UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant þ

Filed by a Party other than the Registrant¨

Check the appropriate box:

PICO HOLDINGS, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

PICO HOLDINGS, INC.

875 Prospect Street, Suite 301

La Jolla, California 92037

March 18, 200820, 2009

Dear Shareholder:

You are cordially invited to attend our Annual Meeting of Shareholders to be held on Friday, May 16, 200815, 2009 at 3:00 p.m. local time at the Museum of Contemporary Art, Coast Room, 700 Prospect Street, La Jolla, California 92037.

The enclosed Notice and Proxy Statement contain details concerning the matters to be considered during the Annual Meeting. At the Annual Meeting, you will be asked to (i) elect three directors;as directors the two nominees named in the attached proxy statement; (ii) ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm;firm, and (iii) transact such other business as may properly come before the meeting. You will note that our board of directors recommends a vote “FOR” the election of each of the three directorstwo director nominees and “FOR” the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm. Please complete, sign and return your Proxy in the enclosed envelope at your earliest convenience to assure that your shares will be represented and voted at the Annual Meeting, even if you cannot attend.

YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend our Annual Meeting of Shareholders, we urge you to vote and submit your proxy by the Internet, telephone or mail in order to ensure the presence of a quorum. If you attend the meeting, you will, of course, have the right to revoke the proxy and vote your shares in person. If you hold your shares through an account with a brokerage firm, bank or other nominee, please follow the instructions you receive from them to vote your shares.

We look forward to seeing you at the Annual Meeting and thank you for your support.

John D. Weil

Chairman

John R. Hart

President and Chief Executive Officer

PICO HOLDINGS, INC.

875 Prospect Street, Suite 301

La Jolla, California 92037

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

PICO Holdings, Inc.’s 20082009 Annual Meeting of Shareholders will be held at the Museum of Contemporary Art, Coast Room, 700 Prospect Street, La Jolla, California 92037 on Friday, May 16, 200815, 2009 at 3:00 p.m. (PDT) for the following purposes:

Our board of directors recommends a vote for Items 1 and 2. Any action may be taken on the foregoing matters at the Annual Meeting on the date specified above, or on any date or dates to which the Annual Meeting may be adjourned or postponed.

The board of directors has fixed the close of business on Monday, March 17, 200816, 2009 as the record date for determining the shareholders entitled to notice of and to vote at the Annual Meeting and at any adjournment or postponement thereof. Only shareholders of record of our common stock, $0.001 par value per share, at the close of business on that date will be entitled to notice of and to vote at the Annual Meeting and at any adjournment or postponement thereof.

OurImportant Notice regarding the availability of proxy statement is attached.materials for the shareholder meeting to be held on May 15, 2009. Our financial and other information is contained in our Annual Report to Shareholders for the fiscal year ended December 31, 2007.2008. Pursuant to new rules promulgated by the United States Securities and Exchange Commission, we have elected to provide access to our proxy materials both by sending you this full set of proxy materials, including a proxy card, and by notifying you of the availability of our proxy materials on the Internet. This proxy statement and our 20072008 Annual Report to Shareholders, including our Form 10-K for the year ended December 31, 2008, are available at our web site at http://www.picoholdings.com/InvestorInformation/PublicInformation/SECFilings/tabid/66/Default.aspx,investors.picoholdings.com/financials.cfm, which does not have “cookies” that identify visitors to the site.

YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the Annual Meeting of Shareholders, we urge you to vote and submit your proxy by the Internet, telephone or mail in order to ensure the presence of a quorum.

Registered holders may vote:

Any Proxy may be revoked by delivery of a later dated Proxy or a written notice of revocation or by attending the Annual Meeting and voting in person.

Beneficial Shareholders. If your shares are held in the name of a broker, bank or other holder of record, follow the voting instructions you receive from the holder of record to vote your shares.

By Order of the Board of Directors,

John R. Hart

President and Chief Executive Officer

Dated:    March 18, 2008

20, 2009

TABLE OF CONTENTS

PICO HOLDINGS, INC.

875 Prospect Street, Suite 301

La Jolla, California 92037

PROXY STATEMENT FOR

ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON MAY 16, 200815, 2009

PICO Holdings, Inc.’s board of directors is soliciting proxies for the 20082009 Annual Meeting of the Shareholders. This proxy statement and proxy card contain information about the items you will vote on at the annual meeting. Distribution of these documents to shareholders is scheduled to begin on or about March 28, 2008.30, 2009. We pay the cost of soliciting proxies. The meeting will be held at the Museum of Contemporary Art, Coast Room, 700 Prospect Street, La Jolla, California at 3:00 p.m. (PDT) on Friday, May 16, 2008.15, 2009. The proxy may be revoked by appropriate written notice at any time before it is exercised or by voting in person at the meeting.

At the meeting the following matters will be considered:

To transact such other business as may be properly brought before the meeting and any adjournment of the meeting.

