre-change tax attributes to offset our post-change income may be limited. Notwithstanding our adoption of a tax benefit preservation plan which is subjectto ratification by our shareholders at our 2018 annual meeting, it is possible that we could experience ownership changes in the future as a result of shifts inour stock ownership. As of December 31, 2017, we had federal and state net operating loss carryforwards of approximately $185.5 million and $174.7million, respectively, which, depending on our value at the time of any ownership changes, could be limited.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 our businesses we must, among other things, continue to retain key management. We relyon the services of a small team of key executive officers. If they depart, it could have a significant adverse effect upon our business. Also, increasedcompetition for skilled management and staff employees in our businesses could cause us to experience significant increases in operating costs and reducedprofitability.Analysts and investors may not be able to evaluate us adequately, which may negatively influence the price of our stock.We own assets that are unique, complex in nature, and difficult to understand. In particular, our water resource business is a developing industry in theUnited States with very little historical and comparable data, very complex valuation issues and a limited following of analysts. Because our assets areunique, analysts and investors may not be able to adequately evaluate our operations and enterprise as a going concern. This could cause analysts andinvestors to make inaccurate evaluations of our stock, or to overlook PICO in general. As a result, the trading volume and price of our stock could suffer andmay be subject to excessive volatility.14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 of our various businesses;•shortfalls in revenue or earnings from estimates forecast by securities analysts or others;•changes in estimates by such analysts;•the ability to monetize our water assets for an adequate economic return, including the length of time any such monetization may take;•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 one time transactions, and impairment losses.Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we do businessor relating to us specifically could result in an immediate and adverse effect on the market price of our common stock. Such fluctuations in the market priceof our common stock could affect the value of your investment and your ability to sell your shares.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.* We have been the subject of shareholder activism efforts that could cause a material disruption to our business.In the past, certain investors took steps to involve themselves in the governance and strategic direction of our Company due to governance and strategic-related disagreements with us. While we have formally settled with certain of such activists, other investors could take steps to involve themselves in thegovernance and strategic direction of our Company. Such shareholder activism efforts could result in substantial costs and diversion of management’sattention and resources, harming our business and adversely affecting the market price of our common stock.Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us more complicated and the removal andreplacement of our directors and management more difficult.Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquireus, even if doing so would benefit our stockholders. These provisions may also make it difficult for stockholders to remove and replace our board of directorsand management. For example, these provisions limit who may call a special meeting of stockholders and establish advance notice requirements fornominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings. In addition, on July 24, 2017, ourboard of directors adopted a tax benefits preservation plan designed to preserve our ability to utilize our net operating losses as a result of certain stockownership changes, which may have the effect of discouraging transactions involving an actual or potential change in our ownership.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 may publish about us and ourbusiness. We do not control these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issueother unfavorable commentary or cease publishing reports about us or our business.15Our business could be negatively impacted by cyber security threats.In the ordinary course of our business, we use our data centers and our networks to store and access our proprietary business information. We face variouscyber security threats, including cyber security attacks to our information technology infrastructure and attempts by others to gain access to our proprietaryor sensitive information. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cybersecurity incidents. The result of these incidents could include disrupted operations, lost opportunities, misstated financial data, liability for stolen assets orinformation, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage. Any remedialcosts or other liabilities related to cyber security incidents may not be fully insured or indemnified by other means.THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS ANDCASH FLOWS AND FINANCIAL CONDITION AND COULD MAKE COMPARISON OF HISTORICAL FINANCIAL STATEMENTS, INCLUDING RESULTSOF OPERATIONS AND CASH FLOWS AND BALANCES, DIFFICULT OR NOT MEANINGFUL.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESWe lease office space in La Jolla, California where our principal executive office is located, and office space in Carson City, Nevada. We continuallyevaluate our current and future space capacity in relation to our business needs. We believe that our existing office space is adequate to meet our currentbusiness requirements and that suitable replacement and additional space will be available in the future on commercially reasonable terms.We have significant holdings of real estate and water assets in the southwestern United States as described in“Item 1 - Business.”ITEM 3. LEGAL PROCEEDINGSNeither we nor our subsidiaries are parties to any potentially material pending legal proceedings.We are subject to various litigation matters that arise in the ordinary course of our business. Based upon information presently available, management isof the opinion that resolution of such litigation will not likely have a material effect on our consolidated financial position, results of operations, or cashflows. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requiresjudgments about future events. When evaluating contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including theprocedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of informationimportant to the matters. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated or unrelated to possible outcomes,and as such are not meaningful indicators of our potential liability. We regularly review contingencies to determine the adequacy of our accruals and relateddisclosures. The amount of ultimate loss may differ from these estimates, and it is possible that cash flows or results of operations could be materially affectedin any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action,investigation or proceeding could reasonably have a material effect on our business, financial condition, results of operations or cash flows will depend on anumber of variables, including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such losses,damages or remedies may have on our consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise toadditional factors.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.16PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESOur common stock is traded on the NASDAQ Global Select Market under the symbol “PICO.” The following table sets out the quarterly high and lowsales prices for the past two years as reported on the NASDAQ Global Select Market. These reported prices reflect inter-dealer prices, without adjustments forretail markups, markdowns, or commissions. 2017 2016 High Low High LowFirst Quarter$15.74 $13.05 $11.03 $7.82Second Quarter$17.95 $13.35 $10.72 $8.47Third Quarter$17.60 $16.05 $11.92 $9.35Fourth Quarter(1)$20.20 $12.30 $16.20 $10.51(1)The lowest stock price during the fourth quarter reflected the $5.00 per share special dividend paid to shareholders on November 21, 2017, while priorperiods prices have not been adjusted to reflect the special dividend.Any future decision to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon, among other factors,our ability to monetize assets, our results of operations, financial condition, capital requirements, and other factors our board of directors may deem relevant.On February 20, 2018, the closing sale price of our common stock was $12.40 and there were approximately 375 holders of record.17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 of ourfiscal year in that calendar year.The stock price performance shown on the graph is not necessarily indicative of future price performance. Additionally, the graph assumes that the $5.00 pershare cash dividend paid to shareholders during the fourth quarter of 2017 was reinvested in PICO stock.ISSUER PURCHASES OF EQUITY SECURITIESPeriod Total number of sharespurchased Average Price Paid perShare Total Number of Shares (orUnits) Purchased as Part ofPublicly Announced Plansor Programs Maximum Number (orApproximate Dollar Value)of Shares (or Units) thatMay Yet Be PurchasedUnder the Plans or Programs(1)10/1/2017 - 10/31/17 — — 47,450 $49,31011/1/2017 - 11/30/17 — — 47,450 $49,31012/1/2017 - 12/31/17 — — 47,450 $49,310(1) The stock repurchase program was announced on March 2, 2017. Our Board of Directors authorized up to $50 million to be used under this program andthere is no set expiration date.18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 of futureoperations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and the related notes thereto included elsewhere in this document. Year Ended December 31, 2017 2016 2015 2014 2013Operating Results (In thousands, except per share data)Revenues and other income: Sale of real estate and water assets$26,388 $633 $3,856 $1,220 $24,050Sale of software 13,649Impairment loss on investment in unconsolidated affiliate (2,170) (20,696) (1,078) Other income9,888 9,471 4,472 1,077 29,435Total revenues and other income (loss)$36,276 $7,934 $(12,368) $1,219 $67,134 Income (loss) from continuing operations$7,259 $(25,153) $(37,841) $(35,905) $(1,778)Net income (loss) from discontinued operations, net of tax(5,645) 12,124 (43,038) (23,700) (27,418)Net (income) loss attributable to noncontrolling interests(1,150) (8,836) (979) 7,180 6,896Net loss attributable to PICO Holdings, Inc.$464 $(21,865) $(81,858) $(52,425) $(22,300) Net loss per common share – basic and diluted: Income (loss) from continuing operations$0.31 $(1.09) $(1.64) $(1.34) $0.10Income (loss) from discontinued operations(0.29) $0.14 $(1.92) $(0.96) $(1.08)Net loss per common share – basic and diluted$0.02 $(0.95) $(3.56) $(2.30) $(0.98)Weighted average shares outstanding – basic and diluted23,122 23,054 23,014 22,802 22,742 As of December 31, 2017 2016 2015 2014 2013Financial Condition (In thousands, except per share data)Total assets (1)$214,402 $235,105 $233,279 $271,177 $335,055Net assets of discontinued operations $233,123 $231,352 $272,675 $284,762Total liabilities (1)$7,239 $40,659 $30,627 $32,307 $54,974Total PICO Holdings, Inc. shareholders’ equity$207,163 $327,994 $346,412 $425,481 $472,889Book value per share (2)$8.95 $14.22 $15.04 $18.50 $20.79(1) Excludes balances classified as discontinued operations.(2) 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. At December 31, 2017, book value per share reflected the $5.00 per share cash special dividend paid to shareholders during 2017.19ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSINTRODUCTIONThe 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, presented laterin 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 their futureprospects;•Critical Accounting Policies, Estimates and Judgments — a discussion of accounting policies which require critical judgments and estimates. Oursignificant accounting policies, including the critical accounting policies discussed in this section, are summarized in the notes to the consolidatedfinancial statements;•Results of Operations — an analysis of our consolidated results of operations for the past three years, presented in our consolidated financial statements;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.COMPANY SUMMARY, RECENT DEVELOPMENTS, AND FUTURE OUTLOOKRecent Developments:Northern NevadaThe majority of our water resource assets is located in northern Nevada at FSR and our Carson / Lyon project. FSR’s water credits are able to provide asustainable water supply in the North Valleys region of Reno, Washoe County, Nevada and the Carson / Lyon water rights are able to provide a sustainablewater supply in Lyon County, Nevada. As a result, we are dependent on new residential or commercial development occurring in these regions in order for usto monetize our water resources in northern Nevada. In turn, new development in these regions is highly dependent on the continued robust economic andjob growth that is occurring in northern Nevada.The economic development in the greater Reno region has been concentrated in the Tahoe Reno Industrial Center business park (“TRIC”) which is a107,000 acre industrial park proximate to Interstate 80 and 15 miles east of Reno, Nevada. Tesla Motors, Inc. (“Tesla”) built its Gigafactory facility in thisbusiness park with initial estimates that 6,500 jobs would be created by the Gigafactory project. Currently, the forecast is that more than 10,000 jobs will becreated by the project. Many other technology companies have also moved to the area including Apple, Google, Jet.com, and Switch.The Economic Development Authority of Western Nevada (“EDAWN”), comprised of Reno, Sparks, and Tahoe areas, estimated that the region wouldgenerate 52,400 direct and indirect jobs from 2015 to 2020. As of the most recent tracking data provided by EDAWN in November 2017, the actual jobgrowth is ahead of this forecast with 52,514 new jobs created since December 2014; a total increase of 15.1% as compared to the forecasted total job growthin that period of 11.1%. This job growth leads to population growth. The Nevada State Demographer, in the most recent Nevada County populationprojections report dated October 1, 2017, estimated that the population growth of Washoe County will grow to 526,090 residents by the year 2035 from thecurrent estimate of 448,316 residents (an increase of approximately 17.3% of the total population in Washoe County). We believe that this increasedemployment and population growth will create demand for new residential, commercial and industrial development specifically in the greater Reno area andin Lyon County.20Current economic conditions have manifested into new business openings, fewer apartment vacancies and the greater absorption of existing housinginventory. This activity has resulted in multiple new housing projects entering the approval process with local governments in Reno, Sparks, Carson City,Lyon County and Fernley. Residential housing projects have to demonstrate sustainable water supply to get final map approval and many projects in theNorth Valleys of Nevada are currently in the process or have obtained master plan amendment / zone change approvals. The next step for these developers isto obtain tentative map and then final map approvals. Within the Reno-Sparks and Washoe County area of Nevada, according to EDAWN, as of October 2017there were 4,457 new housing permits pulled since January 1, 2017. EDAWN’s goal was for at least 6,000 new housing permits for 2017 to meet the projecteddemand for housing. In the year to date as of October 2017, total new permits in Reno / Sparks / Washoe County increased approximately 24% over the totalnumber of new building permits for single-family and multi-family homes combined for all of 2016, and increased approximately 61% over the total numberof new building permits for all of 2015. We believe this increase in activity will lead to demand for our water resources as developers pursue their projects toprovide housing for the population growth in the region. However, the increased activity has strained governmental agencies and has caused delays inprocessing permits as well as new projects’ planning approval process. The timing of future monetization of our water resources in northern Nevada is directlycorrelated to the timing that residential developers pursue their projects in the areas that our FSR and Carson / Lyon assets are located and the time it takes forthose developers to get the requisite planning approvals prior to obtaining final map or, in the case of commercial development projects, final regulatoryapprovals.ArizonaDuring 2017 we sold 102,500 AF of LTSC for $25.9 million. Several market catalysts with respect to our LTSCs continued to emerge including therecent drought in the western United States, continued structural deficits on the Colorado River system, Indian Firming and Settlement obligations by thestate of Arizona and increased water demand from overall growth in Arizona. These supply and demand dynamics led to the sales in 2017 and continued toincrease interest from other parties contemplating buying our LTSCs at prices that we believe reflect the true value of our LTSCs.Arizona has an obligation to “firm” Indian water supplies as negotiated through various Indian Water Settlement Agreements. Section 105 of theSettlements Act (S. 437) titled “Firming of Central Arizona Project Indian Water,” authorizes the Secretary of Interior and the State of Arizona to develop afirming program to ensure that of the total 197,500 acre-feet of non-indian agricultural water reallocated to the Arizona Indian Tribes, 60,648 acre-feet mustbe delivered in the same manner as water with a municipal and industrial priority during water shortages, over a 100 year period. It is estimated that over the100 year period, the total shortfall of the Indian Firming obligation is approximately 550,000 acre-feet. To date approximately 140,000 acre-feet has beensecured by Arizona for the firming obligations shortfall. We believe our LTSCs can be used to help Arizona meet this obligation.A shortage on the Colorado River system will be declared by the Secretary of the Interior when on January 1, of any year, Lake Mead’s surface waterelevation is at or below 1075 ft. When Lake Mead is at an elevation of 1075 ft. and at or above 1050 ft., Nevada’s share of the shortage is 13,000 acre-feet andArizona’s cut-back to its allocation is 320,000 acre-feet. In contrast, California suffers no loss to their allocation from the Colorado River. When Lake Meadis at an elevation of 1050 ft. and at or above 1025 ft., Nevada will suffer a loss of 17,000 acre-feet from their allocation, Arizona will suffer a cut-back to theirallocation of 400,000 acre-feet, and California will not suffer any cut-back to their allocation. If Lake Mead’s surface water elevation level is below 1025 ft.,then Nevada will suffer a loss to its allocation of 20,000 acre-feet and Arizona will suffer a loss to its allocation of 480,000 acre-feet. To put this in context,Arizona’s annual allocation of Colorado River water is 2.8 million acre-feet. As such, the cut back in allocation of just 320,000 acre-feet represents over 11%of Arizona’s annual allocation.It is not only drought which impacts the level of Lake Mead. The Colorado River system has been determined to suffer from a structural deficit of 1.2million acre-feet annually. This means that on an average annual water year, Lake Mead will lose 1.2 million acre-feet to the system, due to evaporation,treaty obligations with Mexico and allocations of water to Arizona, Nevada and California that exceeds what the system yields. We believe that Vidler’sLTSCs are well positioned to buffer Arizona through times of water shortage and our LTSCs could be purchased by state entities to be used directly or to helpsustain levels in Lake Mead.Discontinued Real Estate Operations and Assets and Liabilities Held-for-SaleOn April 10, 2017, our then majority owned subsidiary, UCP, Inc. (“UCP”), entered into a merger agreement with Century Communities, Inc. (“Century”)whereby each outstanding share of UCP common stock outstanding was converted into $5.32 in cash and 0.2309 of a newly issued share of Century commonstock. The merger transaction closed on August 4, 2017 and consequently, we deconsolidated UCP as of the closing date. The assets and liabilities of UCPqualified as held-for-sale and its results of operations have been classified as discontinued operations as of the earliest period presented. Consequently, priorperiods presented have been recast from amounts previously reported to reflect UCP as discontinued operations.21In July 2015, we sold substantially all of the assets used in our agribusiness segment to CHS Inc. (“CHS”). As a result of the transaction, the assets andliabilities of our agribusiness segment qualified as held-for-sale and have been classified as discontinued operations in the accompanying consolidatedfinancial statements as of the earliest period presented.See Note 11,“Discontinued Operations” for additional information about these transactions.CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGEMENTSThis section describes the most important accounting policies affecting our assets and liabilities, and the 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 tangible and intangible water assets, and real estate;•how and when we recognize revenue when we sell water assets and real estate; and•how we determine our income tax provision, deferred tax assets and liabilities, and reserves for unrecognized tax benefits, as well as the need forvaluation allowances on our deferred tax assets.