PICO HOLDINGS INC /NEW - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington DC 20549

FORM 10-Q

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

( ) 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 (I.R.S. Employer
incorporation or organization) Identification No.)

875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
(858) 456-6022

(Address and telephone number of principal executive offices)

Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES X NO
--- ---

The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 12,375,610 as of September 30, 2003, excluding 4,426,313 shares of
common stock held by the registrant and its subsidiaries.

PICO HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

PAGE NO.
--------

PART I: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of 3
September 30, 2003 and December 31, 2002

Condensed Consolidated Statements of Operations for the Three and 4
Nine Months Ended September 30, 2003 and 2002 (As Restated)

Condensed Consolidated Statements of Cash Flows for 5
the Nine Months Ended September 30, 2003 and 2002

Notes to Condensed Consolidated Financial Statements 6

Item 2: Management's Discussion and Analysis of Financial 13
Condition and the Results of Operations

Item 3: Quantitative and Qualitative Disclosure About Market Risk 24

Item 4: Controls and Procedures 24

PART II: OTHER INFORMATION

Item 1: Legal Proceedings 25

Item 2: Changes in Securities and Use of Proceeds 25

Item 3: Defaults Upon Senior Securities 25

Item 4: Submission of Matters to a Vote of Security Holders 25

Item 5: Other Information 25

Item 6: Exhibits and Reports on Form 8-K 26

Signature 27

2

PART I: FINANCIAL INFORMATION
ITEM I: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

September 30, December 31,
2003 2002
------------- -------------

ASSETS
Investments $ 137,385,358 $ 95,495,170
Investments - Discontinued Operations 78,442,627
Cash and cash equivalents 22,725,926 22,079,082
Premiums and other receivables, net 8,364,541 5,472,834
Reinsurance receivables 7,460,964 7,832,708
Real estate and water assets, net 116,722,433 116,790,891
Property and equipment, net 3,188,803 2,143,746
Net deferred income taxes 3,134,458 6,079,810
Other assets 13,629,575 9,692,945
Other assets - Discontinued Operations 658,680 52,138,398
------------- -------------
Total assets $ 313,270,738 $ 396,168,211
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY

Unpaid losses and loss adjustment expenses $ 52,589,596 $ 52,703,113
Unpaid losses and loss adjustment expenses - Discontinued Operations 49,162,995
Reinsurance balance payable 669,330 538,000
Bank and other borrowings 14,991,977 14,636,017
Other liabilities 16,272,598 10,902,399
Other liabilities - Discontinued Operations 2,475,583 44,085,976
------------- -------------
Total liabilities 86,999,084 172,028,500
------------- -------------
Minority interest 3,591,351 3,108,007
------------- -------------
Commitments and Contingencies (Note 4)

Common stock, $.001 par value; authorized 100,000,000 shares,
16,801,923 issued and outstanding in 2003 and 2002 16,802 16,802
Additional paid-in capital 236,082,703 236,082,703
Retained earnings 54,985,673 59,320,715
Accumulated other comprehensive income 9,868,737 3,833,676
Treasury stock, at cost (common shares: 4,426,313 in 2003 and 4,422,681 in 2002) (78,273,612) (78,222,192)
------------- -------------
Total shareholders' equity 222,680,303 221,031,704
------------- -------------
Total liabilities and shareholders' equity $ 313,270,738 $ 396,168,211
============= =============

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

3

PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(AS RESTATED, (AS RESTATED,
Revenues: SEE NOTE 10) SEE NOTE 10)

Net investment income $ 1,102,853 $ 1,300,767 $ 4,078,897 $ 4,438,340
Premium charge (424,659) (424,659)
Net realized gain on investments 341,951 5,871,471 1,317,760 4,891,761
Sale of real estate and water assets 2,002,422 872,113 4,218,276 9,788,550
Rents, royalties and lease income 378,141 425,987 1,101,380 1,299,926
Service revenue 479,058 583,312
Other 266,894 1,058,344 1,165,973 2,404,692
------------ ------------ ------------ ------------
Total revenues 4,571,319 9,104,023 12,465,598 22,398,610
------------ ------------ ------------ ------------
Costs and Expenses:
Operating and other costs 8,141,133 3,850,985 15,767,519 10,701,664
Cost of real estate and water assets sold 807,750 521,149 2,139,116 6,072,624
Cost of service revenue 402,136 572,359
Loss and loss adjustment expenses (recovery) 61,127 (481,746) 4,083,727 (482,199)
Depreciation and amortization 573,719 260,151 1,325,676 777,666
Interest 192,223 187,828 552,980 611,369
------------ ------------ ------------ ------------
Total costs and expenses 10,178,088 4,338,367 24,441,377 17,681,124
------------ ------------ ------------ ------------
Equity in loss of unconsolidated affiliates (570,008) (564,785) (1,500,404)
------------ ------------ ------------ ------------
Income (loss) before income taxes and minority interest (5,606,769) 4,195,648 (12,540,564) 3,217,082
Provision (benefit) for income taxes (1,327,833) 1,885,408 (3,194,895) 1,937,317
------------ ------------ ------------ ------------
Income (loss) before minority interest (4,278,936) 2,310,240 (9,345,669) 1,279,765
Minority interest in loss of subsidiaries 713,829 141,899 1,161,782 378,227
------------ ------------ ------------ ------------
Income (loss) from continuing operations (3,565,107) 2,452,139 (8,183,887) 1,657,992
Income from discontinued operations, net of tax 375,029 796,466 3,044,015 1,319,608
Gain on disposal of discontinued
operations, net (See Note 6) 804,830
------------ ------------ ------------ ------------
(3,190,078) 3,248,605 (4,335,042) 2,977,600
Cumulative effect of change
in accounting principle (See Note 5) 1,984,744
------------ ------------ ------------ ------------
Net income (loss) $ (3,190,078) $ 3,248,605 $ (4,335,042) $ 4,962,344
============ ============ ============ ============

Net income (loss) per common share - basic and diluted:
Income (loss) from continuing operations $ (0.29) $ 0.20 $ (0.66) $ 0.13
Discontinued operations 0.03 0.06 0.31 0.11
Cumulative effect of change in accounting principle 0.16
------------ ------------ ------------ ------------
Net income (loss) per common share $ (0.26) $ 0.26 $ (0.35) $ 0.40
============ ============ ============ ============
Weighted average shares outstanding 12,375,610 12,381,878 12,377,326 12,395,737
============ ============ ============ ============

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

4

PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Nine Months Ended September 30,
2003 2002
------------ ------------

OPERATING ACTIVITIES:
Net cash used in operating activities $ (6,645,116) $ (1,590,460)
Net cash provided by (used in) discontinued operations $ (1,448,722) $ 4,163,477
------------ ------------
$ (8,093,838) $ 2,573,017
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (56,456,722) (62,746,626)
Proceeds from sale of discontinued operations 25,144,350
Proceeds from sale of investments 20,761,811 36,178,627
Proceeds from maturity of investments 20,859,753 22,674,307
Purchases of property and equipment (225,841) (413,639)
Cash used to purchase shares of HyperFeed, net of cash acquired (107,253)
Proceeds from the sale of property and equipment 5,737 50,775
Investing cash flows from discontinued operations (4,903,883)
------------ ------------
Net cash provided by (used in) investing activities 9,981,835 (9,160,439)
------------ ------------

FINANCING ACTIVITIES:
Repayments of debt (389,721) (3,973,098)
Proceeds from borrowings 2,604,911
Proceeds from exercise of stock options 238,066
Purchase of treasury stock for deferred compensation plans (51,420) (66,934)
------------ ------------
Net cash used in financing activities (441,141) (1,197,055)
------------ ------------

Effect of exchange rate changes on cash (800,012) (1,551,617)
------------ ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 646,844 (9,336,094)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,079,082 16,342,374
------------ ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,725,926 $ 7,006,280
============ ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 631,864 $ 411,414
============ ============
Cash paid for taxes: $ 550,000
============

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

5

PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

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

In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of the
financial statements presented, have been included and are of a normal
recurring nature. Operating results presented are not necessarily
indicative of the results that may be expected for the year ending December
31, 2003.

On May 15, 2003, PICO began consolidating HyperFeed Technologies, Inc.
("HyperFeed"), a US publicly traded company, which previously had been
accounted for under the equity method of accounting (See Note 9).

These condensed consolidated financial statements should be read in
conjunction with the Company's audited financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and the Results of Operations and Risk Factors contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002
as filed with the SEC.

The preparation of condensed consolidated financial statements in
accordance with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of
revenues and expenses for each reporting period. The significant estimates
made in the preparation of the Company's condensed consolidated financial
statements relate to the assessment of the carrying value of real estate
and water assets, investments, unpaid losses and loss adjustment expenses,
deferred income taxes, accounts and loans receivable, and contingent
liabilities. While management believes that the carrying value of such
assets and liabilities are appropriate as of September 30, 2003 and
December 31, 2002, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were based.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
that a liability be recorded in the guarantor's balance sheet upon issuance
of a guarantee at its fair value. In addition, FIN 45 requires certain
disclosures about each of the entity's guarantees. At September 30, 2003,
the Company has no guarantees that require the application of FIN 45.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for those entities that elect to
voluntarily adopt the fair value accounting provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 also requires more
prominent disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation as well as pro
forma disclosure of the effect in interim condensed consolidated financial
statements. The interim disclosure requirements are effective for the first
interim period ending after December 15, 2002. The Company has not elected
to adopt the fair value accounting provisions of SFAS No. 123.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51." FIN 46 requires the consolidation of certain variable interest
entities by the primary beneficiary of the entity if the equity investment
at risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties, or if
the equity investors lack the characteristics of a controlling financial
interest. FIN 46 is effective for variable interest entities created or
acquired after January 31, 2003. For variable interest entities

6

created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied in the first interim or annual period beginning after
December 15, 2003. Management does not expect the adoption of FIN 46 will
have a material effect on the Company's results of operations and financial
position.