An electronic version of this proxy statement is available on our website at http://www.picoholdings.com/InvestorInformation/PublicInformation/SECFilings/tabid/66/Default.aspx.investors.picoholdings.com/financials.cfm.

Our principal executive office is located at 875 Prospect Street, Suite 301, La Jolla, California 92037, and our telephone number is (858) 456-6022.

SOLICITATION AND VOTING

Annual Report to Shareholders and Form 10-K

A copy of our Annual Report to Shareholders for 2007,2008, including our Form 10-K for the year ended December 31, 20072008 (which is not a part of our proxy soliciting materials), accompanies this proxy statement. The annual report and these proxy solicitation materials are being mailed on or about March 28, 200830, 2009 to all shareholders entitled to vote at the meeting. In most cases, only one annual report and proxy statement is being delivered to multiple shareholders sharing an address unless we have received a written or oral request for a separate copy of the annual report and proxy statement.

A separate copy of the annual report and proxy statement can be requested by calling us at (858) 456-6022 or by sending us a written request at:

875 Prospect Street

Suite 301

La Jolla, California 92037

Shareholders sharing an address who are receiving multiple copies of the annual report and proxy statement may request delivery of a single copy of the annual report and proxy statement by either calling the number listed above or by sending a written request to the address listed above. The Form 10-K for the year ended December 31, 20072008 and the exhibits filed with it are available at our web site at http://www.picoholdings.com/InvestorInformation/PublicInformation/SECFilings/tabid/66/Default.aspx.investors.picoholdings.com/financials.cfm. Upon request by any shareholder at the address or telephone number listed above, we will promptly furnish a copy of any or all exhibits to the Form 10-K for the year ended December 31, 2007.2008.

Voting Information

Record Date. The record date for our annual meeting is March 17, 2008.16, 2009. On the record date, there were 18,833,73718,840,392 shares of our common stock issued and outstanding, excluding 3,218,408 treasury shares held by our subsidiaries.outstanding.

Voting Your Proxy. Only shareholders of record as of the close of business on March 17, 200816, 2009 are entitled to vote at our annual meeting and any adjournment thereof. Except for shares held by our subsidiaries, which will not be voted at the annual meeting, each share of common stock entitles the holder to one vote on all matters brought before the annual meeting. Shareholders whose shares are registered in their own names may vote (1) by returning a proxy card, (2) via the Internet, or (3) by telephone. Specific instructions to be followed by any registered shareholder interested in voting via the Internet or by telephone are set forth on the enclosed proxy card. The Internet and telephone voting procedures are designed to authenticate the shareholdersshareholder’s identity and to allow the shareholder to vote his or her shares and confirm that his or her voting instructions have been properly recorded. If you do not wish to vote via the Internet or telephone, please complete, sign and return the proxy card in the postage paid envelope provided. Proxies will be voted as instructed by the shareholder or shareholders granting the proxy. Unless contrary instructions are specified, if the enclosed proxy is executed and returned (and not revoked) prior to the annual meeting, the shares of our common stock represented by the proxy will be voted (1) FORthe election of each of the threetwo director candidates nominated by the board of directors; (2) FOR the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008,2009, and (3) in accordance with the best judgment of the named proxies on any other matters properly brought before the annual meeting.

Cumulative Voting.Voting. In voting for the election of directors, all shareholders have cumulative voting rights if at least one shareholder gives notice, whether at the annual meeting or prior to the voting, of the shareholder’s intention to cumulate votes. If cumulative voting is permitted in the election of directors, the proxy holders will have discretion as to the manner in which votes represented by the proxy are to be cumulated, unless the proxy indicates the manner in which such votes are to be cumulated. Accordingly, each shareholder may cumulate such voting power and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares held by the shareholder, or distribute such shareholder’s votes on the same principle among two or more candidates, as such shareholder sees fit. Management is hereby soliciting discretionary authority to cumulate votes represented by proxies if cumulative voting is invoked.

Revoking Your Proxy. A shareholder who delivers an executed proxy pursuant to this solicitation may revoke it any time before it is exercised by: (1) executing and delivering a later dated proxy card to our corporate secretary prior to the annual meeting; (2) delivering written notice of revocation of the proxy to our corporate secretary prior to the annual meeting; or (3) attending and voting in person at the annual meeting.

Vote Required. The presence, in person or by proxy, of the holders of a majority of the shares entitled to vote is required to constitute a quorum for the transaction of business at the annual meeting. Abstentions and “broker non-votes” (shares held by a broker or nominee that does not have the authority, either express or discretionary, to vote on a particular matter) are counted for purposes of determining the presence or absence of a quorum for the transaction of business at the annual meeting.

If a quorum is present, the threetwo nominees for election as directors receiving the highest number of votes will be elected. The following will not be votes cast and will have no effect on the election of any director nominee: (1) a share whose ballot is marked as abstain;withhold; (2) a share otherwise present at the meeting but for which there is an abstention; and (3) a share otherwise present at the meeting as to which a shareholder gives no authority or direction.