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 GAAP, which requires us to make estimates, usingavailable data and our judgment, for things such as valuing assets, accruing liabilities, recognizing revenues, and estimating expenses. Due to the uncertaintyinherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. We base our estimates on historicalexperience, and various 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. Fair value and carrying value of our tangible and intangible water assets and real estateOur primary long-lived assets include tangible and intangible water assets and real estate. At December 31, 2017, the total carrying value of such assetswas $171.5 million, or approximately 80% of our total assets. These assets are carried at cost, less any recorded impairments.Tangible water assets and real estateWe review our long-lived tangible water assets and real estate as facts and circumstances change, or if there are indications of impairment present, toensure that the estimated undiscounted future cash flows, excluding interest charges, from the use and eventual disposition of these assets will at least recovertheir carrying value. Cash flow forecasts are prepared for each discrete asset. We engage in a rigorous process to prepare and review the cash flow modelswhich utilize the most recent information available to us. However, the process inevitably involves the use of significant estimates and assumptions,especially the estimated current and future demand for these assets, the estimated future market values of our assets, the timing of the disposition of theseassets, the ongoing cost of maintenance and improvement of the assets, and the current and projected income earned and other uncertain future events. As aresult, our estimates are likely to change from period to period. In addition, our estimates may change as unanticipated events transpire which would cause usto reconsider the current and future use of the assets.If we use different assumptions, if our plans change, or if the conditions in future periods differ from ourforecasts, our financial condition and results of operations could be materially impacted.There were no material impairment losses recorded on our tangible water assets or real estate during the three years ended December 31, 2017, 2016 or2015.22Intangible water assetsOur intangible water assets are accounted for as indefinite-lived intangible assets. Accordingly, until the asset is sold, they are not amortized, that is, theirvalue is not charged as an expense in our consolidated statement of operations and comprehensive income or loss over time, but the assets are carried at costand reviewed for impairment, at least annually during the fourth quarter, and more frequently if a specific event occurs or there are changes in circumstanceswhich suggest that the asset may be impaired. Such events or changes may include lawsuits, court decisions, regulatory mandates, and economic conditions,including interest rates, demand for residential and commercial real estate, changes in population, and increases or decreases in prices of similar assets. Oncethe assets are sold, the value is charged to cost of real estate and water assets sold in our consolidated statement of operations and comprehensive income orloss.When we calculate the fair value of intangible water assets, we use a discounted cash flow model, under which the future net cash flows from the asset areforecasted and then discounted back to their present value using a weighted average cost of capital approach to determining the appropriate discount rate.Preparing these cash flow models requires us to make significant assumptions about revenues and expenses as well as the specific risks inherent in the assets.If the carrying value exceeds the fair value, an impairment loss is recognized equal to the difference. We conduct extensive reviews utilizing the most recentinformation available to us; however, the review process inevitably involves the use of significant estimates and assumptions, especially the estimatedcurrent asset pricing, potential price escalation, income tax rates, discount rates, absorption rates and timing, and demand for these assets. These models aresensitive to minor changes in any of the input variables.In summary, the cash flow models for our most significant indefinite-lived intangible assets forecast initial sales to begin within approximately one year,and then increase until the assets are mostly sold over the next four decades. We have assumed sale proceeds for the assets that are based on our estimates ofthe likely future sales price per acre-foot. These per-unit sale prices are estimated based on the demand and supply fundamentals in the markets which theseassets serve. If we use different assumptions, if our plans change, or if the conditions in future periods differ from our forecasts, our financial condition andresults of operations could be materially impacted.There were no material impairment losses recorded on our intangible water assets during the three years ended December 31, 2017, 2016 or 2015.2. Revenue recognitionSale of real estate and water assetsWe recognize revenue when there is a legally binding sale contract, the profit is determinable (the collectability of the sales price is reasonably assured,or any amount that will not be collectible can be estimated), the earnings process is virtually complete (we are not obliged to perform significant activitiesafter the sale to earn the profit, meaning we have transferred all risks and rewards to the buyer), and the buyer’s initial and continuing investment are adequateto 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.3. Income taxesOur income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxesto be paid. We are subject to federal and various state income taxes. We have multiple state filing groups with different income tax generating abilities.Significant judgments and estimates are required in determining the consolidated income tax expense.23Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating ourability to recover our deferred tax assets within the jurisdiction from which they arise we consider all available positive and negative evidence, includingscheduled reversals of deferred tax liabilities, tax planning strategies and recent financial operating results. We consider many factors when assessing thelikelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of futuretransactions, the carryforward periods available to us for tax reporting purposes, our historical use of tax attributes, and availability of tax planning strategies.These assumptions require significant judgment about future events however, they are consistent with the plans and estimates we use to manage ourunderlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income or loss.As a result of the analysis of all available evidence as of December 31, 2011, we recorded a full valuation allowance on PICO’s net deferred tax assets.Our evaluation at December 31, 2017 resulted in the same conclusion and we therefore continue to hold a full valuation allowance on our reportedconsolidated net deferred tax assets. If our assumptions change and we determine we will be able to realize these attributes, the tax benefits relating to anyreversal of the valuation allowance on deferred tax assets at December 31, 2017 will be recognized as a reduction of income tax expense. If our assumptionsdo not change, each year we could record an additional valuation allowance on any increases in the deferred tax assets.Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. As a result of recent changes in tax law and rates,that are effective for tax years starting on January 1, 2018, we revalued our deferred tax assets and liabilities using a 21% tax rate for our federal deferredincome tax balances. The resulting decrease in our net deferred tax asset was offset by a reduction in our recorded valuation allowance which resulted in nonet effect on our results of operations, cash flows or financial position. The calculation of our tax liabilities involves dealing with uncertainties in theapplication of complex tax laws and regulations in a multitude of jurisdictions.The accounting guidance for income taxes provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than notthat the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Theguidance also provides information on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure andtransition.We recognize tax liabilities in accordance with accounting guidance on income taxes and we adjust these liabilities when our judgment changes as aresult of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may resultin a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to incometax expense in the period in which they are determined. Currently, we have no material unrecognized tax benefits on any open tax years.RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015Overview of Economic Conditions and Impact on Results of OperationsThe economies in the markets in which are major water assets are located and serve, primarily northern Nevada and Arizona, are exhibiting robust growthwhich we believe will lead to demand for our water assets in those markets. We believe that current trends in employment, housing inventory, home prices,and historically low interest rates, will have a positive impact on our operating performance. There has been an increase in real estate development activity inthe markets where our assets will ultimately be used, and we believe that will lead to increased demand for our intangible and tangible water assets.Individual markets continue to experience varying results, as local home inventories, affordability, and employment factors strongly influence each localmarket. Deterioration in economic conditions in the markets where we operate, and/or if we fail to generate revenue, incur expenses beyond expectations, orincur operating losses, could cause additional impairment losses on our water assets.Our objective is to maximize long-term shareholder value. Currently, we believe the highest potential return to shareholders is from a return of capital. Aswe monetize assets, rather than reinvest the proceeds, we intend to return capital back to shareholders through a stock repurchase program or by other meanssuch as special dividends, such as the special dividend of $5 per share paid to shareholders in the fourth quarter of 2017.Our revenues and results of operations fluctuate from period to period. For example, we recognize revenue from the sale of water assets when specifictransactions close, and as a result, sales of water assets for any individual period are not necessarily indicative of revenues for future periods or the fullfinancial year.24PICO Holdings, Inc. Shareholders’ Equity (in thousands): December 31, Change 2017 2016 2015 2016 to 2017 2015 to 2016Shareholders’ equity$207,163 $327,994 $346,412 $(120,831) $(18,418)Shareholders’ equity per share$8.95 $14.22 $15.04 $(5.27) $(0.82)The primary decrease in shareholders’ equity during 2017 was due to the $115.9 million special dividend paid during the year and the loss on the sale ofour discontinued real estate operations.The decrease in shareholders’ equity during 2016 was due to the comprehensive loss of $20.2 million. The most significant transactions that contributedto the loss for the period were severance and other expenses related to the termination of our former CEO in October 2016.Total Assets and Liabilities (in thousands): December 31,2017 December 31,2016 ChangeTotal assets$214,402 $675,794 $(461,392)Total liabilities$7,239 $248,225 $(240,986)Total assets and liabilities decreased during the year ended December 31, 2017, primarily due to the deconsolidation of the assets owned in UCP inconjunction with the sale of our real estate operations. Additionally, we paid a special dividend during the fourth quarter of 2017 which in part, reduced ourcash and cash equivalents balance to approximately $37.1 million at the end of the year.Results of Operations (in thousands): Year Ended December 31, Change 2017 2016 2015 2016 to 2017 2015 to 2016Total revenue and other income (loss)$36,276 $7,934 $(12,368) $28,342 $20,302Total costs and expenses$25,935 $34,222 $25,012 $(8,287) $9,210Revenue and other income (loss)The majority of our revenue recorded for the year ended December 31, 2017 was from the sale of 102,500 long-term storage credits for $25.9 million. Wealso reported realized gains on the sale of investments of $8.8 million recognized on the sale of investments from our deferred compensation accounts inconjunction with the distribution of such assets to our former CEO.During 2016, revenues primarily included a gain of $8.7 million which resulted from the sale of the majority of the assets used in our oil and gasoperations. The assets sold had previously been significantly reduced by impairment losses recorded in 2015 and 2014. There was no corresponding gainrecorded during 2015. We recorded an impairment loss of $2.2 million on our investment in Synthonics in 2016 due to continuing losses and deterioratingmarket conditions. This is compared to a $20.7 million impairment loss on our investment in Mindjet during 2015 which was recorded due to deterioratingfinancial conditions that had adversely affected the value of our investment. During 2016, we ceased further operations in our 51% owned subsidiary,Klablab, Inc. (“Klablab”) and recorded a $2 million loss on abandonment during the fourth quarter of 2016.In 2015, revenue primarily included the $20.7 million impairment loss on our investment in Mindjet, as described above. We also sold 258 acres of realestate and approximately 774 acre-feet of water rights in the Harquahala Valley area of Arizona for cash proceeds of $3.4 million, which generated a grossmargin of $2.4 million.Costs and ExpensesDuring the year ended December 31, 2017 we recorded $12.8 million in cost of real estate and water assets sold related to our sale of 102,500 watercredits. No similar sales were recorded during 2016 or 2015.25General, Administrative and Other:During 2017 we continued implementing cost saving measures primarily intended to realign our organizational structure due to the changes in roles andworkforce resulting from selling our interest in our real estate operations.During the year ended December 31, 2017 and 2016 we recorded general and administrative costs of $12.4 million and $32.8 million, respectively, adecrease of $20.4 million year-over-year. The decrease in general and administrative costs was primarily due to a $10.4 million decrease in severance andrelated expense incurred in conjunction with the termination of our former CEO in 2016, a decrease of $3.2 million in deferred compensation expenses, adecrease of $1.6 million in stock-based compensation as discussed below, a $687,000 decrease in employee compensation and related payroll and benefitsrelated to executive compensation and headcount, and a combined decrease of $1.8 million in fees paid to our directors, audit fees, rent and shareholderrelated costs. We also realized a $1.2 million reduction in expenses within our oil and gas operations as we wind-down those operations.General and administrative costs were $20 million in 2015. The increase in costs and expenses from 2015 to 2016 was primarily related to the $10.4million severance expense discussed above, a $2.1 million increase in deferred compensation expense, a $1.5 million increase in legal and other expensesrelated to shareholder activism and a $943,000 increase in stock-based compensation expense. These increases were offset by a $1.5 million decrease inemployee compensation and related payroll and benefits due to reductions in executive compensation and headcount.Stock-Based Compensation ExpenseStock-based compensation expense is calculated based on the fair value of the award on the grant date and is recognized over the vesting period of theawards. As of December 31, 2017, there was $178,000 of unrecognized stock-based compensation expense related to restricted stock units (“RSU”), which weexpect to record ratably until the last award vests.The stock-based compensation expense consisted primarily of the following awards (in thousands): Year Ended December 31, 2017 2016 2015PBO - Officers$427 $1,412 $1,029RSU - Officers204 1,205 533RSU - Directors613 179 269RSU - Management50 54 76Total stock-based compensation expense$1,294 $2,850 $1,907Income TaxesThe Tax Cuts and Jobs Act of 2017 (the “Tax Act”) enacted on December 22, 2017, resulted in significant changes to the U.S. corporate income taxsystem. The changes that are effective beginning in 2018 include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certaindomestic deductions and credits and limitations on the deductibility of interest expense and executive compensation as well as limitations on the use offuture net operating losses. Changes in tax rates and tax laws are accounted for in the period of enactment and consequently during the year ended December31, 2017, we recorded a reduction in our net deferred tax asset to reduce the value of each deferred tax attribute to 21% which was offset by a reduction in therecorded valuation allowance resulting in no net effect to the current period income tax provision. We continued to record a full valuation allowance on ournet deferred tax assets, however, as a result of recognizing realized gains on the sale of certain investments that were included in unrealized gains reported inother comprehensive income in previous periods, we recorded $3.1 million in tax expense during the year ended December 31, 2017 and a tax benefit of $1.1million and $3 million during the years ended December 31, 2016 and 2015, respectively. Our effective tax rate for the years ended December 31, 2017,2016, and 2015, was 29.8%, 4.3% and 7.9%, respectively. The effective tax rate differed from our federal corporate income tax rate of 35% due primarily tothe valuation allowance changes recorded on our net deferred tax assets in each of the years. Additionally, during 2015, we recorded a $2.8 million taxbenefit due to the reversal of the taxable temporary difference related to our investment in Mindjet that reversed during the year due to the impairment lossrecorded on the investment. Such temporary difference was originally recorded in an earlier year which contributed to the significant effective tax rate for thatyear and was not expected to reverse within a period that would have allowed us to offset with existing deductible temporary differences. There were minimalincome taxes reported during 2015.26Equity in Loss of Unconsolidated AffiliatesWe previously accounted for our investment in common stock of Mindjet using the equity method of accounting, which resulted in recording ourproportional share of Mindjet’s losses in the consolidated statement of operations and comprehensive income or loss. During 2015, we lost significantinfluence over Mindjet and discontinued the equity method of accounting as our voting ownership declined in conjunction with Mindjet issuing additionalvoting stock in an offering that we did not participate in and the resulting loss of our seat on its board. Consequently, we do not anticipate recording anyadditional equity method losses related to our investment in Mindjet.DISCONTINUED OPERATIONSDuring the years ended December 31, 2017, results from discontinued operations included income or loss from UCP’s operations and the loss recordedon the sale of such operations. During the year ended December 31, 2016, results from discontinued operations included the income or loss from UCP’soperations and additional losses recorded related to the sale of our agribusiness operations. During the year ended December 31, 2015, results fromdiscontinued operations included income or loss from our agribusiness operations and the loss recorded on the sale of such operations.Real Estate:On April 10, 2017, UCP entered into a merger agreement with Century whereby each outstanding share of UCP common stock was converted into $5.32in cash and 0.2309 of a newly issued share of Century common stock. The transaction closed on August 4, 2017 and we received $55.3 million in cash andapproximately 9% of the then outstanding common stock of Century. The transaction resulted in a loss on sale of $8.7 million, which was recorded duringthe year ended December 31, 2017. In October 2017, we sold our entire position of Century common stock for $59.2 million and realized a loss on the sale of$842,000.During 2017, we made certain estimates of the taxable income that would be allocated to us from UCP for the 2017 tax year and received related cashdistributions from UCP as a result. At December 31, 2017, such estimates appear to have overstated taxable income. Consequently, we expect to refund toUCP $356,000 once final taxable income of UCP attributable