In April 2003, the FASB approved Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." This Statement is effective for contracts entered
into or modified after June 30, 2003, except as stated, and for hedging
relationships designated after June 30, 2003. In addition, except as
stated, all provisions of this Statement should be applied prospectively.
SFAS 149 amends Statement 133 for certain decisions made as part of the
Derivatives Implementation Group (DIG) process. For those amendments that
relate to Statement 133 implementation guidance, the specific Statement 133
Implementation Issue necessitating the amendment is identified. If the
amendment relates to a cleared issue, the clearance date also is noted.
This Statement also amends Statement 133 to incorporate clarifications of
the definition of a derivative. This Statement contains amendments relating
to FASB Concepts Statement No. 7,, "Using Cash Flow Information and Present
Value in Accounting Measurements," and FASB Statements No. 65, "Accounting
for Certain Mortgage Banking Activities," No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases," No. 95, "Statement of Cash Flows," and
No. 126, "Exemption from Certain Required Disclosures about Financial
Instruments for Certain Nonpublic Entities." The adoption of this statement
did not have a material effect on the Company's results of operations and
financial position.

2. EARNINGS PER SHARE

Basic earnings per share are computed by dividing net earnings by the
weighted average shares outstanding during the period. Diluted earnings per
share are computed similar to basic earnings per share except the weighted
average shares outstanding are increased to include additional shares from
the assumed exercise of stock options using the treasury method, if
dilutive. The number of additional shares is calculated by assuming that
the outstanding options and warrants were exercised, and that the proceeds
were used to acquire shares of common stock at the average market price
during the period.

For the nine months ended September 30, 2003, there is no difference
between basic and diluted earnings per share since the Company reported a
loss from continuing operations, and therefore the impact of stock options
on earnings per share would be anti-dilutive. For the three months ended
September 30, 2003, there were no outstanding stock options. In July 2003,
the Company adopted a Stock Appreciation Rights Plan whereby all stock
options outstanding were exchanged for stock appreciation rights. These
rights are not considered common stock equivalents for purposes of earnings
per share because no common shares of the Company are issued when a SAR is
exercised (the benefit is paid in cash). Consequently, starting with the
three months ended September 30, 2003, the weighted average shares
outstanding for diluted earnings per share will be identical to the
weighted average shares outstanding for basic earnings per share. (See
Note 7 "Stock-Based Compensation")

For the three and nine months ended September 30, 2002, there is no
difference between basic and diluted earnings per share since the average
market price of the Company's common stock for the period was less than the
exercise price of the outstanding stock options, and consequently the
options are not assumed exercised for purposes of the calculation of
diluted earnings per share.

3. COMPREHENSIVE INCOME

The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.

The components of comprehensive income are as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------

Net income (loss) $(3,190,078) $ 3,248,605 $(4,335,042) $ 4,962,344
Net change in unrealized appreciation
(depreciation) on available for sale investments 4,366,420 (4,633,616) 5,932,006 2,093,208
Net change in foreign currency translation 75,261 235,407 103,055 2,477,211
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ 1,251,603 $(1,149,604) $ 1,700,019 $ 9,532,763
=========== =========== =========== ===========

Total comprehensive income for the three and nine months ended
September 30, 2003 is net of deferred income tax charges of $1.2 million
and $1.8 million, respectively. Total comprehensive income (loss) for the
three and nine months ended September 30, 2002 is net of a deferred income
tax benefit of $2.5 million and a deferred income tax charge of $312,000,
respectively.

7

The components of accumulated other comprehensive income are as
follows:

September 30, December 31,
2003 2002
------------ ------------

Unrealized appreciation on
available for sales investments $ 15,931,448 $ 9,999,442
Foreign currency translation (6,062,711) (6,165,766)
------------ ------------
Accumulated other comprehensive income $ 9,868,737 $ 3,833,676
============ ============

Accumulated other comprehensive income is net of deferred income tax
liability of $5.7 million at September 30, 2003 and $3.5 million at
December 31, 2002.

4. COMMITMENTS AND CONTINGENCIES

In 2000, PICO Holdings loaned a total of $2.2 million to Dominion
Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In
2001, $1.2 million of the loans became overdue. Negotiations between PICO
and Dominion Capital to reach a settlement agreement on both the overdue
loan of $1.2 million and the other loan of $1 million proved unsuccessful.
Accordingly, PICO commenced legal action through the Australian courts
against Dominion Capital to recover the total amount due to PICO Holdings.
Due to the inherent uncertainty involved in pursuing legal action, and the
Company's ability to realize the assets collateralizing the loans, PICO
recorded an allowance in 2001 for the total outstanding balance of $2.3
million for the loans and interest. PICO has been awarded summary judgment
in relation to the principal and interest on the $1.2 million loan and, as
a result, Dominion Capital has been placed in receivership. Other legal
action is on-going.

When PICO acquired Citation Insurance Company ("Citation") in a
reverse merger in 1996, Citation had been a direct writer of workers
compensation insurance. In 1997, Citation reinsured 100% of its workers
compensation book of business with a subsidiary, Citation National
Insurance Company ("CNIC"). Citation then sold CNIC to Fremont Indemnity
Company ("Fremont"). All assets and liabilities, including the assets which
corresponded to the workers compensation reserves reinsured with CNIC, and
records, computer systems, policy files and reinsurance arrangements were
transferred to Fremont, as part of the sale of CNIC. Fremont merged CNIC
into Fremont and administered and paid all workers compensation claims that
had been sold to Fremont. Since 1997, Citation has booked the losses
reported by Fremont and recorded an equal and offsetting reinsurance
recoverable from Fremont, as an admitted reinsurer, for all losses and loss
adjustment expenses, resulting in no net impact on Citation's reserves and
financial statements and no net impact on PICO's condensed consolidated
financial statements.

On June 4, 2003, the California Department of Insurance obtained a
conservation order over Fremont and applied for a court order to liquidate
Fremont. On July 2, 2003, the California Superior Court placed Fremont in
liquidation.

Since Fremont went into liquidation in July 2003, Fremont is no longer
an admitted reinsurance company under the statutory basis of insurance
accounting. Consequently, Citation has reversed the $7.5 million
reinsurance recoverable from Fremont in the three months ended June 30,
2003 in its financial statements prepared on the statutory basis of
accounting. PICO made a corresponding provision for the reinsurance
recoverable from Fremont for GAAP purposes as well which is reflected in
the accompanying condensed consolidated financial statements included
herein. Citation will make a claim to recover deposits reported as held by
Fremont for Citation's insureds; however, the ultimate outcome cannot be
accurately predicted. The Company is pursuing its rights to recover the
reinsurance and to have the deposit assets returned to us to utilize
against the claims obligation.

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

5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." Consequently, goodwill and intangible assets that have indefinite
useful lives are not amortized but rather are tested at least annually, or
on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value for
impairment. The adoption of SFAS No. 142 is reflected in the Company's
condensed consolidated financial statements as a cumulative effect of
change in accounting principle at January 1, 2002. The cumulative
adjustment of $2 million is comprised of negative goodwill of $2.8 million
and positive goodwill of $800,000. The positive goodwill of $800,000 was
deemed impaired based on a present value analysis of the underlying cash
flows.

8

6. DISCONTINUED OPERATIONS

On March 31, 2003, the sale of Sequoia Insurance Company ("Sequoia")
closed for gross proceeds of $43.1 million, which consisted of $25.2
million in cash and a dividend of equity and debt securities previously
held by Sequoia with a market value of $17.9 million. The final sale price
that was determined 60 days after the closing date was reduced by $58,000.
The net income from Sequoia included in PICO's condensed consolidated
results for the nine months ended September 30, 2003 was $2.4 million,
which is reported as "Income from discontinued operations, net of tax." The
Company also recorded a $443,000 gain on disposal, net of estimated income
taxes of $281,000 and selling costs of $844,000, which is reported as "Gain
on disposal of discontinued operations, net" for the nine months ended
September 30, 2003.

In June 2003, HyperFeed Technologies, Inc. ("HyperFeed"), a 51% owned
subsidiary of the Company, disposed of its interest in a consolidated
subsidiary, recording a gain on sale of discontinued operations of
$362,000. This gain is included in the accompanying condensed consolidated
statements of operations in the line item titled "Gain on disposal of
discontinued operations, net" for the nine months ended September 30, 2003.

In the three months ended September 30, 2003, HyperFeed classified a
segment of its business as discontinued operations as a result of a pending
sale expected to close in the fourth quarter of this year. As a result, the
Company reported $375,000 in income from discontinued operations in the
third quarter of 2003 and has reported the assets and liabilities as
discontinued operations in the September 30, 2003 balance sheet.

