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**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      D.C. 20549**

**FORM      10-K **

**(MARK      ONE)**

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

**FOR      THE FISCAL YEAR ENDED DECEMBER 31, 2006**

**OR**

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

**For      the Transition Period from __________ to __________**

**Commission      File Number 0-18786**

**PICO      HOLDINGS, INC.**

**(Exact      Name of Registrant as Specified in its Charter)**

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

**875      Prospect Street, Suite 301**

**La      Jolla, California 92037**

**(Address      of Principal Executive Offices)**

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

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

**Common      Stock, Par Value $.001, Listed on The NASDAQ Stock Market      LLC**

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

**None**

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

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**DOCUMENTS      INCORPORATED BY REFERENCE**

**Portions      of the registrant’s Definitive Proxy Statement to be filed with the Commission      pursuant to Regulation 14A in connection with the registrant’s 2007 Annual      Meeting of Shareholders, to be filed subsequent to the date hereof, are      incorporated by reference into Part III of this Report. Such Definitive Proxy      Statement will be filed with the Securities and Exchange Commission not later      than 120 days after the conclusion of the registrant’s fiscal year ended      December 31, 2006. **

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** PICO      HOLDINGS, INC.**

**ANNUAL      REPORT ON FORM 10-K**

**TABLE      OF CONTENTS**

|                    |                          |                                                                                                                                             | Page                No. |
|-------------------------|-------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|
| PART                I   |                          |
|                    |                          |                                                                                                                                             |                    |
|                    | Item                1.        | BUSINESS                                                                                                                                         |                  2 |
|                    | Item                1A.       | RISK                FACTORS                                                                                                                      | 10                      |
|                    | Item                1B.  | UNRESOLVED              STAFF COMMENTS                                                                                                           | 17                      |
|                    | Item                2.        | PROPERTIES                                                                                                                                       | 17                      |
|                    | Item                3.        | LEGAL                PROCEEDINGS                                                                                                                 | 18                      |
|                    | Item                4.        | SUBMISSION                OF MATTERS TO A VOTE OF SECURITY                HOLDERS                                                                | 18                      |
|                    |                          |                                                                                                                                             |                    |
| PART                II  |                          |
|                    |                          |                                                                                                                                             |                    |
|                    | Item                5.        | MARKET                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER                MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 18                      |
|                    | Item                6.        | SELECTED                FINANCIAL DATA                                                                                                           | 19                      |
|                    | Item                7.        | MANAGEMENT’S                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                AND RESULTS OF OPERATIONS                        | 20                      |
|                    |                          |                                                                                                                                             |                    |
|                    | Item                7A.       | QUANTITATIVE                AND QUALITATIVE DISCLOSURES ABOUT MARKET                RISK                                                         | 60                      |
|                    | Item                8.        | FINANCIAL                STATEMENTS AND SUPPLEMENTARY                DATA                                                                        | 60                      |
|                    | Item                9.        | CHANGE                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                ACCOUNTING AND FINANCIAL DISCLOSURE                                | 98                      |
|                    |                          |                                                                                                                                             |                    |
|                    | Item                9A.       | CONTROLS                AND PROCEDURES                                                                                                           | 98                      |
|                    |                          |                                                                                                                                             |                    |
| PART                III |                          |
|                    |                          |                                                                                                                                             |                    |
|                    | Item                10.       | DIRECTORS,                EXECUTIVE OFFICERS, AND CORPORATE                GOVERNANCE                                                            | 100                     |
|                    | Item                11.       | EXECUTIVE                COMPENSATION                                                                                                            | 100                     |
|                    | Item                12.       | SECURITY                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS                    | 100                     |
|                    | Item                13.       | CERTAIN                RELATIONSHIPS AND RELATED TRANSACTIONS, AND                DIRECTOR INDEPENDENCE                                          | 100                     |
|                    | Item                14.       | PRINCIPAL                ACCOUNTING FEES AND                SERVICES                                                                             | 100                     |
|                    |                          |                                                                                                                                             |                    |
| PART                IV  |                          |
|                    |                          |                                                                                                                                             |                    |
|                    | Item                15.       | EXHIBITS                AND FINANCIAL STATEMENT SCHEDULES                                                                                        | 101                     |
|                    |                          |                                                                                                                                             |                         |
| SIGNATURES              |                          |

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***Table          of Contents***

**PART      I**

**The      following discussion and analysis of financial condition and results of      operations should be read in conjunction with the Consolidated Financial      Statements and Notes thereto included elsewhere in this Annual Report on Form      10-K.**

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

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

**ITEM      1. BUSINESS**

**Introduction**

**Our      objective is to maximize long-term shareholder value. We manage our operations      to achieve a superior return on net assets over the long term, as opposed to      short-term earnings. **

| · | Water                Resource and Water Storage Operations; |
|--------|-------------------------------------------------------------|

| · | Real                Estate Operations; |
|--------|----------------------------------------|

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

| · | Insurance                Operations in “Run Off”. |
|--------|---------------------------------------------------------------|

| · | Vidler                Water Company, Inc. (“Vidler”), a business we started more than 10 years                ago, which develops and owns water resources and water storage operations                in the southwestern United States, primarily in Nevada and                Arizona; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Nevada                Land and Resource Company, LLC (“Nevada Land”), an operation that we have                built since we acquired the company more than 10 years ago, which                currently owns approximately 560,000 acres of land in Nevada, and                certain                mineral rights and water rights related to the                property; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Physicians                Insurance Company of Ohio (“Physicians”), which is “running off” its                medical professional liability insurance loss reserves, and was our                original business historically; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Citation                Insurance Company (“Citation”), which is “running off” its historical                property & casualty and workers’ compensation loss reserves. Citation                was acquired because it was complimentary to our other insurance                operations at the time; and |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Global                Equity AG, which holds our interest in Jungfraubahn Holding AG                (“Jungfraubahn”). Jungfraubahn is a public company, whose shares trade on                the SWX Swiss Exchange, that operates railway and related tourism                and                transport activities in the Swiss Alps.  We believed that                Jungfraubahn was significantly undervalued at the time we acquired                our                interest, which was primarily acquired between 1999 and 2003. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*See      “Discontinued Operations.”*

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***Table            of Contents***

**History**

**Operating      Segments and Major Subsidiary Companies**

**Water      Resource and Water Storage Operations **

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

| · | certain                areas of the Southwest experiencing rapid growth have insufficient                known                supplies of water to support future growth. Vidler identifies and                develops                new water supplies for communities with no other known water resources                to                support future growth. In certain cases, to supply water from the                water                resources identified by Vidler, it may require regulatory approval                to                import the water from its source to where development is occurring,                or                substantial infrastructure to convey the water. Vidler is able to                assess                the likelihood of being able to get the necessary approval to import                water, and to build the infrastructure in a timely and economic manner.                In                cases where we assess that water importation is possible, Vidler                has                demonstrated an ability to obtain all of the required approval and                entitlements, and to manage the building of the infrastructure necessary                to import and convey the identified water from its source to development;                and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

| **·** | a                water storage facility in Arizona and an interest in Semitropic,                a water                storage facility in California. At December 31, 2006, Vidler had“net                recharge credits” (i.e. an acre foot of water) representing more than                115,000 acre-feet of water in storage on its own account at the Vidler                Arizona Recharge Facility. An acre-foot is a unit commonly used to                measure                the volume of water, being the volume of water required to cover                one acre                to a depth of one foot. As a rule of thumb, one acre-foot of water                would                sustain two families of four persons each for one                year. |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***Table            of Contents***

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

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

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

| · | storing                additional water at the Vidler Arizona Recharge Facility, and providing                water supplies from net recharge credits (a recharge credit is                an acre-foot of water) already in                storage. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                             |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Name                of asset & approximate location**                                                                                      |   | **Brief                Description**                                                                                                                                                                   |   | **Present                commercial use**                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                             |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| **WATER                RESOURCES**                                                                                                               |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                             |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| **Arizona:**                                                                                                                                     |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                             |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| **Harquahala                Valley ground water basin**La                Paz County 75                miles northwest of metropolitan Phoenix    |   | 2,703                acres of land  2,880                acre-feet of transferable ground water                                                                                                   |   | Leased                to farmers                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                             |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| **Nevada:**                                                                                                                                      |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                             |   |                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| **Fish                Springs Ranch, LLC (51% interest) & V&B, LLC (100% interest)**Washoe                County, 40 miles north of Reno |   | 8,600                acres of deeded ranch land  13,000                acre-feet of permitted water rights, 8,000 of which are transferable                to                the Reno/Sparks area |   | Vidler                is currently farming the property. Cattle graze on part of the property                on                a revenue- sharing basis Vidler                is constructing a 35 mile long pipeline to convey 8,000 acre-feet                of water                annually from Fish Springs Ranch to the North Valleys of Reno,                Nevada |

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*Table          of Contents*

|                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Lincoln                County water delivery teaming agreement**                                                                                                   |   | Applications*                for more than 100,000 acre-feet of water rights through an agreement                with                Lincoln County. It is currently anticipated that up to 40,000 acre-feet                of                the applications will be permitted, and the water put to use in Lincoln                County / northern Clark County  **The                numbers indicated for water rights applications are the maximum amount                which we have filed for. In some cases, we anticipate that the actual                permits received will be for smaller* *quantities* |   | Agreement                to sell 7,240 acre-feet of water as, and when, supplies are permitted                from                existing applications  Agreement                to sell water to a developer as, and when, supplies are permitted                from                applications in Kane Springs Basin in Lincoln County,                Nevada                                                            |
| **Clark                County**                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Sandy                Valley**Near                the Nevada / California state line in the Interstate 15                corridor                                   |   | 415                acre-feet of permitted water rights  Application                for 1,000 acre-feet of water rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Agreement                to sell at least 415 acre-feet of water pending resolution of a protest                of                the permitting of the water rights                                                                                                                                                                                                                                                               |
|                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Muddy                River water rights**In                the Moapa Valley, approximately 35 miles east of Las Vegas in the                Interstate 15 corridor |   | 221                acre-feet of water rights, plus approximately 46 acre-feet under                option                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Colorado:**                                                                                                                                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Colorado                water rights**                                                                                                                             |   | 180                acre-feet of water rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 66                acre-feet leased. 114                acre-feet are available for sale or lease                                                                                                                                                                                                                                                                                                                                   |
| **WATER                STORAGE**                                                                                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Arizona:**                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Vidler                Arizona Recharge Facility**Harquahala                Valley, Arizona                                                                         |   | An                underground water storage facility with estimated capacity exceeding                1                million acre-feet and annual recharge capability of up to 35,000                acre-feet                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Vidler                is currently buying water and storing it on its own account. At December                31, 2006, Vidler had net recharge credits equivalent to approximately                115,000 acre-feet of water in storage at the Arizona Recharge Facility.                In                addition, Vidler has purchased or ordered approximately 30,000 acre-feet                of water for recharge in 2007. |
| **California:**                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Semitropic                water storage facility**                                                                                                                 |   | The                right to store 30,000 acre-feet of water underground until 2035.                This                includes the right to minimum guaranteed recovery of approximately                2,700                acre-feet of water every year, and the right to recover up to                approximately 6,800 acre-feet in one year in certain                circumstances                                                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |

**Real      Estate Operations **

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***Table            of Contents***

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

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

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

| · | the                management of mineral rights. |
|--------|--------------------------------------------------|

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

| · | Spring                Valley Ranches, which originally consisted of 8,717 acres of deeded                land,                located approximately 40 miles east of Ely in White Pine County,                Nevada.                During 2006, we sold approximately 7,675 acres of land and related                water                assets at Spring Valley. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***Table            of Contents***

**Business      Acquisitions and Financing**

**Insurance      Operations in “Run Off”**

**Physicians      Insurance Company of Ohio**

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

| · | In                1996, Physicians completed a reverse merger with the parent company                of                Citation Insurance Company. At that time, Citation wrote various                lines of                commercial property and casualty insurance and workers’ compensation                insurance, primarily in California and Arizona. The operations of                Sequoia                and Citation were combined, and eventually the business previously                written                by Citation was transferred to Sequoia. At the end of 2000, Citation                ceased writing business and went into “run off”. In 2003, we sold Sequoia                Insurance Company. Despite significant growth in its book of business,                and                combined ratios and investment return better than the industry averages,                Sequoia continued to generate a return on capital lower than our                expectation, and we concluded that value would be maximized by the                sale of                Sequoia, particularly given the increasingly restrictive regulatory                environment and the highly competitive marketplace. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***Table            of Contents***

| · | we                retain management of the associated investment portfolios. After                we                resumed direct management of our insurance company portfolios in                2000, we                believe that the return on our portfolio assets has been attractive                in                absolute terms, and very competitive in relative terms (see next                paragraph). Since the claims reserves of the “run off” insurance companies                effectively recognize the cost of paying and handling claims in future                years, the investment return on the corresponding investment assets,                less                non-insurance expenses, accrues to PICO. We aim to maximize this                source of                income; and |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**Citation      Insurance Company**

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***Table            of Contents***

**Discontinued      Operations**

**HyperFeed      Technologies, Inc.**

**Employees**

**Executive      Officers**

| Name                             | Age | Position                                                       |
|----------------------------------|-----|----------------------------------------------------------------|
| Ronald                Langley    | 62  | Chairman                of the Board, Director                 |
| John                R. Hart      | 47  | President,                Chief Executive Officer and Director |
| Richard                H. Sharpe | 51  | Chief                Operating Officer                         |
| James                F. Mosier   | 59  | General                Counsel and Secretary                   |
| Maxim                C. W. Webb  | 45  | Chief                Financial Officer and Treasurer           |
| W.                Raymond Webb   | 45  | Vice                President, Investments                     |
| John                T. Perri     | 37  | Vice                President, Controller                      |

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***Table            of Contents***

**ITEM      1A. RISK FACTORS**

*The      following information sets forth factors that could cause our actual results      to      differ materially from those contained in forward-looking statements we 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, together with other matters described      in      this Form 10-K or incorporated herein by reference in evaluating our business      and prospects. If any of the following risks occurs, our business, financial      condition or operating results could be harmed. In such case, the trading price      of our securities could decline, in some cases significantly. The risks      described below are not the only ones we face. Additional risks not presently      known to us, or that we currently deem immaterial, may also impair our business      operations.*

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

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

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***Table            of Contents***

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

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

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

**We      may not receive all of the permitted water rights we expect from the water      rights applications we have filed in Nevada.**

**Our      sale of water may be subject to environmental regulations which would impact      the      profitability of such sales.**

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***Table            of Contents***

**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. **

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

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

**Our      acquisitions may result in dilution to our shareholders and increase      liabilities.**

** **

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***Table            of Contents***

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

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

**Volatile      fluctuations in our insurance reserves could cause our financial condition      to be      materially misstated.**

| · | the                length of time in reporting claims; |
|--------|--------------------------------------------------------|

| · | the                diversity of historical losses among                claims; |
|--------|--------------------------------------------------------------------------------|

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

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

| · | the                consistency of reinsurance programs over                time. |
|--------|----------------------------------------------------------------------------------|

**If      we underestimate the amount of reinsurance we need or if the companies with      which we have reinsurance agreements default on their obligations, we may be      unable to cover claims made and that would have a material adverse effect on      our      results of operations.**

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***Table            of Contents***

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

**If      we are required to register as an investment company, we will be subject to      a      significant regulatory burden and our results of operations will      suffer.**

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

| · | exposure                to fluctuations in exchange rates; |
|--------|------------------------------------------------------------|

| · | the                imposition of governmental                controls; |
|--------|------------------------------------------------------------------------|

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

| · | political                and economic instability; |
|--------|----------------------------------------------------|

| · | trade                restrictions; |
|--------|------------------------------------|

| · | changes                in tariffs and taxes; |
|--------|----------------------------------------------|

| · | volatile                interest rates; |
|--------|-----------------------------------------|

| · | changes                in certain commodity prices; |
|--------|-----------------------------------------------------|

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

| · | the                greater difficulty of administering business overseas;                and |
|--------|----------------------------------------------------------------------------------------------|

| · | general                economic conditions outside the United                States. |
|--------|--------------------------------------------------------------------------------------|

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***Table            of Contents***

**Because        our operations are diverse, analysts and investors may**
**not        be able to evaluate us adequately, which may negatively influence our share        price.**

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

| · | quarterly                variations in financial performance and                condition; |
|--------|--------------------------------------------------------------------------------------------|

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

| · | changes                in estimates by such analysts; |
|--------|-------------------------------------------------------|

| · | product                introductions; |
|--------|---------------------------------------|

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

| · | litigation;                and |
|--------|--------------------------------|

| · | general                economic conditions. |
|--------|---------------------------------------------|

**We      may not be able to retain key management personnel we need to succeed, which      could adversely affect our ability to successfully operate our      businesses.**

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

* *

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

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***Table            of Contents***

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

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

**Absence      of dividends could reduce our attractiveness to investors.**

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

**Litigation      may harm our business or otherwise distract our      management.**

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

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***Table            of Contents***

**ITEM          1B.**
** UNRESOLVED STAFF          COMMENTS**

**ITEM        2. PROPERTIES**

*See      “Item 1-Business-Introduction.”*

**ITEM      3. LEGAL PROCEEDINGS**

**Exegy      Litigation:**

**    HyperFeed      Technologies:**

**    Fish      Springs Ranch,      LLC:**

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***Table            of Contents***

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

**PART      II**

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

|                       |   | 2006 |   | 2005   |   |
|----------------------------|--------|------|--------|--------|--------|
|                       |   | High |   | Low    |   | High |   | Low |   |
| 1st                Quarter |   | $    | 35.37  |   | $      | 31.59 |   | $ | 27.00 |   | $ | 20.93 |   |
| 2nd                Quarter |   | $    | 35.03  |   | $      | 30.05 |   | $ | 29.76 |   | $ | 23.94 |   |
| 3rd                Quarter |   | $    | 35.53  |   | $      | 29.72 |   | $ | 35.14 |   | $ | 28.41 |   |
| 4th                Quarter |   | $    | 34.91  |   | $      | 30.42 |   | $ | 35.35 |   | $ | 32.12 |   |

