The following discussion and analysis of financial condition and results of operations should be read together with the Unaudited Condensed Consolidated Financial Statements and accompanying Notes included elsewhere in this report, and the Consolidated Financial Statements and accompanying Notes included in our Annual Report on Form 10-K.

Note About "Forward-Looking Statements"

This Quarterly Report on Form 10-Q (including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section) contains "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, as amended, regarding our business, financial condition, results of operations, and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipated developments, and other information concerning future matters. Words such as "may", "will", "could", "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "should", "target", "projects", "contemplates", "predicts", "potential", "continue" 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 Quarterly Report on Form 10-Q.

Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on current expectations and assumptions. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and the actual results and outcomes could differ from what is expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the headings "Item 1A. Risk Factors" in our 2008 Annual Report on Form 10-K and "Part II, Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q, and in other filings made from time to time with the United States Securities and Exchange Commission ("SEC") after the date of this report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to (and we expressly disclaim any obligation to) revise or update any forward-looking statement, whether as a result of new information, subsequent events, or otherwise (except as may be required by law), in order to reflect any event or circumstance which may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q.

INTRODUCTION

PICO Holdings, Inc. is a diversified holding company. In this Quarterly Report, PICO and its subsidiaries are collectively referred to as "PICO", "the Company", or by words such as "we" and "our". We seek to build and operate businesses where significant value can be created from the development of unique assets, and to acquire businesses which we identify as undervalued and where our management participation in operations can aid in the recognition of the business's fair value, as well as create additional value.

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

Our business is separated into four major operating segments:

· Water Resource and Water Storage Operations;
· Real Estate Operations;
· Insurance Operations in "Run Off"; and
· Corporate

As of March 31, 2009, our major consolidated subsidiaries are:

· Vidler Water Company, Inc. ("Vidler"), a business that we started more than 11 years ago, which acquires and develops water resources and water storage operations in the southwestern United States, with assets in Nevada, Arizona, Idaho, California, and Colorado;
· Nevada Land & Resource Company, LLC ("Nevada Land"), an operation that we built since we acquired the company more than 11 years ago, which owns approximately 440,000 acres of former railroad land in Nevada, and certain mineral rights and water rights related to the property;
· UCP, LLC ("UCP"), a business we started in 2008, which acquires and develops partially-developed and finished residential housing lots in selected markets in California;
· Physicians Insurance Company of Ohio ("Physicians"), which is "running off" its medical professional liability insurance loss reserves; and
· Citation Insurance Company ("Citation"), which is "running off" its property & casualty insurance and workers' compensation loss reserves.

RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 2009 AND 2008

Shareholders' Equity Before Noncontrolling Interests

At March 31, 2009, PICO had shareholders' equity before noncontrolling interests of $457.5 million ($24.28 per share), compared to $477.7 million ($25.36 per share) at December 31, 2008. The $20.3 million decrease in shareholders' equity before noncontrolling interests during the first quarter of 2009 was primarily due to a $21.4 million comprehensive loss resulting primarily from an $18.5 million net loss. Book value per share attributable to PICO shareholders decreased by $1.08, or 4.3%, during the first quarter of 2009.

Comprehensive Income (Loss)

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

For the first quarter of 2009, PICO recorded a comprehensive loss of $21.4 million. This consisted of the quarter's $18.5 million net loss and a $3.4 million net decrease in unrealized appreciation in investments, which were partially offset by a $468,000 foreign currency translation credit.

Segment Results of Operations

Segment revenues and income (loss) before taxes and noncontrolling interest for
the first quarter of 2009 and 2008 were:

                                                                   Three Months Ended March 31,
                                                                       2009               2008
Revenues:
Water Resource and Water Storage Operations                      $        208,000      $   819,000
Real Estate Operations                                                    662,000        1,594,000
Insurance Operations in "Run Off"                                      (6,233,000 )      1,673,000
Corporate                                                              (4,962,000 )        391,000
Total revenues                                                   $    (10,325,000 )    $ 4,477,000

Income (loss) before income taxes and noncontrolling interest:
Water Resource and Water Storage Operations                      $    (13,917,000 )    $  (960,000 )
Real Estate Operations                                                   (929,000 )        422,000
Insurance Operations in "Run Off"                                      (6,893,000 )      1,209,000
Corporate                                                              (9,206,000 )      1,344,000
Income (loss) before income taxes and noncontrolling interests   $    (30,945,000 )    $ 2,015,000

First Quarter Net Income (Loss)

The nature of our operations is on long - term shareholder value and as a result our revenues and results of operations can fluctuate widely from period to period. For example, we only recognize revenue from the sale of real estate and water assets when specific transactions close. Consequently, sales of real estate and water assets for any individual quarter are not indicative of revenues for future quarters or the full financial year.