to us is determined. Any difference between our revised estimates and the actual results wouldimpact the loss recorded on the sale of UCP.Agribusiness:In February 2017, we received the final $6 million that had been held in escrow for general indemnification claims related to the sale of our discontinuedagribusiness operations. We guaranteed up to $8 million for any environmental indemnification claims in excess of the $6 million general indemnificationescrow pursuant to the terms of the sale. This guaranty will remain in force until July 31, 2020. The guaranty has been recorded at estimated fair value thatreflects our expectation that no significant amounts will be paid out under the guaranty. However, any amounts paid by us under the guaranty in excess ofthis estimate will result in additional loss on the sale.See Note 11,“Discontinued Operations” for additional information about these transactions.LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015A substantial portion of our historical revenue and cash flow has, and is expected in the future, to come from one-time sales of our assets which areprimarily long-term water resource development projects that we expect to support economic growth in the local markets where the assets are located. Thetiming and amount of sales and cash flows depend on a number of factors which are difficult to predict, and cannot be directly compared from one period toanother. However, given our cash balances at December 31, 2017, we currently believe that we have sufficient resources to cover our expenses for at least thenext 12 months. In the long-term, we estimate that cash from operations will provide us with adequate funding for future operations. However, if additionalfunding is needed we could defer significant expenditures, obtain a line of credit, or complete a debt or equity offering. Any additional equity offerings maybe dilutive to our shareholders and any additional debt offerings may include operating covenants that could restrict our business.We are currently notsubject to any debt covenants which might limit our ability to obtain additional financing through debt or equity offerings. We classify the sale of and costsincurred to acquire and develop our water assets as operating activities in our consolidated statement of cash flows.27Our OperationsOn October 26, 2017 our board of directors declared a special dividend of $5.00 per share, amounting to approximately $115.9 million. The record datewas November 6, 2017, payment was made on November 20, 2017 and the ex-dividend date was November 21, 2017. The entire cash distribution wasclassified as a return of capital for U.S. federal income tax purposes. Generally, such a cash distribution would reduce the tax basis of a shareholder’s commonshares of our shares; however, if such a distribution is in excess of a shareholder’s tax basis, a portion of the distribution may be treated as a capital gain undercurrent tax law.The majority of our revenue recorded for the year ended December 31, 2017 was from the sale of 102,500 long-term storage credits for $25.9 million. Wealso reported realized gains on the sale of investments of $8.8 million recognized on the sale of investments from our deferred compensation accounts inconjunction with the distribution of $23.3 million of such assets to our former CEO. We also paid our former CEO $10.4 million in severance benefits, settledcertain stock-based compensation, and paid other related severance expenses. See Note 10, “Related-Party Transactions” for additional information.During 2016, we sold a majority of our oil and gas assets for gross proceeds of $9.6 million. After certain holdbacks and consideration of liabilitiesassumed by the buyer, we received $9 million in cash proceeds. We also sold certain of our other remaining oil and gas leases early in 2017. We expect tocompletely cease operations and dispose of the legal entities formed to operate this business in a final transaction with our service agent early in 2018. Tothat end, at December 31, 2017, we accrued what we believe to be the final expenses related to these operations. See Note 10, “Related-Party Transactions”for additional information.Discontinued OperationsDuring 2016 we sold our real estate operations and during 2015 we sold our agribusiness operations.During 2017, we made certain estimates of the taxable income that would be allocated to us from UCP for the 2017 tax year and received related cashdistributions from UCP as a result. At December 31, 2017, such estimates appear to have overstated taxable income. Consequently, we have accrued what weexpect to refund to UCP once final taxable income of UCP attributable to us is determined. Any difference between our revised estimates and the actualresults would impact the loss recorded on the sale of UCP.We guaranteed up to $8 million for any indemnification claims related to the agribusiness operations in excess of a $6 million general indemnificationescrow pursuant to the terms of a guaranty agreement with the buyer that will remain in force until July 31, 2020.Consolidated Cash and SecuritiesWe have adequate working capital reserves and generally hold our cash in money market funds. At December 31, 2017 and 2016, we had unrestrictedand available cash and securities of $34.9 million and $18.7 million, respectively, which could be used for general corporate purposes.At December 31, 2017, we forecast that our 2018 annual net operating cash burn was approximately $6.2 million which was comprised of expectedexpenditures of approximately $7.1 million offset by recurring revenue and other certain receipts of approximately $879,551.28Cash FlowOur cash flows from operating, investing, and financing activities were as follows (in thousands): Year Ended December 31, 2017 2016 2015Cash provided by (used in): Operating activities - continuing operations$(345) $(15,074) $(10,825)Operating activities - discontinued operations(9,728) 8,722 (38,098)Total operating activities(10,073) (6,352) (48,923) Investing activities - continuing operations67,908 9,072 4,400Investing activities - discontinued operations47,173 (1,455) 102,193Total investing activities115,081 7,617 106,593 Financing activities - continuing operations(117,222) — (153)Financing activities - discontinued operations(11,638) 2,315 (63,095)Total financing activities$(128,860) $2,315 $(63,248)Increase (decrease) in cash and cash equivalents$(23,852) $3,580 $(5,578)Cash Flows From Operating ActivitiesDuring 2017, we used cash of $345,000 in our continuing operations which was derived primarily from the $26.3 million sale of long term storagecredits, offset by cash used of $12.2 million for general and administrative expenses and various project costs and $18.3 million for payment of severancebenefits and deferred compensation payment of cash related to the termination of our former CEO. Through the closing date of the merger, our discontinuedoperations used cash of $9.7 million primarily generated from $246 million in sales of residential real estate and lots offset by cash of $216.9 million used forthe acquisition and development of real estate, and $37 million for overhead.During 2016, we used $15.1 million in cash from continuing operations. The cash outflow primarily related to $15.4 million for overhead and variousproject expenses. Our discontinued operations generated $350 million during 2016 from the sale of residential real estate lots and used cash of $301.4million in acquisition and development of real estate and $43.5 million for overhead.During 2015, we used $10.8 million in cash from continuing operations. We used $18.4 million for overhead expenses, primarily for salaries, benefits,marketing expenses, professional fees, and various project and other expenses. Partially offsetting the uses of cash was $3.9 million from the sale of waterassets, and $1.4 million from sales of oil and gas. Our discontinued operations used cash of $38 million. Discontinued real estate operations used $266.3million to acquire and develop residential homes and lots $33.3 million for overhead expenses. Offsetting the uses of cash from our discontinued real estateoperations were $278.8 million in cash received from the sale of residential homes and lots. Our discontinued agribusiness operations used $74.3 million topurchase canola seed, $36.5 million for overhead and operating expenses, and $3.3 million in cash paid for interest. Partially offsetting the uses of cash was$82.1 million generated from the sales of canola oil and meal.Cash Flows From Investing ActivitiesOur continuing investing activities provided $67.9 million of cash during 2017 primarily from the $59.2 million in cash we received when we sold ourinvestment in Century common stock, and approximately $8.2 million in cash from the sale of various other debt and equity investments out of the deferredcompensation plans. During the year we purchased $270 million of U.S. Treasuries, which was offset by related sales and maturities of $198 million and $140million, respectively. Our discontinued operations generated $47.2 million of net cash during 2017 which was comprised of the $55.3 million received onthe sale of UCP less UCP’s cash balance as of the date of the sale, and $6 million in cash received from the escrow account for general indemnification claimsrelated to the sale of our discontinued agribusiness operations.29During 2016, the primary cash inflows from investing activities of continuing operations included $9 million from the sale of the majority of our oil andgas assets, and $1.1 million from the sale and maturity of debt and equity securities, offset by $1.5 million used to purchase debt and equity securities. Ourdiscontinued operations investing cash flows were primarily comprised of a $1.3 million increase in restricted cash.During 2015, the primary cash inflows from investing activities of continuing operations included $9.3 million from the sale and maturity of debt andequity securities, offset by $2.3 million used to purchase debt and equity securities and $2.8 million used to purchase property, plant, and equipment. During2015, investing activities from our discontinued agribusiness operations provided $97.5 million in net proceeds from the sale of our discontinuedagribusiness operations, which was comprised of gross proceeds from the sale of $105.3 million less $7.8 million currently held back in escrow, and $5million in cash released from the restricted debt service reserve account.Cash Flows From Financing ActivitiesDuring 2017, we paid a special dividend of $115.9 million. Our discontinued operations received cash of $86.7 million during 2017 provided fromdraws on its debt arrangements, which was used primarily to fund the acquisition and development of various real estate projects offset by payments of $96.5million which was used to repay debt when certain real estate properties were sold.During 2016, our discontinued operations did not generate net cash, however, we had borrowings of $154 million provided by the debt arrangements,offset by repayments of debt of $150 million and UCP purchases of its own stock of $1 million.During 2015, financing activities, including discontinued agribusiness operations, used cash of $63.2 million, primarily due to repayments of $96.6million paid on debt arrangements in our discontinued agribusiness operations and $112.4 million of mortgage debt repaid when certain real estate propertieswere sold in our discontinued real estate operations. These uses of cash were offset by cash proceeds including $12.7 million from our working capital line ofcredit within our discontinued agribusiness operations and $134.5 million used primarily to fund the acquisition and development of our discontinued realestate operations.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.Off-Balance Sheet ArrangementsAs of December 31, 2017, we had no off-balance sheet arrangements, other than those discussed throughout this document, that have, or are reasonablylikely to have, a material current or future effect on our consolidated financial condition, revenues or expenses, results of operations, liquidity, capitalexpenditures, or capital resources.Aggregate Contractual Obligations:The following table provides a summary of our contractual cash obligations and other commitments and contingencies as of December 31, 2017 (inthousands): Payments Due by PeriodContractual ObligationsLess than1 year 1-3 years 3-5 years More than5 years TotalOperating leases351 522 873Other(1)4,112 4,112Total$4,463 $522 $— $— $4,985(1) Amount represents deferred compensation that is expected to be paid to plan participants no earlier than July 2018.We had no liabilities or potential interest for unrecognized tax benefits associated with uncertain tax positions at December 31, 2017.30ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKOur balance sheets include certain assets whose fair value is subject to market risk. Market risk is the risk of loss arising from adverse changes in marketinterest rates or prices. We currently have interest rate risk as it relates to investments in debt securities, and equity price risk as it relates to our marketableequity securities. The estimated fair value of our debt is based on cash flow models discounted at the then-current interest rates and an estimate of the then-current spread above those rates at which we could borrow, which are Level 3 inputs in the fair value hierarchy.At December 31, 2017, we had $683,000 of debt securities and $1.2 million of marketable equity securities, and at December 31, 2016, we had $4.4million of debt securities and $20.7 million of marketable equity securities, which were subject to market risk.Our debt securities principally consist of bonds with short and medium terms to maturity. The deferred compensation accounts have held bothinvestment-grade and below investment-grade bonds. In the deferred compensation accounts, we managed interest rate risk by matching the maturities of thebonds to the participant’s pre-selected payout schedule.We use two models to report the sensitivity of our assets and liabilities subject to the above risks. For debt 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, or a 1% increase in interest rates andcompares that to the current price of the security. At December 31, 2017 and 2016, the model did not calculate a material loss in fair value. For ourmarketable equity securities, we use a hypothetical 20% decrease in fair value to analyze the sensitivity. The hypothetical 20% decrease in fair value of ourmarketable equity securities would produce a loss in fair value at December 31, 2017 and 2016, of $244,000 and $4.1 million, respectively, that wouldreduce our unrealized appreciation in shareholders’ equity.Actual results may differ from the hypothetical results assumed in this disclosure due to possible actions we may take to mitigate adverse changes in fairvalue, and because the fair value of securities may be affected by both factors related to the individual securities (e.g. credit concerns about a bond issuer) andgeneral market conditions.31ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017, and the Report of theRegistered Independent Public Accounting Firm are included in this report as listed in the index.SELECTED QUARTERLY FINANCIAL DATASummarized unaudited quarterly financial data (in thousands, except per share amounts) for 2017 and 2016 are shown below. In management’s opinion,the interim financial statements from which the following data has been derived contain all adjustments necessary for a fair presentation of results for suchinterim periods and are of a normal recurring nature. Three Months Ended March 31, 2017 June 30, 2017 September 30,2017 December 31,2017Sale of real estate and water assets$25,097 $43 $136 $1,112Other1,096 8,591 69 132Total revenue and other income$26,193 $8,634 $205 $1,244 Gross profit - real estate and water assets$12,565 $26 $81 $500 Income (loss) from continuing operations$9,293 $2,803 $(3,109) $(1,728)Net income (loss) from discontinued operations, net of tax$(3,259) $177 $(3,175) $612Net income (loss)$6,034 $2,980 $(6,284) $(1,116)Net income (loss) attributable to PICO Holdings, Inc.$4,643 $1,575 $(4,639) $(1,116) Net income (loss) per common share – basic and diluted: Income (loss) from continuing operations$0.40 $0.12 $(0.13) $(0.08)Income (loss) from discontinued operations$(0.20) $(0.05) $(0.07) $0.0332 Three Months Ended March 31, 2016 June 30, 2016 September 30,2016 December 31,2016(1)Sale of real estate and water assets$98 $33 $476 $26Impairment loss on investment in unconsolidated affiliate (2,170)Other687 817 689 7,278Total revenue and other income$785 $850 $1,165 $5,134 Gross profit - real estate and water assets$53 $14 $224 $16 Loss from continuing operations$(4,790) $(4,400) $(4,569) $(11,394)Net income (loss) from discontinued operations, net of tax$(2,052) $1,678 $2,712 $9,786Net loss$(6,842) $(2,722) $(1,857) $(1,608)Net loss attributable to PICO Holdings, Inc.$(6,801) $(3,397) $(2,900) $(8,767) Net income (loss) per common share – basic and diluted: Loss from continuing operations$(0.21) $(0.19) $(0.20) $(0.49)Income (loss) from discontinued agribusiness operations$(0.08) $0.04 $0.07 $0.11 (1) During 2017, we sold our real estate segment. As a result of the transaction, the assets and liabilities of our real estate operations qualified as held-for-saleand have been classified as discontinued operations in the accompanying consolidated financial statements as of the earliest period presented. Consequently,while we recast the first three quarters of 2016 in our 2017 filings to reflect the change, this particular prior period had not been presented as recast fromamounts previously reported to reflect the real estate segment as discontinued operations. See Note 11, “Discontinued Operations,” in the accompanyingconsolidated financial statements for additional information.33PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2017 AND 2016AND FOR EACH OF THETHREE YEARS IN THE PERIODENDED DECEMBER 31, 2017INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No.Report of Independent Registered Public Accounting Firm 35Consolidated Balance Sheets as of December 31, 2017 and 2016 36Consolidated Statements of Operations and Comprehensive Income or Loss for the Years Ended December 31, 2017, 2016 and 2015 37Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 39Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 42Notes to Consolidated Financial Statements 4434REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofPICO Holdings, Inc.La Jolla, CaliforniaOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of PICO Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016,the related consolidated statements of operations and comprehensive income or loss, shareholders’ equity, and cash flows for each of the three years in theperiod ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements").In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, andthe results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principlesgenerally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2018, expressed an unqualified opinion on theCompany's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ DELOITTE & TOUCHE LLPSan Diego, CaliforniaMarch 1, 2018We have served as the Company’s auditors since 1997.35PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember 31, 2017 and 2016(In thousands) 2017 2016Assets Cash and cash equivalents$37,128 $19,611Investments ($1,902 and $25,071 measured at fair value at December 31, 2017 and 2016, respectively)3,214 26,383Tangible water assets and real estate, net44,675 57,691Intangible assets126,785 126,796Other assets2,600 4,624Assets held-for-sale 440,689Total assets$214,402 $675,794 Liabilities and shareholders’ equity Deferred compensation4,112 27,322Other liabilities2,431 12,322Accounts payable and accrued expenses696 1,015Liabilities held-for-sale 207,566Total liabilities7,239 248,225 Commitments and contingencies Preferred stock, $0.001 par value; authorized 10,000 shares, none issued Common stock, $0.001 par value; authorized 100,000 shares, 23,153 issued and 23,152 outstanding at December 31,2017, and 23,125 issued and 23,070 outstanding at December 31, 201623 23Additional paid-in capital379,388 495,468Accumulated deficit(172,767) (173,231)Accumulated other comprehensive income544 6,661Treasury stock, at cost (common shares: 1 and 55 at December 31, 2017 and December 31, 2016, respectively)(25) (927)Total PICO Holdings, Inc. shareholders’ equity207,163 327,994Noncontrolling interest in subsidiaries 99,575Total equity207,163 427,569Total liabilities and equity$214,402 $675,794The accompanying notes are an integral part of the consolidated financial statements.36PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME OR LOSSFor the years ended December 31, 2017, 2016, and 2015(In thousands, except per share data) 2017 2016 2015Revenues and other income: Sale of real estate and water assets$26,388$633 $3,856Impairment loss on investment in unconsolidated affiliate (2,170) (20,696)Other income, net9,8889,471 4,472Total revenues and other income (loss)36,2767,934 (12,368) Cost of sales and expenses: Cost of water assets and real estate sold13,216326 1,239General, administrative, and other12,41432,830 20,028Impairment loss on intangible and long-lived assets 201 2,085Depreciation and amortization305865 1,660Total costs and expenses25,93534,222 25,012Income (loss) from continuing operations before income taxes and equity in loss ofunconsolidated affiliates10,341(26,288) (37,380)Benefit (provision) for federal and state income taxes(3,082)1,135 2,961Equity in loss of unconsolidated affiliate (3,422)Income (loss) from continuing operations7,259(25,153) (37,841)Income (loss) from discontinued operations, net of tax3,05313,899 (24,309)Loss on sale of discontinued operations, net of tax(8,698)(1,775) (18,729)Net income (loss) from discontinued operations, net of tax(5,645)12,124 (43,038)Net income (loss)1,614(13,029) (80,879)Net income attributable to noncontrolling interests(1,150)(8,836) (979)Net income (loss) attributable to PICO Holdings, Inc.