7. STOCK-BASED COMPENSATION

On July 2, 2003, all 1,687,242 outstanding stock options were
voluntarily surrendered by employees and directors. On July 17, 2003, the
Company's shareholders voted to adopt the PICO Holdings, Inc. 2003 Stock
Appreciation Rights Program (the "SAR program") to replace the Company's
stock option plans and call option agreements. Upon adoption of the SAR
program, all 355,539 outstanding options under call option agreements were
also surrendered by the holders. The maximum number of SARs issuable under
the SAR program may not exceed 2,042,781, all of which were issued to the
prior option holders upon adoption of the SAR program at an exercise price
equal to that of the surrendered options. In future periods, in the case of
"in the money" SARs (i.e., the market price of PICO stock is higher than
the exercise price of the SAR), a charge or benefit will be recorded in the
Company's consolidated financial statements. The charge or benefit will
recognize the change during the period in the difference between the
exercise price of "in the money" SARs and the market value of PICO stock at
the end of the period. As a result of the adoption of the SAR program in
July 2003, the Company recorded a charge of $3.3 million in the three
months ended September 30, 2003, representing the difference between the
exercise price of the vested SARs and the market value of PICO stock at
September 30 2003. This amount is included in other liabilities at
September 30, 2003.

In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS No. 148 requires more prominent disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation as well as pro forma disclosure of the effect in
interim condensed consolidated financial statements. The Company has
elected to continue accounting for stock-based compensation under the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees."

9

Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 148, the Company's net income and
net income per share would approximate the following pro forma amounts for
the three and nine months ended September 30:

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------

Reported net income (loss) $ (3,190,078) $ 3,248,605 $ (4,335,042) $ 4,962,344
Add: stock based compensation recorded, net of income tax 2,174,090
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of income tax (6,409,554) (111,389) (6,509,234) (334,167)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (7,425,542) $ 3,137,216 $(10,844,276) $ 4,628,177
============ ============
Reported net income (loss) per share: basic and diluted $ (0.26) $ 0.26 $ (0.35) $ 0.40
============ ============ ============ ============
Pro forma net income (loss) per share: basic and diluted $ (0.60) $ 0.25 $ (0.88) $ 0.37
============ ============ ============ ============

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

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

8. SEGMENT REPORTING

PICO Holdings, Inc. is a diversified holding company engaged in five
major operating segments: Vidler Water Company, Nevada Land & Resource
Company, Business Acquisitions and Financing, Insurance Operations in Run
Off, and HyperFeed Technologies, Inc.

The accounting policies of the reportable segments are the same as
those described in the Company's 2002 Annual Report on Form 10-K.
Management analyzes segments using the following information:

Total assets decreased by $82.9 million and total liabilities
decreased by $85 million from December 31, 2002, primarily as a result of
the sale of Sequoia, offset by additions in assets and liabilities due to
the consolidation of HyperFeed Technologies.

Segment assets:

At September 30, At December 31,
2003 2002
---------------- ---------------

TOTAL ASSETS:
Vidler Water Company $ 84,224,118 $ 82,428,762
Nevada Land and Resource Company 62,533,886 60,406,824
Business Acquisitions and Financing 27,904,350 34,006,655
Insurance Operations in Run Off 133,710,094 219,325,970
HyperFeed Technologies, Inc. 4,898,290
------------ ------------
$313,270,738 $396,168,211
============ ============

10

Segment revenues and loss before taxes and minority interest for the
third quarter and nine months of 2003 and 2002 were:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------

REVENUES:
Vidler Water Company $ 661,000 $ 935,000 $ 1,545,000 $ 10,074,000
Nevada Land & Resource Company 1,935,000 714,000 4,997,000 1,908,000
Business Acquisitions and Financing 501,000 7,311,000 3,028,000 8,956,000
Insurance Operations in Run Off 990,000 144,000 2,306,000 1,461,000
HyperFeed Technologies, Inc. 484,000 590,000
------------ ------------ ------------ ------------
Total Revenues $ 4,571,000 $ 9,104,000 $ 12,466,000 $ 22,399,000
============ ============ ============ ============

INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,349,000) $ (826,000) $ (3,405,000) $ (90,000)
Nevada Land & Resource Company 1,048,000 134,000 1,815,000 (644,000)
Business Acquisitions and Financing (4,351,000) 4,455,000 (5,758,000) 2,652,000
Insurance Operations in Run Off 544,000 433,000 (2,842,000) 1,299,000
HyperFeed Technologies, Inc. (1,499,000) (2,351,000)
------------ ------------ ------------ ------------
Income (Loss) Before Taxes and Minority Interest $ (5,607,000) $ 4,196,000 $(12,541,000) $ 3,217,000
============ ============ ============ ============

9. CONSOLIDATION OF HYPERFEED TECHNOLOGIES, INC.

On May 15, 2003 the Company increased its ownership of HyperFeed from
44% to 51% by purchasing 443,623 shares for $1.2 million and accordingly,
now has a controlling financial interest through a direct ownership of a
majority voting interest. Consequently, PICO consolidated HyperFeed's
results from the date of acquisition forward. The acquisition was accounted
for using the purchase method of accounting and accordingly, the
accompanying condensed consolidated financial statements include the
revenues and expenses and costs of HyperFeed beginning May 15. Prior to May
15, the Company accounted for its investment in HyperFeed using the equity
method of accounting. The following is an allocation of the purchase price
to the assets acquired and liabilities assumed at the date of acquisition:

Purchase price $ 1,200,000
===========

Allocation of Purchase Price:
Cash 1,221,866
Receivables 761,459
Property and equipment, net 1,551,182
Other assets 2,564,765
Accounts payable and accrued liabilities (3,493,802)
Other liabilities (69,032)
Minority interest (1,336,438)
-----------
$ 1,200,000
===========

The following are the pro forma results of PICO for the nine months
ended September 30, 2003 and 2002 assuming the acquisition had taken effect
at the beginning of the period:

2003 2002
------------ ------------

Total revenues $ 12,704,929 $ 23,114,829
Income (loss) before taxes and minority interest (14,244,178) 174,083
Net income (loss) (4,620,654) 5,036,063
Net income (loss) per share: basic and diluted $ (0.37) $ 0.41

On October 31, 2003, HyperFeed announced that it closed on a
transaction to sell its consolidated market data feed service contracts to
Interactive Data Corporation for $8.5 million. The gain is expected to be
approximately $6.4 million and will be recorded in the fourth quarter of
2003. Based on PICO's 51% ownership, net of minority interest, the gain to
PICO from this transaction will be approximately $3.2 million.

11

10. RESTATEMENT/RECAST OF PREVIOUSLY REPORTED FINANCIAL INFORMATION

Subsequent to the issuance of the Company's condensed consolidated
financial statements for the nine months ended September 30, 2002, the
Company determined that it needed to record other-than-temporary
impairments on marketable securities.

During the fourth quarter of 2002, the Company classified the
operations of Sequoia Insurance Company as a discontinued operation, and
recast amounts previously reported to reflect net income from Sequoia as a
single line on the statement of operations, and condensed the assets and
liabilities on the balance sheet. As a result, the numbers shown below and
labeled "As Previously Reported and Recast" reflect this change in
presentation.

Other-Than-Temporary Impairments:

The Company has previously recorded losses from other-than-temporary
impairments on certain marketable securities. However, the Company
determined that it should have recorded additional other-than-temporary
impairment charges on other marketable securities. For the three months
ended September 30, 2002, realized gains increased by $1.6 million
primarily due to additional impairment charges of $2.1 million offset by
the reversal of $3.7 million of impairment charges, which as a result of
the restatement were recorded in earlier periods. For the nine months ended
September 30, 2002, realized gains increased by $22,000 resulting from
additional impairment charges of $2.2 million offset by the reversal of
$2.2 million in previously recorded impairment charges.

As a result, the Company has restated its condensed consolidated
financial statements for the three and nine months ended September 30, 2002
from amounts previously reported to record other-than-temporary impairments
on marketable securities.

Statement of Operations September 30, 2002
Three Months Ended Nine Months Ended
As Previously As Previously
Reported and As Restated Reported and As Restated
Recast and Recast Recast and Recast
------------- ----------- ------------- -----------

Realized gain on investments $ 4,278,792 $ 5,871,471 $ 4,869,510 $ 4,891,761
Total revenues 7,511,344 9,104,023 22,376,359 22,398,610
Income before taxes and minority
interest 2,602,969 4,195,648 3,194,831 3,217,082
Income tax expense 1,813,041 1,885,408 2,010,813 1,937,317
Income from continuing operations
before minority interest 789,928 2,310,240 1,184,018 1,279,765
Net income 1,728,293 3,248,605 4,866,597 4,962,344

Income per share: basic and diluted $ 0.14 $ 0.26 $ 0.39 $ 0.40
=========== =========== =========== ===========

Statement of Comprehensive Income (Loss) September 30, 2002
Three Months Ended Nine Months Ended
As Previously As Previously
Reported and As Restated Reported and As Restated
Recast and Recast Recast and Recast
------------- ----------- ------------- -----------

Net income $ 1,728,293 $ 3,248,605 $ 4,866,597 $ 4,962,344
Net change in unrealized appreciation
(depreciation) on available for sale investments (3,113,304) (4,633,616) 2,188,955 2,093,208
Net change in foreign currency translation 235,407 235,407 2,477,211 2,477,211
----------- ----------- ----------- -----------
Total comprehensive income (loss) $(1,149,604) $(1,149,604) $ 9,532,763 $ 9,532,763
=========== =========== =========== ===========

The restatements for the three and nine month periods ended September
30, 2002 have no net impact on total comprehensive income and shareholders'
equity for those periods.

12

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THIS REPORT ON FORM 10-Q (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. 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 FORM 10-Q. ADDITIONALLY, STATEMENTS CONCERNING FUTURE MATTERS ARE
FORWARD-LOOKING STATEMENTS.