**Securities          Authorized for Issuance Under Equity Compensation Plans **

*Security          Ownership of Certain Beneficial Owners and Management and Related Stockholder          Matters,*

**Company          Stock Performance Graph **

**ISSUER            PURCHASES OF EQUITY SECURITIES**

|                              |                                                |   |                                            |   |                                                                                                                              |   |                                                                                                                                                                         |
|-----------------------------------|-----------------------------------------------------|--------|-------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Period                            | (a)                Total number of shares purchased |   | (b)                Average Price Paid per Share |   | (c)                Total Number of Shares (or Units) Purchased as Part of Publicly Announced                Plans or Programs (1) |   | (d)                Maximum Number (or Approximate Dollar Value) of Shares (or Units)                that May                Yet Be Purchased Under the Plans or Programs (1) |
|                              |                                                |   |                                            |   |                                                                                                                              |   |                                                                                                                                                                         |
| 10/1/06                - 10/31/06 | -                                                   |   | -                                               |   |                                                                                                                              |   |                                                                                                                                                                         |
| 11/1/06                - 11/30/06 | -                                                   |   | -                                               |   |                                                                                                                              |   |                                                                                                                                                                         |
| 12/1/06                - 12/31/06 | -                                                   |   | -                                               |   |                                                                                                                              |   |                                                                                                                                                                         |

| (1)                In October 2002, PICO’s Board of Directors authorized the repurchase of up                to $10 million of PICO common stock. The stock purchases may be made                from                time to time at prevailing prices through open market or negotiated                transactions, depending on market conditions, and will be funded                from                available cash. As of December 31, 2006, no stock had been repurchased                under this authorization. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***Table          of Contents***

**ITEM      6. SELECTED FINANCIAL DATA**

|                                                                    |   |  Year                Ended December 31,     |       |
|-------------------------------------------------------------------------|--------|--------------------------------------------------|------------|
|                                                                    |   | 2006                                             |       | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
| OPERATING                RESULTS                                        |   | (In                thousands, except share data) |       |
| Revenues:                                                               |   |                                             |       |   |   |   |   |   |   |   |   |
| Total                investment income                                  |   | $                                                | 39,609     |   | $ | 15,917 |   | $ | 9,056 |   | $ | 8,100 |   |   | 9,595 |   |
| Sale                of real estate and water assets                     |   |                                             | 41,509     |   |   | 124,984 |   |   | 10,879 |   |   | 19,751 |   |   | 15,232 |   |
| Other                income                                             |   |                                             | 1,605      |   |   | 1,210 |   |   | 2,188 |   |   | 3,648 |   |   | 4,447 |   |
| Total                revenues                                           |   | $                                                | 82,723     |   | $ | 142,111 |   | $ | 22,123 |   | $ | 31,499 |   | $ | 29,274 |   |
|                                                                    |   |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                (loss) from continuing operations                 |   | $                                                | 31,511     |   | $ | 22,267 |   | $ | (7,860 | ) | $ | (5,982 | ) | $ | 2,568 |   |
| Income                (loss) from discontinued operations, net          |   |                                             | (2,268     | ) |   | (6,065 | ) |   | (2,698 | ) |   | 2,744 |   |   | 1,376 |   |
| Cumulative                effect of change in accounting principle, net |   |                                             |       |   |   |   |   |   |   |   |   |   |   |   | 1,985 |   |
| Net                income (loss)                                        |   | $                                                | 29,243     |   | $ | 16,202 |   | $ | (10,558 | ) | $ | (3,238 | ) | $ | 5,929 |   |
| PER                COMMON SHARE BASIC AND DILUTED:                      |   |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                (loss) from continuing operations                 |   | $                                                | 2.10       |   | $ | 1.72 |   | $ | (0.64 | ) | $ | (0.48 | ) | $ | 0.21 |   |
| Income                (loss) from discontinued operations               |   |                                             | (0.15      | ) |   | (0.47 | ) |   | (0.22 | ) |   | 0.22 |   |   | 0.11 |   |
| Cumulative                effect of change in accounting principle      |   |                                             |       |   |   |   |   |   |   |   |   |   |   |   | 0.16 |   |
| Net                income (loss)                                        |   | $                                                | 1.95       |   | $ | 1.25 |   | $ | (0.85 | ) | $ | (0.26 | ) | $ | 0.48 |   |
| Weighted                Average Shares Outstanding                      |   |                                             | 14,994,947 |   |   | 12,959,029 |   |   | 12,368,068 |   |   | 12,375,933 |   |   | 12,375,466 |   |

|                                                      |   |  Year                Ended December 31,         |    |
|-----------------------------------------------------------|--------|------------------------------------------------------|---------|
|                                                      |   | 2006                                                 |    | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
| FINANCIAL                CONDITION                        |   | (In                thousands, except per share data) |    |
| Assets                                                    |   | $                                                    | 549,043 |   | $ | 441,830 |   | $ | 354,658 |   | $ | 330,937 |   | $ | 2655,87 |   |
| Asset of              discontinued operations             |   |                                                 |    |   | $ | 4,616 |   |   | 3,974 |   |   | 9,864  |   |   | 498 |   |
| Unpaid                losses and loss adjustment expenses |   | $                                                    | 41,083  |   | $ | 46,647 |   | $ | 55,944 |   | $ | 60,864 |   | $ | 52,703 |   |
| Bank borrowings                                      |   | $                                                    | 12,721  |   | $ | 11,835 |   | $ | 17,556 |   | $ | 15,377 |   | $ | 14,636 |   |
| Liabilities                of discontinued operations     |   |                                                 |    |   | $ | 4,282 |   | $ | 3,121 |   | $ | 3,784 |   |   |   |   |
| Total                liabilities and minority interest    |   | $                                                    | 143,816 |   | $ | 140,955 |   | $ | 114,729 |   |   | 101,777 |   | $ | 81,888 |   |
| Shareholders'                equity                       |   | $                                                    | 405,227 |   | $ | 300,875 |   | $ | 239,929 |   | $ | 229,160 |   | $ | 221,032 |   |
| Book                value per share (1)                   |   | $                                                    | 25.52   |   | $ | 22.67 |   | $ | 19.40 |   | $ | 18.52 |   | $ | 17.86 |   |

|   | (1)                Book value per share is computed by dividing shareholders’ equity by the                net of total shares issued less shares held as treasury                shares. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

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***Table            of Contents***

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

**INTRODUCTION**

**COMPANY      SUMMARY, RECENT DEVELOPMENTS AND FUTURE OUTLOOK**

**WATER      RESOURCE AND WATER STORAGE OPERATIONS**

**BACKGROUND**

----

***Table            of Contents***

**WATER      RESOURCES**

**Arizona**

**Nevada**

|  | **1.** | **Lincoln                County** |
|--|--------|-----------------------------------|

**Tule      Desert Groundwater Basin**

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***Table            of Contents***

**Coyote      Springs**

**Lincoln      County Power Plant Project**

|  | **2.** | **Fish                Springs Ranch** |
|--|--------|---------------------------------------|

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***Table            of Contents***

|  | **3.** | **Carson                City, Nevada** |
|--|--------|----------------------------------------|

|  | **4.** | **Sandy                Valley, Nevada** |
|--|--------|-----------------------------------------|

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***Table            of Contents***

|  | **5.** | **Muddy                River water rights** |
|--|--------|---------------------------------------------|

**Colorado**

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

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

|   | · | in                2006, Vidler closed on the sale of various water rights and related                assets                to the City of Golden, Colorado for $1.2 million. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**WATER      STORAGE**

|   | **1.** | **Vidler                Arizona Recharge Facility** |
|--------|--------|-----------------------------------------------------|

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***Table            of Contents***

|   | **2.** | **Semitropic** |
|--------|--------|----------------|

**Other      Projects**

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***Table            of Contents***

**REAL        ESTATE OPERATIONS**

**BUSINESS      ACQUISITIONS AND FINANCING**

**Conversion      of Swiss Franc amounts to U.S. dollars**

**Jungfraubahn      Holding AG**

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***Table            of Contents***

**Raetia      Energie AG**

----

***Table            of Contents***

**INSURANCE        OPERATIONS IN “RUN OFF”**

----

***Table            of Contents***

**Physicians      Insurance Company of Ohio**

----

***Table            of Contents***

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

**(In      Millions)**

|                                                                 |   | Year                Ended December 31, |                 |
|----------------------------------------------------------------------|--------|----------------------------------------|----------------------|
|                                                                 |   | 2006                                   |                 | 2005 |   | 2004 |   |
|                                                                 |   |                                   |                 |   |   |   |   |
| Direct                Reserves                                       |   | $                                      | 10.4                 |   | $ | 12.9 |   | $ | 19.6 |   |
| Ceded                Reserves                                        |   |                                   | (                1.0 | ) |   | (                1.0 | ) |   | (                3.2 | ) |
| Net                Medical Professional Liability Insurance Reserves |   | $                                      | 9.4                  |   | $ | 11.9 |   | $ | 16.4 |   |

|                                                   |   | Year                Ended December 31, |      |
|--------------------------------------------------------|--------|----------------------------------------|-----------|
|                                                   |   | 2006                                   |      | 2005 |   | 2004 |   |
|                                                   |   |                                   |      |   |   |   |   |
| Open                claims at the start of the year    |   |                                   | 28        |   |   | 41 |   |   | 68 |   |
| New                claims reported during the year     |   |                                   | 2         |   |   | 6 |   |   | 11 |   |
| Claims                closed during the year           |   |                                   | -12       |   |   | -19 |   |   | -38 |   |
| Open                claims at the end of the year      |   |                                   | 18        |   |   | 28 |   |   | 41 |   |
|                                                   |   |                                   |           |   |   |  |   |   |   |   |
| Total                claims closed during the year     |   |                                   | 12        |   |   | 19 |   |   | 38 |   |
| Claims                closed with no indemnity payment |   |                                   | -11       |   |   | -16 |   |   | -22 |   |
| Claims                closed with an indemnity payment |   |                                   | 1         |   |   | 3 |   |   | 16 |   |
|                                                   |   |                                   |           |   |   |  |   |   |   |   |
| Net                indemnity payments                  |   | $                                      | 1,233,000 |   | $ | 878,000 |   | $ | 1,778,000 |   |
| Net                loss adjustment expense payments    |   |                                   | 397,000   |   |   | 499,000 |   |   | 898,000 |   |
| Total                claims payments during the year   |   | $                                      | 1,630,000 |   | $ | 1,377,000 |   | $ | 2,676,000 |   |
|                                                   |   |                                   |           |   |   |  |   |   |  |   |
| Average                indemnity payment               |   | $                                      | 1,233,000 |   | $ | 293,000 |   | $ | 111,000 |   |

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***Table            of Contents***

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

**(In      Millions)**

|                                                                            |   | Year                Ended December 31, |                       |
|---------------------------------------------------------------------------------|--------|----------------------------------------|----------------------------|
|                                                                            |   | 2006                                   |                       | 2005 |   | 2004 |   |
|                                                                            |   |                                   |                       |   |   |   |   |
| Beginning                Reserves                                               |   | $                                      | 11.9                       |   | $ | 16.4 |   | $ | 19.6 |   |
| Loss                & Loss Adjustment Expense Payments                      |   |                                   | (                1.6       | ) |   | (                1.4 | ) |   | (                2.7 | ) |
| Re-estimation                of Prior Year Loss Reserves                        |   |                                   | (                0.9       | ) |   | (                3.1 | ) |   | (                0.5 | ) |
| Net                Medical Professional Liability Insurance Reserves            |   | $                                      | 9.4                million |   | $ | 11.9                million |   | $ | 16.4                million |   |
|                                                                            |   |                              |                       |   |   |   |   |   |    |   |
| Re-estimation                as a percentage of undiscounted beginning reserves |   |                                   | -                7         | % |   | -                19 | % |   | -                3 | % |

*See      “Critical Accounting Policies” and “Risk Factors.”*

----

***Table            of Contents***

**Citation      Insurance Company**

**Property      and Casualty Insurance Loss Reserves**

----

***Table            of Contents***

|                                                                      |   | Year                Ended December 31, |   |
|---------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                      |   | 2006                                   |   | 2005 |   | 2004 |   |
|                                                                      |   |                                   |   |   |   |   |   |
| Open                claims at the start of the year                       |   |                                   | 149    |   |   | 217 |   |   | 317 |   |
| New                claims reported during the year                        |   |                                   | 58     |   |   | 101 |   |   | 183 |   |
| Claims                closed during the year                              |   |                                   | -129   |   |   | -169 |   |   | -283 |   |
| Open                claims at the end of the year                         |   |                                   | 78     |   |   | 149 |   |   | 217 |   |
|                                                                      |   |                                   |        |   |   |  |   |   |  |   |
| Total                claims closed during the year                        |   |                                   | 129    |   |   | 169 |   |   | 283 |   |
| Claims                closed with no payment                              |   |                                   | -51    |   |   | -77 |   |   | -158 |   |
| Claims                closed with LAE payment only (no indemnity payment) |   |                                   | -36    |   |   | -17 |   |   | -39 |   |
| Claims                closed with an indemnity payment                    |   |                                   | 42     |   |   | 75 |   |   | 86 |   |

*See      “Critical Accounting Policies” and “Risk Factors.”*

| **CITATION                INSURANCE COMPANY - PROPERTY & CASUALTY INSURANCE LOSS AND LOSS                ADJUSTMENT EXPENSE RESERVES****(In                Millions)** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                       |   |   |   |   |   |   |   |
|                                                                                                                                                                       |   | December                31, 2006 |   | December                31, 2005 |   | December                31, 2004 |   |
| Direct                Reserves                                                                                                                                             |   | $ | 6.6 |   | $ | 8.2 |   | $ | 11.6 |   |
| Ceded                Reserves                                                                                                                                              |   |   | (1.5 | ) |   | (                1.8 | ) |   | (                1.4 | ) |
| Net                Reserves                                                                                                                                                |   | $ | 5.1 |   | $ | 6.4 |   | $ | 10.2 |   |

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***Table            of Contents***

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

**(In      Millions)**

|                                                               |   | Year                Ended December 31, |                 |
|--------------------------------------------------------------------|--------|----------------------------------------|----------------------|
|                                                               |   | 2006                                   |                 | 2005 |   | 2004 |   |
|                                                               |   |                                   |                 |   |   |   |   |
| Beginning                Reserves                                  |   | $                                      | 6.4                  |   | $ | 10.2 |   | $ | 13.3 |   |
| Loss                & Loss Adjustment Expense Payments         |   |                                   | (                0.7 | ) |   | (                2.0 | ) |   | (                2.8 | ) |
| Re-estimation                of Prior Year Loss Reserves           |   |                                   | (                0.6 | ) |   | (                1.8 | ) |   | (0.3 | ) |
| Net                Property & Casualty Insurance Reserves      |   | $                                      | 5.1                  |   | $ |  6.4 |   | $ | 10.2 |   |
|                                                               |   |                                   |                 |   |   |   |   |   |   |   |
| Re-estimation                as a percentage of beginning reserves |   |                                   | -                10  | % |   | -                18 | % |   | -                2 | % |

**Workers’      Compensation Loss Reserves**

----

***Table            of Contents***

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

**(In      Millions)**

|                           |   | December                31, |   |
|--------------------------------|--------|-----------------------------|--------|
|                           |   | 2006                        |   | 2005 |   | 2004 |   |
|                           |   |                        |   |   |   |   |   |
| Direct                Reserves |   | $                           | 24.1   |   | $ | 25.6 |   | $ | 24.8 |   |
| Ceded                Reserves  |   |                        | (14.4  | ) |   | (13.1 | ) |   | (12.7 | ) |
| Net                Reserves    |   | $                           | 9.6    |   | $ | 12.5 |   | $ | 12.1 |   |

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

| · | the                extended period over which policy benefits are paid. |
|--------|-------------------------------------------------------------------------|

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***Table            of Contents***

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

**(In      Millions)**

|                                                                        |   | **Year                Ended December 31,** |                |
|-----------------------------------------------------------------------------|--------|--------------------------------------------|---------------------|
|                                                                        |   | **2006**                                   |                | **2005** |   | **2004** |   |
|                                                                        |   |                                       |                |   |   |   |   |
| Beginning                Net Reserves                                       |   | $                                          | 12.5                |   | $ | 12.1 |   | $ | 10.5 |   |
| Loss                and Loss Adjustment Expense recovery / (payments)       |   |                                       | (1.1                | ) |   | (0.9 | ) |   | 0.4 |   |
| Re-estimation                of Prior Year Loss Reserves                    |   |                                       | (1.8                | ) |   | 1.3 |   |   | 1.2 |   |
| Net                Workers’ Compensation Insurance Reserves           |   | $                                          | 9.6                 |   | $ | 12.5 |   | $ | 12.1 |   |
|                                                                        |   |                                       |                     |   |   |  |   |   |  |   |
| Re-estimation                as a percentage of adjusted beginning reserves |   |                                       | -                14 | % |   | +                11 | % |   | +                11 | % |

*See      “Critical Accounting Policies” and “Risk Factors.”*

**CRITICAL      ACCOUNTING POLICIES**

| · | Vidler's real                estate, water resource, and water storage operations; |
|--------|-----------------------------------------------------------------------------------------|
| l | Nevada              Land’s real estate operations; |
|---|----------------------------------------------------------|

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

| · | business                acquisitions and financing. |
|--------|-----------------------------------------------------|

|   | **1.** | **Estimation                of reserves in insurance                companies** |
|--------|--------|---------------------------------------------------------------------------------|

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***Table            of Contents***

| **·** | Citation,                $16 million; and |
|------------|-------------------------------------------|

| **·** | Physicians,                $989,000. |
|------------|--------------------------------------|

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

|   | **2.** | **Carrying                value of long-lived assets** |
|--------|--------|--------------------------------------------------------|

|   | **3.** | **Accounting                for investments and investments in unconsolidated                affiliates** |
|--------|--------|-----------------------------------------------------------------------------------------------------------|