$464$(21,865) $(81,858)The accompanying notes are an integral part of the consolidated financial statements.37PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME OR LOSS, CONTINUED(In thousands, except per share data) 2017 2016 2015Other comprehensive loss: Net income (loss)$1,614$(13,029) $(80,879)Other comprehensive loss, net of tax: Unrealized gain (loss) on securities, net of deferred income tax and reclassification adjustments(6,193)1,671 292Foreign currency translation7629 (48)Total other comprehensive income (loss), net of tax(6,117)1,700 244Comprehensive loss(4,503)(11,329) (80,635)Comprehensive income attributable to noncontrolling interests(1,150)(8,836) (979)Comprehensive loss attributable to PICO Holdings, Inc.$(5,653)$(20,165) $(81,614) Net income (loss) per common share – basic and diluted: Income (loss) from continuing operations$0.31$(1.09) $(1.64)Income (loss) from discontinued operations(0.29)0.14 (1.92)Net income (loss) per common share – basic and diluted$0.02$(0.95) $(3.56)Weighted average shares outstanding23,12223,054 23,014The accompanying notes are an integral part of the consolidated financial statements.38PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITYFor the year ended December 31, 2015(In thousands) Shares ofCommonStock Issued CommonStock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome Shares ofTreasuryStock TreasuryStock,at Cost Non-controllingInterest TotalBeginning balance, December 31,201423,083 $23 $491,662 $(69,508) $4,717 78 $(1,413) $86,064 $511,545Stock-based compensation expense 2,882 734 3,616Exercise of restricted stock units33 —Withholding taxes paid on vestedrestricted stock units at UCP, Inc. (337) (159) (496)Distribution to noncontrollinginterest (26) (26)Net income (loss) (81,858) 979 (80,879)Unrealized gain on investments,net of deferred income tax of $173and reclassification adjustmentsof $741 292 292Foreign currency translation (48) (48)Ending balance, December 31, 201523,116 $23 $494,207 $(151,366) $4,961 78 $(1,413) $87,592 $434,004The accompanying notes are an integral part of the consolidated financial statements39PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITYFor the year ended December 31, 2016(In thousands) Shares ofCommonStock Issued CommonStock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome Shares ofTreasuryStock TreasuryStock,at Cost Non-controllingInterest TotalBeginning balance, December 31,201523,116 $23 $494,207 $(151,366) $4,961 78 $(1,413) $87,592 $434,004Stock-based compensation expense 3,507 498 4,005Exercise of restricted stock units9 —Withholding taxes paid on vestedrestricted stock units at UCP, Inc. (26) (20) (46)Changes in ownership ofnoncontrolling interest (1,951) 1,951 —UCP, Inc.’s acquisition of its class Acommon stock (1,250) (1,250)Distribution of treasury stock todeferred compensation planparticipants (269) (23) 486 217Abandonment of consolidatedsubsidiary 1,968 1,968Net income (loss) (21,865) 8,836 (13,029)Unrealized gain on investments,net of deferred income tax of $900and reclassification adjustmentsof $297 1,671 1,671Foreign currency translation 29 29Ending balance, December 31, 201623,125 $23 $495,468 $(173,231) $6,661 55 $(927) $99,575 $427,569The accompanying notes are an integral part of the consolidated financial statements40PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITYFor the year ended December 31, 2017(In thousands) Shares ofCommonStock Issued CommonStock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome Shares ofTreasuryStock TreasuryStock,at Cost Non-controllingInterest TotalBeginning balance, December 31,201623,125 $23 $495,468 $(173,231) $6,661 55 $(927) $99,575 427,569Stock-based compensation expense 1,872 299 2,171Exercise of restricted stock units76 —Withholding taxes paid on vestedrestricted stock units (831) (121) (952)Changes in ownership ofnoncontrolling interest (465) 465 —Distributions to noncontrollinginterest (26) (26)Purchases of treasury stock 47 (690) (690)Retirement of treasury stock(47) (690) (47) 690 —Distribution of treasury stock todeferred compensation planparticipant (former CEO) (106) (54) 902 796Deconsolidation of noncontrollinginterest in conjunction with sale ofconsolidated subsidiary (101,342) (101,342)Special dividend paid (115,860) (115,860)Net income 464 1,150 1,614Unrealized gain on investments,net of deferred income tax of$3,483 and reclassificationadjustments of $9,781 (6,193) (6,193)Foreign currency translation 76 76Ending balance, December 31, 201723,154 $23 $379,388 $(172,767) $544 1 $(25) $— $207,163The accompanying notes are an integral part of the consolidated financial statements41PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31, 2017, 2016, and 2015(In thousands) 2017 2016 2015Operating activities: Net income (loss)$1,614 $(13,029) $(80,879)Adjustments to reconcile net loss to net cash used in operating activities: Provision (benefit) for deferred income taxes3,442 (2,160) (2,817)Depreciation and amortization expense303 899 1,624Stock-based compensation expense1,295 2,850 1,907Impairment loss on investment in unconsolidated affiliate 2,170 20,696Impairment loss on intangible and long-lived assets 201 2,085Gain on sale of available-for-sale investments(8,722) (133) (1,101)Loss on abandonment or liquidation of consolidated subsidiary 1,968 —Net (income) loss from discontinued operations, net5,645 (12,124) 43,038Gain on sale of property, plant and equipment(165) (8,605) Equity in loss of unconsolidated affiliate 3,422Changes in assets and liabilities, net of effects of acquisitions and dispositions: Notes and other receivables1,619 486 253Real estate, water, and intangible assets13,027 (477) (390)Income taxes(275) 1,234 41Other assets32 179 468Deferred compensation(7,500) 2,685 909Accounts payable and accrued expenses(10,714) 8,768 (211)Other operating activities, net54 14 130Cash used in operating activities - continuing operations(345) (15,074) (10,825)Cash provided by (used in) operating activities - discontinued operations(9,728) 8,722 (38,098)Net cash used in operating activities(10,073) (6,352) (48,923) Investing activities: Proceeds from the sale of investments197,848 1,068 7,938Proceeds from maturity of investments139,912 18 1,343Purchases of investments(270,317) (1,511) (2,316)Proceeds from the sale of property, plant and equipment470 8,988 Purchases of property, plant and equipment(5) (152) (2,777)Other investing activities, net 661 212Cash provided by investing activities - continuing operations67,908 9,072 4,400Cash provided by (used in) investing activities - discontinued operations47,173 (1,455) 102,193Net cash provided by investing activities115,081 7,617 106,593 Financing activities: Special dividend paid(115,860) Payment of withholding taxes on exercise of restricted stock units(672) (126)Purchases of treasury stock(690) Other financing activities, net (27)Cash provided by (used in) financing activities - continuing operations(117,222) — (153)Cash provided by (used in) financing activities - discontinuing operations(11,638) 2,315 (63,095)Net cash provided by (used in) financing activities(128,860) 2,315 (63,248)Net increase (decrease) in cash and cash equivalents(23,852) 3,580 (5,578)Cash and cash equivalents, beginning of year60,980 57,400 62,978Cash and cash equivalents, end of year37,128 60,980 57,400Less cash and cash equivalents of discontinued operations, end of year 41,369 41,417Cash and cash equivalents of continuing operations, end of year$37,128 $19,611 $15,98342PICO HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUEDFor the years ended December 31, 2017, 2016 and 2015(In thousands) 2017 2016 2015Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Payment (refund) of federal and state income taxes$(367) $(220)$(67) Non-cash investing and financing activities: Issuance of common stock for vested restricted stock units$1,824 $85 $559Fair value of common stock of Century received in the sale of UCP, Inc.$60,044 Unpaid liability incurred for construction costs $388Distribution of debt and equity securities in satisfaction of deferred compensation liability(including 53,996 and 22,644 shares of treasury stock in 2017 and 2016, respectively)$15,709 $856 The accompanying notes are an integral part of the consolidated financial statements43PICO HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOOTNOTE INDEX Page No.1. Nature of Operations and Significant Accounting Policies 442. Tangible Water Assets and Real Estate, Net 493. Intangible Assets, Net 504. Investments 505. Disclosures About Fair Value 536. Commitments and Contingencies 547. Stock-Based Compensation 558. Federal and State Current and Deferred Income Tax 579. Accumulated Other Comprehensive Income 6010. Related-Party Transactions 6011. Discontinued Agribusiness Operations 621.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIESOrganization and Operations:PICO Holdings, Inc., together with its subsidiaries (collectively, “PICO” or the “Company”), is a holding company. As of December 31, 2017, theCompany has presented its consolidated financial statements and the accompanying notes to the consolidated financial statements using the guidelinesprescribed for real estate companies, as the majority of the Company’s assets and operations are primarily engaged in real estate and related activities.The Company’s most significant operating subsidiary as of December 31, 2017 was Vidler Water Company, Inc. (“Vidler”), a Nevada corporation. Vidlerowns water resources and water storage in the southwestern United States, with assets and operations in Nevada, Arizona, Colorado and New Mexico.Currently, Vidler is primarily focused on selling its existing water rights and storage credits.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.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 tointangibles, real estate and water assets, deferred income taxes, stock-based compensation, and contingent liabilities. While management believes that thecarrying value of such assets and liabilities were appropriate as of December 31, 2017 and December 31, 2016, it is reasonably possible that actual resultscould differ from the estimates upon which the carrying values were based.44Reincorporation:In May 2017, the Company changed its state of incorporation from California to Delaware. The reincorporation was approved by the requisite vote ofshareholders at the Company’s Annual Meeting of Shareholders on May 4, 2017. Other than the change in the state of incorporation, the reincorporation didnot result in any change in the business, physical location, management, assets, liabilities or net worth of the Company, nor did it result in any change inlocation of the Company’s employees, including the Company’s management and board of directors. Furthermore, the Company’s common stock continuesto trade on the Nasdaq Global Market. The reincorporation did not alter any shareholder’s percentage ownership interest or number of shares owned in theCompany. In conjunction with the reincorporation, the Company authorized 10 million shares of preferred stock, par value $0.001 per share. Shares ofpreferred stock may be issued from time to time in one or more series which may be by distinguishing number, letter or title. However, without shareholderapproval, the Company’s board of directors is only authorized to designate and/or issue, out of the unissued shares of preferred stock, one or more series ofpreferred stock in connection with the adoption of a tax benefit preservation plan. The issuance of preferred stock could, among other things, have the effectof delaying, deferring, discouraging or preventing a change in control of the Company and may adversely affect the market price of the Company’s commonstock and the voting and other rights of the holders of common stock.Special Dividend:In October 2017, the Company declared a special cash dividend of $5.00 per share, which amounted to approximately $115.9 million. The distributionwas paid on November 20, 2017, with an ex-dividend date of November 21, 2017.Tax Benefit Preservation Plan:In July 2017, the Company’s board of directors adopted a tax benefit preservation plan (the “Plan”) designed to preserve the Company’s ability to utilizeits net operating loss carryforwards as a result of certain stock ownership changes. Consequently, any person or group, together with its affiliates andassociates (the “acquiring person”), acquiring beneficial ownership of 4.99% or more of the Company’s common stock after August 4, 2017 without theapproval of the Company’s board of directors would be subjected to significant dilution in its holdings. Such dilution would occur as a consequence of eachholder of a Right, other than Rights that are beneficially owned by the acquiring person, obtaining the right to purchase, upon exercise of a Right andpayment of the purchase price, a number of shares of the Company’s common stock having a market value of two times the exercise price of the Right.Pursuant to the Plan, which is subject to ratification by the Company’s shareholders at the 2018 annual meeting, the Company issued one Right for eachoutstanding share of the Company’s common stock to shareholders of record at the close of business on August 4, 2017. Prior to exercise, a Right does notgive its holder any rights as a shareholder of the Company, including any dividend, voting or liquidation rights.Segment Reporting:Historically, the Company organized its reportable segments by line of business. As a result of the disposition of the Company’s real estate operationsand other significant dispositions and recent events, currently the only major line of business that constitutes an operating and reportable segment is thewater resource and water storage operations. Furthermore, the allocation of resources, and assessment of financial performance is now completed on aconsolidated basis as the Company monetizes its assets and returns such proceeds to shareholders. Consequently, as of December 31, 2017, the Company nolonger reports segment results as part of its consolidated financial statements.Tangible Water Assets and Real Estate:Tangible water assets and real estate include the cost of certain tangible water assets, water storage credits and related storage facilities, real estate,including raw land and improvements. The Company capitalizes pre-acquisition costs, the purchase price of real estate, development costs and otherallocated costs, including any interest, during development and construction. Pre-acquisition costs, including non-refundable land deposits, are expensed tocost of sales when the Company determines continuation of the related project is not probable.Additional costs to develop or otherwise get tangible water and real estate assets ready for their intended use are capitalized. These costs typicallyinclude direct construction costs, legal fees, engineering, consulting, direct cost of drilling wells or related construction, and any interest costs capitalized onqualifying assets during the development period. The Company expenses all maintenance and repair costs. The types of costs capitalized are consistentacross periods presented. Tangible water assets consist of various water interests in development or awaiting permitting. Amortization of real estateimprovements is computed on the straight-line method over the estimated useful lives of the improvements ranging from five to 15 years.45Intangible Water Assets:Intangible water assets include the costs of indefinite-lived intangible assets and is comprised of water rights and the exclusive right to use two watertransportation pipelines. The Company capitalizes development and entitlement costs and other allocated costs, including any interest, during thedevelopment period of the assets to tangible water assets and transfers the costs to intangible water assets when water rights are permitted. Water rights consistof various water interests acquired or developed independently or in conjunction with the acquisition of real estate. When the Company purchases intangiblewater assets that are attached to real estate, an allocation of the total purchase price, including any direct costs of the acquisition, is made at the date ofacquisition based on the estimated relative fair values of the water rights and the real estate.Intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually in the fourth quarter, or more frequently ifevents or changes in circumstances indicate that the asset may be impaired, by comparing the fair value of the assets to their carrying amounts. The fair valueof the intangible assets is calculated using discounted cash flow models that incorporate a wide range of assumptions including current asset pricing, priceescalation, discount rates, absorption rates, timing of sales, and costs. These models are sensitive to minor changes in any of the input variables.Investments:The Company’s investment portfolio at December 31, 2017 and 2016 was comprised of corporate bonds and equity securities. Corporate bonds arepurchased based on the maturity and yield-to-maturity of the bond and an analysis of the fundamental characteristics of the issuer. The Company’sinvestments in equity securities primarily consisted of common stock of publicly traded and private small-capitalization companies in the United States(“U.S.”).The Company classifies its marketable securities as available-for-sale investments. Such investments are reported at fair value, with unrealized gains andlosses, net of tax effects, recorded in accumulated other comprehensive income. Investments in private companies are generally held at the lower of cost orfair value, unless the Company has the ability to exercise significant influence. The Company reports the amortization of premium and accretion of discounton the level yield method relating to bonds acquired at other than par value and realized investment gains and losses in other income. The cost of any equitysecurity sold is determined using an average cost basis and specific identification for bond cost. Sales and purchases of investments are recorded on the tradedate.Investment in Unconsolidated Affiliate:Investments where the Company owns at least 20% but not more than 50% of the voting interest, or has the ability to exercise significant influence, butnot 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 the Company’s consolidated results. Any impairment losses recorded against investments accounted for under the equity method ofaccounting are included in impairment loss on investment in unconsolidated affiliates.Other-than-Temporary Impairment:All of the Company’s debt and equity investments are subject to a periodic impairment review. The Company recognizes an impairment loss when adecline in the fair value of its investments below the cost basis is judged to be other-than-temporary.Factors considered in determining whether a loss is temporary on an equity security includes the length of time and extent to which the investments fairvalue 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, theexpected cash flows from the security, the Company’s intent to sell the security and whether or not the Company will be required to sell the security beforethe recovery of its cost. If a security is impaired and continues to decline in value, additional impairment losses are recorded in the period of the decline ifdeemed other-than-temporary. Subsequent recoveries of the value are reported as unrealized gains and are part of other comprehensive income or loss.The Company will recognize an impairment loss on debt securities if the Company (a) intends to sell or expects to be required to sell the security beforeits amortized cost is recovered, or (b) does not expect to ultimately recover the amortized cost basis even if the Company does not intend to sell the security.Impairment losses on debt securities that are expected to be sold before the amortized cost is recovered are recognized in earnings. For debt securities that theCompany does not expect to recover the amortized costs basis, credit losses are recognized in earnings and the difference between fair value and theamortized cost basis net of the credit loss is recognized in other comprehensive income.46Impairment of Long-Lived Assets:The Company records an impairment loss when the condition exists where the carrying amount of a long-lived asset or asset group is not recoverable.Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding interest charges, for the lowest level for whichthere is identifiable cash flows that are independent of the cash flows of other groups of assets do not exceed the carrying amount. The Company prepares andanalyzes cash flows at appropriate levels of grouped assets. If the events or circumstances indicate that the remaining balance may be impaired, suchimpairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated futurediscounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective long-lived asset.Noncontrolling Interests:The Company reports the share of the results of operations that are attributable to other owners of its consolidated subsidiaries that are less than wholly-owned as noncontrolling interest in the accompanying consolidated financial statements. In the consolidated statement of operations and comprehensiveincome or loss, the income or loss attributable to the noncontrolling interest is reported separately and the accumulated income or loss attributable to thenoncontrolling interest, along with any changes in ownership of the subsidiary, is reported within shareholders’ equity.Cash and Cash Equivalents:Cash and cash equivalents include short-term, highly liquid instruments, purchased with original maturities of three months or less.Other Assets:Other assets include the following significant account balances:Property, Plant and Equipment, Net:Property, plant and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over theestimated lives of the assets. Buildings and leasehold improvements are depreciated over the shorter of the useful life or lease term and range from 15 to 30years, office furniture and fixtures are generally depreciated over seven years, and computer equipment is depreciated over three years. Maintenance andrepairs are charged to expense as incurred, while significant improvements are capitalized. Gains or losses on the sale of property, plant and equipment areincluded in other income.Accounts payable and accrued expenses:Accounts payable and accrued expenses includes trade payables and accrued construction payables.Deferred Compensation:The Company reports the investment returns generated in the deferred compensation accounts in other income with a corresponding increase in the trustassets (except in the case of PICO stock, which is reported as treasury stock, at cost). There is an increase in the deferred compensation liability when there isappreciation in the market value of the assets held, with a corresponding expense recognized in operating and other costs. In the event the trust assets declinein value, the Company reverses previously expensed compensation. The assets of the plan are held in rabbi trust accounts. Such accounts hold variousinvestments that are consistent with the Company’s investment policy, and are accounted for and reported as available-for-sale securities in theaccompanying consolidated balance sheets. Assets of the trust will be distributed according to predetermined payout elections established by eachparticipant. In July 2017, the Company’s board of directors elected to terminate the Company’s deferred compensation plans. Consequently, whileparticipant compensation remains deferred at December 31, 2017, the plan is no longer active. In accordance with applicable regulations, distribution of theremaining assets and settlement of the deferred compensation obligation will be made to the participants no earlier than one year from the date the plans wereterminated.Other Liabilities:Other liabilities includes primarily employee benefits, unearned revenues, option payments and deposits received.47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 infull when there is a legally binding sale contract, the profit is determinable (the collectability of the sales price is reasonably assured, or any amount that willnot be collectible can be estimated), the earnings process is virtually complete (the Company is not obligated to perform significant activities after the sale toearn the profit, meaning the Company has transferred all risks and rewards to the buyer), and the buyer’s initial and continuing investment is adequate todemonstrate a commitment to pay for the property. If these conditions are not met, the Company records the cash received as deferred revenue until theconditions to recognize full profit are met.Other Income, Net:Included in other income are various transactional results including realized gains and losses from the sale of investments and property, plant andequipment, interest income, sales of oil and gas, and other sources not considered to be the core focus of the existing operating entities within the group.Cost of Sales:Cost of Real Estate and Water Assets:Cost of real estate and water assets sold includes direct costs of the acquisition of the asset less any impairment losses previously recorded against theasset, development costs incurred to get the asset ready for use, and any capitalized interest costs incurred during the development period.General, Administrative, and Other:General, administrative, and other costs include salaries and benefits, stock-based compensation, consulting, audit, tax, legal, insurance, property taxes,rent and utilities, and other general operating expenses.Stock-Based Compensation:Stock-based compensation expense is measured at the grant date based on the fair values of the awards, calculated using the closing stock price on thedate of grant, and is recognized as expense over the period in which the share-based compensation vests using the straight-line method. When an employeeRestricted Stock Award (“RSU”) vests, the recipient receives a new share of PICO common stock for each RSU, less the number of shares of common stockequal in value to applicable withholding taxes. When an RSU is forfeited, all previously recognized expense is reversed during the respective forfeiture yearand the remaining unamortized expense is canceled.Accounting for Income Taxes:The Company’s provision for income tax expense includes federal and state income taxes currently payable and those deferred because of temporarydifferences between the income tax and financial reporting bases of the assets and liabilities. The asset and 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. At December 31, 2017, the Company concluded that it is likely that not all of its deferred tax assets will be realized, and accordingly, avaluation allowance was recorded against the deferred tax assets that are not expected to be realized.The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not to be sustainedupon audit by the relevant taxing authority. An uncertain income tax position will not be recognized unless it has a greater than a 50% likelihood of beingsustained. The Company recognizes any interest and penalties related to uncertain tax positions in income tax expense.48The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), enacted in December 2017, resulted in significant changes to the U.S. corporate income tax system.These changes, that are effective beginning in 2018, include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certaindomestic deductions and credits, and limitations on the deductibility of interest expense and executive compensation as well as limitations on the use offuture net operating. Changes in tax rates and tax laws are accounted for in the period of enactment and consequently during the year ended December 31,2017, the Company remeasured its net deferred tax asset and reduced the value of each deferred tax attribute using a tax rate of 21%, which was offset by areduction in the recorded valuation allowance resulting in no net effect to the income tax provision for the year ended December 31, 2017.Loss per Share:Basic earnings or loss per share was computed by dividing net earnings by the weighted average number of shares outstanding during the period. Dilutedearnings or loss per share was 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 stockappreciation rights (“SAR”), performance-based price-contingent stock options (“PBO”), and RSU are considered common stock equivalents for this purpose.The number of additional shares related to these common stock equivalents is calculated using the treasury stock method.For the three years ended December 31, 2017, the Company’s common stock equivalents were excluded from the diluted per share calculation becausetheir effect on earnings per share was anti-dilutive.Recently Issued Accounting Pronouncements:In May of 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding revenue from contracts with customers, which providesa consistent revenue accounting model across industries. The Company has reviewed this update and other guidance that was subsequently issued to furtherclarify the implementation guidance. Under this guidance, revenue is recognized as the transfer of goods and services to customers takes place and inamounts that reflect the payment or payments that are expected to be received from the customers for those goods and services and requires new disclosuresabout revenue. The Company will adopt the guidance effective January 1, 2018. We have analyzed our revenues and contracts and have concluded that theimplementation will not have a material impact on our consolidated financial statements upon adoption.In March 2016, the FASB issued guidance on accounting for share-based payments to employees. The guidance clarifies income tax consequences,classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company implemented this guidance during thethree months ended March 31, 2017 and it did not have a material effect on the consolidated financial statements.2. TANGIBLE WATER ASSETS AND REAL ESTATE, NETThe cost assigned to the various components of tangible water and real estate assets were as follows (in thousands): December 31, 2017 2016Tangible water assets$29,655 $42,498Real estate and improvements held and used, net of accumulated amortization of $12,003 at December 31, 2017 andDecember 31, 20169,469 9,469Other real estate inventories5,551 5,724Total tangible water and real estate assets, net$44,675 $57,691The Company’s real estate improvements were fully depreciated at December 31, 2016. Amortization of such improvements was approximately$225,000 and $879,000 for December 31, 2016 and 2015, respectively.493. INTANGIBLE ASSETSThe Company’s carrying amounts of its intangible assets were as follows (in thousands): December 31, 2017 2016Pipeline rights and water credits at Fish Springs Ranch$83,897 $83,897Pipeline rights and water rights at Carson-Lyon25,569 25,569Other17,319 17,330Total intangible assets$126,785 $126,796Fish Springs Ranch Pipeline Rights and Water Credits: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, Nevada area. Under a settlement agreement signed in 2007, the Pyramid Lake Paiute Tribe (the “Tribe”)agreed to not oppose any permitting activities for the pumping and export of groundwater in excess of 8,000 acre-feet of water per year, and in exchange, FishSprings Ranch will pay the Tribe 12% of the gross sales price for each acre-foot of additional water that Fish Springs Ranch sells in excess of 8,000 acre-feetper year, up to 13,000 acre-feet per year. The obligation to expense and pay the 12% fee is due only if and when the Company sells water in excess of 8,000acre-feet, and accordingly, Fish Springs Ranch will record the liability for such amounts as they become due upon the sale of any such excess water.Currently, Fish Springs Ranch does not have regulatory approval to export any water in excess of 8,000 acre-feet per year from Fish Springs Ranch to supportfurther development in northern Reno, and it is uncertain whether such regulatory approval will be granted in the future.Impairment Losses:There were no impairment losses recognized on intangible assets during the years ended December 31, 2017 or December 31, 2016.4. INVESTMENTSThe cost and carrying value of available-for-sale investments were as follows (in thousands):December 31, 2017Cost Gross Unrealized Gains Gross Unrealized Losses Carrying ValueDebt securities: corporate bonds$700 $6 $(22) $684Marketable equity securities513 710 (5) 1,218Total$1,213 $716 $(27) $1,902December 31, 2016Cost Gross Unrealized Gains Gross Unrealized Losses Carrying ValueDebt securities: corporate bonds$4,306 $82 $(6) $4,382Marketable equity securities10,400 10,327 (38) 20,689Total$14,706 $10,409 $(44) $25,07150The amortized cost and carrying value of investments in debt securities, by contractual maturity, are shown below. Actual maturity dates may differ fromcontractual maturity dates because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands): December 31, 2017 December 31, 2016 Amortized Cost Carrying Value Amortized Cost Carrying ValueDue in one year or less$225 $204 $182 $183Due after one year through five years475 480 4,124 4,199 $700 $684 $4,306 $4,382Included in other income, net in the accompanying consolidated financial statements is the net realized gain or loss on investments (in thousands): Year Ended December 31, 2017 2016 2015Gross realized gains: Debt securities$77 $419Equity securities and other investments9,746 $610 1,010Total gain9,823 610 1,429Gross realized losses: Debt securities(87) (90) (4)Equity securities and other investments (1)(1,014) (4,525) (21,020)Total loss(1,101) (4,615) (21,024)Net realized gain (loss)$8,722 $(4,005) $(19,595)(1) Included within this caption for the years ended December 31, 2016 and 2015 is $2.2 million and $20.7 million, respectively, that is reported in a separateline, impairment loss on unconsolidated affiliate, within the Company’s consolidated statements of operations and comprehensive income or loss for theyears then ended.Significant Realized Gains and Losses:During the year ended December 31, 2016, the Company’s 51% owned subsidiary, Klablab, Inc. (“Klablab”), ceased further operations and the Companyrecorded a $2 million loss which is included within other income, net within the Company’s consolidated statements of operations and comprehensiveincome or loss for the year then ended and also reported in the gross realized loss on equity securities in the table above.The realized losses reported in 2015 were primarily due to the $20.7 million impairment loss on the common and preferred stock investment in Mindjet,Inc. (“Mindjet”) a privately held company located in San Francisco, California that provides business innovation software, as discussed below.Debt and Marketable Equity SecuritiesAt December 31, 2017, there were no material unrealized losses on the Company’s investments in debt or marketable equity securities. Furthermore, therewere no impairment losses recorded on debt or equity securities during the three years ended December 31, 2017.51Other Investments:Investment in Synthonics:Synthonics, Inc. (“Synthonics”) is a private company co-founded by a previous member of the Company’s board of directors. The Company’s investmentconsists of preferred shares with an 18.3% voting interest. During 2016, the Company recorded an impairment loss of $2.2 million on the investment whenthe estimated fair value dropped below the carrying value due to continuing losses reported by Synthonics, the resulting liquidity issues, and decreasedmarket conditions that have adversely affected the value. The loss was recorded within impairment loss on investment in unconsolidated affiliate in theCompany’s consolidated statements of operations and comprehensive income or loss for the year ended December 31, 2016 and also reported in the grossrealized loss on equity securities in the table above. The fair value approach relied primarily on Level 3 unobservable inputs, whereby the enterprise valuewas determined using book value multiples that included assumptions regarding an entity’s risks and uncertainties. The estimates were based uponassumptions believed to be reasonable, but which by their nature are uncertain and unpredictable.Investment in Mindjet:The Company owns a convertible note receivable (which is recorded within other assets in the consolidated financial statements) and common stock andnonvoting preferred stock representing a voting ownership of 19.3% of Mindjet. The Company determined it currently does not have significant influenceover the operating and financial policies of Mindjet and records the investment at cost. The carrying value of the investment, including the convertible notereceivable and associated interest, was approximately $2.3 million at December 31, 2017 and 2016.The Company had previously accounted for the investment in common stock using the equity method of accounting when it did have significantinfluence over Mindjet. This resulted in recording a loss within equity in loss of unconsolidated affiliate in the consolidated statement of operations andcomprehensive income or loss of $3.4 million for the year ended December 31, 2015. The Company’s share of the losses reported by Mindjet during 2015was allocated to the carrying value of the common stock investment until it reached zero and then to the preferred stock and convertible debt.During 2015, the Company recorded a $20.7 million impairment loss on the investment in Mindjet common and preferred shares when the estimated fairvalue dropped below the carrying value due to significantly increased, and continuing operating losses and resulting liquidity issues at the company, actualfinancial results significantly less than projections, and unfavorable market conditions that have adversely affected the value of Mindjet. Such loss wasrecorded in impairment loss on investment in unconsolidated affiliate in the consolidated statement of operations and comprehensive income or loss. The fairvalue of the investment in Mindjet was based on an analysis of the financial and operational aspects of the company, including consideration of businessenterprise value-to-revenue ratios for comparable public companies to current revenue metrics for the company. Determination of the business enterprisevalue based on the foregoing was then considered in an analysis of the distribution of equity value to the various classes of debt and equity issued byMindjet in order to reflect differences in value due to differing liquidation preferences, dividend and voting rights. The fair value approach relied primarilyon Level 3 unobservable inputs, whereby expected future cash flows were determined using revenue multiples that included assumptions regarding anentity’s assumptions about risk and uncertainties. The estimates were based upon assumptions believed to be reasonable, but which by their nature areuncertain and unpredictable.It is reasonably possible that the Company’s ownership percentage in Mindjet will continue to decline as other shareholders fund the ongoing operationswith additional equity capital and upon conversion of notes. The Company does not anticipate investing any additional capital into Mindjet.The carrying value of the Company’s investment in Mindjet is subject to impairment testing at each reporting period, or more frequently if facts andcircumstances indicate the investment may be impaired. It is reasonably possible that circumstances may continue to deteriorate which could require theCompany to record additional impairment losses on the remaining investment balances.525. DISCLOSURES ABOUT FAIR VALUERecurring Fair Value MeasurementsAssets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair valuemeasurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment andconsiders factors specific to the asset or liability. The following tables set forth the Company’s assets and liabilities that were measured at fair value, on arecurring basis, by level within the fair value hierarchy. There were no significant transfers between Level 1 and Level 2 during the years ended December 31,2017 and 2016. The Company’s policy is to recognize transfers between levels at the end of the reporting period.At December 31, 2017 (in thousands): Quoted Prices InActiveMarkets forIdentical Assets(Level 1) Significant OtherObservable Inputs(Level 2) SignificantUnobservableInputs(Level 3) Balance atDecember 31, 2017Assets Available-for-sale equity securities (1)$975 $244 $1,219Available-for-sale debt securities (1)$683 $683Total$1,658$244 $1,902At December 31, 2016 (in thousands): Quoted Prices InActiveMarkets forIdentical Assets(Level 1) Significant OtherObservable Inputs(Level 2) SignificantUnobservableInputs(Level 3) Balance atDecember 31, 2016Assets Available-for-sale equity securities (1)$12,545 $8,144 $20,689Available-for-sale debt securities (1)$4,382 $4,382Total$16,927 $8,144 $25,071(1) 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 1available-for-sale investments are valued using quoted market prices multiplied by the number of shares owned and debt securities are valued using amarket quote in an active market. All Level 2 available-for-sale securities are one class because they all contain similar risks and are valued using marketprices and include securities where the markets are not active, that is where there are few transactions, or the prices are not current or the prices varyconsiderably over time. Inputs include directly or indirectly observable inputs such as quoted prices. Level 3 available-for-sale securities would includesecurities where valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of theassets. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.Non-Recurring Fair Value MeasurementsAssets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair valuemeasurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment andconsiders factors specific to the asset.There were no non-financial assets that were measured at fair value, on a non-recurring basis during the year ended December 31, 2017.53The following table sets forth the Company’s non-financial assets that were measured at fair value, on a non-recurring basis, by level within the fair valuehierarchy during the year Ended December 31, 2016 (in thousands):Asset Description Quoted Prices InActiveMarkets forIdentical Assets(Level 1) Significant OtherObservable Inputs(Level 2) SignificantUnobservable Inputs(Level 3) Total LossOil and gas wells (1) $— $201Investment in unconsolidated affiliate (2) $— $2,170(1) The Company recorded an impairment loss to write down the value of certain oil and gas wells. The loss was reported in the consolidated statements ofoperations and comprehensive income or loss within impairment loss on intangible and long-lived assets and was included in the results of operations of thecorporate segment.(2) The Company had a non-recurring fair value measurement on its investment in Synthonics that resulted in an impairment loss discussed in Note 4“Investments.”Estimated Fair Value of Financial Instruments Not Carried at Fair ValueFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsat the measurement date. The level within the fair value hierarchy in which the fair value measurements are classified include measurements using quotedprices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical orsimilar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).As of December 31, 2017 and 2016, the fair values of cash and cash equivalents, accounts payable, and accounts receivable approximated their carryingvalues because of the short-term nature of these assets or liabilities. The estimated fair value of the Company’s investments in unconsolidated affiliatesapproximated their carrying values. The estimated fair value of certain of the Company’s other investments, which included investments in preferred stock ofprivate companies, cannot be reasonably estimated on a recurring basis.6. COMMITMENTS AND CONTINGENCIESThe Company leases some of its offices under non-cancelable operating leases that expire at various dates through 2020. Rent expense for the yearsended December 31, 2017, 2016, and 2015, for office space was $388,000, $696,000, and $571,000, respectively.Future minimum payments under all operating leases were as follows (in thousands):Year ended December 31, 2018$35120193562020166Thereafter—Total$87354Neither PICO nor its subsidiaries are parties to any potentially material pending legal proceedings.The Company is subject to various litigation matters that arise in the ordinary course of its business. Because litigation is inherently unpredictable andunfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluatingcontingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter inquestion, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. Inaddition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to possible outcomes, and as such arenot meaningful indicators of the Company’s potential liability. The Company regularly reviews contingencies to determine the adequacy of accruals andrelated disclosures. The amount of ultimate loss may differ from these estimates, and it is possible that the Company’s consolidated financial statementscould be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company’sbusiness, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses; thestructure and type of any remedies; the significance of the impact any such losses, damages or remedies may have on the consolidated financial statements;and the unique facts and circumstances of the particular matter that may give rise to additional factors.7. STOCK-BASED COMPENSATIONAt December 31, 2017, the Company had one stock-based payment arrangement outstanding, the PICO Holdings, Inc. 2014 Equity Incentive Plan (the“2014 Plan”).The 2014 Plan provides for the issuance of up to 3.3 million shares of common stock in the form of PBO, RSU, SAR, non-statutory stock options,restricted stock awards (“RSA”), performance shares, performance units, deferred compensation awards, and other stock-based awards to employees, directors,and consultants of the Company (or any present or future parent or subsidiary corporation or other affiliated entity of the Company). The 2014 Plan allows forbroker assisted cashless exercises and net-settlement of income taxes and employee withholding taxes. Upon exercise of a PBO, RSU, and SAR, the employeewill receive newly issued shares of PICO common stock with a fair value equal to the in-the-money value of the award, less applicable federal, state and localwithholding and income taxes (however, the holder can elect to pay withholding taxes in cash).The Company recorded total stock based compensation expense of $1.3 million, $2.9 million and $1.9 million during the years ended December 31,2017, 2016 and 2015, respectively.Performance-Based Options (PBO):At various times, the Company has awarded PBO to various members of management. All of the PBO issued contain a market condition based on theachievement of a stock price target during the contractual term and vest monthly over a three year period. The vested portion of the options may be exercisedonly if the 30-trading-day average closing sales price of the Company’s common stock equals or exceeds 125% of the grant date stock price. The stock pricecontingency may be met any time before the options expire and it only needs to be met once for the PBO to remain exercisable for the remainder of the term.Compensation expense is amortized on a straight-line basis over the requisite service period for the entire award, which is the vesting period of the award.However, any unrecognized compensation expense for unvested awards can be accelerated if the vesting period is modified.55The estimated fair value of the Company’s PBO was determined using a Monte Carlo model, which incorporated the following assumptions: 201410-Year OptionGrant date 11/14/2014Expiration date 11/14/2024Grant date stock price $19.51Historical volatility 35.00%Risk-free rate (annualized) 2.38%Dividend yield (annualized) —%PBO granted 167,619Weighted average grant date fair value $6.51Fair value of award on grant date $1,475,705The determination of the fair value of PBO using an option valuation model is affected by the Company’s stock price, as well as assumptions regarding anumber of complex and subjective variables. The volatility is calculated through an analysis based on historical daily returns of PICO’s stock over a look-back period equal to the PBO contractual term. The risk-free interest rate assumption is based upon a risk-neutral framework using the 10-year and 4.58-yearzero-coupon risk-free interest rates derived from the treasury constant maturities yield curve on the grant date, for the 10-year PBO award and the 4.58-yearPBO award, respectively. The dividend yield assumption is based on the expectation of no future dividend payouts by the Company.A summary of PBO activity was as follows: Performance-Based Options Weighted-AverageExercise Price PerShareOutstanding at December 31, 2015 and 2016453,333 $19.51Forfeited(285,714) $19.51Outstanding at December 31, 2017 (1)167,619 $14.51(1) In November 2017, the exercise price per share of the PBO was reduced to reflect the special dividend paid to shareholders.On January 8, 2017, 285,714 PBO expired and were canceled in conjunction with the termination of the Company’s former CEO. The remaining 167,619PBO outstanding are exercisable for up to 10 years from the grant date. Performance-Based Options Weighted-AverageExercise Price PerShare Weighted-AverageContractual TermRemaining (Years) AggregateIntrinsic ValueVested at December 31, 2015163,704 Vested238,413 Vested at December 31, 2016402,117 $19.51 4.5 —Vested51,216 Forfeited(285,714) Vested at December 31, 2017 (1)167,619 $14.51 6.9 —(1) In November 2017, the exercise price per share of the PBO was reduced to reflect the special dividend paid to shareholders.56During the year ended December 31, 2016, the Company accelerated the vesting of 87,302 PBO and recorded $428,000 of additional stock-basedcompensation expense in conjunction with the termination of the Company’s former CEO.As of December 31, 2017 and December 31, 2016, there were no PBO exercisable as the market condition had not been met. The was no unrecognizedcompensation cost related to unvested PBO at December 31, 2017 and at December 31, 2016 there was $428,000 of unrecognized compensation cost.Restricted Stock Units (RSU):RSU awards the recipient, who must be continuously employed by the Company until the vesting date, unless the employment contracts stipulateotherwise, the right to receive one share of the Company’s common stock. RSU issued to management do not vote and are not entitled to receive dividends,however the RSU issued to the Company’s director’s are entitled to dividends.A summary of RSU activity was as follows: RSU Shares Weighted-AverageGrant Date FairValue Per ShareOutstanding and unvested at December 31, 2014142,131 $19.81Granted23,300 $15.68Vested(45,753) $20.43Forfeited(11,020) $15.72Outstanding and unvested at December 31, 2015108,658 $19.07Granted24,326 $10.28Vested(76,152) $19.14Forfeited(8,600) $17.30Outstanding and unvested at December 31, 201648,232 $14.85Granted54,186 $15.01Vested(71,944) $14.58Forfeited(19,999) $13.82Outstanding and unvested at December 31, 201710,475 $19.51The unrecognized compensation cost related to unvested RSU for the years ended December 31, 2017 and 2016 was $178,000 and $508,000,respectively.During the year ended December 31, 2016, the Company accelerated the vesting of 35,714 RSU and recorded $651,000 of additional stock-basedcompensation expense in conjunction with the termination of the Company’s former CEO.Stock-Settled Stock Appreciation Right (SAR):The 466,470 previously outstanding SAR with an exercise price of $42.71 expired during the year ended December 31, 2017. Consequently, there are nosuch awards outstanding.8. FEDERAL AND STATE CURRENT AND DEFERRED INCOME TAXAs a result of the Tax Act, the Company remeasured its net deferred tax assets and corresponding valuation allowance using a federal rate of 21% duringthe year ended December 31, 2017, which resulted in no net impact to the income tax provision. The Company and its subsidiaries file a consolidated federalincome tax return. Companies that are less than 80% owned corporations, or entities that are treated as partnerships for federal income tax purposes, fileseparate federal income tax returns. All of the Company’s pre-tax loss from continuing operations in each of the three years ended December 31, 2017, 2016and 2015 was generated in the U.S. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for income tax purposes.57The Company’s income tax (provision) benefit for federal and state income taxes consisted of the following (in thousands): Year Ended December 31, 2017 2016 2015Current tax (provision) benefit$360 $(47) $48Deferred tax (provision) benefit(3,442) 1,182 2,913Total income tax (provision) benefit$(3,082) $1,135 $2,961The difference between income taxes provided at the Company’s federal statutory rate and effective tax rate was as follows (in thousands): Year Ended December 31, 2017 2016 2015Federal income tax (provision) benefit at statutory rate$(3,620) $9,201 $13,083Change in valuation allowance36,055 (7,664) (16,026)Impact of U.S. tax reform(35,570) State taxes, net of federal benefit319 225 280Nondeductible compensation (530)Equity in loss of unconsolidated affiliate 2,766Research and development credit 2,248Other(266) (627) 1,140Total income tax (provision) benefit$(3,082) $1,135 $2,961The significant components of deferred income tax assets and liabilities were as follows (in thousands): December 31, 2017 2016Deferred tax assets: Net operating losses, capital losses, and tax credit carryforwards$55,852 $67,838Deferred compensation1,212 10,908Impairment loss on securities36 1,221Impairment loss on water assets10,791 17,277Impairment loss on real estate 1,847Capitalized expenses 9,788Employee benefits, including stock-based compensation745 9,945Excess tax basis in affiliate5,743 7,676Fixed assets811 469Other, net1,011 3,528Total deferred tax assets76,201 130,497Deferred tax liabilities: Unrealized appreciation on securities122 4,138Revaluation of real estate and water assets3,251 5,247Excess book basis in affiliate 5,770Other, net520 2,113Total deferred tax liabilities3,893 17,268Valuation allowance(72,308) (113,229)Net deferred income tax asset$— $—58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. Valuation allowances are established and maintained for deferred taxassets on a “more likely than not” threshold. At December 31, 2011, the Company considered it more likely than not that the deferred tax assets would not berealized and a full valuation allowance was provided. At December 31, 2017, after evaluating the positive and negative evidence, management concluded tomaintain a full valuation allowance against its deferred tax assets. The Company has considered the following possible sources of taxable income whenassessing the realization of the deferred tax assets: (1) future reversals of existing taxable temporary differences; (2) taxable income in prior carryback years;(3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards. Reliance on future U.S. taxableincome as an indicator that a valuation allowance is not required is difficult when there is negative evidence such as the Company's cumulative losses inrecent years. In considering the evidence as to whether a valuation allowance is needed, the existence, magnitude and duration of such cumulative losses arefactors that are accorded significant weight in the Company's assessment. As a result, a determination was made that there was not sufficient positive evidenceto enable the Company to conclude that it was “more likely than not” that certain of these deferred tax assets would be realized. Therefore, the Company hasprovided a full valuation allowance against the Company's net deferred tax assets balances as discussed above. This assessment will continue to beundertaken in the future. The Company's results of operations may be impacted in the future by the Company's inability to realize a tax benefit for future taxlosses or for items that will generate additional deferred tax assets.The Company's results of operations might be favorably impacted in the future by reversals of valuation allowances if the Company is able todemonstrate sufficient positive evidence that the Company's deferred tax assets will be realized.The Company had operating loss carryforwards, federal tax credit carryforwards, and state capital loss carryforwards as of December 31, 2017, that willexpire if not utilized. The following table summarizes such carryforwards and their expiration as follows (in thousands): Federal NetOperating Losses Federal TaxCredits State NetOperating Losses State CapitalLossesExpire 2018 through 2020 $2,751 $14,161 $8,500Expire 2021 through 2025 782 6,819 5,655Expire 2026 through 2030 17,009 Expire 2031 through 2037 $185,494 3,970 136,730 Total $185,494 $7,503 $174,719 $14,155Utilization of the Company's U.S. federal and certain state net operating loss and tax credit carryovers may be subject to substantial annual limitationdue to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in theexpiration of the net operating loss carryforwards before utilization. As of December 31, 2017, the Company believes that utilization of its federal netoperating losses and federal tax credits are not limited under any ownership change limitations provided under the Internal Revenue Code. The tax benefitpreservation plan adopted during 2017, which is subject to ratification by the Company’s shareholders at the 2018 annual meeting, provides protections topreserve the Company’s ability to utilize its net operating loss carryforwards as a result of certain stock ownership changes in the future.The Company is subject to taxation in the U.S. and various state jurisdictions. As of December 31, 2017, the Company's statute is open from 2014 and2013 forward for federal and for state tax purposes, respectively.599. ACCUMULATED OTHER COMPREHENSIVE INCOMEThe components of accumulated other comprehensive income was as follows (in thousands): December 31, 2017 2016Net unrealized gain on available-for-sale investments (1)$544 $6,736Foreign currency translation (75)Accumulated other comprehensive income$544 $6,661(1) The unrealized gain on available-for-sale investments is net of a deferred income tax liability of $145,000 at December 31, 2017 and $3.6 million atDecember 31, 2016.The following table reports amounts that were reclassified from accumulated other comprehensive income and included in earnings (in thousands): Year Ended December 31, 2017 2016 2015Accumulated other comprehensive income - January 1$6,661 $4,961 $4,717Unrealized gain reclassified and recognized in net loss, net of tax(1)(6,358) (193) (481)Foreign exchange reclassified and recognized in net loss, net of tax(1)2 20 361Total reclassified and recognized in net loss, net of tax(6,356) (173) (120)Unrealized gain on marketable securities, net of tax164 1,864 773Accumulated currency, net of tax75 9 (409)Net change in other comprehensive income, net of tax(6,117) 1,700 244Accumulated other comprehensive income - December 31$544 $6,661 $4,961(1) Amounts reclassified from this category are included in other income in the consolidated statement of operations and comprehensive income or loss.10. RELATED-PARTY TRANSACTIONSDeferred CompensationIn July 2017, the Company’s board of directors terminated the Company’s deferred compensation plans. Consequently, while participant compensationremains deferred at December 31, 2017, the plan is no longer active. In accordance with applicable regulations, distribution of the remaining assets andsettlement of the deferred compensation obligation will be made to the participants no earlier than one year from the date the plans were terminated. The totalvalue of the deferred compensation obligation for all participants at December 31, 2017 and December 31, 2016 was $4.1 million and $27.3 million,respectively, and is included in the accompanying consolidated balance sheets.In conjunction with the termination of the Company’s former CEO, assets valued at $23.3 million were distributed from the trust accounts during 2017.Within these accounts, the following individuals are the beneficiaries of the following number of PICO common shares and fair value: December 31, 2017 December 31, 2016Former CEO 53,996Mr. Webb, CEO1,375 1,375Number of shares held1,375 55,371Fair value of PICO stock held in deferred compensation accounts$17,600 $839,00060The trustee for the accounts is U.S. Bank. The accounts are subject to the claims of outside creditors, and the cost of the shares of PICO common stockheld in the accounts are reported as treasury stock in the consolidated financial statements.Employment Agreements:During 2016, the Company entered into employment agreements with Mr. Webb and Mr. Perri, effective as of January 1, 2017, that stipulated theirannual salary and participation in the standard benefits package, subject to an annual cost of living adjustment that is subject to Compensation Committeeapproval, certain termination benefits, and participation in a revised bonus plan and an executive change in control bonus plan, as described below.Executive Bonus Plan:The bonus plan is effective from January 1, 2016 through December 31, 2020 and replaced and superseded the previous bonus plan maintained by theCompany. Such arrangement awards an annual bonus only if 1) there is a net gain derived from a sale or other disposal of assets, as defined, and 2) cashproceeds from such transactions are distributed directly to the Company’s shareholders during the same year.The agreement establishes a bonus pool that is calculated as 8.75% of the adjusted total net gain from assets sold or otherwise disposed. The plan definesthe total net gain as the difference between the cash received in sale or other disposal transactions less (a) the invested capital of each such asset as of the saledate, as determined in accordance with U.S. GAAP, subject to adjustment by the Compensation Committee to the extent necessary to reflect the capitalizationof costs with respect to such assets as required by GAAP; (b) any bonus paid or payable to the Company’s management for the sale or other disposition ofeach such asset, other than any bonus under the bonus plan; and (c) administrative expenses specified in the bonus plan. Such total net gain is then alsomultiplied by an adjustment factor resulting in an adjusted total net gain. The adjustment factor is a fraction, the numerator of which is the total amount ofcash distributed or committed to be distributed to the Company’s shareholders with respect to all such assets sold or otherwise disposed of during the year,and the denominator, which is the total amount of cash received after payment of all selling costs, including any fees and commissions for which all suchassets were sold or otherwise disposed of during the year. For assets distributed directly to the Company’s shareholders, the adjustment factor is 100%. Theresulting bonus pool is allocated 55% to Mr. Webb, 32.5% to Mr. Perri, and 12.5% to other employees of the Company who are designated by theCompensation Committee as eligible to participate in the bonus plan with respect to the applicable bonus plan year, in amounts designated by theCompensation Committee, in each case based on the recommendation of the Mr. Webb. Each individual will be entitled to his allocated portion