ALTHOUGH FORWARD-LOOKING STATEMENTS IN THIS REPORT ON FORM 10-Q REPRESENT
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 ACTUAL RESULTS
AND OUTCOMES COULD DIFFER FROM THOSE DISCUSSED IN OR ANTICIPATED BY THE
FORWARD-LOOKING STATEMENTS. FACTORS WHICH COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES IN RESULTS AND OUTCOMES INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED
UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN OUR 2002 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 FORM 10-Q. WE UNDERTAKE NO
OBLIGATION TO REVISE OR UPDATE ANY FORWARD-LOOKING STATEMENT IN ORDER TO REFLECT
ANY EVENT OR CIRCUMSTANCE WHICH MAY ARISE AFTER THE DATE OF THIS FORM 10-Q.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
IN THIS FORM 10-Q AND OUR 2002 ANNUAL REPORT ON FORM 10-K, WHICH ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS WHICH MAY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND PROSPECTS.

The condensed consolidated financial statements and other portions of this
Form 10-Q for the period ended September 30, 2003, including Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," reflect the effects of:

1. the restatement of our condensed consolidated financial statements for the
three and nine month periods ended September 30, 2002 as detailed in Note
10 of Notes to Condensed Consolidated Financial Statements,
"Restatement/Recast of Previously Reported Financial Information";

2. presenting Sequoia Insurance Company as a discontinued operation; and

3. presenting HyperFeed Technologies, Inc. as a separate segment beginning
May 15, 2003, when HyperFeed became a consolidated subsidiary. See Note 9
of Notes To Condensed Consolidated Financial Statements, "Consolidation of
HyperFeed Technologies, Inc."

INTRODUCTION

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

We have acquired businesses and interests in businesses by the purchase of
private companies, and shares in public companies, through both open market
purchases and participation in financings. When we buy a company, we have a long
term horizon, typically 5 years or more. Selected acquisitions may become core
operations; however, we are prepared to sell companies if the price received
exceeds the return we expect to earn if we retain ownership. We expect that most
of our interests in businesses will ultimately be sold to other companies in the
same industry seeking to expand or to gain economies of scale.

Our objective is to generate superior long-term growth in shareholders'
equity, as measured by book value per share. Over time, we anticipate that most
of the growth in shareholders' equity will come from realized gains on the sale
of businesses and interests in businesses, as opposed to ongoing operating
earnings.

Currently our major operating businesses are:

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

o Nevada Land & Resource Company, LLC ("Nevada Land"), which owns
approximately 1.1 million acres of land in Nevada, and the mineral rights
and water rights related to the property;

13

o Citation Insurance Company ("Citation"), which is "running off" its
historical property and casualty insurance loss reserves, and Physicians
Insurance Company of Ohio ("Physicians"), which is "running off" its
medical professional liability insurance loss reserves; and

o HyperFeed Technologies, Inc. ("HyperFeed"), which is now a 51%-owned
subsidiary. HyperFeed is a provider of Managed Exchange Platform Services
("MEPS") to users including exchanges, content providers, re-distributors,
and institutions.

On March 31, 2003, we closed on the sale of Sequoia Insurance Company
("Sequoia"), which is accounted for in our condensed consolidated financial
statements for 2003 and prior years as a discontinued operation. See "Net
Income" and "Discontinued Operations."

RESULTS OF OPERATIONS -- THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

SHAREHOLDERS' EQUITY

At September 30, 2003, PICO had shareholders' equity of $222.7 million
($17.99 per share), compared to $221.4 million ($17.89 per share) at June 30,
2003, and $221 million ($17.86 per share) at December 31, 2002. Book value per
share increased by $0.10 per share during the third quarter, and $0.13 per share
during the first nine months of 2003.

The $1.3 million increase in shareholders' equity during the third quarter
primarily resulted from a $4.4 million net increase in unrealized appreciation
in investments, partially offset by a $3.2 million net loss.

The $1.7 million increase in shareholders' equity during the first nine
months was principally a result of a $5.9 million net increase in unrealized
appreciation in investments, partially offset by a $4.3 million net loss.

COMPREHENSIVE INCOME

In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," PICO reports comprehensive income in addition
to net income from the Condensed Consolidated Statement of Operations.
Comprehensive income includes items resulting in unrealized changes in
shareholders' equity, such as foreign currency translation and change in
unrealized investment gains and losses on available-for-sale securities.

For the third quarter of 2003, PICO recorded comprehensive income of $1.3
million, consisting of $4.4 million in unrealized appreciation in investments
and a foreign currency translation credit of $75,000, which were partially
offset by a $3.2 million net loss.

During the first nine months of 2003, PICO recorded comprehensive income of
$1.7 million, consisting of $5.9 million in unrealized appreciation in
investments and a foreign currency translation credit of $103,000, partially
offset by the net loss of $4.3 million.

THIRD QUARTER RESULTS

PICO reported a net loss of $3.2 million ($0.26 per basic and diluted
share) for the third quarter of 2003, ended September 30. This consisted of a
loss from continuing operations of $3.6 million ($0.29 per share), and income
from discontinued operations of HyperFeed of $375,000 after-tax ($0.03 per
share). The $3.6 million loss from continuing operations consisted of a $5.6
million loss before income taxes and minority interest, which was partially
offset by an income tax benefit of $1.3 million and minority interest of
$714,000.

In the third quarter of 2002, PICO reported net income of $3.2 million
($0.26 per basic and diluted share). This consisted of income from continuing
operations of $2.5 million ($0.20 per share), and income from discontinued
operations of $796,000 after-tax ($0.06 per share). The $2.5 million income from
continuing operations consisted of income before income taxes and minority
interest of $4.2 million, income tax expense of $1.9 million, and minority
interest of $142,000.

NINE MONTHS RESULTS

PICO reported a net loss of $4.3 million ($0.35 per basic and diluted
share) for the first nine months of 2003, ended September 30. A loss from
continuing operations of $8.2 million ($0.66 per share) was partially offset by
$3.8 million ($0.31 per share) of after-tax income related to discontinued
operations. The $8.2 million loss from continuing operations consisted of a
$12.5 million loss before income taxes and minority interest, which was
partially offset by an income tax benefit of $3.2 million, and minority interest
of $1.2 million. The income from discontinued operations consisted of the income
earned by Sequoia in 2003 until its sale of $2.4 million after-tax, a $443,000
after-tax gain on the sale of Sequoia, income earned by discontinued operations
of HyperFeed of $655,000, and a $362,000 gain on HyperFeed's sale of PCQuote.com
($0.31 per share in total).

14

In the first nine months of 2002, PICO reported net income of $5 million
($0.40 per basic and diluted share). This consisted of income from continuing
operations of $1.7 million ($0.13 per share), income from discontinued
operations of $1.3 million ($0.11 per share), and a cumulative effect of change
in accounting principle which increased income by $2 million ($0.16 per share).
The income from continuing operations consisted of income before income taxes
and minority interest of $3.2 million, a provision for income taxes of $1.9
million, and minority interest of $378,000.

From January 1, 2002, PICO adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets," which requires that
goodwill and intangible assets with indefinite lives be tested for impairment
annually rather than amortized over time. The recognition of $2 million in net
income reflects the surplus of negative goodwill arising from the 1996 reverse
merger between Physicians and Citation Insurance Group (now known as PICO
Holdings, Inc.) over the write-off of goodwill items that were determined to be
impaired. See Note 5 of Notes to Condensed Consolidated Financial Statements,
"Cumulative Effect of Change in Accounting Principle."

Segment revenues and income (loss) before taxes and minority interest for
the third quarter and first nine months of 2003 and 2002 were:

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------

REVENUES:
Vidler Water Company $ 661,000 $ 935,000 $ 1,545,000 $ 10,074,000
Nevada Land & Resource Company 1,935,000 714,000 4,997,000 1,908,000
Business Acquisitions and Financing 501,000 7,311,000 3,028,000 8,956,000
Insurance Operations in Run Off 990,000 144,000 2,306,000 1,461,000
HyperFeed Technologies, Inc. 484,000 590,000
------------ ------------ ------------ ------------
Total Revenues $ 4,571,000 $ 9,104,000 $ 12,466,000 $ 22,399,000
============ ============ ============ ============

INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,349,000) $ (826,000) $ (3,405,000) $ (90,000)
Nevada Land & Resource Company 1,048,000 134,000 1,815,000 (644,000)
Business Acquisitions and Financing (4,351,000) 4,455,000 (5,758,000) 2,652,000
Insurance Operations in Run Off 544,000 433,000 (2,842,000) 1,299,000
HyperFeed Technologies, Inc. (1,499,000) (2,351,000)
------------ ------------ ------------ ------------
Income (Loss) Before Taxes and Minority Interest $ (5,607,000) $ 4,196,000 $(12,541,000) $ 3,217,000
============ ============ ============ ============

Detailed information on the performance of each segment follows; however,
the major factors affecting PICO's third quarter and nine months results were:

VIDLER WATER COMPANY

Vidler is a water resource development business, and as such its quarterly
results are affected by the timing of significant water rights sales. During the
first nine months of 2002, Vidler closed on three significant sales of water
rights and related assets which, combined, added approximately $8.4 million to
revenues and $2.6 million to gross margin. Vidler did not close on any
significant sales of water rights and related assets in the first nine months of
2003.