Our results of operations decreased by $32.9 million in the first quarter of 2009 compared to the first quarter of 2008. For the first quarter of 2009 and 2008 we did not record any significant real estate and water asset sales. The first quarter of 2009 included a $12.4 million impairment charge to our water assets in the Tule Desert Groundwater Basin in Lincoln County, Nevada as a result of a ruling by the Nevada State Engineer that we intend to appeal. We did not have any similar charges in 2008. We also experienced a $12.6 million unfavorable change in net realized losses from first quarter 2009 compared to first quarter 2008, primarily as a result of other - than - temporary impairments on some of our investments, and a net increase in foreign currency expense of $6.8 million from first quarter 2009 compared to first quarter 2008.

First quarter revenues were negative $10.3 million in 2009, compared to $4.5 million in 2008, a decrease of $14.8 million year over year. Revenues from the Insurance Operations in "Run Off" segment decreased $7.9 million year over year, principally due to a $7.7 million unfavorable change in net realized investment gain/loss on the sale or impairment of securities recorded in 2009, which primarily reflected provisions for other-than-temporary impairment of securities held in the investment portfolios of the insurance companies. Revenues from the Corporate segment decreased $5.4 million year over year, principally due to a $4.9 million increase in net realized investment loss on the sale or impairment of securities recorded in 2009, which primarily reflected provisions for other-than-temporary impairment of securities held in deferred compensation accounts. Revenues from the Real Estate Operations segment declined $932,000 year over year, and revenues from the Water Resources and Water Storage Operations segment declined $611,000 year over year, primarily due to lower net investment income on liquid funds.

First quarter costs and expenses were $20.6 million in 2009, compared to $2.5 million in 2008. A number of expenses changed significantly year over year, combining to result in an $18.1 million expense increase. In particular, in the Water Resource and Water Storage Operations, the Company recorded an impairment charge of $12.4 million related to its Tule Desert water rights after the Nevada State Engineer ruled to award only a fraction of the water rights the Company had expected it would receive in Lincoln County, Nevada. In addition, for the three months ended March 31, 2009, Corporate segment expenses increased by a $3 million foreign exchange loss, as opposed to a $3.8 million foreign exchange gain which reduced expenses in 2008.

PICO recorded a loss before taxes and noncontrolling interests of $30.9 million in the first quarter of 2009, compared to income before taxes and noncontrolling interest of $2 million in the first quarter of 2008. The $32.9 million year over year decrease primarily resulted from a $12.4 million impairment charge in the Water Resource and Water Storage Segment and deteriorations of $10.5 million in the Corporate segment result, and $8.1 million in the Insurance Operations in "Run Off" segment.

The $10.5 million decrease in the Corporate Segment result was primarily due to the $6.8 million unfavorable change in foreign exchange gain/expense year over year, as discussed above. The $8.1 million decrease in the Insurance Operations in "Run Off" was principally due to a $7.7 million unfavorable change in net realized gain/loss on the sale or impairment of investments year over year, as discussed above.

The Real Estate Operations segment result decreased $1.4 million, primarily due to a $659,000 decrease in net investment income year over year, and a $472,000 year over year increase in segment operating expenses, as we build the business of UCP. The Water Resource and Water Storage Operations segment net loss before income taxes and noncontrolling interests increased by $13 million, principally as a result of the $12.4 million impairment charge in the first quarter of 2009 related to our Tule Desert water applications (see " Water Resource and Water Storage Operations - Tule Desert Groundwater Basin and Impairment of Water Assets " below)

After an $11.1 million tax benefit, and the add-back of $1.3 million of noncontrolling interest in subsidiary losses (see " Noncontrolling Interest in Subsidiaries " below), PICO reported a net loss of $18.5 million ($0.98 per share) for the first quarter of 2009. The effective rate of the tax benefit for the first quarter of 2009 is 36%, compared to the federal corporate income tax rate of 35%.