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***Table            of Contents***

|   | **4.** | **Revenue                recognition** |
|--------|--------|----------------------------------------|

**Sale        of Land and Water**

| (a) | there                is a legally binding sale contract; |
|-----|----------------------------------------------------------|

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

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

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

**Investment        Income and Realized Gain or Losses**

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***Table            of Contents***

**RESULTS        OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2006, 2005, AND        2004**

**Shareholders’        Equity**

|   | · | the                year’s $29.2 million in net income;                and |
|--------|--------|---------------------------------------------------------------------------------|

|   | · | the                issuance of 2.6 million new shares for net proceeds of $73.9                million. |
|--------|--------|---------------------------------------------------------------------------------------------------------|

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

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

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

**Balance      Sheet**

*See      “Business Acquisitions and Financing” segment analysis later in Item 7.*

**Net      Income**

**2006**

| · | income                before taxes and minority interest of $50.9 million from continuing                operations; |
|--------|----------------------------------------------------------------------------------------------------------------------|

| · | a                $19.4 million provision for income taxes. The effective tax rate                for 2006                is 38.1%, which is higher than the federal corporate rate of 35%,                principally due to state tax liabilities and certain compensation                expense                which is not tax-deductible; and |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a                net loss from discontinued operations of $2.3 million. |
|--------|-------------------------------------------------------------------------|

**2005**

| · | income                before taxes and minority interest of $40.3 million from continuing                operations; and |
|--------|--------------------------------------------------------------------------------------------------------------------------|

| · | the                add-back of $536,000 in minority interest in continuing operations,                which                reflects the interest of outside shareholders in the net losses of                subsidiaries which are less than 100%-owned by PICO; which were partially                offset by |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | an                $18.6 million provision for income taxes. The effective tax rate                for 2005                is 46%, which is greater than the 35% federal corporate rate. This                is                principally due to the accrual of state taxes on Vidler income, and                other                permanent differences, primarily resulting from certain management                compensation which was not tax-deductible;                and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a                net loss from                discontinued operations of $6.1 million. |
|--------|----------------------------------------------------------------------------------------|

**2004**

| · | an                $11.5 million loss before taxes and minority interest from continuing                operations; which was partially offset                by |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a                $3 million income tax benefit. The income tax benefit represents                approximately 26% of our 2004 pre-tax loss, which is below the 35%                federal                corporate income tax rate primarily due to permanent differences                between                book loss and taxable loss. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | the                add-back of $599,000 in minority interest in continuing operations,                which                reflects the interest of outside shareholders in the net losses of                subsidiaries which are less than 100%-owned by PICO; which were partially                offset by |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***Table            of Contents***

| · | a                net loss from                discontinued operations of $2.7                million. |
|--------|-------------------------------------------------------------------------------------------------------|

**Comprehensive      Income**

| · | comprehensive                income of $30.1 million in 2006, which primarily consisted of the                year’s                net income of $29.2 million. In addition, there was a $69,000 net                increase                in net unrealized appreciation in investments (after-tax) and a $789,000                net increase in foreign currency                translation; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

**Operating      Revenues**

|                                                       |   | **Year                Ended December 31,** |       |
|------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                       |   | **2006**                                   |       | **2005** |   | **2004** |   |
|                                                       |   |                                       |       |   |   |   |   |
| Water                Resource and Water Storage Operations |   | $                                          | 6,182,000  |   | $ | 106,449,000 |   | $ | 1,964,000 |   |
| Real                Estate Operations                      |   |                                       | 41,406,000 |   |   | 21,811,000 |   |   | 11,560,000 |   |
| Business                Acquisitions and Financing         |   |                                       | 21,858,000 |   |   | 5,743,000 |   |   | 2,852,000 |   |
| Insurance                Operations in Run Off             |   |                                       | 13,277,000 |   |   | 8,109,000 |   |   | 5,747,000 |   |
|                                                       |   |                                       |       |   |   |   |   |   |   |   |
| Total                Revenues                              |   | $                                          | 82,723,000 |   | $ | 142,112,000 |   | $ | 22,123,000 |   |

**Costs        and Expenses**

*See      “Business Acquisitions and Financing” segment analysis later in Item      7.*

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***Table            of Contents***

**Income      (Loss) Before Taxes and Minority Interest**

|                                                            |   | **Year                Ended December 31,** |                       |
|-----------------------------------------------------------------|--------|--------------------------------------------|----------------------------|
|                                                            |   | **2006**                                   |                       | **2005** |   | **2004** |   |
|                                                            |   |                                       |                       |   |   |   |   |
| Water                Resource and Water Storage Operations      |   | $                                          | (                2,451,000 | ) | $ | 56,212,000 |   | $ | (                5,701,000 | ) |
| Real                Estate Operations                           |   |                                       | 30,499,000                 |   |   | 12,038,000 |   |   | 5,290,000 |   |
| Business                Acquisitions and Financing              |   |                                       | 6,839,000                  |   |   | (38,464,000 | ) |   | (15,156,000 | ) |
| Insurance                Operations in Run Off                  |   |                                       | 15,980,000                 |   |   | 10,539,000 |   |   | 4,060,000 |   |
| Income                (Loss) Before Taxes and Minority Interest |   | $                                          | 50,867,000                 |   | $ | 40,325,000 |   | $ | (11,507,000 | ) |

| · | $18.5                million higher income from Real Estate Operations, essentially due                to                the sale of Spring Valley Ranch; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a                $45.3 million higher contribution from the Business                Acquisitions and Financing segment. This principally resulted from                a $13.2                million increase in realized gains year over year, and SAR expense                of zero                in 2006 compared to $23.9 million in 2005;                and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | $5.5                million higher income from Insurance                Operations in Run Off, primarily due to a $5 million year over year                increase in realized gains; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | which,                combined, exceeded the $58.7 million lower result from Water Resource                and                Water Storage Operations. The total gross margin earned from the                sale of                real estate and water assets in 2006 was $1.4 million, compared to                $65.9                million in 2005, which included the two significant sales of water                discussed in preceding paragraphs. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | the                Water Resource and Water Storage Operations                segment generated income of $56.2 million in 2005, compared to a                $5.7                million loss in 2004. The income in 2005 principally resulted from                the                $65.7 million in gross margin earned from the two significant sales                of                water referenced above; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | $6.7                million higher income                from Real Estate Operations, primarily due to a $6.4 million year                over                year increase in gross margin from land sales;                and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | $6.5                million higher income                from Insurance Operations in Run Off, principally due to a $4.1 million                improvement in underwriting expenses/recoveries as a result of favorable                reserve development, and a $2.1 million increase in realized gains; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | which,                combined, exceeded the $23.3 million greater Business                Acquisitions and Financing segment loss, which primarily resulted                from                year over year increases of $14 million in SAR expense and $12.2                million                in other segment expenses. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Water      Resource and Water Storage Operations**

|                                                |   | **Year                Ended December 31,** |                       |
|-----------------------------------------------------|--------|--------------------------------------------|----------------------------|
|                                                |   | **2006**                                   |                       | **2005** |   | **2004** |   |
| **Revenues:**                                       |   |                                       |                       |   |   |   |   |
| Sale                of Real Estate And Water Assets |   | $                                          | 2,969,000                  |   | $ | 104,812,000 |   | $ | 408,000 |   |
| Lease                of Agricultural Land           |   |                                       |                       |   |   | 298,000 |   |   | 485,000 |   |
| Net                Investment Income                |   |                                       | 2,805,000                  |   |   | 1,177,000 |   |   | 471,000 |   |
| Other                                               |   |                                       | 408,000                    |   |   | 162,000 |   |   | 600,000 |   |
| Segment                Total Revenues               |   | $                                          | 6,182,000                  |   | $ | 106,449,000 |   | $ | 1,964,000 |   |
|                                                |   |                                       |                            |   |   |  |   |   |  |   |
| **Expenses:**                                       |   |                                       |                            |   |   |  |   |   |  |   |
| Cost                of Real Estate And Water Assets |   |                                       | (1,614,000                 | ) |   | (38,957,000 | ) |   | (                240,000 | ) |
| Commission                and Other Cost of Sales   |   |                                       |                       |   |   | (                1,066,000 | ) |   |  |   |
| Depreciation                & Amortization      |   |                                       | (1,084,000                 | ) |   | (                1,173,000 | ) |   | (1,184,000 | ) |
| Interest                                            |   |                                       | (                1,000     | ) |   | (                270,000 | ) |   | (                403,000 | ) |
| Overhead                                            |   |                                       | (3,067,000                 | ) |   | (                4,449,000 | ) |   | (1,574,000 | ) |
| Project                Expenses                     |   |                                       | (                2,867,000 | ) |   | (                4,322,000 | ) |   | (4,264,000 | ) |
| Segment                Total Expenses               |   | $                                          | (8,633,000                 | ) | $ | (50,237,000 | ) | $ | (7,665,000 | ) |
|                                                |   |                                       |                       |   |   |   |   |   |   |   |
| **Income                (Loss) Before Tax**         |   | $                                          | (2,451,000                 | ) | $ | 56,212,000 |   | $ | (5,701,000 | ) |

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***Table            of Contents***

| · | Lincoln/Vidler                sold approximately 570 acre-feet of water rights at Meadow Valley,                Nevada                for $6,050 per acre-foot. Vidler’s 50% share of the sales price was $1.7                million; and |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Vidler                sold its water rights at Golden, Colorado for $1.2 million. |
|--------|-----------------------------------------------------------------------------------|

| · | the                sale of approximately 42,000 acre-feet of transferable groundwater                rights,                and the related land, in the Harquahala Valley Irrigation District                of                Arizona. This transaction added $94.4 million to revenues and $56.6                million to gross margin; and |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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***Table            of Contents***

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

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

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

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

**Real      Estate Operations**

|                                               |   | **Year                Ended December 31,** |                       |
|----------------------------------------------------|--------|--------------------------------------------|----------------------------|
|                                               |   | **2006**                                   |                       | **2005** |   | **2004** |   |
| **Revenues:**                                      |   |                                       |                       |   |   |   |   |
| Sale              of Real Estate and Water Assets: |   |                                       |                       |   |   |   |   |
| Sale                of Former Railroad Land        |   | $                                          | 16,541,000                 |   | $ | 20,173,000 |   | $ | 10,472,000 |   |
| Sale                of Spring Valley Ranch         |   |                                       | 22,000,000                 |   |   |   |   |   |   |   |
| Net              Investment Income                 |   |                                       | 2,003,000                  |   |   | 1,054,000 |   |   | 477,000 |   |
| Other                                              |   |                                       | 862,000                    |   |   | 584,000 |   |   | 611,000 |   |
| Segment                Total Revenues              |   | $                                          | 41,406,000                 |   | $ | 21,811,000 |   | $ | 11,560,000 |   |
|                                               |   |                                       |                            |   |   |  |   |   |  |   |
| **Expenses:**                                      |   |                                       |                            |   |   |  |   |   |  |   |
| Cost                of Former Railroad Land Sold   |   |                                       | (                5,489,000 | ) |   | (7,573,000 | ) |   | (4,257,000 | ) |
| Cost                of Spring Valley Ranch         |   |                                       | (                3,174,000 | ) |   |   |   |   |   |   |
| Operating                Expenses                  |   |                                       | (                2,244,000 | ) |   | (2,200,000 | ) |   | (2,013,000 | ) |
| Segment                Total Expenses              |   | $                                          | (10,907,000                | ) | $ | (9,773,000 | ) | $ | (6,270,000 | ) |
|                                               |   |                                       |                  |   |   |   |   |   |   |   |
| **Income                Before Tax**               |   | $                                          | 30,499,000                 |   | $ | 12,038,000 |   | $ | 5,290,000 |   |

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***Table            of Contents***

**Business      Acquisitions and Financing**

|                                                                       |   | **Year                Ended December 31,** |        |
|----------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                       |   | **2006**                                   |        | **2005** |   | **2004** |   |
| **Business                Acquisitions and Financing Revenues (Charges):** |   |                                       |        |   |   |   |   |
| Realized                Gains (Losses):                                    |   |                                       |        |   |   |   |   |
| On                Sale or Impairment of Holdings                           |   | $                                          | 15,943,000  |   | $ | 2,666,000 |   | $ | 840,000 |   |
| SFAS                No. 133 Change In Warrants                             |   |                                       |             |   |   |  |   |   | (556,000 | ) |
| Investment                Income                                           |   |                                       | 5,611,000   |   |   | 2,957,000 |   |   | 2,088,000 |   |
| Other                                                                      |   |                                       | 304,000     |   |   | 120,000 |   |   | 480,000 |   |
| Segment                Total Revenues                                      |   | $                                          | 21,858,000  |   | $ | 5,743,000 |   | $ | 2,852,000 |   |
|                                                                       |   |                                       |             |   |   |  |   |   |  |   |
| Stock                Appreciation Rights Expense                           |   |                                       |        |   | $ | (23,894,000 | ) | $ | (                9,875,000 | ) |
| Other                Expenses                                              |   | $                                          | (15,019,000 | ) |   | (20,313,000 | ) |   | (                8,133,000 | ) |
| **Segment                Total Expenses**                                  |   | $                                          | (15,019,000 | ) | $ | (44,207,000 | ) | $ | (18,008,000 | ) |
|                                                                       |   |                                       |        |   |   |   |   |   |   |   |
| **Income                (Loss) Before Taxes**                              |   | $                                          | 6,839,000   |   | $ | (38,464,000 | ) | $ | (15,156,000 | ) |

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***Table            of Contents***

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***Table            of Contents***

| · | the                accrual of $5.9 million in incentive compensation. Six of PICO’s officers                participate in an incentive compensation program tied to growth in                the                Company’s book value per share relative to a pre-determined threshold;                and |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | other                parent company overhead of $11.7 million. This includes deferred                compensation expense of $3.6 million, which reflects an increase                in                deferred compensation liabilities resulting from growth in the value                of                invested assets corresponding to the deferred compensation liabilities.                In                effect, this expense will be offset by investment income and realized                gains, which are recorded as revenue in this segment, and by unrealized                appreciation from the invested assets. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**SAR      Expense**

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***Table            of Contents***

**Insurance      Operations in Run Off**

|                                                 |   | **Year                Ended December 31,** |       |
|------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                 |   | **2006**                                   |       | **2005** |   | **2004** |   |
| **Revenues:**                                        |   |                                       |       |   |   |   |   |
| Net                Investment Income                 |   | $                                          | 3,159,000  |   | $ | 3,052,000 |   | $ | 2,765,000 |   |
| Realized                Gains On Sale of Investments |   |                                       | 10,110,000 |   |   | 5,057,000 |   |   | 2,982,000 |   |
| Other                                                |   |                                       | 8,000      |   |   |   |   |   |   |   |
| Segment                Total Revenues                |   | $                                          | 13,277,000 |   | $ | 8,109,000 |   | $ | 5,747,000 |   |
|                                                 |   |                                       |       |   |   |   |   |   |   |   |
| **(Expenses)                / Recoveries :**         |   |                                       |            |   |   |  |   |   |  |   |
| Underwriting                (Expenses) / Recoveries  |   |                                       | 2,703,000  |   |   | 2,431,000 |   |   | (1,687,000 | ) |
| Segment                Total (Expenses) / Recoveries |   | $                                          | 2,703,000  |   | $ | 2,431,000 |   | $ | (1,687,000 | ) |
|                                                 |   |                                       |            |   |   |  |   |   |  |   |
| **Income                Before Taxes:**              |   |                                       |            |   |   |  |   |   |  |   |
| Physicians                Insurance Company of Ohio  |   | $                                          | 10,914,000 |   | $ | 8,553,000 |   | $ | 3,417,000 |   |
| Citation                Insurance Company            |   |                                       | 5,066,000  |   |   | 1,987,000 |   |   | 643,000 |   |
| Income                Before Taxes                   |   | $                                          | 15,980,000 |   | $ | 10,540,000 |   | $ | 4,060,000 |   |

*See      the Physicians and Citation sections of the “Company Summary, Recent      Developments, and Future Outlook” portion of Item 7.*

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***Table            of Contents***

**Physicians      Insurance Company of Ohio**

|                                                      |   | **Year                Ended December 31,** |         |
|-----------------------------------------------------------|--------|--------------------------------------------|--------------|
|                                                      |   | **2006**                                   |         | **2005** |   | **2004** |   |
| **MPL                Revenues:**                          |   |                                       |         |   |   |   |   |
| Net                Investment Income                      |   | $                                          | 2,225,000    |   | $ | 2,016,000 |   | $ | 1,546,000 |   |
| Net                Realized Investment Gain               |   |                                       | 7,758,000    |   |   | 4,016,000 |   |   | 2,109,000 |   |
| Segment                Total Revenues                     |   | $                                          | 9,983,000    |   | $ | 6,032,000 |   | $ | 3,655,000 |   |
|                                                      |   |                                       |         |   |   |   |   |   |   |   |
| **MPL                Underwriting Recoveries (Expenses)** |   | $                                          | 931,000      |   | $ | 2,520,000 |   | $ | (238,000 | ) |
|                                                      |   |                                  |    |   |    |    |   |    |    |   |
| **Income                Before Taxes**                    |   | $                                          | 10,914,000   |   | $ | 8,552,000 |   | $ | 3,417,000 |   |

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***Table            of Contents***

**Citation        Insurance Company**

|                                                |   | **Year                  Ended December 31,** |      |
|-----------------------------------------------------|--------|----------------------------------------------|-----------|
|                                                |   | **2006**                                     |      | **2005** |   | **2004** |   |
| **Revenues:**                                       |   |                                         |      |   |   |   |   |
| Net                  Investment Income              |   | $                                            | 934,000   |   | $ | 1,035,000 |   | $ | 1,219,000 |   |
| Realized                  Investment Gains          |   |                                         | 2,352,000 |   |   | 1,041,000 |   |   | 873,000 |   |
| Other                                               |   |                                         | 8,000     |   |   |   |   |   |   |   |
| Segment                  Total Revenues             |   | $                                            | 3,294,000 |   | $ | 2,076,000 |   | $ | 2,092,000 |   |
|                                                |   |                                         |           |   |   |  |   |   |  |   |
| **Expenses:**                                       |   |                                         |      |   |    |   |   |   |   |   |
| Underwriting                  Recoveries (Expenses) |   | $                                            | 1,772,000 |   | $ | (89,000 | ) | $ | (1,449,000 | ) |
|                                                |   |                                         |      |   |   |    |   |   |   |   |
| **Income                  Before Taxes**            |   | $                                            | 5,066,000 |   | $ | 1,987,000 |   | $ | 643,000 |   |