NEVADA LAND & RESOURCE COMPANY

The quarterly results for Nevada Land are affected by the timing of
closings on land sales transactions. Revenues and gross margins from land sales
were significantly higher in the third quarter, and the first nine months, of
2003 than in the same periods in 2002. Land sales revenues increased $1.2
million year over year in the third quarter and $2.9 million for the nine
months. The gross margin from land sales increased $914,000 year over year in
the third quarter and $1.5 million for the first nine months.

BUSINESS ACQUISITIONS AND FINANCING

Revenues and results in this segment vary considerably from quarter to
quarter, primarily due to fluctuations in net realized gains or losses. In 2002,
revenues and segment income included net realized gains of $5.9 million in the
third quarter and $4.8 million in the first nine months of 2002, primarily due
to an $8 million realized gain on the sale of our holding in Australian Oil &
Gas Corporation Limited. Segment expenses for the third quarter and first nine
months of 2003 were increased by a $3.3 million non-cash charge related to the
adoption of the PICO Holdings, Inc. 2003 Stock Appreciation Rights Program.

INSURANCE OPERATIONS IN RUN OFF

The results of this segment for the first nine months of 2003 were affected
by two significant items. Due to continued favorable claims experience,
Physicians Insurance Company of Ohio reduced its medical professional liability
insurance loss reserves in the

15

second quarter, which added approximately $3.6 million to income for the
first nine months of 2003. However, this was more than offset by a $7.5 million
provision for a reinsurance recoverable recorded by Citation Insurance Company,
after Fremont Indemnity Company went into liquidation in July 2003.

HYPERFEED TECHNOLOGIES, INC.

In May 2003, HyperFeed became a consolidated subsidiary and a new reporting
segment. HyperFeed contributed segment losses of $1.5 million for the third
quarter, and $2.4 million for the first nine months, of 2003.

VIDLER WATER COMPANY, INC.

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------

REVENUES:
Sale of Land, Water Rights, and Water $ 414,000 $ 500,000 $ 414,000 $ 8,873,000
Option Premiums Earned 346,000
Lease of Water 17,000 55,000 23,000 207,000
Lease of Agricultural Land 176,000 168,000 528,000 521,000
Other 54,000 212,000 234,000 473,000
------------ ------------ ------------ ------------
Segment Total Revenues $ 661,000 $ 935,000 $ 1,545,000 $ 10,074,000
============ ============ ============ ============

EXPENSES:
Cost of Land, Water Rights, and Water Sold $ (385,000) $ (400,000) $ (385,000) $ (5,710,000)
Commission and Other Costs Of Sales (17,000) (515,000)
Depreciation and Amortization (268,000) (238,000) (746,000) (715,000)
Interest (113,000) (121,000) (346,000) (379,000)
Operations, Maintenance, and Other (1,244,000) (985,000) (3,473,000) (2,845,000)
------------ ------------ ------------ ------------
Segment Total Expenses $ (2,010,000) $ (1,761,000) $ (4,950,000) $(10,164,000)

------------ ------------ ------------ ------------
LOSS BEFORE TAX $ (1,349,000) $ (826,000) $ (3,405,000) $ (90,000)
============ ============ ============ ============

In the third quarter of 2003, Vidler closed on the previously announced
sale of its remaining water rights at Wet Mountain, Colorado, which added
$414,000 to revenues and $29,000 to gross margin. All other revenues totaled
$247,000. Excluding the cost of land, water rights, and water sold, all other
expenses were $1.6 million. As a result of these factors, Vidler generated a
loss before taxes of $1.3 million for the third quarter of 2003.

In the third quarter of 2002, Vidler closed on the sale of 7 acres of
unimproved land near West Wendover, Nevada, which added $500,000 to revenues and
$83,000 to gross margin. All other revenues were $435,000. Excluding the cost of
land, water rights, and water sold, all other expenses were $1.3 million. Vidler
incurred a pre-tax loss of $826,000 for the third quarter of 2002.

The third quarter segment loss increased by $523,000 year over year,
principally as a result of a $158,000 decrease in other revenues and a $281,000
increase in operating expenses due to professional fees related to applications
for additional water rights to expand Vidler's asset base.

The third quarter sale of water rights at Wet Mountain, Colorado also added
$414,000 to revenues and $29,000 to gross margin for the first nine months of
2003. All other revenues totaled $1.1 million, including $346,000 in option
premiums earned when options over land and water granted to two
electricity-generating companies expired without being exercised. Excluding the
cost of land, water rights, and water sold, all other expenses were $4.6
million, resulting in a $3.4 million segment loss for Vidler in the first nine
months of 2003.

In the first nine months of 2002, Vidler closed on three significant sales
of water rights and related assets:

o 3,645 acre-feet of water rights and 1,217 acres of land in the Harquahala
Valley Irrigation District to golf course developers near Scottsdale,
Arizona, which added $5.2 million to revenues and approximately $1.9
million to gross margin;

o its interest in Cline Ranch, which added $2.1 million to revenues and
approximately $119,000 to gross margin; and

o 480 acre-feet of water rights and the related 240 acres of land in the
Harquahala Valley Irrigation District to an industrial user, which added $1
million to revenues and $556,000 to gross margin;

as well as the 7 acres of land near West Wendover described in a preceding
paragraph, which added $500,000 to revenues and $83,000 to gross margin. All
other revenues were $1.2 million. Excluding the cost of land, water rights, and
water sold, and commission and other selling costs, all other operating expenses
were $3.9 million. As a result of these factors, Vidler generated a pre-tax loss
of $90,000 for the first nine months of 2002.

16

The nine months segment result decreased $3.3 million year over year. The
result for the first nine months of 2002 included approximately $2.6 million in
gross margin from the sale of water rights and land, which did not recur in
2003. In addition, operating expenses were $626,000 higher year over year,
primarily due to professional fees related to applications for new water rights.

NEVADA LAND & RESOURCE COMPANY, LLC

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------

REVENUES:
Sale of Land $ 1,588,000 $ 372,000 $ 3,804,000 $ 915,000
Option Premiums Earned 137,000
Lease and Royalty 186,000 203,000 551,000 571,000
Interest and Other 161,000 139,000 505,000 422,000
----------- ----------- ----------- -----------
Segment Total Revenues $ 1,935,000 $ 714,000 $ 4,997,000 $ 1,908,000
=========== =========== =========== ===========

EXPENSES:
Cost of Land Sales $ (423,000) $ (121,000) $(1,754,000) $ (362,000)
Operating Expenses (464,000) (459,000) (1,428,000) (2,190,000)
----------- ----------- ----------- -----------
Segment Total Expenses $ (887,000) $ (580,000) $(3,182,000) $(2,552,000)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAX $ 1,048,000 $ 134,000 $ 1,815,000 $ (644,000)
=========== =========== =========== ===========

Nevada Land recognizes revenue from land sales, and the resulting gross
profit or loss, when the sales transactions close. On closing, the entire sales
price is recorded as revenue and a gross margin is recognized depending on the
cost basis attributed to the land which was sold. Since the date of closing
determines the accounting period in which the sales revenue and gross margin are
recorded:

o Nevada Land's reported revenues and income fluctuate from quarter to
quarter depending on the dates when specific transactions close; and

o land sales revenues for any individual quarter are not indicative of likely
full-year revenues.

The average sales price per acre fluctuates from quarter to quarter
depending on the percentage of the sales mix coming from the various categories
of land sold. For example, typically land which is suitable for industrial or
residential use would have a higher sales price per acre than land whose highest
and best use is ranching.

In the third quarter of 2003, segment total revenues were $1.9 million.
Nevada Land sold approximately 14,406 acres of land for $1.6 million, an average
sales price of $110 per acre. The gross margin on land sales was $1.2 million.
Lease and royalty revenues were $186,000, and interest and other revenues
contributed $161,000. After operating expenses of $464,000, Nevada Land recorded
income of $1 million.

In the third quarter of 2002, segment total revenues were $714,000. Nevada
Land sold approximately 1,577 acres of land for $372,000, or an average sales
price of $236 per acre. The gross margin on land sales was $251,000. Lease and
royalty revenues were $203,000, and interest and other revenues contributed
$139,000. Following operating expenses of $459,000, Nevada Land generated income
of $134,000 for the third quarter of 2002.

The segment result improved by $914,000 year over year, essentially due to
the $914,000 higher gross margin on land sales.

In the first nine months of 2003, segment total revenues were $5 million.
Nevada Land sold approximately 66,813 acres of land for $3.8 million, or an
average sales price of $57 per acre. The gross margin on land sales was $2
million. Lease and royalty revenues were $551,000, option premiums of $137,000
were earned, and interest and other revenues contributed $505,000. After
operating expenses of $1.4 million, Nevada Land recorded income of $1.8 million
for the first nine months of 2003.

In the first nine months of 2002, segment total revenues were $1.9 million.
Nevada Land sold approximately 7,779 acres of land for $915,000, or an average
sales price of $118 per acre. The gross margin on land sales was $553,000. Lease
and royalty revenues were $571,000, and interest and other revenues contributed
$422,000. Following operating expenses of $2.2 million, Nevada Land experienced
a loss of $644,000 for the first nine months of 2002.

The $2.5 million year over year improvement in the segment result primarily
resulted from the $1.5 million higher gross margin on land sales, and a $762,000
reduction in operating expenses. In the first nine months of 2002, operating
expenses were unusually high due to approximately $613,000 in legal and related
expenses and a one-time write-off of $261,000 in previously capitalized costs.