In the first quarter of 2008, after a $4 million provision for taxes, and the add-back of $306,000 of noncontrolling interest in subsidiary losses, PICO reported a net loss of $1.6 million ($0.09 per share). The effective tax rate for the three months ended March 31, 2008 was 197%, compared to the federal corporate income tax rate of 35%. The $4 million tax charge exceeded the federal corporate rate due to interest and penalties on uncertain tax positions, operating losses with no associated tax benefit from subsidiaries that are excluded from the consolidated federal income tax return and unable to use the losses on their own separate tax returns, certain compensation expense which is not tax-deductible, and state tax charges.

Noncontrolling Interest In Subsidiaries

On January 1, 2009, we adopted Statement of Financial Accounting Standards ("SFAS") No. 160 "Noncontrolling Interests in Consolidated Financial Statements". During the three months ended March 31, 2009, we added back a net loss of $1.3 million to our condensed consolidated statement of operations, which represented the interest of noncontrolling shareholders in the losses of consolidated subsidiaries where the Company owns less than 100% of such subsidiaries. Our most significant subsidiary that is not wholly owned is Fish Springs Ranch, LLC ("FSR"). Most of the losses attributable to the noncontrolling interests in our subsidiaries relate to our 49% partner's share of the financing cost charged by our wholly-owned subsidiary, Vidler Water Company, on expenditures incurred for the Fish Springs pipeline project.

                  WATER RESOURCE AND WATER STORAGE OPERATIONS

                                                                 Three Months Ended March 31,
                                                                     2009               2008
Revenues:
Sale of real estate and water assets                           $         23,000     $    129,000
Net investment income                                                    20,000          566,000
Other                                                                   165,000          124,000
Segment total revenues                                         $        208,000     $    819,000

Expenses:
Cost of real estate and water assets sold                      $         (6,000 )   $    (22,000 )
Impairment of water assets                                          (12,378,000 )
Depreciation and amortization                                          (267,000 )       (277,000 )
Overhead                                                               (819,000 )       (858,000 )
Project expenses                                                       (655,000 )       (622,000 )
Segment total expenses                                         $    (14,125,000 )   $ (1,779,000 )
Loss before income taxes and noncontrolling interests          $    (13,917,000 )   $   (960,000 )

Our Water Resource and Water Storage operations are conducted through Vidler and its subsidiaries. Over the past few years, several large sales of real estate and water assets have generated the bulk of Vidler's revenues. Since the date of closing generally determines the accounting period in which revenues and cost of sales are recorded, Vidler's reported revenues and income fluctuate from quarter to quarter depending on the dates when specific transactions close. Consequently, sales of real estate and water assets for any individual quarter are not indicative of likely revenues for future quarters or the full financial year.

Segment Results

In the first quarter of 2009, Vidler generated $208,000 in revenues. Net investment income of $20,000 was earned, primarily from the temporary investment of cash proceeds from the February 2007 equity offerings by PICO. The February 2007 stock offering raised net proceeds of $100.1 million, which were principally allocated to Vidler for new water resource and water storage acquisitions. Throughout 2008, Vidler acquired several real estate and water assets from these proceeds, primarily in the western Nevada region, resulting in $546,000 lower investment income earned on liquid funds in the first quarter 2009, compared to the first quarter of 2008. Other revenues include farm lease income and water service fees.

In the first quarter of 2008, Vidler generated $819,000 in revenues. Net investment income of $566,000 was earned, primarily from the temporary investment of cash proceeds from the February 2007 equity offerings by PICO. As noted above, the proceeds were principally allocated to Vidler for new water resource and water storage acquisitions. During 2007 and the first quarter of 2008, Vidler acquired several real estate and water assets from these proceeds, primarily in the western Nevada region and Idaho.

There were no significant sales of real estate and water assets in the first quarter of 2009 and 2008.