of the bonuspool for the year if employed by the Company on the last day of the year. However, in the event that Mr. Webb’s or Mr. Perri’s employment with theCompany is terminated in certain circumstances as provided in their employment agreements such terminated individual will be entitled to payment of anamount under the bonus plan for a portion of the year in which such termination occurs.For assets sold or otherwise disposed of entirely or partially for non-cash consideration by the Company, the calculation of total net gain with respect tothe non-cash consideration will instead be made in the year in which the non-cash consideration is ultimately sold or otherwise disposed of for cash by theCompany. For assets distributed directly to the Company’s shareholders, other than an asset resulting from a previous sale or other disposal of an asset fornon-cash consideration as described in the preceding sentence, the total net gain will be determined by deducting items (a) through (c) above from the valueof such assets upon such distribution, as determined in accordance with U.S. GAAP.For the year ended December 31, 2017, a bonus pool of $88,000 was calculated based on the Company’s financial results for 2017. Such total will beallocated according to the specifics discussed above with 70% of the award distributed in cash during 2018 and 30% of the award issued in RSU that willvest immediately, but will not be stock settled for three years from the grant date.Executive Change in Control Bonus Plan:In connection with exploring strategic alternatives, the Compensation Committee approved a change in control bonus plan during 2017. In summary, ifa change in control occurs during the term of the agreement and the participants are terminated without cause in connection with such change in control, thena pool of funds will be made available for the payment of bonuses under the plan. The change in control bonus plan terminates at December 31, 2018 if notransaction is consummated.61Under the plan, a change in control occurs when any person (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes thebeneficial owner, directly or indirectly, of securities of the Company representing more than 50% of the total combined voting power of the Company’s thenoutstanding securities entitled to vote generally in the election of directors of the Company; provided, however, that a change in control transaction shall notbe deemed to have occurred if such degree of beneficial ownership results from any acquisition directly from the Company, any acquisition by the Companyor any acquisition by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership ofthe voting securities of the Company; or either the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of theCompany of securities of the Company representing more than 50% of the total combined voting power of the Company’s then outstanding securitiesentitled to vote generally in the election of directors of the Company or a merger or consolidation in which the Company is a party (collectively, a“Transaction”) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction direct orindirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding securities entitled to vote generally inthe election of directors of the Company.The bonus is calculated as the sum of the total purchase price for the Company’s securities, less all cash and cash equivalents of the Company as of theclosing date of the transaction, other than any cash remaining as of the closing date that is attributable to the sale or disposal of assets prior to the closingdate but had not yet been distributed or committed to be distributed to shareholders and less all selling costs of the transaction. The sum of those threeamounts is multiplied by 0.8% to calculate the bonus pool. Such bonus pool will be allocated two-thirds to Mr. Webb and one-third to Mr. Perri.Termination of the Company’s CEO and Other Related Changes in Executive Management During 2016:During 2016, the Company terminated its CEO. In connection with the termination, the Company’s board of directors appointed Mr. Webb as Presidentand Chief Executive Officer and as a class III director of the Company and appointed Mr. Perri as Chief Financial Officer. Mr. Webb and Mr. Perri irrevocablyand unconditionally waived their right to receive any bonus payment that would have otherwise been payable pursuant to the terms of the Company’s thenexisting executive bonus plan.The Company’s former CEO received severance benefits as set forth in Section 4(b) of his Amended and Restated Employment Agreement with theCompany, dated March 11, 2016 and filed with the SEC on March 14, 2016. Such benefits included certain severance and vacation differential paymentstotaling approximately $10.4 million, certain medical benefits that are on-going, and immediate vesting of the outstanding RSU and PBO previouslygranted. The Company’s former CEO was also entitled to the balance of his accrued vacation and personal days valued at $338,000.Incentive CompensationCertain officers of Vidler are eligible to receive an annual incentive award based on the combined net income, after certain adjustments, of Vidler. Thecompensation earned and accrued under this plan during the year ended December 31, 2017 was $414,000. There was no compensation earned during theyears ended December 31, 2016 or 2015.Sale of Oil and Gas AssetsIn conjunction with exiting our residual oil and gas operations, during 2017, the Company sold the majority of the remaining oil and gas lease assets tothe service agent the Company had contracted with to operate and manage such oil and gas operations. The Company received book value for the majority ofthe assets sold resulting in no significant gain or loss on the transaction. The Company expects to sell the legal business entities that were created to operatethe oil and gas operations to its service agent. Consequently, at December 31, 2017, the Company had accrued $150,000 of disposal expense related to thefinal sale.11. DISCONTINUED OPERATIONSThe Company’s agribusiness and real estate segment qualified as held-for-sale at December 31, 2017 and has been classified as discontinued operationsin the accompanying consolidated financial statements as of the earliest period presented.During 2017, UCP entered into a merger agreement with Century whereby each outstanding share of UCP common stock was converted into $5.32 incash and 0.2309 of a newly issued share of Century common stock representing 9% of Century’s common stock then outstanding. The transaction closed onAugust 4, 2017 and as a result the Company deconsolidated UCP as of the closing date. In October 2017, the Company sold its entire position of Centurycommon stock for $59.2 million and recorded a realized loss of $842,000.62During 2015, the Company sold substantially all of the assets used in its agribusiness segment for a net selling price of $105.3 million. After repaymentof $80.9 million of outstanding debt and $5.9 million in selling and other related costs of the sale, the Company received net proceeds of $18.4 million onthe date of close. After resolution of certain operation escrow matters and all selling and related costs of the sale, the Company received final proceeds of$16.4 million.The Company has guaranteed up to $8 million for any indemnification claims in excess of the $6 million escrow pursuant to the terms of a guarantyagreement with the buyer. The guaranty will remain in force until July 31, 2020. The guaranty has been recorded at estimated fair value that reflects theCompany’s expectation that no significant amounts will be paid out under the guaranty. However, any amounts paid by the Company in excess of theestimate will result in additional loss on the sale.The following table presents the details of the Company’s results from all discontinued operations included in the consolidated statement of operationsand comprehensive income or loss (in thousands): 2017 2016 2015Revenue and other income: Sale of real estate$247,213 $354,368 $278,826Sale of canola oil and meal 82,267Other506 866 173Total revenue and other income247,719 355,234 361,266 Cost of goods sold: Cost of real estate sold200,789 290,412 226,476Cost of canola oil and meal sold 90,061Total cost of goods sold200,789 290,412 316,537 Impairment loss on intangible and long-lived assets102 6,811 3,072Interest 3,259Selling expenses13,784 19,774 21,596General, administrative and other29,631 29,554 41,111Total expenses244,306 346,551 385,575Income (loss) from discontinued operations3,413 8,683 (24,309)Benefit (provision) for federal and state income taxes(360) 5,216 Loss on sale of discontinued operations, net of tax(8,698) (1,775) (18,729)Net loss from discontinued operations, net of tax(5,645) 12,124 (43,038)Net loss from discontinued operations attributable to noncontrolling interests(1,150) (8,836) (979)Net loss from discontinued operations attributable to PICO Holdings, Inc.$(6,795) $3,288 $(44,017)63The following table presents the details of the Company’s discontinued assets and liabilities classified as held-for-sale in the consolidated balance sheet(in thousands): December 31, 2016Assets: Cash and cash equivalents$40,931Real estate373,207Accounts receivable5,628Other assets14,418Real estate assets held-for-sale$434,184Agribusiness assets held-for-sale6,505Total assets held-for-sale$440,689 Liabilities: Debt$160,994Accounts payable and accrued expenses34,025Other12,271Real estate liabilities held-for-sale$207,290Agribusiness liabilities held-for-sale276Total liabilities held-for-sale$207,56664ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures.The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to providereasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, withthe participation of the Chief Executive and Chief Financial Officers, evaluated the effectiveness of the Company’s disclosure controls and procedures as ofDecember 31, 2017. 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, 2017.Management’s Annual Report on Internal Control over Financial Reporting.Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the UnitedStates and includes those policies and procedures that:•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations ofmanagement and directors of the Company; and•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets thatcould have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance of achieving their control objectives.Management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management, with theparticipation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2017, the Company’s internal control overfinancial reporting was effective based on the COSO criteria (2013).Deloitte & Touche LLP, the independent registered public accounting firm who audited the Company’s consolidated financial statements included inthis Form 10-K, has issued an attestation 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 our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter endedDecember 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.65REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofPICO Holdings, Inc.La Jolla, CaliforniaOpinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of PICO Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based oncriteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, basedon criteria established in Internal Control - Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedfinancial statements and financial statement schedule as of and for the year ended December 31, 2017 of the Company and our report dated March 1, 2018,expressed an unqualified opinion on those financial statements and financial statement schedule.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control 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 are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ DELOITTE & TOUCHE LLPSan Diego, CaliforniaMarch 1, 201866ITEM 9B. OTHER INFORMATIONNone.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe 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 2018 annual meeting of shareholders (the “2018 proxy statement”), to be filed on or before April 30, 2018 and is incorporated herein byreference. The information required by this item regarding the Company’s code of ethics will be set forth in the section headed “Code Of Ethics” in the 2018proxy statement and is incorporated herein by reference. Information regarding executive officers is set forth in Item 1 of Part 1 of this Report under thecaption “Executive Officers.” Other information required by this item will be set forth in the sections headed “Corporate Governance” and “Section 16(a)Beneficial Ownership Reporting Compliance” in the 2018 proxy statement and is incorporated herein by reference.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item will be set forth in the section headed “Executive Compensation and Related Information” in the 2018 proxystatement and is incorporated herein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERSThe information required by this item will be set forth in the sections headed “Security Ownership of Certain Beneficial Owners and Management” and“Equity Compensation Plan Information” in the 2018 proxy statement and is incorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be set forth in the section headed “Certain Relationships and Related Persons Transactions” and“Compensation Committee, Interlocks and Insider Participation” in the 2018 proxy statement and is incorporated herein by reference.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item will be set forth in the sections headed “Independent Registered Public Accounting Firm Fees” and “AuditCommittee Pre-Approval Policy” in the 2018 proxy statement and is incorporated herein by reference.67PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a)FINANCIAL SCHEDULES AND EXHIBITS1.ExhibitsExhibitNumber Description2.1 Asset Purchase Agreement dated July 13, 2015, by and between PICO Northstar Hallock, LLC and CHS Hallock, LLC. (1)3.1 Certificate of Incorporation of PICO Holdings, Inc. (2)3.2 Bylaws of PICO Holdings, Inc. (2)3.3 Certificate of Designation of Series A Junior Participating Preferred Stock of PICO Holdings, Inc. (3)4.1 Section 382 Rights AGreement, dated as of July 24, 2017, by and between PICO Holdings, Inc. and Computershare Trust Company N.A. (3)4.2 PICO Holdings, Inc. Stock Certificate. (4)10.1 Guaranty, dated July 31, 2015, between PICO Holdings, Inc. and CHS Hallock, LLC. (6)10.2 Restrictive Covenant Agreement, dated July 31, 2015, between CHS Hallock, LLC and PICO Holdings, Inc. (6)10.1† PICO Holdings, Inc. 2014 Equity Incentive Plan, Stock Option Grant Notice, Stock Option Award Agreement, Stock Option Notice ofExercise, Restricted Stock Unit Grant Notice, Restricted Stock Unit Award Agreement, and Restricted Stock Deferral Election Form. (7)10.2† Trust for PICO Deferred Holdings, LLC Executive Deferred Compensation dated November 25, 2008 between PICO Deferred Holdings, LLCand U.S. Bank (as successor to Union Bank of California, N.A.) relating to a Deferred Compensation Plan originally established in December 7,2004. (8)10.3† Infrastructure Dedication Agreement between Fish Springs Ranch, LLC, and Washoe County, Nevada dated October 16, 2007. (10)10.4† Employment Agreement, dated December 14, 2016, by and between PICO Holdings, Inc. and Maxim C.W. Webb. (9)10.5† Employment Agreement, dated December 14, 2016, by and between PICO Holdings, Inc. and John T. Perri. (9)10.6† PICO Holdings, Inc. Executive Bonus Plan. (9)10.7† PICO Holdings, Inc. Executive Change in Control Bonus Plan. (5)10.8† PICO Holdings, Inc. Amended and Restated Nonemployee Director Compensation Policy10.9 Form of Indemnity Agreement with directors and executive officers of PICO Holdings, Inc. and each of its subsidiaries. (4)10.10† Directorship Letter Agreement with Eric Speron dated December 18, 2015. (11)10.11 Agreement dated January 27, 2017, by and among PICO Holdings, Inc., Bandera Partners LLC, Bandera Master Fund L.P., Gregory Bylinskyand Jefferson Gramm. (12)21.1 Subsidiaries of PICO Holdings, Inc.23.1 Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP.31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley 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 Act of2002.32.1 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).101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL XBRL Taxonomy Extension Calculation Linkbase Document101.DEF XBRL Taxonomy Extension Definition Linkbase Document68ExhibitNumber Description101.LAB XBRL Taxonomy Extension Label Linkbase Document101.PRE XBRL Taxonomy Extension Presentation Linkbase Document † Indicates compensatory plan, contract or arrangement in which directors or executive officers may participate.(1) Incorporated by reference to Form 8-K filed with the SEC on July 17, 2015.(2) Incorporated by reference to Form 8-K filed with the SEC on June 1, 2017.(3) Incorporated by reference to Form 8-A filed with the SEC on July 24, 2017.(4) Incorporated by reference to Form 10-Q filed with the SEC on August 9, 2017.(5) Incorporate by reference to Form 8-K filed with the SEC on October 2, 2017.(6) Incorporated by reference to Form 8-K filed with the SEC on August 6, 2015.(7) Incorporated by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 10, 2014.(8) Incorporated by reference to the Annual Report on Form 10-K filed with the SEC on March 1, 2010.(9) Incorporated by reference to Form 8-K filed with the SEC on December 15, 2016.(10) Incorporated by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 7, 2007.(11) Incorporated by reference to Form 8-K filed with the SEC on December 22, 2015.(12) Incorporated by reference to Form 8-K filed with the SEC on January 30, 2017.69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:March 1, 2018PICO Holdings, Inc.By: /s/ Maxim C. W. WebbMaxim C. W. WebbChief Executive OfficerPresident and Chairman of the BoardPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 1, 2018 by the following persons onbehalf of the Registrant and in the capacities indicated./s/ Maxim C. W. WebbChief Executive Officer, President and Chairman of the BoardMaxim C. W. Webb(Principal Executive Officer) /s/ John T. PerriChief Financial Officer and SecretaryJohn T. Perri(Principal Financial Officer) /s/ Daniel B. SilversLead Independent DirectorDaniel B. Silvers /s/ Eric H. SperonDirectorEric H. Speron /s/ Gregory E. BylinskyDirectorGregory E. Bylinsky 70PICO Holdings, Inc.Amended and Restated Nonemployee Director Compensation Policy1.GeneralThe PICO Holdings, Inc. Amended and Restated Nonemployee Director Compensation Policy (the “Policy”) is designed to provide for thecompensation of each member of the board of directors (the “Board”) of PICO Holdings, Inc. (the “Company”) who is a Nonemployee Director (as defined inthe PICO Holdings, Inc. 2014 Equity Incentive Plan (the “EIP”)) (each, a “Nonemployee Director”). The Policy will become effective on January 1, 2018 andwill continue in effect until its termination by the Board. The Policy will replace and supersede any and all compensation policies or programs previouslyestablished or maintained by the Company with respect to Nonemployee Directors.2.AdministrationThe Policy will be administered by the Board. The Board will have the sole discretion and authority to administer, interpret, amend and terminatethe Policy, and the decisions of the Board will in every case be final and binding on all persons having an interest in the Policy.3.EligibilityEach Nonemployee Director will be eligible to receive the compensation set forth in the Policy in accordance with the terms of the Policy. Suchcompensation will be paid or granted, as applicable, automatically and without further action of the Board to each Nonemployee Director.4.Annual Retainers(a)General. Subject to Sections 4(b), 4(c) and 4(d), each Nonemployee Director will be eligible to receive annual retainers (each, an“Annual Retainer”) in the values set forth in the following table, as applicable, for each calendar year of service as a lead independent director and/ormember of the Board.Type of Annual RetainerDollar ValuePer Calendar Year If Paid Fully inCash(“Cash Dollar Value”)Dollar ValuePer Calendar Year If Paid Fullyin RSUs(“RSU Dollar Value”)BoardLead Independent Director$20,000$25,000Member$35,000$43,750For clarity, an individual will not be eligible to receive any type of Annual Retainer set forth in the table above (the “Table”) unless he or she is aNonemployee Director on the applicable payment or grant date. Further, for clarity, each Nonemployee Director will be eligible to receive each type ofAnnual Retainer set forth in the Table that is applicable to such Nonemployee Director (e.g., if a Nonemployee Director is the lead independent director ofthe Board, he or she will be eligible to receive (i) an Annual Retainer for service as the lead independent director of the Board and (ii) an Annual Retainer forservice as a member of the Board.(b)Prorated Annual Retainers for Mid-Year Appointees. Section 4(a) will apply to any Nonemployee Director who is newly appointed asa lead independent director or member of the Board, in each case after January 1 of a calendar year (each, a “Mid-Year Appointee”); provided, however, thatwith respect to any Annual Retainer for such Mid-Year Appointee’s first (partial) calendar year of service in the role applicable to such Annual Retainer,“Cash Dollar Value” and “RSU Dollar Value” will mean, as applicable, (i) the applicable amount set forth in the Table, multiplied by (ii) a fraction, thenumerator of which is the number of days in the period beginning on (and including) the effective date of such Mid-Year Appointee’s appointment to theapplicable role and ending on (and including) December 31 of such calendar year and the denominator of which is the total number of days during suchcalendar year.