17

BUSINESS ACQUISITIONS AND FINANCING

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------

REVENUES:
Realized Gains (Losses):
On Sale or Impairment of Holdings $ (48,000) $ 5,519,000 $ 525,000 $ 4,011,000
SFAS No. 133 Change in Warrants (9,000) 348,000 237,000 782,000
Investment Income 349,000 599,000 1,801,000 2,195,000
Other 209,000 845,000 465,000 1,968,000
----------- ----------- ----------- -----------
Segment Total Revenues $ 501,000 $ 7,311,000 $ 3,028,000 $ 8,956,000
=========== =========== =========== ===========

SEGMENT TOTAL EXPENSES $(4,852,000) $(2,286,000) $(8,221,000) $(4,804,000)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INVESTEE INCOME $(4,351,000) $ 5,025,000 $(5,194,000) $ 4,152,000

Equity in Loss of Unconsolidated Affiliates $ (570,000) $ (564,000) $(1,500,000)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES $(4,351,000) $ 4,455,000 $(5,758,000) $(2,652,000)
=========== =========== =========== ===========

This segment contains businesses, interests in businesses, and other parent
company assets. The segment was referred to as Long-Term Holdings in prior
years.

The largest holding in this segment is Jungfraubahn Holding AG. Extracts
from Jungfraubahn's 2002 Annual Report and summary financial statements,
prepared on Swiss accounting standards, can be viewed at www.jungfraubahn.com
(in the "Finances" section of the "Inside" tab). The URL is provided for the
reader's convenience, and the contents of Jungfraubahn's web site are not
incorporated in this 10-Q. At September 30, 2003, our holding in Jungfraubahn
had an estimated market value and a carrying value before taxes of $25.4
million. In 2002 and until May 15, 2003, our holding in HyperFeed Technologies,
Inc. was included in this segment. On May 15, 2003, HyperFeed became a
consolidated subsidiary, and its results are now recorded in a separate segment.
See HyperFeed Technologies, Inc. segment.

For the third quarter of 2003, Business Acquisitions and Financing segment
revenues were $501,000. Investment income was $349,000. Revenues were reduced by
net realized investment losses of $57,000, including a $48,000 net realized loss
on the sale or impairment of investments. In addition, a $9,000 decrease in the
estimated fair value of warrants we own to buy shares in other companies --
principally HyperFeed -- was also recorded as a realized loss in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting For Derivative
Instruments and Hedging Activities." Other revenues were $209,000. After
expenses of $4.9 million, the segment reported a loss before taxes of $4.4
million for the third quarter of 2003.

For the first nine months of 2003, Business Acquisitions and Financing
segment revenues were $3 million. Net realized investment gains were
approximately $762,000. Realized gains of approximately $1.6 million on the sale
of two equity securities were partially offset by approximately $1.1 million in
charges for other-than-temporary impairment of our holdings in Accu Holding AG
and SIHL, to reflect a decline in the market value of those holdings during the
first nine months of 2003. In addition, a $237,000 increase in the estimated
fair value of warrants was recorded as a realized gain under SFAS No. 133.
Investment income was $1.8 million, including the $957,000 annual dividend from
Jungfraubahn, and other revenues were $465,000. After segment expenses of $8.2
million, and our $564,000 equity share of HyperFeed's net loss and other events
affecting equity (until May 15, 2003), the segment reported a loss before taxes
of $5.8 million for the first nine months of 2003.

Segment expenses for the third quarter and first nine months of 2003
include an initial charge of approximately $3.3 million related to the adoption
of the PICO Holdings, Inc. 2003 Stock Appreciation Rights ("SAR") Program, which
was approved at the 2003 Annual Meeting of Shareholders held on July 17, 2003.
During the third quarter, the previously existing stock options and call options
were canceled and replaced by SAR. In future accounting periods, the change in
the "in the money" amount (i.e., the difference between the market price of PICO
stock and the exercise price of the SAR) of SAR outstanding during the
accounting period will be recorded through the consolidated statement of
operations. An increase in the "in the money" amount of SAR will be recorded as
an expense, and a decrease in the "in the money" amount of SAR will be recorded
as a reduction in expenses. Previously we disclosed the fair value of
outstanding stock options, but in accordance with GAAP, we did not expense this
value in our statement of operations.

The $3.3 million charge records the amount by which the SAR are "in the
money" for the period ended September 30, 2003 as an expense. Part of the charge
is one-time in nature, expensing the increase in the "in the money" value of the
call options and stock options which were subsequently converted to SAR, from
the date they were originally issued through September 30, 2003. It should be
noted that 355,539 SAR, out of the total of 2,042,781 SAR, were formerly call
options granted in 1993 and 1994. The charge recorded in the period reflects the
increase in the PICO stock price from the dates when the call options were
granted ($3.49 for the 1993 grant and $4.74 for the 1994 grant) to $13.20 per
share as of September 30, 2003.

18

In the third quarter of 2002, segment revenues were $7.3 million. Net
realized investment gains came to almost $5.9 million. This included $5.5
million in net gains on the sale or impairment of securities, principally
consisting of an $8 million gain on the sale of our holding in Australian Oil &
Gas Corporation Limited, partially offset by a $1.9 million charge for
other-than-temporary impairment of our holding in Accu Holding AG. In addition,
a $348,000 increase in the estimated fair value of warrants was recorded as a
realized gain under SFAS No. 133. Investment income was $599,000, and other
revenues were $845,000. After segment expenses of $2.3 million, and our $570,000
equity share of the net losses and other events affecting equity of companies
accounted for under the equity method -- primarily HyperFeed -- the segment
reported income before taxes of $4.5 million for the third quarter of 2002.

In the first nine months of 2002, segment revenues were $9 million. Net
realized investment gains were approximately $4.8 million. This included
approximately $4 million in net gains on the sale or impairment of securities,
primarily composed of an $8 million gain on the sale of AOG, partially offset by
other-than-temporary impairment charges of $3.7 million. A $782,000 increase in
the estimated fair value of warrants was recorded as a realized gain under SFAS
No. 133. Investment income was $2.2 million, including a $703,000 dividend from
Jungfraubahn, and other revenues were $2 million. After expenses of $4.8
million, and our $1.5 million equity share of the net losses and other events
affecting equity of companies accounted for under the equity method -- primarily
HyperFeed -- the segment reported income before taxes of $2.7 million for the
first nine months of 2002.

Segment expenses were also affected by fluctuation in a non-cash expense
related to foreign currency. Our interests in Swiss public companies are held by
Global Equity SA, a wholly owned subsidiary which is incorporated in
Switzerland. Part of Global Equity SA's funding comes from a loan from PICO,
which is denominated in Swiss Francs. During accounting periods when the Swiss
Franc appreciates relative to the US dollar, under GAAP we are required to
record a benefit through the statement of operations to reflect the fact that
Global Equity SA owes PICO more US dollars. In Global Equity SA's financial
statements, an equivalent amount is reflected in the foreign currency
translation component of shareholders' equity (since it owes PICO more US
dollars); however, this does not go through the statement of operations.
Consequently, an expense or benefit is recorded in PICO's statement of
operations even though there is no net impact on shareholders' equity. A benefit
of $528,000 was recorded in the third quarter of 2003, compared to a benefit of
$15,000 in the third quarter of 2002. A benefit of approximately $1 million was
recorded for the first nine months of 2003, compared to a benefit of
approximately $1.5 million in the first nine months of 2002.

INSURANCE OPERATIONS IN RUN OFF

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------

REVENUES:
Net Investment Income $ 633,000 $ 563,000 $ 1,794,000 $ 1,783,000
Realized Investment Gains 357,000 4,000 510,000 98,000
Other (423,000) 2,000 (420,000)
----------- ----------- ----------- -----------
Segment Total Revenues $ 990,000 $ 144,000 $ 2,306,000 $ 1,461,000
=========== =========== =========== ===========

EXPENSES:
Operating and Underwriting Expenses (446,000) 289,000 (5,148,000) (162,000)
----------- ----------- ----------- -----------
Segment Total (Expenses)/Recoveries $ (446,000) $ 289,000 $(5,148,000) $ (162,000)

INCOME (LOSS) BEFORE TAXES:
Citation Insurance Company $ 326,000 $ 399,000 $(6,717,000) $ 1,178,000
Physicians Insurance Company of Ohio 218,000 34,000 3,875,000 121,000
----------- ----------- ----------- -----------
Segment Income (Loss) Before Taxes $ 544,000 $ 433,000 $(2,842,000) $ 1,299,000
=========== =========== =========== ===========

This segment consists of Citation Insurance Company and Physicians
Insurance Company of Ohio. Both Citation and Physicians are in "run off." This
means the companies are handling and resolving claims on expired policies, but
not writing new business.

Typically, most of the revenues of an insurance company in run off come
from investment income, which is expected to decline over time as fixed-income
securities mature or are sold to provide the funds to pay claims and expenses.
The Insurance Operations in Run Off segment generated total revenues of $990,000
in the third quarter of 2003, compared to $144,000 in the third quarter of 2002.
The principal factor in the $846,000 year over year revenue increase was that
revenues in 2002 were reduced by $425,000 of additional reinsurance, which is
recorded as a reduction in earned premiums, and therefore, revenues. In
addition, realized gains were $353,000 higher in 2003, primarily due to the
realization of gains on several of the smaller stock positions in the insurance
company investment portfolios, and investment income increased by $70,000 year
over year.

19

In the third quarter of 2003, operating and underwriting expenses were
$446,000, compared to a $289,000 recovery in the third quarter of 2002. As a
result of these factors, segment income increased from $433,000 in the third
quarter of 2002 to $544,000 in the third quarter of 2003.