If a quorum is present, the approval of the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008,2009, and all other matters

that properly come before the meeting, require that the votes cast for such actions exceed the votes cast against

such actions. As with the election of directors, abstentions and broker non-votes will have no effect on the proposal to ratify the selection of Deloitte & Touche LLP or other proposals.

Proxies and ballots will be received and tabulated by Computershare Investor Services, LLC, our transfer agent and the inspector of elections for the annual meeting. Except for contested proxy solicitations or as required by law, proxy cards and voting tabulations that identify shareholders are kept confidential.

PROPOSAL NO. 1:

ELECTION OF DIRECTORS

Nominees and Continuing Directors

We have a classified board of directors. Our directors are divided into three classes, with each class serving a three-year term. The terms of office of each class end in successive years. Pursuant to Section 3.2 of our bylaws, our total number of directors has been established at seven. ThreeTwo of our directors are to be elected at our 20082009 annual meeting for terms ending at the meeting in the year 20112012 or until their respective successors have been duly elected and qualified.

Unless otherwise instructed, the proxy holders named on the enclosed form of proxy intend to distribute the votes represented by proxies in such proportions as they deem desirable to elect the threetwo nominees named below or their substitutes. Although it is not contemplated that any nominee will decline or be unable to serve, if either occurs prior to the meeting, a substitute nominee will be recommended to the board by the Nominating Committee. See “Security Ownership of Certain Beneficial Owners and Management” for the number of shares of our common stock beneficially owned by these nominees.

The board of directors, at the recommendation of our Corporate Governance and Nominating Committee, has nominated Ronald Langley, John R. HartS. Walter Foulkrod III, Esq. and JohnRichard D. WeilRuppert, MD for election as directors at our annual meeting on May 16, 200815, 2009 for terms ending in 2011.2012. A majority of the independent directors approved the nomination for election to the board of Messrs. Langley, HartMr. Foulkrod and WeilDr. Ruppert and each of the nominees has consented to be nominated and to serve if elected.

While Mr. Langley’s nomination to continue as a member of the board of directors is for a three year term, Mr. Langley has indicated that he intends to remain a member of our board of directors through at least December 31, 2008. If he resigns prior to the end of 2011, the board of directors will fill such vacancy by electing a new director to serve for the remainder of Mr. Langley’s term and until his successor has been duly elected and qualified.

Information Regarding Nominees and Directors

The following table and biographical descriptions set forth certain information with respect to the threetwo nominees and our other fourfive directors, each of whom are currently serving and, unless otherwise specified, have served continuously since he was previously elected, based on information furnished to us by each such director. The following information is as of February 1, 2008,2009, unless otherwise specified.

The following provides certain biographical information with respect to the threetwo nominees and the other fourfive directors.

Nominees for Directors to be Elected in 20082009 With Terms Ending in 20112012

S. Walter Foulkrod has served as a member of our board of directors since 1996. Mr. Foulkrod is an attorney and a member of the Dauphin County Bar Association and the Pennsylvania Bar Association. From 2000 to 2006, he was a member of Foulkrod Ellis Professional Corporation, Attorneys at Law and prior to that was the sole owner of S. Walter Foulkrod, III & Associates, Attorneys at Law from 1994 to 2000. From 1984 to 1994, Mr. Foulkrod served as President and Chairman of Foulkrod, Reynolds & Havas, P.C.

Richard D. Ruppert has served as a member of our board of directors since 1996. Dr. Ruppert is a physician and has served as a director of our subsidiary, Physicians Insurance Company of Ohio, since 1998. Dr. Ruppert currently serves as Trustee and has previously served as President of the Ohio Historical Society from 2006 to 2008. He is also a Trustee of the Fort Meigs Historical Society and an Emeritus President and an Emeritus Professor of Internal Medicine at Medical College of Ohio. Dr. Ruppert was President of the American Society of Internal Medicine from 1992 to 1993 and President of the Medical College of Ohio from 1978 to 1993.

Directors Whose Terms Continue Through 2009

Carlos C. Campbell has served as a member of our board of directors since 1998. Mr. Campbell has been President of C.C. Campbell & Co., a strategic advisory company, since June 1985. Mr. Campbell has served as a director of Herley Industries, Inc. since 2005 and of Resource America, Inc. since 1990. In addition, Mr. Campbell was a director of HyperFeed Technologies, Inc., our 80% owned subsidiary. On November 29, 2006, HyperFeed Technologies filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, District of Delaware.

Kenneth J. Slepicka has served as a member of our board of directors since 2005. Mr. Slepicka is currently the Chief Executive Officer of Synthonics Inc., an early stage biotechnology company. In addition, Mr. Slepicka has served as President and Treasurer of SBC Warburg Futures Inc. from 1994 to 1998 and as Executive of Fixed Income Trading for O’Connor & Associates from 1985 to 1994. He has also held risk advisor and portfolio manager positions in the financial services industry. Mr. Slepicka has served as a member of the FIA Steering Committee and the Federal Reserve FCM Working Group and as a Governor of the Board of Trade Clearing Corporation. He is also a former member of the Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Board of Options Exchange, and Pacific Options Exchange. Mr. Slepicka was also a director of HyperFeed Technologies, Inc., our 80% owned subsidiary. On November 29, 2006, HyperFeed Technologies, filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, District of Delaware.