(c)Dollar Value of Annual Retainers. The dollar value of each Annual Retainer payable to a Nonemployee Director will be determined inaccordance with the following terms.(i)If a Nonemployee Director makes an election pursuant to Section 4(d) to receive any portion of an Annual Retainer in the formof cash, the dollar value of such portion will be equal to (A) the applicable Cash Dollar Value (as setforth in the Table and adjusted pursuant to Section 4(b), if applicable) or 100% of any lesser amount elected by such Nonemployee Director pursuant toSection 4(d)(i), as applicable, multiplied by (B) the percentage elected by such Nonemployee Director (the “Cash Election Percentage”).(ii)If a Nonemployee Director makes an election pursuant to Section 4(d) to receive any portion of an Annual Retainer in the formof a restricted stock unit (“RSU”) award, the dollar value of such portion will be equal to (A) the applicable RSU Dollar Value (as set forth in the Table andadjusted pursuant to Section 4(b), if applicable) or 125% of any lesser amount elected by such Nonemployee Director pursuant to Section 4(d)(i), asapplicable, multiplied by (B) the percentage elected by such Nonemployee Director (the “RSU Election Percentage”).(d)Election for Annual Retainers and Annual Awards.(i)With respect to any Annual Retainer, each Nonemployee Director may make an election (A) to receive the full amount of suchAnnual Retainer (i.e., based on the applicable Cash Dollar Value and/or RSU Dollar Value (as set forth in the Table and adjusted pursuant to Section 4(b), ifapplicable)) or any lesser amount (including zero) and (B) to receive any portion of such Annual Retainer in the form of cash or an RSU award.(ii)With respect to any Annual Award, each Nonemployee Director may make an election to receive the full amount of suchAnnual Award (i.e., based on an Annual Award Dollar Value equal to $75,000 and adjusted pursuant to Section 5(c), if applicable) or any lesser amount(including zero) by electing an Annual Award Dollar Value less than $75,000 and adjusted pursuant to Section 5(c), if applicable.(iii)With respect to any Annual Retainer or Annual Award for a particular calendar year of service, any election made pursuant tothis Section 4(d) (A) must be made on a form provided by the Company, (B) must be made on or before December 31 of the year immediately prior to suchcalendar year (or such earlier date as required by the Company); provided, however, that any such election made by a Mid-Year Appointee who will become anew member of the Board may be made before the effective date of his or her appointment to the Board, and (C) will be irrevocable once made.(iv)If a Nonemployee Director does not make an election pursuant to this Section 4(d) or fails to submit such an election on atimely basis, such Nonemployee Director will be deemed to have elected (A) to receive the full amount of his or her Annual Retainer(s), (B) to receive his orher Annual Retainer(s) in the form of cash only, and (C) to receive the full amount of his or her Annual Award.(e)Terms of Annual Retainers in the Form of Cash.(i)Subject to Section 4(e)(ii), with respect to any Annual Retainer for a particular calendar year of service, the portion (if any) ofsuch Annual Retainer to be paid in the form of cash, as determined in accordance with Section 4(c)(i), will be paid in substantially equal quarterlyinstallments on January 1, April 1, July 1 and October 1 of such calendar year, provided that the Nonemployee Director is in service in the role applicable tosuch Annual Retainer on the applicable payment date (e.g., if a Nonemployee Director is the lead independent director of the Board on January 1 butterminates his or her service as such lead independent director on August 1, then with respect to his or her Annual Retainer for service as such leadindependent director, he or she will receive the quarterly installments payable on January 1, April 1, and July 1 but not the quarterly installment payable onOctober 1, regardless of whether he or she is in service as a Nonemployee Director on October 1).(ii)With respect to any Annual Retainer for a Mid-Year Appointee’s first (partial) calendar year of service in the role applicable tosuch Annual Retainer, the portion (if any) of such Annual Retainer to be paid in the form of cash will be paid as follows:(A) the first installment will be paid on the effective date of such Mid-Year Appointee’s appointment to the applicable role andthe amount of such first installment will be equal to (x) the total amount of the portion of such Annual Retainer to be paid in the form of cash, minus (y) anamount equal to the product of (1) 25% multiplied by (2) the applicable Cash Dollar Value (as set forth in the Table, without any adjustment pursuant toSection 4(b)) or 100% of any lesser amount elected by such Mid-Year Appointee pursuant to Section 4(d)(i), as applicable, multiplied by (3) the CashElection Percentage multiplied by (4) the number of quarterly payment dates (i.e., April 1, July 1 and October 1) remaining in such calendar year after theeffective date of such Mid-Year Appointee’s appointment to the applicable role; and(B) any remaining installments will be paid in substantially equal amounts on April 1 (if such effective date occurs prior to April1), July 1 (if such effective date occurs prior to July 1) and October 1 (if such effective dateoccurs prior to October 1) of such calendar year, provided that such Mid-Year Appointee is in service in the role applicable to such Annual Retainer on theapplicable payment date.(f)Terms of Annual Retainers in the Form of RSU Awards. With respect to any Annual Retainer for a particular calendar year of service,the portion (if any) of such Annual Retainer to be paid in the form of an RSU award will be subject to the following terms.(i)Such award will be granted under the EIP and will be subject to the terms of the EIP, the applicable award agreement and thePolicy.(ii)Such award will be granted on the first trading day in January of such calendar year; provided, however, that with respect to anysuch award for a Mid-Year Appointee’s first (partial) calendar year of service in the role applicable to such award, such award will be granted on the effectivedate of such Mid-Year Appointee’s appointment to the applicable role.(iii)The number of RSUs subject to such award will be equal to (A) the dollar value of such portion, as determined in accordancewith Section 4(c)(ii), divided by (B) the average of the daily volume weighted average prices (“VWAP”) of the Company’s common stock for all of thetrading days during the 30 calendar day period ending on (and including) the last trading day immediately prior to the grant date of such award, roundeddown to the nearest whole share; provided, however, that the number of RSUs subject to such award, together with any RSUs or shares subject to any otherNonemployee Director Awards (as defined in the EIP) granted to the Nonemployee Director (including any Annual Awards granted under Section 5), may notexceed the limit set forth in Section 5.5 of the EIP.(iv)Such award will vest in substantially equal quarterly installments on the grant date of such award and on April 1, July 1 andOctober 1 of the calendar year in which such award is granted; provided, however, that:(A) with respect to any such award for a Mid-Year Appointee’s first (partial) calendar year of service in the role applicable to suchaward, such award will vest as follows:(x) the first installment will vest on the effective date of such Mid-Year Appointee’s appointment to the applicable roleand the number of RSUs in such first installment will be equal to (1) the total number of RSUs with respect to the portion of such Annual Retainer to be paidin the form of an RSU award, minus (2) an amount equal to the product of (I) 25% multiplied by (II) the number of RSUs that would be subject to the fullAnnual Retainer (as adjusted if any lesser amount is elected by such Mid-Year Appointee pursuant to Section 4(d)(i)), without any adjustment pursuant toSection 4(b), determined as if the award were granted on the effective date of such Mid-Year Appointee’s appointment to the applicable role, multiplied by(III) the RSU Election Percentage multiplied by (IV) the number of quarterly vesting dates (i.e., April 1, July 1 and October 1) remaining in such calendar yearafter the effective date of such Mid-Year Appointee’s appointment to the applicable role; and(y) any remaining installments will vest in substantially equal amounts on April 1 (if such effective date occurs prior toApril 1), July 1 (if such effective date occurs prior to July 1) and October 1 (if such effective date occurs prior to October 1) of such calendar year;(B) vesting will be fully accelerated upon a Change in Control (as defined in the EIP), as set forth in Section 13.2 of the EIP; and(C) vesting will cease upon the termination of the Nonemployee Director’s service in the role applicable to such Annual Retainerand any RSUs subject to such award that are unvested on the date of such termination will be forfeited by such Nonemployee Director on such date (e.g., if aNonemployee Director is granted an RSU award with respect to his or her Annual Retainer for service as the lead independent director of the Board, such RSUaward will cease vesting upon his or her termination as such lead independent director and any RSUs subject to such award that are unvested on the date ofsuch termination will be forfeited by the Nonemployee Director on such date, regardless of whether he or she continues in service as a Nonemployee Directorafter such date).(v)Except as provided in Section 4(f)(vi), the issuance of any shares pursuant to such award, to the extent vested, will occur on thedate of the Nonemployee Director’s termination of service as a member of the Board, provided that such termination constitutes a “separation from service”within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), subject to Section 7 and the terms of the awardagreement.(vi)Each RSU subject to such award (whether vested or unvested) will be credited with any cash dividend, stock dividend or otherdistribution that is paid with respect to a share of the Company’s common stock. Any such dividend or other distribution will be credited to such RSU on thesame date and in the same form as such dividend or other distribution is paid to the Company’s shareholders. Any such dividend or other distribution that iscredited to such RSU will be issued (A) on the date of such crediting if such RSU is vested on such date or (B) on the date such RSU becomes vested if suchRSU is unvested on the date of such crediting, in each case in the same form paid to the Company’s shareholders. For clarity, any such dividend or otherdistribution that is credited to an unvested RSU will be unvested and will only vest and be issued if the underlying RSU vests.5.Annual RSU AwardsEach Nonemployee Director will be eligible to receive an annual RSU award (an “Annual Award”) for each calendar year of service as a member ofthe Board. For clarity, an individual will not be eligible to receive an Annual Award unless he or she is a Nonemployee Director on the applicable grant date.Each Annual Award will be subject to the following terms.(a)Each Annual Award will be granted under the EIP and will be subject to the terms of the EIP, the applicable award agreement and thePolicy.(b)Each Annual Award will be granted on the first trading day in January of the applicable calendar year of service; provided, however, thatwith respect to any Annual Award for a Mid-Year Appointee’s first (partial) calendar year of service as a member of the Board, such Annual Award will begranted on the effective date of such Mid-Year Appointee’s appointment to the Board.(c)The number of RSUs subject to each Annual Award will be equal to (i) the Annual Award Dollar Value (as defined below), divided by (ii)the average of the daily VWAP of the Company’s common stock for all of the trading days during the 30 calendar day period ending on (and including) thelast trading day immediately prior to the grant date of such Annual Award, rounded down to the nearest whole share; provided, however, that the number ofRSUs subject to such Annual Award, together with any RSUs or shares subject to any other Nonemployee Director Awards (as defined in the EIP) granted tothe Nonemployee Director (including any RSU awards granted under Section 4), may not exceed the limit set forth in Section 5.5 of the EIP. For purposes ofthe foregoing, the “Annual Award Dollar Value” will mean $75,000 or any lesser amount elected by such Nonemployee Director pursuant to Section 4(d)(ii),as applicable; provided, however, that with respect to any Annual Award for a Mid-Year Appointee’s first (partial) calendar year of service as a member of theBoard, the “Annual Award Dollar Value” will mean (A) $75,000 multiplied by a fraction, the numerator of which is the number of days in the periodbeginning on (and including) the effective date of such Mid-Year Appointee’s appointment to the Board and ending on (and including) December 31 of suchcalendar year and the denominator of which is the total number of days during such calendar year, or (B) any lesser amount elected by such Mid-YearAppointee pursuant to Section 4(d)(ii), as applicable.(d)Each Annual Award will vest in substantially equal quarterly installments on the grant date of such Annual Award and on April 1, July 1and October 1 of the calendar year in which such Annual Award is granted; provided, however, that:(i)with respect to any Annual Award for a Mid-Year Appointee’s first (partial) calendar year of service as a member of the Board,such Annual Award will vest as follows:(A) the first installment will vest on the effective date of such Mid-Year Appointee’s appointment to the Board and the numberof RSUs in such first installment will be equal to (x) the total number of RSUs subject to such Annual Award, minus (y) an amount equal to the product of (1)25% multiplied by (2) the number of RSUs that would result if the Annual Award Dollar Value were $75,000 or any lesser amount elected by such Mid-YearAppointee pursuant to Section 4(d)(ii), as applicable, determined as if the Annual Award were granted on the effective date of such Mid-Year Appointee’sappointment to the Board, multiplied by (3) the number of quarterly vesting dates (i.e., April 1, July 1 and October 1) remaining in such calendar year afterthe effective date of such Mid-Year Appointee’s appointment to the Board; and(B) any remaining installments will vest in substantially equal amounts on April 1 (if such effective date occurs prior to April 1),July 1 (if such effective date occurs prior to July 1) and October 1 (if such effective date occurs prior to October 1) of such calendar year;(ii)vesting will be fully accelerated upon a Change in Control (as defined in the EIP), as set forth in Section 13.2 of the EIP; and(iii)vesting will cease upon the termination of the Nonemployee Director’s service as a member of the Board and any RSUs subjectto such Annual Award that are unvested on the date of such termination will be forfeited by such Nonemployee Director on such date.(e)Except as provided in Section 5(f), the issuance of any shares pursuant to each Annual Award, to the extent vested, will occur on the dateof the Nonemployee Director’s termination of service as a member of the Board, provided that such termination constitutes a “separation from service” withinthe meaning of Section 409A of the Code, subject to Section 7 and the terms of the award agreement.(f)Each RSU subject to each Annual Award (whether vested or unvested) will be credited with any cash dividend, stock dividend or otherdistribution that is paid with respect to a share of the Company’s common stock. Any such dividend or other distribution will be credited to such RSU on thesame date and in the same form as such dividend or other distribution is paid to the Company’s shareholders. Any such dividend or other distribution that iscredited to such RSU will be issued (i) on the date of such crediting if such RSU is vested on such date or (ii) on the date such RSU becomes vested if suchRSU is unvested on the date of such crediting, in each case in the same form paid to the Company’s shareholders. For clarity, any such dividend or otherdistribution that is credited to an unvested RSU will be unvested and will only vest and be issued if the underlying RSU vests.6.ExpensesSubject to Section 7, each Nonemployee Director will be eligible for reimbursement from the Company for all reasonable out-of-pocket expensesincurred in connection with his or her duties as a Nonemployee Director.Each Nonemployee Director may consult the chairperson of the Board on a case-by-case basis with respect to reimbursement for any expensesrelated to attending any seminars (including the proposed budget for any such seminar).1.Section 409AThe Company intends that any amounts provided under the Policy be exempt from or comply with the requirements of Section 409A of the Codeand the regulations and rulings issued thereunder (collectively, “Section 409A”), and the Policy will be so construed. Without limiting the generality of theforegoing and notwithstanding any other provision of the Policy to the contrary:(a)If any amount under the Policy (i) constitutes a “deferral of compensation” within the meaning of Section 409A, (ii) is payable pursuantto an individual’s “separation from service” within the meaning of Section 409A, and (iii) such individual is a “specified employee” within the meaning ofSection 409A (determined using the identification methodology selected by the Company from time to time, or if none, the default methodology) as of thedate of such individual’s separation from service, then except as otherwise permitted by Section 409A, such amount will be paid to such individual on thedate that is six months and one day after such individual’s separation from service or, if earlier, the date of such individual’s death following such separationfrom service.(b)Each payment made under the Policy will be treated as a separate payment.(c)To the extent that any taxable reimbursements are provided to any Nonemployee Director, they will be provided in accordance withSection 409A, including, but not limited to, the following provisions: (i) the amount of any such expenses eligible for reimbursement during suchindividual’s taxable year may not affect the expenses eligible for reimbursement in any other taxable year; (ii) the reimbursement of an eligible expense mustbe made no later than the last day of such individual’s taxable year that immediately follows the taxable year in which the expense was incurred; and (iii) theright to any reimbursement may not be subject to liquidation or exchange for another benefit.Subsidiaries of Registrant Exhibit 21.1Name of Subsidiary Jurisdiction of Incorporation/OrganizationFish Springs Ranch, LLC NevadaNevada Land and Resource Holdings, Inc. NevadaVidler Water Company, Inc. NevadaExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement Nos. 333-141321, 333-134296, and 333-125362 on Form S-3 and RegistrationStatement Nos. 333-198065 on Form S-8 of our reports dated March 1, 2018, relating to the consolidated financial statements and financial statementschedule of PICO Holdings, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting,appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2017./s/ DELOITTE & TOUCHE LLPSan Diego, CaliforniaMarch 1, 2018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, Maxim C.W. Webb, certify that:1.I have reviewed this annual report on Form 10-K of PICO Holdings, Inc. (the “Registrant”);2.Based on my knowledge, this 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, 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: March 1, 2018/s/ Maxim C.W. WebbMaxim C.W. WebbPresident 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, John T. Perri, certify that:1.I have reviewed this annual report on Form 10-K of PICO Holdings, Inc. (the “Registrant”);2.Based on my knowledge, this 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, 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: March 1, 2018/s/ John T. PerriJohn T. PerriChief 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, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Maxim C.W. Webb, 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 myknowledge:(1) The Report fully complies with requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 1, 2018/s/ Maxim C.W. WebbMaxim C.W. WebbPresident 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, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Perri, Chief Financial Officer of the Company, certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that to the best of my knowledge:(1) The Report fully complies with requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 1, 2018/s/ John T. PerriJohn T. PerriChief Financial Officer

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