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***Table            of Contents***

**Discontinued      Operations - **
**HyperFeed      Technologies**

|                                                                    |   | **Year                Ended December 31,** |        |
|-------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                    |   | **2006**                                   |        | **2005** |   | **2004** |   |
|                                                                    |   |                                       |        |   |   |   |   |
| Net                Loss before minority interest                        |   | $                                          | (10,257,000 | ) | $ | (7,316,000 | ) | $ | (5,812,000 | ) |
| Minority                interest in net loss                            |   |                                       |        |   |   | 706,000 |   |   | 2,614,000 |   |
| Net                loss                                                 |   |                                       | (10,257,000 | ) |   | (6,610,000 | ) |   | (3,198,000 | ) |
| Gain                On Disposal, before tax                             |   |                                       | 3,002,000   |   |   |   |   |   |   |   |
| Income                Tax Benefit                                       |   |                                       | 4,657,000   |   |   |   |   |   |   |   |
| Gain                On Disposal, net                                    |   |                                       | 7,659,000   |   |   |   |   |   |   |   |
|                                                                    |   |                                       |        |   |   |   |   |   |   |   |
| Gain                On Sale of HyperFeed's Discontinued Operations, net |   |                                       | 330,000     |   |   | 545,000 |   |   | 500,000 |   |
|                                                                    |   |                                       |        |   |   |   |   |   |   |   |
| Gain                On Sale of Disposal and Sale of Discontinued        |   | $                                          | 7,989,000   |   | $ | 545,000 |   | $ | 500,000 |   |
| Operations,                net                                          |   |                                       |        |   |   |   |   |   |   |   |
| **Net                Loss After-Tax**                                   |   | $                                          | (2,268,000  | ) | $ | (6,065,000 | ) | $ | (2,698,000 | ) |

|   | · | the                $10.3 million net loss consisted of a $5.3 million loss, and a $4.9                million write-down in the third quarter of 2006 of HyperFeed’s assets to                estimated fair value of zero; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | during                the fourth quarter of 2006, HyperFeed filed for bankruptcy under                Chapter 7                of the Bankruptcy Code. The $8 million gain on disposal and the sale                of                discontinued operations was comprised of a $7.7 million after-tax                gain on                disposal, and a $330,000 after-tax gain on the sale of discontinued                operations. The $7.7 million after-tax gain on disposal consisted                of a $3                million gain on disposal before tax due to the removal of HyperFeed’s                liabilities from PICO’s financial statements after the bankruptcy filing,                and a $4.7 million income tax benefit.  See Notes 2 and 7 of                Notes to Consolidated Financial                Statements. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***Table            of Contents***

**LIQUIDITY      AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004**

**Cash      Flow**

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

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

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

| · | in                2006, the sale of Spring Valley Ranch for $22 million, and $11.1                million                from cash land sales by Nevada Land; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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***Table            of Contents***

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

| · | in                2006, the proceeds from the maturity or sale of fixed-income investments                exceeded new purchases, providing cash of $28.9 million, and proceeds                from                the sale of stocks exceeded new purchases, providing $16.7 million                in                cash. The principal use of investing cash was $27.2 million in outlays                for                property and equipment, primarily related to the Fish Springs pipeline                project; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| · | in                2004, the sale and maturity of fixed-income securities exceeded new                purchases, providing a $12.3 million net cash inflow. During 2004,                a net                $7.6 million was invested in stocks, consisting of $10.9 million                in sales,                and $18.5 million of new purchases. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | in                2006, the sale of 2.6 million newly-issued shares of PICO common                stock for                net cash proceeds of $73.9 million; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | in                2005, the sale of 905,000 newly-issued shares of PICO common stock                for net                proceeds of $21.4 million, which was partially offset by the repayment                of                $3.9 million in principal on notes collateralized by certain of the                farm                properties which Vidler sold in the Harquahala Valley Irrigation                District;                and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | in                2004, a $2.4 million increase in Swiss franc borrowings to fund additional                purchases of stocks in Switzerland, which was partially offset by                the                repayment of $1.3 million in borrowings by                Vidler. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Share      Repurchase Program**

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***Table            of Contents***

**Commitments      and Supplementary Disclosures**

| **1.** | **At                December 31, 2006:** |
|--------|------------------------------------------|

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

| · | PICO                has not provided any debt guarantees; and |
|--------|---------------------------------------------------------------|

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

**Aggregate      Contractual Obligations:**

|                                                            |   | **Payments                Due by Period** |       |
|-----------------------------------------------------------------|--------|-------------------------------------------|------------|
| Contractual                Obligations                          |   | Less                than 1 year           |       | 1                -3 years |   | 3                -5 years |   | More                than 5 years |   | Total |   |
| Bank                borrowings (including interest of $450,458) |   | $                                         | 2,912,501  |   |  $ |  10,258,515 |   |   |   |   |   |   |   | $ | 13,171,016 |   |
| Operating                leases                                 |   |                                      | 991,347    |   |   | 934,449 |   | $ | 416,842 |   | $ | 2,913,299 |   |   | 5,255,937 |   |
| Expected                claim payouts                           |   |                                      | 10,902,488 |   |   | 16,940,667 |   |   | 8,028,133 |   |   | 5,212,013 |   |   | 41,083,301 |   |
| Other                borrowings/obligations                     |   |                                      | 25,077,794 |   |   |   |   |   |   |   |   |   |   |   | 25,077,794 |   |
| Total                                                           |   | $                                         | 39,884,130 |   | $ | 28,133,631 |   | $ | 8,444,975 |   | $ | 8,125,312 |   | $ | 84,588,048 |   |

----

***Table            of Contents***

| **2.** | **Recent                Accounting Pronouncements** |
|--------|-----------------------------------------------------|

**SFAS      153**

**SFAS      154 **

**SFAS      155**

**FIN      48**

**SFAS      157**

**SFAS      158 - **

**SAB        108**

----

***Table            of Contents***

**Regulatory      Insurance Disclosures**

*Liabilities      for Unpaid Loss and Loss Adjustment Expenses*

**ANALYSIS      OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT**

----

***Table            of Contents***

|                                                    |   |     |    |     |   |     |   |     |    |     |   |
|---------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
|                                                    |   | **1996** |    | **1997** |   | **1998** |   | **1999** |    | **2000** |   |
|                                                    |   |     |    |     |   |     |   |     |    |     |   |
| Net                liability as originally estimated:   |   | $        | 153,891 |     | $      | 110,931  |   | $        | 89,554  |     | $      | 88,112 |   | $ | 74,896 |   |
| Discount                                                |   |     | 12,217  |     |   | 9,159    |   |     | 8,515   |     |   | 7,521 |   |   |   |   |
| Gross                liability as originally estimated: |   |     | 166,108 |     |   | 120,090  |   |     | 98,069  |     |   | 95,633 |   |   | 74,896 |   |
| Cumulative                payments as of:               |   |     |    |     |   |     |   |     |    |     |   |   |   |   |   |   |
| One                year later                           |   |     | 54,500  |     |   | 37,043   |   |     | 23,696  |     |   | 22,636 |   |   | 9,767 |   |
| Two                years later                          |   |     | 88,298  |     |   | 57,622   |   |     | 41,789  |     |   | 31,987 |   |   | 16,946 |   |
| Three                years later                        |   |     | 107,094 |     |   | 73,096   |   |     | 50,968  |     |   | 39,150 |   |   | 23,162 |   |
| Four                years later                         |   |     | 121,698 |     |   | 82,249   |   |     | 58,129  |     |   | 45,140 |   |   | 29,675 |   |
| Five                Years later                         |   |     | 130,247 |     |   | 89,398   |   |     | 64,119  |     |   | 51,566 |   |   | 33,902 |   |
| Six                years later                          |   |     | 137,462 |     |   | 95,454   |   |     | 70,545  |     |   | 55,793 |   |   | 37,327 |   |
| Seven                years later                        |   |     | 143,532 |     |   | 101,877  |   |     | 74,772  |     |   | 59,218 |   |   |   |   |
| Eight                years later                        |   |     | 149,877 |     |   | 106,088  |   |     | 78,198  |     |   |   |   |   |   |   |
| Nine                years later                         |   |     | 153,987 |     |   | 109,485  |   |     |    |     |   |   |   |   |   |   |
| Ten                years later                          |   |     | 157,258 |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Liability                re-estimated as of:            |   |     |    |     |   |     |   |     |    |     |   |   |   |   |   |   |
| One                year later                           |   |     | 166,870 |     |   | 129,225  |   |     | 114,347 |     |   | 96,727 |   |   | 63,672 |   |
| Two                years later                          |   |     | 182,963 |     |   | 145,543  |   |     | 115,539 |     |   | 85,786 |   |   | 61,832 |   |
| Three                years later                        |   |     | 193,498 |     |   | 146,618  |   |     | 104,689 |     |   | 83,763 |   |   | 66,494 |   |
| Four                years later                         |   |     | 194,423 |     |   | 135,930  |   |     | 102,704 |     |   | 88,460 |   |   | 66,275 |   |
| Five                Years later                         |   |     | 183,333 |     |   | 133,958  |   |     | 107,409 |     |   | 88,167 |   |   | 62,519 |   |
| Six                years later                          |   |     | 181,705 |     |   | 138,520  |   |     | 107,127 |     |   | 84,412 |   |   | 59,298 |   |
| Seven                years later                        |   |     | 185,201 |     |   | 138,386  |   |     | 103,374 |     |   | 81,200 |   |   |   |   |
| Eight                years later                        |   |     | 185,178 |     |   | 134,637  |   |     | 100,153 |     |   |   |   |   |   |   |
| Nine                years later                         |   |     | 181,465 |     |   | 131,379  |   |     |    |     |   |   |   |   |   |   |
| Ten                years later                          |   |     | 178,503 |     |   |     |   |     |    |     |   |   |   |   |   |   |
|                                                    |   |     |    |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Cumulative                Redundancy (Deficiency)       |   | $        | (12,395 | )        | $      | (11,289  | )      | $        | (2,084  | )        | $      | 14,433 |   | $ | 15,598 |   |

----

***Table            of Contents***

|                                                                                                                    |   | **Year                Ended December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                    |   |  **2001**                             |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   |
|                                                                                                                    |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Net                liability as originally estimated:                                                                   |   | $                                          | 54,022 |   | $ | 44,906 |   | $ | 43,357 |   | $ | 36,603 |   | $ | 28,618 |   | $ | 21,972 |   |
| Discount                                                                                                                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross                liability before discount as originally estimated:                                                 |   |                                       | 54,022 |   |   | 44,906 |   |   | 43,357 |   |   | 36,603 |   |   | 28,618 |   |   | 21,972 |   |
| Cumulative                payments as of:                                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One                year later                                                                                           |   |                                       | 7,210  |   |   | 6,216 |   |   | 6,515 |   |   | 4,227 |   |   | 3,425 |   |   |   |   |
| Two                years later                                                                                          |   |                                       | 13,426 |   |   | 12,729 |   |   | 10,740 |   |   | 6,275 |   |   |   |   |   |   |   |
| Three                years later                                                                                        |   |                                       | 19,939 |   |   | 16,956 |   |   | 14,165 |   |   |   |   |   |   |   |   |   |   |
| Four                years later                                                                                         |   |                                       | 24,166 |   |   | 20,381 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Five                Years later                                                                                         |   |                                       | 27,591 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Six                years later                                                                                          |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Seven                years later                                                                                        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Eight                years later                                                                                        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nine                years later                                                                                         |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ten                years later                                                                                          |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liability                re-estimated as of:                                                                            |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One                year later                                                                                           |   |                                       | 52,115 |   |   | 49,574 |   |   | 43,115 |   |   | 32,845 |   |   | 25,397 |   |   |   |   |
| Two                years later                                                                                          |   |                                       | 56,782 |   |   | 49,331 |   |   | 39,358 |   |   | 29,623 |   |   |   |   |   |   |   |
| Three                years later                                                                                        |   |                                       | 56,540 |   |   | 45,574 |   |   | 36,135 |   |   |   |   |   |   |   |   |   |   |
| Four                years later                                                                                         |   |                                       | 52,784 |   |   | 42,352 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Five                Years later                                                                                         |   |                                       | 49,562 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Six                years later                                                                                          |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Seven                years later                                                                                        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Eight                years later                                                                                        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nine                years later                                                                                         |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ten                years later                                                                                          |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative                Redundancy (Deficiency)                                                                       |   | $                                          | 4,460  |   | $ | 2,554 |   | $ | 7,222 |   | $ | 6,980 |   | $ | 3,221 |   |   |   |   |
|                                                                                                                    |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RECONCILIATION                TO FINANCIAL STATEMENTS                                                                   |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
| Gross                liability - end of year                                                                            |   |                                       |   |   |   |   |   |   |   |   | $ | 53,905 |   | $ | 44,476 |   | $ | 38,944 |   |
| Reinsurance                recoverable                                                                                  |   |                                       |   |   |   |   |   |   |   |   |   | (17,302 | ) |   | (15,858 | ) |   | (16,972 | ) |
| Net                liability - end of year                                                                              |   |                                       |   |   |   |   |   |   |   |   |   | 36,603 |   |   | 28,618 |   |   | 21,972 |   |
| Reinsurance                recoverable                                                                                  |   |                                       |   |   |   |   |   |   |   |   |   | 17,302 |   |   | 15,858 |   |   | 16,972 |   |
|                                                                                                                    |   |                                       |   |   |   |   |   |   |   |   |   | 53,905 |   |   | 44,476 |   |   | 38,944 |   |
| Discontinued                personal lines insurance                                                                    |   |                                       |   |   |   | 51 |   |   | 132 |   |   | 101 |   |
| Liability                to California Insurance Guarantee Association for Workers' Compensation                payouts |   | 2,038                                      |   |   | 2,038 |   |   | 2,038 |   |
| Balance                sheet liability                                                                                  |   |                                       |   |   |   |   |   |   |   |   | $ | 55,994 |   | $ | 46,646 |   | $ | 41,083 |   |
|                                                                                                                    |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross                re-estimated liability - latest                                                                    |   |                                       |   |   |   |   |   |   |   |   | $ | 51,196 |   | $ | 43,776 |   |   |   |   |
| Re-estimated                recoverable - latest                                                                        |   |                                       |   |   |   |   |   |   |   |   |   | (21,573 | ) |   | (18,379 | ) |   |   |   |
| Net                re-estimated liability - latest                                                                      |   |                                       |   |   |   |   |   |   |   |   | $ | 29,623 |   | $ | 25,397 |   |   |   |   |
| Net                cumulative redundancy                                                                                |   |                                       |   |   |   |   |   |   |   |   | $ | 6,980 |   | $ | 3,221 |   |   |   |   |

**Loss      Reserve Experience**

----

***Table            of Contents***

*Reconciliation      of Unpaid Loss and Loss Adjustment Expenses*

**Reinsurance**

*Medical      Professional Liability Insurance through Physicians Insurance Company of      Ohio*

*Property      and Casualty Insurance through Citation Insurance Company*

----

***Table            of Contents***

*Workers’      Compensation Insurance through Citation Insurance Company*

*Claims      and Liabilities*
*      Related to the Insolvency of Fremont Indemnity Company*

*Reinsurance      Agreements on Workers’ Compensation Insurance Liabilities*

----

***Table            of            Contents***

**ITEM      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET      RISK**

**ITEM      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY      DATA**

----

***Table            of Contents***

**SELECTED      QUARTERLY FINANCIAL DATA**

|                                                                     |   | **Three                Months Ended** |       |
|--------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                     |   | March                31,              |       | June                30, |   | September                30, |   | December                31, |   |
|                                                                     |   | 2006                                  |       | 2006 |   | 2006 |   | 2006 |   |
| Net                investment income and net realized gain               |   |                                  | 16,758     |   |   | 5,119 |   |   | 7,215 |   |   | 10,518 |   |
| Sale                of land and water rights                             |   |                                  | 1,256      |   |   | 3,833 |   |   | 28,311 |   |   | 8,109 |   |
| Total                revenues                                            |   |                                  | 18,247     |   |   | 9,548 |   |   | 36,199 |   |   | 18,730 |   |
| Gross                profit                                              |   |                                  | 876        |   |   | 2,531 |   |   | 22,494 |   |   | 5,331 |   |
| Net                income (loss)                                         |   |                                  | 7,218      |   |   | 382 |   |   | 11,830 |   |   | 9,813 |   |
|                                                                     |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic                and Diluted:                                        |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per share                               |   | $                                     | 0.54       |   | $ | 0.03 |   | $ | 0.74 |   | $ | 0.62 |   |
|                                                                     |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Weighted                average common and equivalent shares outstanding |   |                                  | 13,271,440 |   |   | 14,927,125 |   |   | 15,880,458 |   |   | 15,880,458 |   |

|                                                                     |   | **Three                Months Ended** |       |
|--------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                     |   | March                31,              |       | June                30, |   | September                30, |   | December                31, |   |
|                                                                     |   | 2005                                  |       | 2005 |   | 2005 |   | 2005 |   |
| Net                investment income and net realized gain               |   | $                                     | 4,670      |   | $ | 5,657 |   | $ | 2,611 |   | $ | 2,980 |   |
| Sale                of land and water rights                             |   |                                  | 2,154      |   |   | 96,171 |   |   | 3,914 |   |   | 22,745 |   |
| Total                revenues                                            |   |                                  | 7,227      |   |   | 102,166 |   |   | 6,731 |   |   | 25,988 |   |
| Gross                profit                                              |   |                                  | 1,412      |   |   | 57,888 |   |   | 2,468 |   |   | 16,686 |   |
|                                                                     |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss)                                         |   | $                                     | (6,963     | ) | $ | 23,592 |   | $ | (9,283 | ) | $ | 8,856 |   |
|                                                                     |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic                and Diluted:                                        |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per share                               |   | $                                     | (0.56      | ) | $ | 1.83 |   | $ | (0.70 | ) | $ | 0.67 |   |
|                                                                     |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Weighted                average common and equivalent shares outstanding |   |                                  | 12,366,440 |   |   | 12,919,496 |   |   | 13,271,440 |   |   | 13,271,440 |   |