John R. Hart has served as our President and Chief Executive Officer and as a member of our board of directors since 1996. Mr. Hart also serves as an officer and/or director of our following subsidiaries: Physicians Insurance Company of Ohio (President, Chief Executive Officer, and director since 1993), Vidler Water Company, Inc. (Chairman since 1997 and Chief Executive Officer since 1998), Citation Insurance Company (Chairman since 1996), and Nevada Land and Resource Company, LLC (Chairman and Chief Executive Officer since 1997). Mr. Hart was a director of HyperFeed Technologies, Inc., our 80% owned subsidiary. On November 29, 2006, HyperFeed Technologies filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, District of Delaware.

Ronald Langley has served as a member of our board of directors since 1996 and served as our Chairman from 1995 to December 31, 2007. On May 7, 2007, Mr. Langley announced his retirement as our Chairman. If elected asis currently a director by the shareholders at the annual meeting,private investor. Mr. Langley intends to remain a member of our board of directors through at least December 31, 2008. Mr. Langley has alsopreviously served as an officer and/or director of our following subsidiaries: Physicians Insurance Company of Ohio from 1993 to 2007 (as Chairman from 1995 to 2007), Vidler Water Company, Inc. from 1995 to 2007, Citation Insurance Company from 1996 to 2007, and Nevada Land and Resource Company, LLC from 1997 to 2007. Mr. Langley has served as a director of Jungfraubahn Holding AG, a public company traded on the SWX Swiss Exchange, since 2000. In addition, Mr. Langley was a director of HyperFeed Technologies, Inc., our 80% owned subsidiary. On November 29, 2006, HyperFeed Technologies filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, District of Delaware.

John D. Weilhas served as a member of our board of directors since 1996. Mr. Weil served as our Lead Director from May 2007 until he was elected our Chairman in February 2008. Mr. Weil has also served as a member of the board of directors of Allied Health Products, Inc. and Baldwin & Lyons, Inc. since 1997. Mr. Weil currently serves as President of Clayton Management Company, an investment company, and has served in this capacity since 1978.

Directors Whose Terms Continue Through 2008

S. Walter Foulkrod has served as a member of our board of directors since 1996. Mr. Foulkrod is an attorney. From 2000 to 2006, he was a member of Foulkrod Ellis Professional Corporation, Attorneys at Law and prior to that was the sole owner of S. Walter Foulkrod, III & Associates, Attorneys at Law from 1994 to 2000. From 1984 to 1994, Mr. Foulkrod served as President and Chairman of Foulkrod, Reynolds & Havas, P.C.

Richard D. Ruppert has served as a member of our board of directors since 1996. Dr. Ruppert is a physician and has served as a director of our subsidiary, Physicians Insurance Company of Ohio, since 1998. Dr. Ruppert has served as President of the Ohio Historical Society from 2006 to 2008. Prior to that time, Dr. Ruppert was President of the American Society of Internal Medicine from 1992 to 1993 and President of the Medical College of Ohio from 1978 to 1993.

Carlos C. Campbell has served as a member of our board of directors since 1998. Mr. Campbell has been President of C.C. Campbell & Co., a strategic advisory company, since June 1985. Mr. Campbell has served as a director of Herley Industries, Inc. since 2005 and of Resource America, Inc. since 1990. In addition, Mr. Campbell was a director of HyperFeed Technologies, Inc., our 80% owned subsidiary. On November 29, 2006, HyperFeed Technologies filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, District of Delaware.

Kenneth J. Slepicka has served as a member of our board of directors since 2005. Mr. Slepicka is currently the Chief Executive Officer of Synthonics Inc., an early stage biotechnology company. In addition, Mr. Slepicka has served as President and Treasurer of SBC Warburg Futures Inc. from 1994 to 1998 and as Executive of Fixed

Income Trading for O’Connor & Associates from 1985 to 1994. He has also held risk advisor and portfolio manager positions in the financial services industry. Mr. Slepicka is currently a member of the FIA Steering Committee and the Federal Reserve FCM Working Group and served as a Governor of the Board of Trade Clearing Corporation. He is also a former member of the Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Board of Options Exchange, and Pacific Options Exchange. Mr. Slepicka was also a director of HyperFeed Technologies, Inc., our 80% owned subsidiary. On November 29, 2006, HyperFeed Technologies, filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, District of Delaware.

Vote Required for Election of Each Director

The threetwo nominees for election ofas directors receiving the highest number of votes will be elected.

OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES TO THE BOARD OF DIRECTORS.