Tule Desert Groundwater Basin

The Lincoln County Water District and Vidler ("Lincoln/Vidler") have entered into a water delivery teaming agreement to locate and develop water resources in Lincoln County, Nevada for planned projects under the County's master plan. As previously disclosed, Lincoln/Vidler jointly filed a permit application in 1998 for 14,000 acre-feet of water rights for industrial use from the Tule Desert Groundwater Basin in Lincoln County, Nevada. In November 2002, the Nevada State Engineer awarded Lincoln/Vidler a permit for 2,100 acre-feet of water rights - which Lincoln/Vidler subsequently sold in 2005 - and ruled that an additional 7,240 acre-feet could be granted pending additional studies by Lincoln/Vidler (the "2002 Ruling"). Subsequent to the 2002 Ruling and consistent with the Nevada State Engineer's conditions, Vidler engaged independent experts to conduct these additional engineering and scientific studies. These studies indicated that the pumping of an additional 7,240 acre-feet of water for 100 years would not cause unreasonable drawdown in the Tule Desert Groundwater Basin or surrounding basins and that the recharge to the groundwater basin was as much as 10,500 acre-feet per annum. As a result of the 2002 Ruling, Lincoln/Vidler entered into agreements with developers in 2005 whereby the developers had up to 10 years to purchase up to 7,240 acre-feet of water, as and when water rights were permitted from the applications.

During 2008 Lincoln/Vidler submitted comprehensive and substantial evidence to the Nevada State Engineer to support its permit applications as required by the 2002 Ruling. On April 29, 2009 the Nevada State Engineer issued a ruling with respect to such applications (the "2009 Ruling"). In the 2009 Ruling, the Nevada State Engineer determined that the perennial yield of the groundwater recharge in the Tule Desert Groundwater Basin is likely in the range of 2,500 to 5,000 acre-feet per annum. The Nevada State Engineer further concluded that it would permit the appropriation of only one-half of the upper end of that range, or 2,500 acre-feet. Since 2,100 acre-feet had already been appropriated to and permitted by Lincoln/Vidler under the 2002 Ruling, the Nevada State Engineer found that only approximately 400 acre-feet of unappropriated water remained in the Tule Desert Groundwater Basin. Accordingly, the 2009 Ruling granted Lincoln/Vidler approximately 400 acre-feet of additional permitted water rights instead of the applied for 7,240 acre-feet of water rights.

We believe that the data provided to the Nevada State Engineer appropriately supported our application for the additional 7,240 acre feet of water and was consistent with the 2002 Ruling. Accordingly, Lincoln/Vidler intends to appeal the 2009 Ruling. The outcome of any appeal is inherently uncertain and it may be a considerable period of time before Lincoln/Vidler is able to ascertain the final volume of water rights that will be permitted by the Nevada State Engineer from its applications in the Tule Desert Groundwater Basin.

As of March 31, 2009 our carrying value in the applications for the additional 7,240 acre feet was $16.4 million which primarily represents the data collection, drilling and monitoring costs and expenses incurred to collect, interpret and submit the groundwater data to the Nevada State Engineer. Under our agreements with developers, Vidler would only record approximately $4 million of revenue from the approximately 400 acre feet of water rights granted in the 2009 Ruling (the current sales price under existing contracts is $9,983 per acre-foot of permitted water rights). Because of the 2009 Ruling, for the three months ended March 31, 2009, the Company has written down the carrying value of these water rights and applications to its estimated recoverable value under the 2009 Ruling and recorded a loss on impairment of approximately $12.4 million, before any related tax effects.

Other Expenses

Overhead expenses consist of costs which are not related to the development of specific water resources, such as salaries and benefits, rent, and audit fees. Overhead expenses of $819,000 in the first quarter of 2009 were largely unchanged when compared to the first quarter of 2008 of $858,000.