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***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      FINANCIAL STATEMENTS**

**AS      OF DECEMBER 31, 2006 AND 2005**

**AND      FOR EACH OF THE**

**THREE      YEARS IN THE PERIOD**

**ENDED      DECEMBER 31, 2006**

**INDEX      TO CONSOLIDATED FINANCIAL STATEMENTS**

| Report                of Independent Registered Public Accounting Firm                                                                    | 63    |
|-------------------------------------------------------------------------------------------------------------------------------------------|-------|
| Consolidated                Balance Sheets as of December 31, 2006 and 2005                                                               | 64-65 |
| Consolidated                Statements of Operations for the Years Ended December 31, 2006, 2005                and                2004   | 66    |
| Consolidated                Statements of Shareholders’ Equity for the Years Ended December 31, 2006,                2005, and 2004 | 67-69 |
| Consolidated                Statements of Cash Flows for the Years Ended December 31, 2006, 2005                and                2004   | 70    |
| Notes                to Consolidated Financial Statements                                                                                 | 71-97 |

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***Table            of Contents***

**REPORT        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

*Share-Based        Payment, *

*Internal Control*
*—Integrated        Framework*

----

***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

**December      31, 2006 and 2005**

|                                                      |   | 2006   |        | 2005   |   |
|-----------------------------------------------------------|--------|--------|-------------|--------|--------|
| Available                for Sale Investments (Note 3):   |   |   |        |   |   |
| Fixed                maturities                           |   | $      | 63,483,271  |   | $      | 92,813,137 |   |
| Equity                securities                          |   |   | 208,478,670 |   |   | 194,633,197 |   |
| Total                investments                          |   |   | 271,961,941 |   |   | 287,446,334 |   |
|                                                      |   |   |        |   |   |   |   |
| Cash                and cash equivalents                  |   |   | 136,621,578 |   |   | 37,492,245 |   |
| Notes                and other receivables, net (Note 6)  |   |   | 17,177,827  |   |   | 14,410,739 |   |
| Reinsurance                receivables (Note 10)          |   |   | 17,290,039  |   |   | 16,186,105 |   |
| Real                estate and water assets (Note 5)      |   |   | 102,538,859 |   |   | 76,891,435 |   |
| Property                and equipment, net (Note 8)       |   |   | 518,564     |   |   | 1,036,894 |   |
| Other                assets                               |   |   | 2,934,131   |   |   | 3,750,352 |   |
| Assets                of discontinued operations (Note 2) |   |   |        |   |   | 4,615,518 |   |
| Total                assets                               |   | $      | 549,042,939 |   | $      | 441,829,622 |   |

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

----

***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS, CONTINUED**

**December      31, 2006 and 2005**

|                                                                                                                                                                                                          |   | 2006   |        | 2005   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|
| Policy                liabilities and accruals:                                                                                                                                                               |   |   |        |   |   |
| Unpaid                losses and loss adjustment expenses (Note 11)                                                                                                                                           |   | $      | 41,083,301  |   | $      | 46,646,906 |   |
| Reinsurance                balance payable                                                                                                                                                                    |   |   | 317,431     |   |   | 325,081 |   |
| Deferred                compensation (Note 1)                                                                                                                                                                 |   |   | 49,776,043  |   |   | 42,737,293 |   |
| Other                liabilities                                                                                                                                                                              |   |   | 21,965,391  |   |   | 16,790,693 |   |
| Bank borrowings                (Note 4)                                                                                                                                                                  |   |   | 12,720,558  |   |   | 11,834,868 |   |
| Net                deferred income taxes (Note 7)                                                                                                                                                             |   |   | 17,952,916  |   |   | 17,239,062 |   |
| Liabilities                of discontinued operations (Note 2 )                                                                                                                                               |   |   |        |   |   | 4,282,247 |   |
| Total                liabilities                                                                                                                                                                              |   |   | 143,815,640 |   |   | 139,856,150 |   |
| Minority                interest                                                                                                                                                                              |   |   |        |   |   | 1,098,515 |   |
|                                                                                                                                                                                                          |   |   |        |   |   |   |   |
| Commitments                and Contingencies (Notes 10 - 15 and 19)                                                                                                                                           |   |   |        |   |   |   |   |
|                                                                                                                                                                                                          |   |   |        |   |   |   |   |
| Common                stock, $.001 par value; authorized 100,000,000; 20,306,923 issued                and                outstanding at December 31, 2006 and 17,706,923 at December 31,                2005 |   |   | 20,307      |   |   | 17,707 |   |
| Additional                paid-in capital                                                                                                                                                                     |   |   | 331,582,308 |   |   | 257,466,412 |   |
| Accumulated                other comprehensive income (Note 1)                                                                                                                                                |   |   | 60,950,679  |   |   | 60,092,462 |   |
| Retained                earnings                                                                                                                                                                              |   |   | 90,968,815  |   |   | 61,725,860 |   |
|                                                                                                                                                                                                          |   |   | 483,522,109 |   |   | 379,302,441 |   |
| Less                treasury stock, at cost (common shares: 4,426,465 in 2006 and 4,435,483                in                2005)                                                                            |   |   | (78,294,810 | )      |   | (78,427,484 | ) |
| Total                shareholders' equity                                                                                                                                                                     |   |   | 405,227,299 |   |   | 300,874,957 |   |
| Total                liabilities and shareholders' equity                                                                                                                                                     |   | $      | 549,042,939 |   | $      | 441,829,622 |   |

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

----

***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**For      the years ended December 31, 2006, 2005 and 2004**

|                                                                                                   |   | 2006   |        | 2005   |   | 2004        |   |
|--------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|-------------|--------|
| Revenues:                                                                                              |   |   |        |   |   |        |   |
| Sale                of real estate and water assets                                                    |   | $      | 41,509,116  |   | $      | 124,984,427 |   | $ | 10,879,172 |   |
| Net                investment income (Note 3)                                                          |   |   | 13,556,192  |   |   | 8,195,173   |   |   | 5,789,930 |   |
| Net                realized gain on investments (Note 3)                                               |   |   | 26,053,077  |   |   | 7,721,774   |   |   | 3,265,505 |   |
| Other                                                                                                  |   |   | 1,604,859   |   |   | 1,210,320   |   |   | 2,188,114 |   |
| Total                revenues                                                                          |   |   | 82,723,244  |   |   | 142,111,694 |   |   | 22,122,721 |   |
| Costs                and expenses:                                                                     |   |   |        |   |   |        |   |   |   |   |
| Operating                and other costs                                                               |   |   | 23,581,759  |   |   | 56,914,672  |   |   | 26,509,190 |   |
| Cost                of real estate and water assets sold                                               |   |   | 10,276,789  |   |   | 46,530,763  |   |   | 4,496,652 |   |
| Loss                and loss adjustment (recoveries) expenses (Note 11)                                |   |   | (3,224,401  | )      |   | (3,664,832  | )      |   | 443,284 |   |
| Interest                expense                                                                        |   |   |        |   |   | 661,314     |   |   | 787,925 |   |
| Depreciation                and amortization                                                           |   |   | 1,222,351   |   |   | 1,344,371   |   |   | 1,393,025 |   |
| Total                costs and expenses                                                                |   |   | 31,856,498  |   |   | 101,786,288 |   |   | 33,630,076 |   |
| Income                (loss) before income taxes and minority interest                                 |   |   | 50,866,746  |   |   | 40,325,406  |   |   | (11,507,355 | ) |
| Provision                (benefit) for federal, foreign and state income taxes (Note                7) |   |   | 19,390,374  |   |   | 18,594,623  |   |   | (3,047,721 | ) |
| Income                (loss) before minority interest                                                  |   |   | 31,476,372  |   |   | 21,730,783  |   |   | (8,459,634 | ) |
| Minority                interest in loss of subsidiaries                                               |   |   | 34,252      |   |   | 536,120     |   |   | 599,375 |   |
| Income                (loss) from continuing operations                                                |   |   | 31,510,624  |   |   | 22,266,903  |   |   | (7,860,259 | ) |
| Loss                from discontinued operations, net of tax (Note 2)                                  |   |   | (10,256,984 | )      |   | (7,315,964  | )      |   | (5,811,861 | ) |
| Minority                interest in loss of discontinued operations                                    |   |   |        |   |   | 705,702     |   |   | 2,613,436 |   |
| Gain                on disposal of discontinued operations, net                                        |   |   | 7,989,315   |   |   | 545,000     |   |   | 500,000 |   |
| Loss                from discontinued operations                                                       |   |   | (2,267,669  | )      |   | (6,065,262  | )      |   | (2,698,425 | ) |
| Net                income (loss)                                                                       |   | $      | 29,242,955  |   | $      | 16,201,641  |   | $ | (10,558,684 | ) |
|                                                                                                   |   |   |        |   |   |        |   |   |   |   |
| Net                income (loss) per common share - basic and diluted:                                 |   |   |        |   |   |        |   |   |   |   |
| Income                (loss) from continuing operations                                                |   | $      | 2.10        |   | $      | 1.72        |   | $ | (0.64 | ) |
| Loss                from discontinued operations                                                       |   |   | (0.15       | )      |   | (0.47       | )      |   | (0.22 | ) |
| Net                income (loss) per common share                                                      |   | $      | 1.95        |   | $      | 1.25        |   | $ | (0.85 | ) |
| Weighted                average shares outstanding                                                     |   |   | 14,994,947  |   |   | 12,959,029  |   |   | 12,368,354 |   |

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

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***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE      INCOME**

**For      the years ended December 31, 2006, 2005 and 2004**

|                                                                                                                                                                       |   |   |   |       |   |        |   | Accumulated                Other    |        |        |   |       |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|--------|-------------|--------|-------------------------------------|-------------|-------------|--------|------------|--------|
|                                                                                                                                                                       |   |   |   |       |   |        |   | Comprehensive                Income |        |        |   |       |   |
|                                                                                                                                                                       |   |   |   | Additional |   |        |   | Net                Unrealized       |        | Foreign     |   |       |   |   |   |
|                                                                                                                                                                       |   | Common |   | Paid-In    |   | Retained    |   | Appreciation                        |        | Currency    |   | Treasury   |   |   |   |
|                                                                                                                                                                       |   | Stock  |   | Capital    |   | Earnings    |   | on                Investments       |        | Translation |   | Stock      |   | Total |   |
|                                                                                                                                                                       |   |   |   |       |   |        |   |                                |        |        |   |       |   |   |   |
| Balance,                January 1, 2004                                                                                                                                    |   | $      | 16,802 |       | $      | 236,082,703 |   | $                                   | 56,082,903  |        | $      | 20,879,030 |   | $ | (5,595,626 | ) | $ | (78,305,410 | ) | $ | 229,160,402 |   |
|                                                                                                                                                                       |   |   |   |       |   |        |   |                                |        |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                Loss for 2004                                                                                                                                 |   |   |   |       |   |        |   |                                |        |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Net                loss                                                                                                                                                    |   |   |   |       |   |        |   |                                | (10,558,684 | )           |   |       |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized appreciation on investments net of deferred tax of $11                million                and reclassification adjustment of $2.2 million |   |   |   |       |   |        |   |                                |        |        |   | 21,068,132 |   |   |   |   |   |   |   |   |   |   |
| Foreign                currency translation                                                                                                                                |   |   |   |       |   |        |   |                                |        |        |   |       |   |   | 374,164 |   |   |   |   |   |   |   |
| Total                Comprehensive Income                                                                                                                                  |   |   |   |       |   |        |   |                                |        |        |   |       |   |   |   |   |   |   |   |   | 10,883,612 |   |
|                                                                                                                                                                       |   |   |   |       |   |        |   |                                |        |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition                of treasury stock for deferred compensation plans                                                                                               |   |   |   |       |   |        |   |                                |        |        |   |       |   |   |   |   |   | (121,235 | ) |   | (121,235 | ) |
|                                                                                                                                                                       |   |   |   |       |   |        |   |                                |        |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Other                                                                                                                                                                      |   |   |   |       |   | 6,519       |   |                                |        |        |   |       |   |   |   |   |   |   |   |   | 6,519 |   |
| Balance,                December 31, 2004                                                                                                                                  |   | $      | 16,802 |       | $      | 236,089,222 |   | $                                   | 45,524,219  |        | $      | 41,947,162 |   | $ | (5,221,462 | ) | $ | (78,426,645 | ) | $ | 239,929,298 |   |

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

----

***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME,      CONTINUED**

**For      the years ended December 31, 2006, 2005 and 2004**

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

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

----

***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME,      CONTINUED**

**For      the years ended December 31, 2006, 2005 and 2004**

|                                                                                                                                                                         |   |   |   |       |   |        |   | Accumulated                Other    |       |        |   |       |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|--------|-------------|--------|-------------------------------------|------------|-------------|--------|------------|--------|
|                                                                                                                                                                         |   |   |   |       |   |        |   | Comprehensive                Income |       |        |   |       |   |
|                                                                                                                                                                         |   |   |   | Additional |   |        |   | Net                Unrealized       |       | Foreign     |   |       |   |   |   |
|                                                                                                                                                                         |   | Common |   | Paid-In    |   | Retained    |   | Appreciation                        |       | Currency    |   | Treasury   |   |   |   |
|                                                                                                                                                                         |   | Stock  |   | Capital    |   | Earnings    |   | on                Investments       |       | Translation |   | Stock      |   | Total |   |
|                                                                                                                                                                         |   |   |   |       |   |        |   |                                |       |        |   |       |   |   |   |
| Balance,                December 31, 2005                                                                                                                                    |   | $      | 17,707 |       | $      | 257,466,412 |   | $                                   | 61,725,860 |        | $      | 66,124,412 |   | $ | (6,031,950 | ) | $ | (78,427,484 | ) | $ | 300,874,957 |   |
|                                                                                                                                                                         |   |   |   |       |   |        |   |                                |       |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                Income for 2006                                                                                                                                 |   |   |   |       |   |        |   |                                |       |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                                                                                    |   |   |   |       |   |        |   |                                | 29,242,955 |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized appreciation on investments net of deferred tax of $1.5                million                and reclassification adjustment of $10.7 million |   |   |   |       |   |        |   |                                |       |        |   | 69,016     |   |   |   |   |   |   |   |   |   |   |
| Foreign                currency translation                                                                                                                                  |   |   |   |       |   |        |   |                                |       |        |   |       |   |   | 789,201 |   |   |   |   |   |   |   |
| Total                Comprehensive Income                                                                                                                                    |   |   |   |       |   |        |   |                                |       |        |   |       |   |   |   |   |   |   |   |   | 30,101,172 |   |
|                                                                                                                                                                         |   |   |   |       |   |        |   |                                |       |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Disposition                of treasury stock from deferred compensation plans                                                                                                |   |   |   |       |   | 173,352     |   |                                |       |        |   |       |   |   |   |   |   | 132,674 |   |   | 306,026 |   |
|                                                                                                                                                                         |   |   |   |       |   |        |   |                                |       |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Common                stock offering, net of expenses of $4.1 million                                                                                                        |   |   | 2,600  |       |   | 73,942,544  |   |                                |       |        |   |       |   |   |   |   |   |   |   |   | 73,945,144 |   |
|                                                                                                                                                                         |   |   |   |       |   |        |   |                                |       |        |   |       |   |   |   |   |   |   |   |   |   |   |
| Balance,                December 31, 2006                                                                                                                                    |   | $      | 20,307 |       | $      | 331,582,308 |   | $                                   | 90,968,815 |        | $      | 66,193,428 |   | $ | (5,242,749 | ) | $ | (78,294,810 | ) | $ | 405,227,299 |   |