For the first nine months of 2003, total revenues were $2.3 million,
compared to $1.5 million in the first nine months of 2002. Operating and
underwriting expenses were $5.1 million in the first nine months of 2003. This
principally represented two significant items:

o Physicians recorded a $3.6 million benefit from favorable development in
our medical professional liability claims reserves. The reserve reduction
was booked after actuarial analysis concluded that Physicians' reserves
against claims were significantly greater than the actuary's projections
of future claims payments, due to continued favorable trends in the
"severity" of claims. Reserves were reduced in 14 out of 20 accident
years, increased in one accident year, and unchanged in five accident
years. This was more than offset by;

o a $7.5 million provision against a reinsurance recoverable previously
recorded by Citation, after Fremont Indemnity Company went into liquidation
in July 2003. Until we acquired Citation in the 1996 reverse merger,
Citation had been a direct writer of workers compensation insurance. In
1997, Citation reinsured 100% of its workers compensation book of business
with a subsidiary, Citation National Insurance Company ("CNIC"). Citation
then sold CNIC to Fremont. All assets and liabilities, including the assets
which correspond to the workers compensation reserves reinsured with CNIC,
and records, computer systems, policy files, and reinsurance arrangements
were transferred to Fremont, as part of the sale of CNIC. Fremont merged
CNIC into Fremont, and administered and paid all workers compensation
claims that had been sold to Fremont. Fremont has been an admitted
reinsurer since 1997 and had filed statutory reports with the California
Department of Insurance showing that Fremont held deposits corresponding to
Citation's workers compensation claims reserves. Until June 30, 2003,
Citation booked the losses reported by Fremont and recorded an equal and
offsetting reinsurance recoverable from Fremont, as an admitted reinsurer,
for all losses and loss adjustment expenses, resulting in no net impact on
Citation's financial statements and no net impact on PICO's condensed
consolidated financial statements.

Since Fremont went into liquidation in July 2003, Fremont is no longer an
admitted reinsurance company under the statutory basis of insurance
accounting. Consequently, Citation was required to reverse the $7.5 million
reinsurance offset from Fremont in its June 30, 2003 financial statements
prepared on the statutory basis of accounting. We made a corresponding
provision against the entire reinsurance recoverable from Fremont in our
June 30, 2003 GAAP condensed consolidated financial statements as well.
Citation will make a claim to recover the deposits reported as held by
Fremont for Citation's insureds; however, the ultimate outcome cannot be
accurately predicted. The Company is aggressively pursuing its rights to
recover the reinsurance and to have the deposit assets returned to us.

To this end, we have written to the California Department of Insurance
requesting clarification of how the Department intends to treat funds
required to be held in trust for the benefit of Citation's workers
compensation insureds. Due to Fremont's liquidation, the California
Insurance Commissioner currently holds certain deposit assets as trustee
for the benefit of claimants under workers compensation policies issued by
Citation, and reinsured on a full assumption/servicing basis by Fremont. By
law, these deposits are required to be held "separate and apart" from other
assets of Fremont's estate and applied solely to the payment of the direct
and assumed claims and allocated claims expenses arising from the workers
compensation policies that Citation ceded/transferred to Fremont. We have
asked the Department of Insurance for an accounting of the deposit funds
required to be, and actually, held by Fremont with respect to assumed
workers compensation reinsurance, as well as a statement from the
California Insurance Commissioner whether the Fremont Estate intends to
honor Citation's rights to prompt payment of claims and allocated expenses
out of Fremont's deposit assets.

As a result of these factors, the segment incurred a loss before taxes of
$2.8 million for the first nine months of 2003, compared to income of $1.3
million in the first nine months of 2002.

CITATION INSURANCE COMPANY

For the third quarter of 2003, Citation generated revenues of $575,000.
After operating and underwriting expenses of $249,000, Citation reported income
before taxes of $326,000. In the third quarter of 2002, Citation's revenues were
negative $17,000. After an operating and underwriting expense recovery of
$416,000, Citation generated $399,000 in income before taxes.

For the first nine months of 2003, Citation generated revenues of $1.4
million. After operating and underwriting expenses of $8.1 million, Citation
reported a loss before taxes of $6.7 million. In the first nine months of 2002,
Citation's revenues were $902,000. After an operating and underwriting expense
recovery of $276,000, Citation generated $1.2 million in income before taxes.

20

At September 30, 2003, Citation's property and casualty insurance claims
reserves were $20.8 million, net of reinsurance, compared to $21.1 million at
June 30, 2003, and $14.6 million at December 31, 2002:

o the $368,000 net reserve decrease in the third quarter of 2003 was
primarily due to the payment of direct loss and loss adjustment expenses;
and

o the increase in the first nine months of 2003 was primarily due to the
provision against the $7.5 million reinsurance recoverable from Fremont.
During the first nine months of 2003, net reserves were reduced by payment
of approximately $4 million in direct losses (i.e., claims) and loss
adjustment expenses, which were partially offset by the recovery of
approximately $2.3 million from reinsurance companies.

CITATION INSURANCE COMPANY -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

SEPTEMBER 30, 2003 JUNE 30, 2003 DECEMBER 31, 2002
------------------ ------------- -----------------

Direct Reserves $22.5 million $22.5 million $16.3 million
Ceded Reserves (1.7) (1.4) (1.7)
------------- ------------- -------------
Net Property & Casualty Insurance Reserves $20.8 million $21.1 million $14.6 million
============= ============= =============

PHYSICIANS INSURANCE COMPANY OF OHIO

During the third quarter of 2003, Physicians generated total revenues of
$415,000. After operating and underwriting expenses of $197,000, income before
taxes was $218,000. During the third quarter of 2002, total revenues were
$161,000, operating and underwriting expenses were $127,000, and Physicians
reported income before taxes of $34,000.

During the first nine months of 2003, Physicians generated total revenues
of $944,000. Regular operating and underwriting expenses were exceeded by the
reserve reduction, resulting in income before taxes of $3.9 million. During the
first nine months of 2002, total revenues were $559,000, operating and
underwriting expenses were $438,000, and Physicians reported income before taxes
of $121,000.

At September 30, 2003, Physicians' loss and loss adjustment reserves were
$24.3 million, net of reinsurance, compared to $24.6 million at June 30, 2003,
and $30.3 million at December 31, 2002:

o during the third quarter, reserves decreased by $257,000, due to the
payment of $257,000 in losses and loss adjustment expenses; and

o reserves decreased by $6 million during the first nine months, due to the
$3.6 million reserve reduction, and the payment of approximately $2.4
million in losses and loss adjustment expenses.

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

SEPTEMBER 30, 2003 JUNE 30, 2003 DECEMBER 31, 2002
------------------ ------------- -----------------

Direct Reserves $30.1 million $30.4 million $36.4 million
Ceded Reserves (5.8) (5.8) (6.1)
------------- ------------- -------------
Net Medical Professional Liability Insurance Reserves $24.3 million $24.6 million $30.3 million
============= ============= ==============

HYPERFEED TECHNOLOGIES, INC.

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------

REVENUES:
Service $ 479,000 $ 583,000
Investment Income 5,000 7,000
----------- ----------- ----------- -----------
Segment Total Revenues $ 484,000 $ 590,000
=========== =========== =========== ===========

EXPENSES:
Cost of Service (402,000) (572,000)
Depreciation and Amortization (236,000) (369,000)
Other (1,345,000) (2,000,000)
----------- ----------- ----------- -----------
Segment Total Expenses $(1,982,000) $(2,941,000)
----------- ----------- ----------- -----------
SEGMENT LOSS BEFORE TAXES $(1,499,000) $(2,351,000)
=========== =========== =========== ===========

In May 2003, PICO purchased an additional 443,622.9 HyperFeed common shares
for approximately $1.2 million, or $2.705 per share (adjusted for the 1:10
reverse stock split in August 2003), in a private placement, increasing our
holding to 1,546,311.7 HyperFeed common shares. PICO now has a direct
controlling financial interest in HyperFeed, through direct ownership of a
majority

21

voting interest. Consequently, HyperFeed become a consolidated subsidiary of
PICO on May 15, 2003. See Note 9 of Notes to Condensed Consolidated Financial
Statements, "Consolidation of HyperFeed Technologies, Inc."

HyperFeed's revenues and expenses are recorded in this segment for the
period from May 15, 2003 until September 30, 2003. In 2002 and 2003 until May
15, PICO used the equity method of accounting for HyperFeed under Accounting
Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," and HyperFeed was part of the Business
Acquisitions and Financing segment.

For the three months ended September 30, 2003, HyperFeed's total revenues
were $484,000 and total expenses were $2 million, resulting in a segment loss
before taxes of $1.5 million. For the nine months ended September 30, 2003,
HyperFeed contributed total revenues of $590,000, segment expenses of $2.9
million, and a segment loss before taxes of $2.4 million.

In addition to, and separately from, the segment result, HyperFeed recorded
two items of income related to discontinued operations:

o income earned from the discontinued operations of $375,000 after-tax for
the third quarter, and $655,000 after-tax for the first nine months of
2003. This is included in the "Income from discontinued operations, net of
tax" line of the Condensed Consolidated Statements of Operations for the
third quarter and first nine months of 2003; and

o a $362,000 after-tax gain on the divestment of its retail trading business,
PCQuote.com, which was recorded in the first nine months of 2003. This is
included in the "Gain on disposal of discontinued operations, net" line of
the Condensed Consolidated Statements of Operations for the first nine
months of 2003.