PROPOSAL NO. 2:

RATIFICATION OF

DELOITTE & TOUCHE LLP AS THE COMPANY’S INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has appointed Deloitte & Touche LLP as our independent registered public accounting firm to audit our financial statements for the year ending December 31, 2008.2009.

Although ratification by shareholders is not required by law, the board of directors has determined that it is desirable to request approval of this appointment by the shareholders. If the shareholders do not ratify the appointment, the Audit Committee will reconsider whether or not to retain Deloitte & Touche LLP and may decide to retain them notwithstanding the vote. Even if the appointment is ratified, the Audit Committee in its discretion may change the appointment at any time during the year if it determines that such a change would be in the best interests of the company and our shareholders. In addition, if Deloitte & Touche LLP should decline to act or otherwise become incapable of acting, or if the employment should be discontinued, the Audit Committee will appoint a substitute independent public registered public accounting firm. A representative of Deloitte & Touche LLP will be present at the Annual Meeting, will be given the opportunity to make a statement if he or she so desires and will be available to respond to appropriate questions.

Independent Registered Public Accounting Firm Fees

The following table sets forth the aggregate fees billed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates for the fiscal years ended December 31, 20062008 and December 31, 2007:

Audit Fees consist of fees we paid for (i) the audit of our annual financial statements included in our Annual Reports on Forms 10-K and reviews of our quarterly financial statements included in our Quarterly Reports on Forms 10-Q; (ii) services that are normally provided by Deloitte & Touche LLP in connection with statutory and regulatory audits or consents; and (iii) the audit of our internal control over financial reporting with the objective of obtaining reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Tax Fees consist of fees for professional services for tax compliance, which totaled $279,020$494,250 and $295,895 in 20062008 and 2007, respectively, and tax planning and advice services, which totaled $101,115$374,700 and $317,056 in 20062008 and 2007, respectively. These services included assistance regarding United States federal, state, local and international tax return preparation, tax audits and appeals, and advice on structuring potential mergers, acquisitions and disposals, altering employee benefit plans, and intra-group restructuring.

Audit-Related Fees consist of fees we paid for the audit of PICO Holdings, Inc. Employees 401(k) Retirement Plan and Trust.

The Audit Committee has determined that the provision of non-audit services listed above is compatible with the independence of Deloitte & Touche LLP.

Audit Committee Pre-Approval Policy

Consistent with SEC policies regarding independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has recommended, and the board of directors has approved, pre-approval guidelines for all audit and non-audit services to be provided by the independent registered public accounting firm. These pre-approval guidelines are:

Vote Required for Ratification of the Appointment of Deloitte & Touche LLP as the Independent Registered Public Accounting Firm

Ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm requires the affirmative vote of a majority of all the votes cast on the matter at the annual meeting.

OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2008.2009.

CORPORATE GOVERNANCE

Director Independence

The board of directors has determined that Carlos C. Campbell, S. Walter Foulkrod, III, Esq., Richard D. Ruppert, MD, Kenneth J. Slepicka and John D. Weil are “independent directors” as defined by listing standards for the Nasdaq Global Market. The independent directors have regularly scheduled executive session meetings at which only the independent directors are present. Executive sessions are led by our Chairman, Mr. Weil. An executive session is held in conjunction with each regularly scheduled quarterly board meeting and other sessions may be called by the Chairman in his own discretion or at the request of the board of directors.

Committees of the Board of Directors

The board of directors has an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee. Our audit and compensation committees are composed solely of independent directors. Our corporate governance and nominating committee is not composed entirely of independent directors. As a result, any nominations for our board of directors must be approved by a majority of our independent directors. The committees operate pursuant to written charters, which are available on our website at http://www.picoholdings.com/InvestorInformation/PublicInformation/SECFilings/tabid/66/Default.aspx.investors.picoholdings.com/governance.cfm. The following table sets forth the three standing committees of the Board,board, the members of each committee during the last fiscal year and the number of meetings held by each committee.

Audit Committee.The Audit Committee consists of Dr. Ruppert (Chairman) and Messrs. Campbell, Foulkrod, and Slepicka, none of whom has been or is an officer or employee of our company. Each member of the Audit Committee, in the judgment of the board of directors, is independent as that term is defined in the listing standards for the Nasdaq Global Market. In 2007,2008, this committee met sixfive times. The functions of the Audit Committee include: (a) meeting with the independent registered public accounting firm to review their reports on their audits of our financial statements, their comments on our internal control over financial reporting and the action taken by management with regard to such comments; (b) reviewing auditor independence; (c) issuing an Audit Committee report to shareholders; and (d) the appointment of our independent registered public accounting firm. The Audit Committee has the authority, in its discretion, to order interim and unscheduled audits to investigate any matter brought to its attention and to perform such other duties as may be assigned to it from time to time by the board of directors.