Project expenses consist of costs related to the development of existing water resources, such as maintenance and professional fees. Project expenses are expensed as appropriate under accounting principles generally accepted in the United States (U.S. GAAP), and could fluctuate from period to period depending on activity within Vidler's various water resource projects. Costs related to the development of water resources which meet the criteria to be recorded as assets in our financial statements are capitalized as part of the cost of the asset, and charged to cost of sales when revenue is recognized. Project expenses principally relate to:

· the operation and maintenance of the Vidler Arizona Recharge Facility;
· the development of water rights in the Tule Desert groundwater basin (part of the Lincoln County agreement);
· the utilization of water rights at Fish Springs Ranch as a future municipal water supply for the north valleys of the Reno, Nevada area; and
· the operating and financing costs of our farm properties in Idaho and maintenance of the associated water rights.

Project expenses were $655,000 in the first quarter of 2009, compared to $622,000 in the first quarter of 2008. In both periods, the most significant expense was the operating and maintenance costs of our water storage facility in Arizona.

                             REAL ESTATE OPERATIONS

                                                                   Three Months Ended March 31,
                                                                      2009                2008
Revenues:
Sale of real estate and water assets                             $       219,000      $    365,000
Net investment income                                                    264,000           923,000
Other                                                                    179,000           306,000
Segment total revenues                                           $       662,000      $  1,594,000

Expenses:
Cost of real estate and water assets sold                        $       (75,000 )    $   (128,000 )
Operating expenses                                                    (1,516,000 )      (1,044,000 )
Segment total expenses                                           $    (1,591,000 )    $ (1,172,000 )
Income (loss) before income taxes and noncontrolling interests   $      (929,000 )    $    422,000

Currently our businesses in the Real Estate Operations segment are conducted through our wholly owned subsidiaries, and its operations in Nevada, and UCP, LLC ("UCP") with its operations in California.

Nevada Land recognizes revenue from land sales when a sale transaction closes. On closing, the entire sales price is recorded as revenue, and the associated cost basis is reported as cost of land sold. Since the date of closing determines the accounting period in which the revenue and cost of land are recorded, Nevada Land's reported results fluctuate from quarter to quarter, depending on the dates when transactions close. Consequently, results for any one quarter are not necessarily indicative of likely results for future quarters or the full financial year. In the following, gross margin is defined as revenue less cost of sales, and gross margin percentage is defined as gross margin divided by revenue.

UCP is still in the acquisition phase of its operations in purchasing and developing finished and partially-entitled residential housing lots in select California markets. The timing of revenues from the disposition of UCP's inventory of lots is uncertain and will, to a large extent, coincide with any recovery of the housing markets in the regions of California in which UCP operates. UCP did not complete the acquisition of any additional lots during the first quarter of 2009.

In the first quarter of 2009, segment total revenues were $662,000. Nevada Land sold approximately 1,280 acres of former railroad land for $219,000. The average sales price was $171 per acre, and our average basis in the land sold was $59 per acre. The gross margin on land sales was $144,000, which represents a gross margin percentage of 65.8 %. Net investment income, representing interest earned on the proceeds from land sales and on land sales contracts where Nevada Land has provided vendor financing, was $264,000, and other revenues (primarily lease and royalty income from the former railroad land) were $179,000. After segment operating expenses of $1.5 million, Real Estate Operations generated a segment loss of $929,000 for the first three months of 2009.

In the first quarter of 2008, segment total revenues were $1.6 million. Nevada Land sold approximately 4,161 acres of land for $365,000. The average sales price was $88 per acre, and our average basis in the land sold was $31 per acre. The gross margin on land sales was $237,000, which represents a gross margin percentage of 64.9%. Net investment income from liquid funds was $923,000, and other revenues, primarily land lease and royalty income, were $306,000. After segment operating expenses of $1 million, Real Estate Operations generated segment income of $422,000 for the first three months of 2008.

The first quarter segment result decreased by $1.4 million year over year. This was due to a $193,000 decrease in gross margin from land sales at Nevada Land year over year, primarily as a result of the continuing decrease in the volume of land sold in the first quarter of 2009 compared to the corresponding period in 2008. There was also a significant reduction in net investment income of $659,000 year over year, as interest-bearing liquid funds have been allocated to non-income producing real estate acquisitions within UCP throughout 2008. In addition, segment operating expenses were $472,000 higher in the first quarter of 2009 compared to the corresponding period in 2008, primarily due to the additional overhead incurred by UCP, which only commenced operations in the . . .