Detail on HyperFeed's results is contained in HyperFeed's 10-Q for the
period ended September 30, 2003, which should be filed with the SEC on or before
November 14, 2003. The contents of HyperFeed's 10-Q are not incorporated into
this 10-Q.

DISCONTINUED OPERATIONS

On March 31, 2003, PICO closed on the sale of Sequoia Insurance Company.
Our condensed consolidated financial statements for 2003 and previous years now
present Sequoia as a discontinued operation.

During the first three months of 2003, Sequoia contributed income of $2.4
million after-tax, which is included in the "Income from discontinued
operations, net of tax" line in the Condensed Consolidated Statements of
Operations for the nine months ended September 30, 2003. Sequoia contributed
income of $796,000 after-tax in the third quarter of 2002 and income of $1.3
million after-tax for the first nine months of 2002.

PICO also recorded a $443,000 after-tax gain from the sale of Sequoia in
the first nine months of 2003, which is included in the "Gain on disposal of
discontinued operations, net" line of the Condensed Consolidated Statements of
Operations.

The gross sale proceeds from the sale of Sequoia were approximately $43.1
million, consisting of a dividend of $17.9 million and the balance in cash. The
dividend included the common stocks previously held in Sequoia's investment
portfolio with a value of $16.4 million. The common stocks received in the
dividend primarily consist of a number of holdings in small-capitalization value
stocks, which we believed were still undervalued based on the private market
value of the underlying assets, earnings, and cash flow. These common stocks
were added to the investment portfolio of Physicians, which was Sequoia's direct
parent company.

LIQUIDITY AND CAPITAL RESOURCES

Our assets primarily consist of our operating subsidiaries, holdings in
other public companies, marketable securities, and cash and cash equivalents. On
a consolidated basis, the Company had $22.7 million in cash and cash equivalents
at September 30, 2003, compared to $19 million at June 30, 2003, and $22.1
million at December 31, 2002.

In addition to the $22.7 million in consolidated cash and cash equivalents
as defined by GAAP, at September 30, 2003, the parent company held fixed-income
securities, mostly investment-grade corporate bonds maturing in 2003 and 2004,
with a market value of $13.9 million.

Our cash flow fluctuates depending on the requirements of our operating
subsidiaries for capital and activity in our investment portfolios. Our primary
sources of funds include cash balances, cash flow from operations, the sale of
holdings, and -- potentially -- the proceeds of borrowings or offerings of
equity and debt. We endeavor to ensure that funds are always available to take
advantage of new acquisition opportunities.

22

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

o As commercial use of Vidler's water assets increases, we expect that Vidler
will generate free cash flow as receipts from leasing water or storage, and
the proceeds from selling land and water rights, begin to overtake
maintenance capital expenditure, financing costs, and operating expenses.
As water lease and storage contracts are signed, we anticipate that Vidler
may be able to monetize some of the contractual revenue streams, which
could potentially provide another source of funds;

o Nevada Land is actively selling land which has reached its highest and best
use, and is not part of PICO's long-term utilization plan for the property.
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 costs, so Nevada Land is generating
strong positive cash flow;

o At this stage of its run off, investment income more than covers Citation's
operating expenses. The funds required to pay claims are coming from the
maturity of fixed-income securities in the company's investment portfolio
and recoveries from reinsurance companies; and

o As its run off progresses, Physicians is obtaining funds to pay operating
expenses and claims from the maturity of fixed-income securities, the
realization of investments, and recoveries from reinsurance companies.

The Departments of Insurance in Ohio and California prescribe minimum
levels of capital and surplus for insurance companies and set guidelines for
insurance company investments. Typically, PICO's insurance subsidiaries
structure the maturity of fixed-income securities to match the projected pattern
of claims payments. When interest rates are at very low levels, to insulate the
capital value of the bond portfolios against a decline in value which would be
brought on by a future increase in interest rates, the bond portfolios may have
a shorter duration than the projected pattern of claims payments.

As shown in the Condensed Consolidated Statements of Cash Flow, cash and
cash equivalents increased by $647,000 in the first nine months of 2003,
compared to a $9.3 million net decrease in the first nine months of 2002.

During the first nine months of 2003, cash of $8.1 million was used in
Operating Activities, including $1.4 million of cash used in Sequoia's operating
activities. In the first nine months of 2002, operating activities provided cash
of $2.6 million, primarily due to the receipt of the cash proceeds from water
rights and related assets sold by Vidler. The principal uses of cash in both
years included operating expenses at Vidler, the payment of claims by Citation
and Physicians, and group overhead.

Investing Activities generated $10 million of cash in the first nine months
of 2003. The cash inflow in 2003 primarily resulted from cash received of $25.1
million from the sale of Sequoia (gross proceeds of approximately $43 million,
less the $17.9 million dividend of common stocks and debt securities received).
The remaining 2003 Investing Activity cash flow items principally reflect the
net investment of $10 million in fixed-income securities and the net investment
of $4.9 million in stocks, being routine activity in the investment portfolios
of our insurance subsidiaries and the temporary investment of funds held by
non-insurance group companies. In the first nine months of 2002, Investing
Activities used $9.2 million of cash. The cash used in 2002 primarily
represented the net investment of $7.4 million in stocks and $4.9 million of
cash used in Sequoia's investing activities, partially offset by net proceeds of
$3.5 million from the maturity or sale of fixed-income securities.

Financing Activities used cash of $441,000 in the first nine months of
2003, compared to $1.2 million of cash used in the first nine months of 2002.
The cash used in 2002 primarily represented the repayment of $4 million in
non-recourse borrowings collateralized by the Harquahala Valley farm properties
sold by Vidler during the period. This was partially offset by a $2.6 million
increase in Swiss Franc borrowings to help finance the increase of our holdings
in selected Swiss public companies.

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

At September 30, 2003, PICO had no significant commitments for future
capital expenditures.

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

As of September 30, 2003, no stock had been repurchased under this
authorization.

23

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

PICO's balance sheet includes a significant amount of assets and
liabilities whose fair values are subject to market risk. Market risk is the
risk of loss arising from adverse changes in market interest rates or prices.
PICO currently has interest rate risk as it relates to its fixed maturity
securities and mortgage participation interests, equity price risk as it relates
to its marketable equity securities, and foreign currency risk as it relates to
investments denominated in foreign currencies. Generally, PICO's borrowings are
short to medium term in nature and therefore approximate fair value. At
September 30, 2003, PICO had $52.6 million of fixed maturity securities and
mortgage participation interests, $80.1 million of marketable equity securities
that were subject to market risk, of which $42.3 million were denominated in
foreign currencies, primarily Swiss francs. PICO's investment strategy is to
manage the duration of the portfolio relative to the duration of the liabilities
while managing interest rate risk.

PICO uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities and
mortgage participation interests, PICO uses duration modeling to calculate
changes in fair value. For its marketable securities, PICO uses a hypothetical
20% decrease in the fair value to analyze the sensitivity of its market risk
assets and liabilities. For investments denominated in foreign currencies, PICO
uses a hypothetical 20% decrease in the local currency of that investment.
Actual results may differ from the hypothetical results assumed in this
disclosure due to possible actions taken by management to mitigate adverse
changes in fair value and because the fair value of securities may be affected
by credit concerns of the issuer, prepayment rates, liquidity, and other general
market conditions. The sensitivity analysis duration model produced a loss in
fair value of $1.1 million for a 100 basis point decline in interest rates on
its fixed securities and mortgage participation interests. The hypothetical 20%
decrease in fair value of PICO's marketable equity securities produced a loss in
fair value of $16 million that would impact the unrealized appreciation in
shareholders' equity. The hypothetical 20% decrease in the local currency of
PICO's foreign denominated investments produced a loss of $6.6 million that
would impact the foreign currency translation in shareholders' equity.

ITEM 4: CONTROLS AND PROCEDURES

Under the supervision of and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of our disclosure controls and procedures, as such
term is defined under Rules 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
quarterly report.

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PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None

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

The Company had an Annual Meeting of Shareholders on July 17, 2003. At the
meeting, S. Walter Foulkrod, III, Esq. and Richard D. Ruppert, MD, were
re-elected as directors. The vote for Mr. Foulkrod was 10,118,789 in favor, none
against, and 1,021,950 withheld. The vote for Dr. Ruppert was 10,119,521,000 in
favor, none against, and 1,021,218 withheld.

Also at the July 17, 2003 Annual Meeting of Shareholders, the shareholders
voted to approve the PICO Holdings, Inc. 2003 Stock Appreciation Rights Program
with 8,268,491 votes in favor, 1,386,334 votes against, and 288,155 withheld.

ITEM 5: OTHER INFORMATION

None

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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

Exhibit
Number Description
------ -----------

+ 3.1 Amended and Restated Articles of Incorporation of PICO.

++ 3.2 Amended and Restated By-laws of PICO.

21. Subsidiaries of PICO. See Note 1 of Notes To
Consolidated Financial Statements, "Nature of
Operations and Significant Accounting Policies" in
Registrant's Annual Report on Form 10-K for 2002,
filed with the SEC on March 31, 2003.

31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

32.1. Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

32.2. Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

---------------------------------

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

++ Filed as Appendix to the prospectus in Part I of Registration
Statement on Form S-4 (File No. 333-06671).

(B) REPORTS ON FORM 8-K

None.

26

PICO HOLDINGS, INC. AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PICO HOLDINGS, INC.

Dated: November 12, 2003 By: /s/ Maxim C. W. Webb
------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)

27