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

----

***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**For      the years ended December 31, 2006, 2005 and 2004**

|                                                                                                                                                                 |   | 2006    |        | 2005   |   | 2004        |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|-------------|--------|--------|-------------|--------|
| **CASH                FLOWS FROM OPERATING ACTIVITIES:**                                                                                                             |   |    |        |   |   |        |   |
| Net                income (loss)                                                                                                                                     |   | $       | 29,242,955  |   | $      | 16,201,641  |   | $ | (10,558,684 | ) |
| Adjustments                to reconcile net income (loss) to net cash provided by (used in)                operating                activities, net of acquisitions: |   |    |        |   |   |        |   |   |   |   |
| Provision                for deferred taxes                                                                                                                          |   |    | 4,286,402   |   |   | (6,682,144  | )      |   | (2,211,306 | ) |
| Depreciation                and amortization                                                                                                                         |   |    | 2,303,827   |   |   | 2,216,934   |   |   | 1,956,183 |   |
| Gain                on sale of investments                                                                                                                           |   |    | (26,053,077 | )      |   | (7,721,774  | )      |   | (3,265,505 | ) |
| Loss                from discontinued operations, net                                                                                                           |   |    | 2,267,669   |   |   | 6,065,662   |   |   | 2,698,435 |   |
| Gain                on retirement of minority interest in V&B, LLC.                                                                                              |   |    | (322,048    | )      |   |        |   |   |   |   |
| Provision                for uncollectible accounts                                                                                                                  |   |    | 278,664     |   |   |        |   |   | 264,056 |   |
| Minority                interest                                                                                                                                     |   |    | (34,252     | )      |   | (536,120    | )      |   | (599,375 | ) |
| Changes                in assets and liabilities, net of effects of acquisitions:                                                                                    |   |    |        |   |   |        |   |   |   |   |
| Notes                and other receivables                                                                                                                           |   |    | (3,045,752  | )      |   | (416,856    | )      |   | 1,081,747 |   |
| Other                liabilities                                                                                                                                     |   |    | 502,669     |   |   | 7,525,944   |   |   | 822,262 |   |
| Other                assets                                                                                                                                          |   |    | 816,221     |   |   | 3,759,607   |   |   | (2,331,656 | ) |
| Real                estate and water assets                                                                                                                          |   |    | 4,277,939   |   |   | 35,659,806  |   |   | 2,740,891 |   |
| Income                taxes                                                                                                                                          |   |    | 4,636,472   |   |   | 824,547     |   |   | 3,439 |   |
| Reinsurance                receivable                                                                                                                                |   |    | (1,103,934  | )      |   | 971,224     |   |   | 556,683 |   |
| Reinsurance                payable                                                                                                                                   |   |    | (7,650      | )      |   | (347,943    | )      |   | 1,993 |   |
| SAR                payable and deferred compensation                                                                                                                 |   |    | 7,344,777   |   |   | 24,275,483  |   |   | 9,761,978 |   |
| Unpaid                losses and loss adjustment expenses                                                                                                            |   |    | (5,563,605  | )      |   | (9,347,469  | )      |   | (4,869,509 | ) |
| All                other operating activities                                                                                                                        |   |    | (244,983    | )      |   | (5,488      | )      |   | 254,615 |   |
| Cash                provided by (used in) operating activities - continuing                operations                                                                |   |    | 19,582,294  |   |   | 72,443,054  |   |   | (3,693,763 | ) |
| Cash                used by operating activities - discontinued                operations                                                                       |   |    | (6,992,994) |   |   | (4,398,197) |   |   | (3,310,282 | ) |
| Cash                provided by (used in) operating activities                                                                                                       |   |    | 12,589,300  |   |   | 68,044,857  |   |   | (7,004,045 | ) |
|                                                                                                                                                                 |   |    |        |   |   |        |   |   |   |   |
| **CASH                FLOWS FROM INVESTING ACTIVITIES:**                                                                                                             |   |    |        |   |   |        |   |   |   |   |
| Proceeds                from the sale of available for sale investments:                                                                                             |   |    |        |   |   |        |   |   |   |   |
| Fixed                maturities                                                                                                                                      |   |    | 2,703,700   |   |   | 13,757,855  |   |   | 18,334,850 |   |
| Equity                securities                                                                                                                                     |   |    | 47,339,058  |   |   | 11,993,556  |   |   | 10,871,372 |   |
| Proceeds                from maturity of available for sale investments                                                                                              |   |    | 73,408,060  |   |   | 9,822,000   |   |   | 5,325,000 |   |
| Purchases                of available for sale investments:                                                                                                          |   |    |        |   |   |        |   |   |   |   |
| Fixed                maturities                                                                                                                                      |   |    | (47,253,484 | )      |   | (78,685,009 | )      |   | (11,322,556 | ) |
| Equity                securities                                                                                                                                     |   |    | (30,633,915 | )      |   | (22,552,436 | )      |   | (18,503,481 | ) |
| Purchases                of minority interest in subsidiaries                                                                                                        |   |    | (700,000    | )      |   |        |   |   | (1,322,138 | ) |
| Real                estate and water asset capital expenditure                                                                                                       |   |    | (27,606,419 | )      |   | (1,456,843  | )      |   | (790,961 | ) |
| All                other investing activities                                                                                                                        |   |    | (120,568    | )      |   | (73,013     | )      |   | (297,980 | ) |
| Cash                provided by (used in) investing activities - continuing                operations                                                                |   |    | 17,136,432  |   |   | (67,193,890 | )      |   | 2,294,106 |   |
| Cash                used in investing activities - discontinued operations                                                                                           |   |    | (1,936,237  | )      |   | (1,779,446  | )      |   | (1,713,730 | ) |
| Cash                provided by (used in) investing activities                                                                                                       |   |    | 15,200,195  |   |   | (68,973,336 | )      |   | 580,376 |   |
|                                                                                                                                                                 |   |    |        |   |   |        |   |   |   |   |
| **CASH                FLOWS FROM FINANCING ACTIVITIES:**                                                                                                             |   |    |        |   |   |        |   |   |   |   |
| Proceeds                from issuance of common stock, net of expenses                                                                                               |   |    | 73,945,144  |   |   | 21,378,095  |   |   |   |   |
| Repayment                of bank and other borrowings                                                                                                                |   |    | (37,930     | )      |   | (3,915,176  | )      |   | (1,344,516 | ) |
| Proceeds                from bank and other borrowings                                                                                                               |   |    |        |   |   |        |   |   | 2,443,196 |   |
| Cash                paid for purchase of PICO stock (for deferred compensation                plans)                                                                 |   |    |        |   |   | (839        | )      |   | (121,235 | ) |
| Cash                provided by financing activities - continuing operations                                                                                         |   |    | 73,907,214  |   |   | 17,462,080  |   |   | 977,445 |   |
| Cash                provided by (used in) financing activities - discontinued                operations                                                              |   |    | (498,272    | )      |   | 43,880      |   |   | 506,416 |   |
| Cash                provided by financing activities                                                                                                                 |   |    | 73,408,942  |   |   | 17,505,960  |   |   | 1,483,861 |   |
| Effect                of exchange rate changes on cash                                                                                                               |   |    | (2,371,275  | )      |   | 3,809,797   |   |   | (2,001,747 | ) |
| Net                increase (decrease) in cash and cash equivalents                                                                                                  |   |    | 98,827,162  |   |   | 20,387,278  |   |   | (6,941,555 | ) |
| Cash                and cash equivalents, beginning of year                                                                                                          |   |    | 37,794,416  |   |   | 17,407,138  |   |   | 24,348,693 |   |
| Cash                and cash equivalents, end of year                                                                                                                |   |    | 136,621,578 |   |   | 37,794,416  |   |   | 17,407,138 |   |
| Less                cash and cash equivalents of discontinued operations at end of year                                                                              |   |    |        |   |   | 302,171     |   |   | 193,702 |   |
| Cash                and cash equivalents of continuing operations end of year                                                                                        |   |    | 136,621,578 |   |   | 37,492,245  |   |   | 17,213,436 |   |
|                                                                                                                                                                 |   |    |        |   |   |        |   |   |   |   |
| Supplemental                disclosure of cash flow information:                                                                                                     |   |    |        |   |   |        |   |   |   |   |
| Cash                paid during the year for:                                                                                                                        |   |    |        |   |   |        |   |   |   |   |
| Interest                expense (net of amounts capitalized)                                                                                                         |   |    |        |   | $      | 692,615     |   | $ | 327,608 |   |
| Federal,                state and foreign Income taxes                                                                                                               |   | $       | 10,515,540  |   | $      | 25,487,931  |   | $ | 555,600 |   |
| Non-cash                investing and financing activities:                                                                                                          |   |    |        |   |   |        |   |   |   |   |
| Capitalized                costs included in other liabilities                                                                                                       |   | $  | 2,944,637   |   | $      | 1,106,885   |   |   |   |   |
|                                                                                                                                                                 |   |    |        |   |   |        |   |   |   |   |

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

----

***Table            of Contents***

**PICO      HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

| **1.** | **NATURE                OF OPERATIONS AND SIGNIFICANT ACCOUNTING                POLICIES:** |
|--------|---------------------------------------------------------------------------------------------|

*Organization      and Operations:*

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

|   |   | Currently                PICO’s major activities are: |
|--------|--------|-------------------------------------------------------------|

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

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

|   | · | The                acquisition and financing of                businesses. |
|--------|--------|----------------------------------------------------------------------------|

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

*Unconsolidated      Affiliates:*

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***Table            of Contents***

*Principles        of Consolidation:*

*Use      of Estimates in Preparation of Financial Statements:*

*Revenue      Recognition:*

*Investments:*

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***Table            of Contents***

*Cash      and Cash Equivalents:*

*Real      Estate and Water Assets:*

*Notes      and Other Receivables:*

*Property      and Equipment:*

*Intangibles:*

*Impairment      of Long-Lived Assets:*

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***Table            of Contents***

*Reinsurance:*

*Unpaid      Losses and Loss Adjustment Expenses:*

*Income      Taxes:*

*Earnings      per Share:*

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***Table            of Contents***

*Stock-Based      Compensation:*

*Share-based      Payment,*

*Stock      Based Plans:*

*Stock-Settled      Stock Appreciation Rights:*

*Cash-Settled      Stock Appreciation Rights:*

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***Table            of Contents***

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

*Deferred      Compensation:*

*Accounting      for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi      Trust and Invested*

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***Table            of Contents***

*mprehensive      Income:*

*Reporting      Comprehensive Income,*

|                                                  |   | December                31, |       |
|-------------------------------------------------------|--------|-----------------------------|------------|
|                                                  |   | 2006                        |       | 2005 |   |
|                                                  |   |                        |       |   |   |
| Net                unrealized gain on securities      |   | $                           | 66,193,428 |   | $ | 66,124,412 |   |
| Foreign                currency translation           |   |                        | (5,242,749 | ) |   | (6,031,950 | ) |
| Accumulated                other comprehensive income |   | $                           | 60,950,679 |   | $ | 60,092,462 |   |

*Translation      of Foreign Currency:*

*Reclassifications:*

*Recently      Issued Accounting Pronouncements*

**SFAS      153**

**SFAS      154 **

**SFAS      155**

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***Table            of Contents***

**FIN      48**

**SFAS      157**

**SFAS      158 - **

**SAB      108**

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***Table            of Contents***

| **2.** | **DISCONTINUED                  OPERATIONS:** |
|--------|-----------------------------------------------|

**Proposed        HyperFeed Merger with Exegy:**

**HyperFeed’s      Ability to Continue as a Going Concern:**

**Disposal of      HyperFeed:**

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***Table          of Contents***

|                                                                                |   | 2006   |        | 2005   |   | 2004       |   |
|-------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|------------|--------|
| Revenues:                                                                           |   |   |        |   |   |       |   |
| Service                revenue                                                      |   | $      | 2,907,268   |   | $      | 4,269,618  |   | $ | 5,994,688 |   |
| Investment                income                                                    |   |   | 3,892       |   |   | 1,297      |   |   | 9,427 |   |
| Total                revenues                                                       |   |   | 2,911,160   |   |   | 4,270,915  |   |   | 6,004,115 |   |
| Expenses:                                                                           |   |   |        |   |   |       |   |   |   |   |
| Cost                of service revenue                                              |   |   | 1,326,162   |   |   | 1,443,084  |   |   | 1,585,129 |   |
| Depreciation                and amortization                                        |   |   | 446,922     |   |   | 756,881    |   |   | 870,330 |   |
| Other                costs and expenses                                             |   |   | 9,243,085   |   |   | 9,480,624  |   |   | 8,938,237 |   |
| Total                expenses                                                       |   |   | 11,016,169  |   |   | 11,680,589 |   |   | 11,393,696 |   |
| Loss                before income taxes                                             |   |   | (8,105,009  | )      |   | (7,409,674 | )      |   | (5,389,581 | ) |
| Benefit                for income taxes                                             |   |   | 2,771,672   |   |   | 601,458    |   |   |   |   |
| Loss                from continuing operations                                      |   |   | (5,333,337  | )      |   | (6,808,216 | )      |   | (5,389,581 | ) |
| Loss                on write down of assets to fair value                           |   |   | 4,923,647   |   |   |       |   |   |   |   |
| Loss                from HyperFeed's discontinued operations                        |   |   |        |   |   | (507,748   | )      |   | (422,280 | ) |
| Net                loss before minority interest                                    |   | $      | (10,256,984 | )      | $      | (7,315,964 | )      | $ | (5,811,861 | ) |
| Minority                interest in net loss                                        |   |   |        |   |   | 705,702    |   |   | 2,613,436 |   |
|                                                                                |   |   | (10,256,984 | )      |   | (6,610,262 | )      |   | (3,198,425 | ) |
| Gain                on disposal before tax                                          |   | $      | 3,002,003   |   |   |       |   |   |   |   |
| Income                tax benefit                                                   |   |   | 4,657,283   |   |   |       |   |   |   |   |
| Total                gain on disposal, net of tax                                   |   |   | 7,659,286   |   |   | -          |   |   | - |   |
| Previously                reported gain on discontinued operations within HyperFeed |   |   | 330,000     |   |   | 545,000    |   |   | 500,000 |   |
| Reported                gain on disposal of discontinued operations                 |   |   | 7,989,286   |   |   | 545,000    |   |   | 500,000 |   |
|                                                                                |   | $      | (2,267,698  | )      | $      | (6,065,262 | )      | $ | (2,698,425 | ) |

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***Table            of Contents***

| **3.** | **INVESTMENTS:** |
|--------|------------------|

|                                                                                                                  |   |   |        | Gross      |   | Gross       |   |     |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|------------|--------|-------------|--------|----------|------------|
|                                                                                                                  |   |   |        | Unrealized |   | Unrealized  |   | Carrying |       |
| 2006:                                                                                                                 |   | Cost   |        | Gains      |   | Losses      |   | Value    |       |
| Fixed                  maturities:                                                                                    |   |   |        |       |   |        |   |     |       |
| U.S.                  Treasury securities and obligations of U.S. government - sponsored                  enterprises |   | $      | 1,110,278   |       |   |        |   | $        | (3,731     | ) | $ | 1,106,547 |   |
| Corporate                  securities                                                                                 |   |   | 62,320,043  |       |   | 483,947     |   |     | (427,266   | ) |   | 62,376,724 |   |
|                                                                                                                  |   |   |        |       |   |        |   |     |       |   |   | - |   |
|                                                                                                                  |   |   | 63,430,321  |       |   | 483,947     |   |     | (430,997   | ) |   | 63,483,271 |   |
| Equity                  securities                                                                                    |   |   | 108,866,121 |       |   | 100,313,455 |   |     | (700,906   | ) |   | 208,478,670 |   |
| Total                                                                                                                 |   | $      | 172,296,442 |       | $      | 100,797,402 |   | $        | (1,131,903 | ) | $ | 271,961,941 |   |

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

**Marketable      equity securities: **

**Corporate      Bonds and US Treasury Obligations**

|                                                 |   | Amortized |       | Carrying |   |
|------------------------------------------------------|--------|-----------|------------|----------|--------|
|                                                 |   | Cost      |       | Value    |   |
|                                                 |   |      |       |     |   |
| Due                in one year or less               |   | $         | 25,464,699 |     | $      | 25,417,902 |   |
| Due                after one year through five years |   |      | 17,714,699 |     |   | 17,562,096 |   |
| Due                after five years                  |   |      | 20,250,922 |     |   | 20,503,273 |   |
|                                                 |   | $         | 63,430,321 |     | $      | 63,483,271 |   |

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***Table            of Contents***

|                                   |   | 2006   |       | 2005   |   | 2004      |   |
|----------------------------------------|--------|--------|------------|--------|--------|-----------|--------|
| Investment                income:      |   |   |       |   |   |      |   |
| Fixed                maturities        |   | $      | 2,084,072  |   | $      | 2,468,733 |   | $ | 1,956,838 |   |
| Equity                securities       |   |   | 3,333,526  |   |   | 3,074,692 |   |   | 2,556,841 |   |
| Other                                  |   |   | 8,171,777  |   |   | 2,694,778 |   |   | 1,308,646 |   |
| Total                investment income |   |   | 13,589,375 |   |   | 8,238,203 |   |   | 5,822,325 |   |
| Investment                expenses:    |   |   | (33,183    | )      |   | (43,030   | )      |   | (32,395 | ) |
| Net                investment income   |   | $      | 13,556,192 |   | $      | 8,195,173 |   | $ | 5,789,930 |   |

|                                                   |   | 2006   |       | 2005   |   | 2004      |   |
|--------------------------------------------------------|--------|--------|------------|--------|--------|-----------|--------|
| Gross                realized gains:                   |   |   |       |   |   |      |   |
| Fixed                maturities                        |   | $      | 138,624    |   | $      | 27,303    |   | $ | 205,017 |   |
| Equity                securities and other investments |   |   | 26,391,570 |   |   | 7,843,098 |   |   | 5,629,155 |   |
| Total                gain                              |   |   | 26,530,194 |   |   | 7,870,401 |   |   | 5,834,172 |   |
| Gross                realized losses:                  |   |   |       |   |   |      |   |   |   |   |
| Fixed                maturities                        |   |   | (14,324    | )      |   | (6,899    | )      |   | (50,393 | ) |
| Equity                securities and other investments |   |   | (462,793   | )      |   | (141,728  | )      |   | (2,518,274 | ) |
| Total                loss                              |   |   | (477,117   | )      |   | (148,627  | )      |   | (2,568,667 | ) |
| Net                realized gain                       |   | $      | 26,053,077 |   | $      | 7,721,774 |   | $ | 3,265,505 |   |

*Realized      Gains*

*Realized      Losses*

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***Table            of Contents***

| **4.** | **BANK                BORROWINGS:** |
|--------|-------------------------------------|

|                                                       |   | 2006   |       | 2005   |   |
|------------------------------------------------------------|--------|--------|------------|--------|--------|
| 3.32%                  due in 2007 (3.27% - 3.32% in 2005) |   | $      | 2,462,043  |   | $      | 11,796,940 |   |
| 3.98%                  due in 2009                         |   |   | 10,258,515 |   |   |   |   |
| 7%                  - 8% Notes due:                        |   |   |       |   |   |   |   |
| 2005                  - 2006                               |   |   |       |   |   | 37,928 |   |
|                                                       |   | $      | 12,720,558 |   | $      | 11,834,868 |   |