Compensation Committee.The Compensation Committee consists of Messrs. Weil (Chairman), Slepicka and Campbell, and Dr. Ruppert. None of its members is or has been an officer or employee of our company, and the board of directors has determined that each member of the Committee is independent as that term is defined in the listing standards for the Nasdaq Global Market. The Compensation Committee met four timesone time in 2007.2008. The functions of the Compensation Committee include: (a) reviewing and approving the overall executive compensation program for our officers and the officers of our subsidiaries; (b) considering and reviewing compensation levels for services as a member of the Board;board; (c) approving individual executive officer compensation packages; and (d) recommending to the board modifications of the compensation package for the

Chief Executive Officer, Chief Operating Officer and other elected officers. The Compensation Committee’s goals are to attract and retain

qualified directors and key executives critical to our long-term success, to reward executives for our long-term success and the enhancement of shareholder value, and to integrate executive compensation with both annual and long-term financial results. Additional information on the Compensation Committee’s processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis below.

Corporate Governance and Nominating Committee.The Corporate Governance and Nominating Committee met one timethree times in 2007.2008. Its members consist of Messrs. LangleyFoulkrod (Chairman), Campbell and Hart.Langley. Mr. Campbell isand Mr. Foulkrod are not and hashave not been an officer or employee of our company. In the judgment of the board of directors, Mr. Campbell isand Mr. Foulkrod are independent as that term is defined in the listing standards for the Nasdaq Global Market. Mr. Hart is our employee and Mr. Langley was our employee until he resigned effective December 31, 2007.

The Corporate Governance and Nominating Committee works with the board of directors to determine the appropriate characteristics, skills, and experience for the board as a whole and its individual members. In evaluating the suitability of individual board members, the Corporate Governance and Nominating Committee and the board take into account many factors, including general understanding of marketing, finance, and other disciplines relevant to the success of a publicly traded company; understanding of our business; education and professional background, including current employment and other board memberships; and reputation for integrity. These factors, and others considered useful by the Corporate Governance and Nominating Committee, will be reviewed in the context of an assessment of the perceived needs of the board at a particular point in time. After assessing the perceived needs of the board, the Corporate Governance and Nominating Committee identifies specific individuals as a potential source of director candidates with relevant experience. The priorities and emphasis of the Corporate Governance and Nominating Committee and of the board may change from time to time to take into account changes in business and other trends and the portfolio of skills and experience of current and prospective board members. The Corporate Governance and Nominating Committee establishes procedures for the nomination process and recommends candidates for election to the board. Consideration of new board nominee candidates involves a series of internal discussions, review of information concerning candidates, and interviews with selected candidates. Board members or employees typically suggest candidates for nomination to the board. In 2007,2008, we did not employ a search firm or pay fees to other third parties in connection with seeking or evaluating board nominee candidates.

The Corporate Governance and Nominating Committee will consider nominees recommended by shareholders; however, such recommendations must be submitted in writing to our corporate secretary along with the candidate’s resume and any other relevant information. Because our Corporate Governance and Nominating Committee is not composed entirely of independent directors, any nominations for our board of directors must be approved by a majority of our independent directors.

Audit Committee Financial Expert

Pursuant to Section 407 of the Sarbanes-Oxley Act of 2002, the board of directors has determined that Richard D. Ruppert, MD is “independent” and qualified as an audit committee financial expert as defined in Regulation S-K, Item 407 of the Securities Exchange Act of 1934. Dr. Ruppert is independent1934, as defined in Regulation S-K, Item 407, of the Securities Exchange Act of 1934.amended.

Directors’ Attendance

In 2007,2008, there were fivefour meetings of the board of directors. All of the directors attended 75% or more of the aggregate of their respective board and committee meetings.

It is the policy of the board that each director, in the absence of extenuating circumstances, should attend our annual meeting in person. All directors attended our 20072008 annual meeting except for Mr. Langley, who was out of the country on business at the time of the annual meeting.

Shareholder Nomination of Directors

Nominations other than thosefor director candidates that are made by our directorsthe shareholders must be in writing and be delivered or mailed to our corporate secretary not less than 60 days prior to the meeting.meeting for consideration. However, such proposals may not be included in our proxy materials for our 2010 annual meeting of our shareholders if we do not receive them on or before November 15, 2009. Such nominations must include the information

regarding each nominee required by our bylaws. Nominations not made according to these procedures will be disregarded. The Corporate Governance and Nominating Committee will consider candidates recommended by shareholders, when submitted in writing along with the candidate’s resume and any other relevant information. A copy of the Corporate Governance and Nominating Committee’s Charter is posted on our website at http://www.picoholdings.com/InvestorInformation/PublicInformation/SECFilings/tabid/66/Default.aspx.investors.picoholdings.com/governance.cfm.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

OverviewThe Compensation Committee determines our compensation objectives, philosophy and forms of compensation and benefits for our executive officers. The committee generally seeks input from management and often requests reports and recommendations from the Consulting Division of Silverton Bank (formerly known as The Bankers Bank), an independent compensation consultant. This Compensation Discussion and Analysis discusses and analyzes our executive compensation program and the fiscal year 2008 amounts shown in the executive compensation tables that follow.

Our compensation programs are designed to support our business goals and promote both short-term and long-termeconomically sustainable growth. This section of the proxy statement discusses the principles underlying our compensation policies and the practices and decisions of the Compensation Committee with respect to our named executive officers. For the year ended December 31, 2007,2008, our named executive officers were our chief executive officer, John R. Hart, our chief financial officer, Maxim C.W. Webb, and our three other most highly compensated executive officers, Ronald Langley,officers: Richard H. Sharpe, Damian C. Georgino, and W. Raymond Webb.

2008—The Year In Review

Though our net income for 2008 increased over the prior year, the global financial and economic crisis and steep decline in investor and business confidence in 2008 had a negative impact on our business. Our book value per share declined and as a result, none of the named executive officers received a bonus or incentive payout.

2009—The Year Ahead

We expect to continue to face a very challenging economic environment throughout 2009. It is difficult to predict the effects that the unprecedented global financial and economic crises will have on our financial performance. As a result, the Compensation Committee evaluated compensation for 2009 with a goal of balancing retention of our executive officers with our compensation philosophy and costs to us. With that in mind, the Compensation Committee determined that it was in the company’s best interest to retain Messrs. Sharpe, M. Webb, and Georgino through three year term employment agreements that formalize our compensation arrangement with each of them.

Our Compensation Philosophy and Programs

Our compensation philosophy centers on the principle of aligning pay and performance. Total compensation varies with individual performance and the company’s performance in achieving objectives. We focus on developing an overall compensation package that helps to recruit, retain and motivate qualified executives upon whom we will dependrely for our current and future success.

We have designed our compensation programs to achieve the following primary objectives:

Each element

The following table lists the components of our total executive compensation reflects one or moreand the primary purpose of the above objectives. Totaleach.

Before 2009, we did not establish specific benchmarks to compare compensation we pay our executive officers against that paid by our peer groups. In setting compensation for the named executive officers consists of the following components:

We considera formulaic approach. The Compensation Committee considered the prevailing general compensation practices of comparable companies in decidingrelevant industry segments, while recognizing our unique and diversified operations and assets. Our management gathered cost of living data and compensation information on our peer group, which was determined in 2007 by Silverton Bank, and made those findings to the amount and typeCompensation Committee, who ultimately approved of the specific levels of the various elements of compensation for our overall compensation package. In selecting peer industry segmentsnamed executive officers for 2008, as discussed below.

As described under “Item 1. Business” of our Annual Report on Form 10-K for the fiscal year ending December 31, 2008, we are a diversified holding company. To maximize long-term shareholder value, our strategic mission is to manage operations to achieve a superior return on net assets by:

This business strategy and operations,requires a management team with particular emphasis placed on demonstrated expertise in asset acquisition, investment, and investmentfinancial management and business operations of acquired entities in both domesticlocal as well as international markets. This team must review, operate and international markets;manage a broad and (2) the naturediversified range of our business which includes the ownershipinvestments, assets, and operation of entities involved in insurance, financing,operations that currently include water resources and storage, real estate, and water resourcesinsurance, but may include related or unrelated businesses in the future.

Goals of the Compensation Program

The Compensation Committee attempts to align compensation paid to our named executive officers with the value that they achieve for our shareholders. We offer all six elements of compensation listed above under“Our Compensation Philosophy and storage. BasedPrograms.” However, the Compensation Committee focuses primarily on the combination of total cash compensation (base salary and annual incentive awards) and long-term incentives, because we believe these criteria, we selected a peer group of public companies in industry segments classified as asset management, investment companies,elements are the most critical and broker dealers. This process was followed in 2007influential to attract, retain, and is consistentmotivate executives with prior year studies. The Consulting Division of Silverton Bank (f/k/a The Bankers Bank) assists us in this analysis by conducting surveys and screenings of certain peer companies.the skill sets necessary to maximize shareholder value.

The Role of the Compensation Committee in Determining Executive Compensation

Our Compensation Committee is a standing committee. The Compensation Committee is comprisedcomposed of independent, outside directors within the meaning of Section 162(m) of the Internal Revenue Code and independent, non-employee directors within the meaning of Rule 16b-3 of the Exchange Act, who also meet the

independence requirements of the Nasdaq Global Market. John D. Weil is Chairman of the committee. The other committee members are Carlos C. Campbell, Richard D. Ruppert, MD, and Kenneth J. Slepicka.

The Compensation Committee oversees and administers our executive compensation program. The role of the committee is to oversee the compensation and benefit plans and policies, administer the PICO Holdings, Inc. 2005 Long-Term Incentive Plan (including reviewing and approving grants of awards under the 2005 Long-Term Incentive Plan), and to review and approve annually the compensation paid and incentive awards granted to our officers. The committee is responsible for assuring that all of our executive compensation decisions are developed, implemented, and administered in a way that supports our fundamental philosophy that a significant portion of executive compensation is linked to our performance. To this end, the committee oversees and administers all of our executive compensation and benefit plans and policies, administers the PICO Holdings, Inc. 2005 Long-Term Incentive Plan (including reviewing and approving grants of awards under the 2005 Long-Term Incentive Plan), and annually reviews and approves individual elements of the named executive officers’ total compensation package.