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***Table            of Contents***

| **5.** | **REAL                ESTATE AND WATER ASSETS:** |
|--------|--------------------------------------------------|

|                                                                                                                                             |   | 2006   |        | 2005   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|
| Nevada                Land:                                                                                                                      |   |   |        |   |   |
| Land                and related mineral rights and water rights                                                                                  |   | $      | 21,771,084  |   | $      | 30,066,419 |   |
|                                                                                                                                             |   |   |        |   |   |   |   |
| Vidler:                                                                                                                                          |   |   |        |   |   |   |   |
| Water                and water rights                                                                                                            |   |   | 26,962,541  |   |   | 22,595,686 |   |
| Land                                                                                                                                             |   |   | 11,171,062  |   |   | 11,213,306 |   |
| California                water storage (Semitropic)                                                                                             |   |   | 2,972,286   |   |   | 2,472,697 |   |
| Land                improvements, net of accumulated amortization of $3.9 million in                2006 and                $3.1 million in 2005 |   |   | 39,661,886  |   |   | 10,543,327 |   |
|                                                                                                                                             |   |   | 80,767,775  |   |   | 46,825,016 |   |
|                                                                                                                                             |   | $      | 102,538,859 |   | $      | 76,891,435 |   |

| **6.** | **NOTES                AND OTHER RECEIVABLES:** |
|--------|-------------------------------------------------|

|                                           |   | 2006   |       | 2005   |   |
|------------------------------------------------|--------|--------|------------|--------|--------|
| Notes                receivable                |   | $      | 15,703,640 |   | $      | 13,012,833 |   |
| Interest                receivable             |   |   | 1,089,950  |   |   | 1,042,520 |   |
| Other                receivables               |   |   | 662,901    |   |   | 619,442 |   |
|                                           |   |   | 17,456,491 |   |   | 14,674,795 |   |
| Allowance                for doubtful accounts |   |   | (278,664   | )      |   | (264,056 | ) |
|                                           |   | $      | 17,177,827 |   | $      | 14,410,739 |   |

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***Table            of Contents***

| **7.** | **FEDERAL,                FOREIGN AND STATE INCOME                TAX:** |
|--------|--------------------------------------------------------------------------|

|                                                                 |   | 2006   |        | 2005   |   |
|----------------------------------------------------------------------|--------|--------|-------------|--------|--------|
| Deferred                tax assets:                                  |   |   |        |   |   |
| Net                operating loss carryforwards                      |   |   |        |   | $      | 2,539,062 |   |
| Deferred                compensation                                 |   | $      | 15,268,524  |   |   | 13,992,344 |   |
| Capital                loss carryforwards                            |   |   | 156,757     |   |   | 156,757 |   |
| Loss                reserves                                         |   |   | 944,912     |   |   | 1,633,853 |   |
| Basis                difference on securities                        |   |   | 5,186,609   |   |   | 1,074,277 |   |
| Impairment                charges                                    |   |   | 4,673,146   |   |   | 5,587,354 |   |
| Fixed                asset basis and deprecation                     |   |   | 806,285     |   |   | 1,141,768 |   |
| Allowance                for bad debts                               |   |   | 300,948     |   |   | 992,244 |   |
| Employee                benefits                                     |   |   | 2,083,723   |   |   | 1,977,876 |   |
| Cumulative                loss on SFAS 133 derivatives               |   |   | 1,385,576   |   |   | 1,385,576 |   |
| Other                                                                |   |   | 2,656,294   |   |   | 2,226,762 |   |
| Total                deferred tax assets                             |   |   | 33,462,774  |   |   | 32,707,873 |   |
| Deferred                tax liabilities:                             |   |   |        |   |   |   |   |
| Unrealized                appreciation on securities                 |   |   | 36,281,111  |   |   | 35,588,675 |   |
| Revaluation                of real estate and water assets           |   |   | 4,902,089   |   |   | 5,330,587 |   |
| Foreign                receivables                                   |   |   | 1,694,970   |   |   | 1,108,702 |   |
| Installment                land sales                                |   |   | 7,347,213   |   |   | 3,941,476 |   |
| Accretion                of bond discount                            |   |   | 90,213      |   |   | 83,540 |   |
| Capitalized                lease                                     |   |   | 287,528     |   |   | 287,528 |   |
| Other                                                                |   |   | 812,566     |   |   | 2,325,154 |   |
| Total                deferred tax liabilities                        |   |   | 51,415,690  |   |   | 48,665,662 |   |
| Net                deferred tax liability before valuation allowance |   |   | (17,952,916 | )      |   | (15,957,789 | ) |
| Valuation                allowance                                   |   |   |        |   |   | (1,281,273 | ) |
| Net                deferred income tax liability                     |   | $      | (17,952,916 | )      | $      | (17,239,062 | ) |

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***Table            of Contents***

|     |   | 2006   |       | 2005   |   | 2004       |   |
|----------|--------|--------|------------|--------|--------|------------|--------|
| Domestic |   | $      | 40,711,997 |   | $      | 39,528,714 |   | $ | (10,270,968 | ) |
| Foreign  |   |   | 10,154,749 |   |   | 796,692    |   |   | (1,236,387 | ) |
| Total    |   | $      | 50,866,746 |   | $      | 40,325,406 |   | $ | (11,507,355 | ) |

|                                              |   | 2006   |       | 2005   |   | 2004       |   |
|---------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|
| Current                tax expense (benefit):     |   |   |       |   |   |       |   |
| U.S.                Federal and state             |   | $      | 14,397,082 |   | $      | 25,203,660 |   | $ | (908,367 | ) |
| Foreign                                           |   |   | 706,890    |   |   | 73,107     |   |   | 71,952 |   |
|                                              |   |   | 15,103,972 |   |   | 25,276,767 |   |   | (836,415 | ) |
| Deferred                tax expense (benefit):    |   |   |       |   |   |       |   |   |   |   |
| U.S.                Federal and state             |   |   | 4,168,822  |   |   | (6,715,681 | )      |   | (1,957,765 | ) |
| Foreign                                           |   |   | 117,580    |   |   | 33,537     |   |   | (253,541 | ) |
|                                              |   |   | 4,286,402  |   |   | (6,682,144 | )      |   | (2,211,306 | ) |
| Total                income tax expense (benefit) |   | $      | 19,390,374 |   | $      | 18,594,623 |   | $ | (3,047,721 | ) |

|                                                                    |   | 2006   |       | 2005   |   | 2004       |   |
|-------------------------------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|
| Federal                income tax provision (benefit) at statutory rate |   | $      | 17,803,361 |   | $      | 14,113,892 |   | $ | (3,912,501 | ) |
| Change                in valuation allowance                            |   |   | (1,281,273 | )      |   | 698,195    |   |   |   |   |
| State                taxes                                              |   |   | (23,658    | )      |   | 3,318,795  |   |   |   |   |
| Management              compensation                                    |   |   | 1,533,445  |   |   | 2,149,534  |   |   | 358,736 |   |
| Capitalized                interest expense                             |   |   | (157,660   | )      |   |       |   |   |   |   |
| Write                off of deferred tax assets                    |   |   | 504,389    |   |   |       |   |   | (809,124 | ) |
| Foreign                rate differences                                 |   |   |       |   |   | (216,626   | )      |   | 277,366 |   |
| Rate                changes                                             |   |   | (212,935   | )      |   | (470,424   | )      |   |   |   |
| Permanent                differences                                    |   |   | 1,224,706  |   |   | (998,743   | )      |   | 1,037,802 |   |
| Total                                                                   |   | $      | 19,390,374 |   | $      | 18,594,623 |   | $ | (3,047,721 | ) |

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***Table            of Contents***

| **8.** | **PROPERTY                AND EQUIPMENT:** |
|--------|--------------------------------------------|

|                                                    |   | 2006   |       | 2005   |   |
|---------------------------------------------------------|--------|--------|------------|--------|--------|
| Office                furniture, fixtures and equipment |   | $      | 2,725,386  |   | $      | 3,154,178 |   |
| Building                and leasehold improvements      |   |   | 437,132    |   |   | 527,218 |   |
|                                                    |   |   | 3,162,518  |   |   | 3,681,396 |   |
| Accumulated                depreciation                 |   |   | (2,643,954 | )      |   | (2,644,502 | ) |
| Property                and equipment, net              |   | $      | 518,564    |   | $      | 1,036,894 |   |

| **9.** | **SHAREHOLDERS’                EQUITY:** |
|--------|------------------------------------------------|

*Long      Term Inventive Plan *

*PICO      Holdings, Inc. 2005 Long Term Incentive Plan*

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***Table            of Contents***

| **10.** | **REINSURANCE:** |
|---------|------------------|

|                                                                    |   | 2006   |       | 2005   |   |
|-------------------------------------------------------------------------|--------|--------|------------|--------|--------|
| Estimated                reinsurance recoverable on:                    |   |   |       |   |   |
| Unpaid                losses and loss adjustment expense                |   | $      | 16,972,280 |   | $      | 15,858,000 |   |
| Reinsurance                recoverable on paid losses and loss expenses |   |   | 317,759    |   |   | 328,105 |   |
| Reinsurance                receivables                                  |   | $      | 17,290,039 |   | $      | 16,186,105 |   |

**CONCENTRATION      OF REINSURANCE AT DECEMBER 31, 2006**

|                                                     |   | Reported |      | Unreported |   | Reinsurer |   |
|----------------------------------------------------------|--------|----------|-----------|------------|--------|-----------|--------|
|                                                     |   | Claims   |      | Claims     |   | Balances  |   |
| General                Reinsurance (A++)                 |   | $        | 6,599,714 |       | $      | 8,296,263 |   | $ | 14,895,977 |   |
| Odessy                Reinsurance (A)                    |   |     | 312,612   |       |   | 350,000   |   |   | 662,612 |   |
| National                Reinsurance Company (NR-3)  |   |     | 221,936   |       |   | 435,064   |   |   | 657,000 |   |
| Medical                Reinsurance (A-)                  |   |     |      |       |   | 326,220   |   |   | 326,220 |   |
| Swiss                Reinsurance America Corp (A+)  |   |     | 16,482    |       |   | 193,742   |   |   | 210,224 |   |
| North                Star Reinsurance (NR-3)             |   |     | 13        |       |   | 148,000   |   |   | 148,013 |   |
| GE                Reinsurance Corporation (NR-5)         |   |     | 48,785    |       |   | 66,462    |   |   | 115,247 |   |
| All                others                                |   |     | 118,288   |       |   | 156,458   |   |   | 274,746 |   |
|                                                     |   | $        | 7,317,830 |       | $      | 9,972,209 |   | $ | 17,290,039 |   |

|    |   | 2006   |       | 2005 |   | 2004       |   |
|---------|--------|--------|------------|------|--------|------------|--------|
| Direct  |   | $      | (700,818   | )    | $      | (2,092,123 | )      | $ | 1,159,439 |   |
| Assumed |   |   | (2,927     | )    |   | 176,880    |   |   | 192,102 |   |
| Ceded   |   |   | (2,520,656 | )    |   | (1,749,589 | )      |   | (908,257 | ) |
|    |   | $      | (3,224,401 | )    | $      | (3,664,832 | )      | $ | 443,284 |   |

----

***Table            of Contents***

| **11.** | **RESERVES                FOR UNPAID LOSS AND LOSS ADJUSTMENT                EXPENSES:** |
|---------|------------------------------------------------------------------------------------------|

|                                                                                                                                |   | 2006   |        | 2005   |   | 2004        |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|-------------|--------|
| Balance                at January 1                                                                                                 |   | $      | 46,646,906  |   | $      | 55,994,375  |   | $ | 60,863,884 |   |
| Less                reinsurance recoverable                                                                                         |   |   | (15,858,000 | )      |   | (17,302,699 | )      |   | (17,490,157 | ) |
| Net                balance at January 1                                                                                             |   |   | 30,788,906  |   |   | 38,691,676  |   |   | 43,373,727 |   |
| Incurred                loss and loss adjustment expenses (recoveries) for prior accident                year                claims |   |   | (3,224,401  | )      |   | (3,664,832  | )      |   | 443,284 |   |
| Payments                for claims occurring during                                                                                 |   |   |        |   |   |        |   |   |   |   |
| prior                accident years                                                                                                 |   |   | (3,453,484  | )      |   | (4,237,938  | )      |   | (5,125,335 | ) |
| Net                change for the year                                                                                              |   |   | (6,677,885  | )      |   | (7,902,770  | )      |   | (4,682,051 | ) |
| Net                balance at December 31                                                                                           |   |   | 24,111,021  |   |   | 30,788,906  |   |   | 38,691,676 |   |
| Plus                reinsurance recoverable                                                                                         |   |   | 16,972,280  |   |   | 15,858,000  |   |   | 17,302,699 |   |
| Balance                at December 31                                                                                               |   | $      | 41,083,301  |   | $      | 46,646,906  |   | $ | 55,994,375 |   |

----

***Table            of Contents***

| **12.** | **EMPLOYEE                BENEFITS, COMPENSATION AND INCENTIVE                PLAN:** |
|---------|---------------------------------------------------------------------------------------|

| **13.** | **REGULATORY                MATTERS:** |
|---------|----------------------------------------|

----

***Table            of Contents***

| **14.** | **COMMITMENTS                  AND CONTINGENCIES:** |
|---------|-----------------------------------------------------|

| Year       |   |   |      |
|------------|--------|--------|-----------|
| 2007       |   | $      | 991,347   |   |
| 2008       |   |   | 620,766   |   |
| 2009       |   |   | 313,683   |   |
| 2010       |   |   | 205,721   |   |
| 2011       |   |   | 211,121   |   |
| Thereafter |   |   | 3,001,783 |   |
| Total      |   | $      | 5,344,421 |   |

* *
* *

**Exegy      Litigation:**

**    HyperFeed      Technologies:**

**    Fish      Springs Ranch,      LLC:**

----

***Table            of Contents***

| **15.** | **RELATED-PARTY                TRANSACTIONS:** |
|---------|------------------------------------------------|

| **16.** | **STATUTORY                INFORMATION:** |
|---------|-------------------------------------------|

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

|   | (2) | Equity                in net income of subsidiaries and affiliates is credited directly                to                shareholders’ equity for statutory accounting                purposes. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Table            of Contents***

|   | (3) | Fixed                maturity securities are carried at amortized                cost. |
|--------|-----|----------------------------------------------------------------------------------------|

|   | (4) | Loss                and loss adjustment expense reserves and unearned premiums are reported                net of the impact of reinsurance for statutory accounting                purposes. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                 |   | 2006        |       | 2005   |   | 2004       |   |
|------------------------------------------------------|--------|-------------|------------|--------|--------|------------|--------|
| Physicians                Insurance Company of Ohio: |   | (Unaudited) |       |   |   |       |   |
| Policyholders'                surplus                |   | $           | 68,929,902 |   | $      | 57,409,969 |   | $ | 43,255,603 |   |
| Statutory                net income                  |   | $           | 7,173,897  |   | $      | 6,514,608  |   | $ | 9,628,569 |   |
| Citation                Insurance Company:           |   |        |       |   |   |       |   |   |   |   |
| Policyholders'                surplus                |   | $           | 26,383,195 |   | $      | 25,401,061 |   | $ | 19,293,135 |   |
| Statutory                net income                  |   | $           | 3,502,998  |   | $      | 1,655,790  |   | $ | 562,129 |   |

| **17.** | **SEGMENT                REPORTING:** |
|---------|---------------------------------------|

*Water      Resources and Water Storage*

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

|   | · | development                of storage and distribution infrastructure;                and |
|--------|--------|-------------------------------------------------------------------------------------------|

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

*Real      Estate Operations*

----

***Table            of Contents***

*Insurance      Operations in Run Off*

*Business      Acquisitions and Financing*

----

***Table            of Contents***

|                                             |   |                       |       | Water                Resources |   | Insurance                    |   | Business                          |        |         |   |         |   |
|--------------------------------------------------|--------|----------------------------|------------|--------------------------------|--------|------------------------------|--------|-----------------------------------|-------------|--------------|--------|--------------|--------|
|                                             |   | Real                Estate |       | and                Water       |   | Operations                in |   | Acquisitions                & |        | Discontinued |   |         |   |
|                                             |   | Operations                 |       | Storage                        |   | Run                Off       |   | Finance                           |        | Operations   |   | Consolidated |   |
| 2006                                             |   |                       |       |                           |   |                         |   |                              |        |         |   |         |   |
| Revenues                                         |   | $                          | 41,405,577 |                           | $      | 6,181,616                    |   | $                                 | 13,277,532  |         | $      | 21,858,519   |   |   |   |   | $ | 82,723,244 |   |
| Net                investment income             |   |                       | 1,981,172  |                           |   | 2,805,107                    |   |                              | 3,158,955   |         |   | 5,610,958    |   |   |   |   |   | 13,556,192 |   |
| Interest                expense                  |   |                       |       |                           |   |                         |   |                              |        |         |   |         |   |   |   |   |   | - |   |
| Depreciation                and amortization     |   |                       | 54,223     |                           |   | 1,084,404                    |   |                              | 7,467       |         |   | 76,257       |   |   |   |   |   | 1,222,351 |   |
| Income                (loss) before income taxes |   |                       | 30,499,188 |                           |   | (2,451,422                   | )      |                              | 15,980,096  |         |   | 6,838,884    |   |   |   |   |   | 50,866,746 |   |
| Assets                                           |   |                       | 73,266,068 |                           |   | 146,115,727                  |   |                              | 202,356,668 |         |   | 127,304,476  |   |   |   |   |   | 549,042,939 |   |
| Capital                expenditure               |   |                       | 79,938     |                           |   | 30,117,492                   |   |                              |        |         |   | 27,337       |   |   |   |   |   | 30,224,767 |   |
|                                             |   |                       |       |                           |   |                         |   |                              |        |         |   |         |   |   |   |   |   |   |   |
| 2005                                             |   |                       |       |                           |   |                         |   |                              |        |         |   |         |   |   |   |   |   |   |   |
| Revenues                                         |   | $                          | 21,811,469 |                           | $      | 106,448,584                  |   | $                                 | 8,108,639   |         | $      | 5,743,002    |   |   |   |   | $ | 142,111,694 |   |
| Net                investment income             |   |                       | 1,010,194  |                           |   | 1,177,078                    |   |                              | 3,051,278   |         |   | 2,956,623    |   |   |   |   |   | 8,195,173 |   |
| Interest                expense                  |   |                       |       |                           |   | 269,954                      |   |                              |        |         |   | 391,360      |   |   |   |   |   | 661,314 |   |
| Depreciation                and amortization     |   |                       | 81,228     |                           |   | 1,172,974                    |   |                              | 11,276      |         |   | 78,893       |   |   |   |   |   | 1,344,371 |   |
| Income                (loss) before income taxes |   |                       | 12,038,040 |                           |   | 56,211,819                   |   |                              | 10,539,533  |         |   | (38,463,986  | )      |   |   |   |   | 40,325,406 |   |
| Assets                                           |   |                       | 66,513,641 |                           |   | 86,353,051                   |   |                              | 187,112,896 |         |   | 97,234,516   |   | $ | 4,615,518 |   |   | 441,829,622 |   |
| Capital                expenditure               |   |                       | 5,947      |                           |   | 4,658,969                    |   |                              |        |         |   | 122,753      |   |   |   |   |   | 4,787,669 |   |
|                                             |   |                       |       |                           |   |                         |   |                              |        |         |   |         |   |   |   |   |   |   |   |
| 2004                                             |   |                       |       |                           |   |                         |   |                              |        |         |   |         |   |   |   |   |   |   |   |
| Revenues                                         |   | $                          | 11,559,905 |                           | $      | 1,963,943                    |   | $                                 | 5,747,244   |         | $      | 2,851,629    |   |   |   |   | $ | 22,122,721 |   |
| Net                investment income             |   |                       | 465,606    |                           |   | 470,667                      |   |                              | 2,765,372   |         |   | 2,088,285    |   |   |   |   |   | 5,789,930 |   |
| Interest                expense                  |   |                       |       |                           |   | 402,706                      |   |                              |        |         |   | 385,219      |   |   |   |   |   | 787,925 |   |
| Depreciation                and amortization     |   |                       | 90,757     |                           |   | 1,183,829                    |   |                              | 15,526      |         |   | 102,913      |   |   |   |   |   | 1,393,025 |   |
| Income                (loss) before income taxes |   |                       | 5,290,153  |                           |   | (5,701,110                   | )      |                              | 4,059,818   |         |   | (15,156,216  | )      |   |   |   |   | (11,507,355 | ) |
| Assets                                           |   |                       | 47,391,982 |                           |   | 83,533,742                   |   |                              | 131,824,847 |         |   | 87,905,906   |   | $ | 3,974,546 |   |   | 354,631,023 |   |
| Capital                expenditure               |   |                       | 25,536     |                           |   | 2,976,546                    |   |                              | 23,267      |         |   | 122,753      |   |   |   |   |   | 3,148,102 |   |

----

***Table            of Contents***

|                                         |   | United |        |   |   |         |   |
|----------------------------------------------|--------|--------|-------------|--------|--------|--------------|--------|
|                                         |   | States |        | Europe |   | Consolidated |   |
| 2006                                         |   |   |        |   |   |         |   |
| Revenues                                     |   | $      | 69,553,292  |   | $      | 13,169,952   |   | $ | 82,723,244 |   |
| Net                investment income         |   |   | 11,858,886  |   |   | 1,697,306    |   |   | 13,556,192 |   |
| Interest                expense              |   |   |        |   |   |         |   |   | - |   |
| Depreciation                and amortization |   |   | 1,222,351   |   |   |         |   |   | 1,222,351 |   |
| Income                before income taxes    |   |   | 40,573,284  |   |   | 10,293,462   |   |   | 50,866,746 |   |
| Assets                                       |   |   | 442,694,654 |   |   | 106,348,285  |   |   | 549,042,939 |   |
| Capital                expenditure           |   |   | 30,224,767  |   |   |         |   |   | 30,224,767 |   |
|                                         |   |   |        |   |   |         |   |   |   |   |
| 2005                                         |   |   |        |   |   |         |   |   |   |   |
| Revenues                                     |   | $      | 138,895,359 |   | $      | 3,216,335    |   | $ | 142,111,694 |   |
| Net                investment income         |   |   | 6,762,721   |   |   | 1,432,452    |   |   | 8,195,173 |   |
| Interest                expense              |   |   | 269,954     |   |   | 391,360      |   |   | 661,314 |   |
| Depreciation                and amortization |   |   | 1,344,371   |   |   |         |   |   | 1,344,371 |   |
| Income                before income taxes    |   |   | 39,529,439  |   |   | 795,967      |   |   | 40,325,406 |   |
| Assets                                       |   |   | 356,663,916 |   |   | 85,165,706   |   |   | 441,829,622 |   |
| Capital                expenditure           |   |   | 4,787,669   |   |   |         |   |   | 4,787,669 |   |
|                                         |   |   |        |   |   |         |   |   |   |   |
| 2004                                         |   |   |        |   |   |         |   |   |   |   |
| Revenues                                     |   | $      | 21,612,800  |   | $      | 509,921      |   | $ | 22,122,721 |   |
| Net                investment income         |   |   | 4,466,162   |   |   | 1,323,768    |   |   | 5,789,930 |   |
| Interest                expense              |   |   | 402,706     |   |   | 385,219      |   |   | 787,925 |   |
| Depreciation                and amortization |   |   | 1,393,025   |   |   |         |   |   | 1,393,025 |   |
| Loss                before income taxes      |   |   | (10,234,219 | )      |   | (1,273,136   | )      |   | (11,507,355 | ) |
| Assets                                       |   |   | 285,687,909 |   |   | 68,943,114   |   |   | 354,631,023 |   |
| Capital                expenditure           |   |   | 3,148,102   |   |   |         |   |   | 3,148,102 |   |

| **18.** | **DISCLOSURES                ABOUT FAIR VALUE OF FINANCIAL                INSTRUMENTS:** |
|---------|------------------------------------------------------------------------------------------|

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

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

|   | - | BANK BORROWINGS:                Carrying amounts for these items approximate fair value because current                interest rates and, therefore, discounted future cash flows for the                terms                and amounts of loans disclosed in Note 4, are not significantly different                from the original terms. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Table            of Contents***

|                                       |   | December                  31, 2006 |        | December                  31, 2005 |   |
|--------------------------------------------|--------|------------------------------------|-------------|------------------------------------|--------|
|                                       |   | Carrying                           |        | Estimated                          |   | Carrying |   | Estimated |   |
|                                       |   | Amount                             |        | Fair                  Value        |   | Amount |   | Fair                  Value |   |
| Financial                  assets:         |   |                               |        |                               |   |   |   |   |   |
| Fixed                  maturities          |   | $                                  | 63,483,271  |                               | $      | 63,483,271 |   | $ | 92,813,137 |   | $ | 92,813,137 |   |
| Equity                  securities         |   |                               | 208,478,670 |                               |   | 208,478,670 |   |   | 194,633,197 |   |   | 194,633,197 |   |
| Cash                  and cash equivalents |   |                               | 136,621,578 |                               |   | 136,621,578 |   |   | 37,492,245 |   |   | 37,492,245 |   |
| Financial                  liabilities:    |   |                               |             |                               |   |  |   |   |  |   |   |  |   |
| Bank borrowings                       |   |                               | 12,720,558  |                               |   | 12,720,558 |   |   | 11,834,868 |   |   | 11,834,868 |   |

| **19.** | **SUBSEQUENT                EVENTS:** |
|---------|---------------------------------------|

----

***Table            of Contents***

**ITEM          9.**
**CHANGE          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL          DISCLOSURE**

**ITEM        9A. **
**CONTROLS        AND PROCEDURES**

**EVALUATION        OF DISCLOSURE CONTROLS AND PROCEDURES**

**MANAGEMENT’S      RESPONSIBILITY FOR FINANCIAL STATEMENTS **

**MANAGEMENT’S      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING **

*Internal      Control-Integrated Framework*
*Internal      Control-Integrated Framework,*

----

***Table            of Contents***

**REPORT        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

*Internal        Control—Integrated Framework*

*Internal        Control—Integrated Framework*
*Internal        Control—Integrated Framework*

*Share-Based        Payment,*

----

***Table            of Contents***

**ITEM      9B. **
**OTHER      INFORMATION**

**PART      III**

**ITEM      10.**
**DIRECTORS,      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

**ITEM      11.**
**EXECUTIVE      COMPENSATION **

**ITEM      12.**
**SECURITY      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER      MATTERS**

**ITEM      13.**
**CERTAIN      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR      INDEPENDENCE**

**ITEM      14.**
**PRINCIPAL      ACCOUNTING FEES AND SERVICES**

----

***Table            of Contents***

**PART      IV**

**ITEM15.**
**EXHIBITS      AND FINANCIAL STATEMENT SCHEDULES**

|   | **(a)** | **FINANCIAL                SCHEDULES AND EXHIBITS.** |
|--------|---------|------------------------------------------------------|

|   | **1.** | **Financial                Statement Schedules.** |
|--------|--------|---------------------------------------------------|

|   | **2.** | **Exhibits** |
|--------|--------|--------------|

| ExhibitNumber |   | Description                                                                                                                                                                                                     |
|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1           |   | Amended                and Restated Articles of Incorporation of PICO.(1)                                                                                                                                       |
| 3.2           |   | Amended                and Restated By-laws of PICO. (2)                                                                                                                                                        |
|  10.1    |   | PICO              Holdings, Inc. 2005 Long-Term Incentive Plan (3)                                                                                                                                              |
|  10.4    |   | Bonus              Plan of Dorothy A. Timian-Palmer (4)                                                                                                                                                         |
|  10.5    |   | Bonus              Plan of Stephen D. Hartman (4)                                                                                                                                                               |
| 10.7          |   | Employment              Agreement of Ronald Langley (5)                                                                                                                                                         |
|  10.8    |   | Employment              Agreement of John R. Hart (5)                                                                                                                                                           |
|  10.9    |   | Secured                Convertible Promissory Note and accompanying Warrant between PICO                Holdings, Inc. and HyperFeed Technologies, Inc. dated March 30, 2006                (6)                 |
|  10.10   |   | Form                of Securities Purchase Agreement dated May 4, 2006 between PICO and                the                Accredited Investors (7)                                                              |
| 10.11         |   | Contribution                Agreement dated August 25, 2006 among Exegy Incorporated and PICO                Holdings, Inc. and HyperFeed Technologies, Inc. (8)                                                |
|  10.12   |   | Form                of Securities Purchase Agreement dated February 28, 2007 between                PICO                Holdings, Inc. and the Accredited Investors. (9)                                        |
| 10.13         |   | Purchase                and Sale Agreement dated June 30, 2006 between Nevada Land and Resource                Company, LLC and Vidler Water Company, Inc. and Southern Nevada Water                Authority.  |
| 10.14         |   | Letter                dated November 7, 2006 from Exegy Incorporated to PICO Holdings,                Inc. and                HyperFeed Technologies, Inc. (10)                                                 |
| 21.1          |   | Subsidiaries                of PICO                                                                                                                                                                             |
| 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 Act of                2002. |
| 31.2          |   | Certification                of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as                adopted                pursuant to Section 302 of the Sarbanes-Oxley Act of                2002. |
| 32.1          |   | Certification                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section                906                of the Sarbanes-Oxley Act of 2002).                                       |
| 32.2          |   | Certification                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section                906                of the Sarbanes-Oxley Act of 2002).                                       |

|   | (1) | Incorporated                by reference to exhibit of same number filed with Form 8-K dated                December                4, 1996. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Filed                as Appendix to the prospectus in Part I of Registration Statement                on Form                S-4 (File No. 333-06671). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (3) | Incorporated                by reference to Proxy Statement for Special Meeting of Shareholders                on                December 8, 2005 dated November 8, 2005 and filed with the SEC on                November                8, 2005. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (4) | Incorporated                by reference to Form 8-K filed with SEC on February 25,                2005. |
|--------|-----|----------------------------------------------------------------------------------------------------------|
|   | (5) | Incorporated                by reference to exhibit of same number filed with Form 10-Q for the                quarterly period ended September 30,                2005. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (6) | Incorporated                by reference to exhibit of same number filed with Form 8-K dated                March 31,                2006. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
|   | (7) | Incorporated                by reference to exhibit of same number filed with Form 8-K dated                May 10,                2006. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------|
|   | (8) | Incorporated                by reference to exhibit of same number filed with Form 8-K dated                August                29, 2006. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------|
|   | (9) | Incorporated                by reference to exhibit of same number filed with Form 8-K dated                March 2,                2007. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------|
|   | (10) | Incorporated                by reference to Form 8-K filed with SEC on November 8,                2006. |
|--------|------|---------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

----

***Table            of Contents***

**SIGNATURES**

|   | PICO                Holdings, Inc. |
|--------|------------------------------------|
|   |                               |   |
|   |                               |   |
|   | By:                                | /s/                  John R. Hart |
|   |                               | John                  R. Hart |
|   |                               | Chief                  Executive Officer |
|   |                               | President                  and Director |

| /s/                  Ronald Langley                |   | Chairman                  of the Board                           |
|----------------------------------------------------|--------|------------------------------------------------------------------|
| Ronald                  Langley                    |   |                                                             |
|                                               |   |                                                             |
| /s/                  John R. Hart                  |   | Chief                  Executive Officer, President and Director |
| John                  R. Hart                      |   | (Principal                  Executive Officer)                   |
|                                               |   |                                                             |
| /s/                  Maxim C. W. Webb              |   | Chief                  Financial Officer and Treasurer           |
| Maxim                  C. W. Webb                  |   | (Chief                  Accounting Officer)                      |
|                                               |   |                                                             |
| /s/                  S. Walter Foulkrod, III, Esq. |   | Director                                                         |
| S.                  Walter Foulkrod, III, Esq.     |   |                                                             |
|                                               |   |                                                             |
| /s/                  Richard D. Ruppert, MD        |   | Director                                                         |
| Richard                  D. Ruppert, MD            |   |                                                             |
|                                               |   |                                                             |
| /s/                  Carlos C. Campbell            |   | Director                                                         |
| Carlos                  C. Campbell                |   |                                                             |
|                                               |   |                                                             |
| /s/                  Kenneth J. Slepicka           |   | Director                                                         |
| Kenneth                  J. Slepicka               |   |                                                             |
|                                               |   |                                                             |
|  /s/                  John D. Weil            |   | Director                                                         |
| John                  D. Weil                      |   |                                                             |

----

**INDEX        TO EXHIBITS**

| ExhibitNumber |   | Description                                                                                                                                                                                                                                            |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1           |   | Amended                  and Restated Articles of Incorporation of PICO.(1)                                                                                                                                                                            |
| 3.2           |   | Amended                  and Restated By-laws of PICO. (2)                                                                                                                                                                                             |
|  10.1    |   | PICO                Holdings, Inc. 2005 Long-Term Incentive Plan (3)                                                                                                                                                                                   |
|  10.4    |   | Bonus                Plan of Dorothy A. Timian-Palmer (4)                                                                                                                                                                                              |
|  10.5    |   | Bonus                Plan of Stephen D. Hartman (4)                                                                                                                                                                                                    |
| 10.7          |   | Employment                Agreement of Ronald Langley (5)                                                                                                                                                                                              |
|  10.8    |   | Employment                Agreement of John R. Hart (5)                                                                                                                                                                                                |
|  10.9    |   | Secured                  Convertible Promissory Note and accompanying Warrant between PICO                  Holdings, Inc. and HyperFeed Technologies, Inc. dated March 30,                  2006                  (6)                                 |
|  10.10   |   | Form                  of Securities Purchase Agreement dated May 4, 2006 between PICO                  and the                  Accredited Investors (7)                                                                                               |
| 10.11         |   | Contribution                  Agreement dated August 25, 2006 among Exegy Incorporated and PICO                  Holdings, Inc. and HyperFeed Technologies, Inc. (8)                                                                                   |
|  10.12   |   | Form                  of Securities Purchase Agreement dated February 28, 2007 between                  PICO                  Holdings, Inc. and the Accredited Investors. (9)                                                                         |
| 10.13         |   | Purchase                  and Sale Agreement dated June 30, 2006 between Nevada Land and                  Resource                  Company, LLC and Vidler Water Company, Inc. and Southern Nevada                  Water                  Authority. |
| 10.14         |   | Letter                  dated November 7, 2006 from Exegy Incorporated to PICO Holdings,                  Inc. and                  HyperFeed Technologies, Inc. (10)                                                                                  |
| 21.1          |   | Subsidiaries                  of PICO                                                                                                                                                                                                                  |
| 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 Act of                  2002.                                |
| 31.2          |   | Certification                  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted                  pursuant to Section 302 of the Sarbanes-Oxley Act of                  2002.                                                 |
| 32.1          |   | Certification                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section                  906                  of the Sarbanes-Oxley Act of 2002).                                                                        |
| 32.2          |   | Certification                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section                  906                  of the Sarbanes-Oxley Act of 2002).                                                                        |

|   | (1) | Incorporated                    by reference to exhibit of same number filed with Form 8-K dated                    December                    4, 1996. |
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|   | (2) | Filed                    as Appendix to the prospectus in Part I of Registration Statement                    on Form                    S-4 (File No. 333-06671). |
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|   | (3) | Incorporated                    by reference to Proxy Statement for Special Meeting of Shareholders                    on                    December 8, 2005 dated November 8, 2005 and filed with the SEC                    on November                    8, 2005. |
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|   | (4) | Incorporated                    by reference to Form 8-K filed with SEC on February 25,                    2005. |
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|   | (5) | Incorporated                    by reference to exhibit of same number filed with Form 10-Q for                    the                    quarterly period ended September 30,                    2005. |
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|   | (6) | Incorporated                    by reference to exhibit of same number filed with Form 8-K dated                    March 31,                    2006. |
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|   | (7) | Incorporated                    by reference to exhibit of same number filed with Form 8-K dated                    May 10,                    2006. |
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|   | (8) | Incorporated                    by reference to exhibit of same number filed with Form 8-K dated                    August                    29, 2006. |
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|   | (9) | Incorporated                    by reference to exhibit of same number filed with Form 8-K dated                    March 2,                    2007. |
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|   | (10) | Incorporated                    by reference to Form 8-K filed with SEC on November 8,                    2006. |
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