The Compensation Committee recognizes the importance of maintainingits role to maintain sound principles for the development, maintenance, and administration of compensation and benefit programs, and has taken steps to enhance our ability to carry out ourthese responsibilities. ExamplesRecent examples of these steps include:

These independent compensation expertsconsultants do not advise our management, and do not receive any fees from us other than consulting fees for advice rendered to the Compensation Committee.

The committee holds meetings duringRole of Consultants and Management in the Executive Compensation Process

Consultant’s Role. In early 2007, the Compensation Committee engaged Silverton Bank to assist with the transition of executive management functions between Ronald Langley, our former Chairman who retired on December 31, 2007, and Mr. Hart. With respect to our executive officers, the consultant was asked to:

Our Compensation Committee directed Silverton Bank to compile a peer group of companies in industry categories that were comparable to our businesses and strategies. Such criteria included both of the following:

Based on that criteria, Silverton Bank recommended the peer group companies listed below in 2007. The list, which is categorized by type of company, was reviewed and confirmed by the Compensation Committee. The Compensation Committee carried forward the peer group companies and used them in setting compensation for 2008.

As recommended by Silverton Bank, the peer group of comparable industry categories included a broad spectrum of finance, insurance, and real estate organizations (SIC codes 6100 – 6700), but excluded depository and non-depository institutions, insurance brokers and agents, and trusts. While many additional companies could have been included in the industry categories noted above, we were significantly differentiated from many individual companies in these categories. For instance, in order to develop competitive market compensation data on similarly sized organizations in comparable industry categories, the Compensation Committee used the value of shareholders’ equity as reported on a company’s Form 10-K as the best indicator of organizational size, along with total assets and market capitalization. As a result, while we are most similar, in terms of business strategy and the skill set required of management, to larger publicly-held companies such as Berkshire-Hathaway, Inc. and Leucadia National Corp., such companies were excluded because their relative size makes any comparison necessarily inappropriate. In addition, many other peer entities whose size and operations are similar to ours were excluded because they are privately held enterprises that do not make their compensation information publicly available.

The Compensation Committee will review the selection of comparable industry categories and public companies at least annually, and may add, delete, or replace from year to year as necessary. Ournecessary to maintain comparability and relevance. The Compensation Committee determined that our operations were substantially similar from 2007 to 2008 and, as a result, continued to use these same peer companies from 2007 to assess our executive officers compensation for 2008.

Management’s Role. The Compensation Committee often seeks input from our management. For example, some of our named executive officers and other officers have from time to time assistassisted the Compensation Committee in implementing its decisions. For example, our chief operating officer provides market analysisgathering compensation data. Our human resources department also gathers and reviews major compensation studies and salary surveys and monitors the consumer price index. Based on base compensationthe department’s summary of these studies, surveys and reports, the Chief Operating Officer will recommend a cost of living adjustment for the upcoming year to the Compensation Committee. The cost of living adjustment is the same for all of our executive officers and employees. Also, if our chief executive officer recommends compensation packages forChief Executive Officer received an annual incentive award under his employment agreement, he generally recommended that the other named executive officers other than himself and for certain other officers.

Goals of the Compensation Program

The Compensation Committee attempts to align compensation paid toalso receive awards. In accordance with NASDAQ rules, however, (i) our named executive officers with the value that they achieve fordid not vote on executive compensation matters, and (ii) none of our shareholders. While we offer all six elementsnamed executive officers were present when their own compensation was being discussed or approved.

General Determination of compensation listed above under“Our2008 Compensation Philosophy and Programs,” the Compensation Committee focuses primarily on the combination of (i) base salary, (ii) annual incentive awards, and (iii) long-term incentives because we believe these three elements are the most critical and influential to attract, retain, and motivate executives who will maximize shareholder value.

Employment Agreements with Certain Named Executive Officers

As aIn 2008 and prior years, our general policy we dowas to not offer employment agreements to our named executive officers. However, the Compensation Committee decided to deviate from this policy in 2000 in order to secure the long-term employment of Ronald Langley as our Chairman and John R. Hart asofficers other than our President and Chief Executive Officer, who had joined our company in 1996 in connection with our acquisition of Physicians Insurance Company of Ohio.John R. Hart. The Compensation Committee previously offered an employment agreement to Mr. Hart because it determined that Mr. Langley and Mr. Hart werehe was uniquely critical to the successour success. The elements of the companycompensation packages of our other named executive officers, while not in written agreements, generally corresponded to elements of compensation under Mr. Hart’s employment agreement.

Mr. Hart’s employment agreement was amended and agreedrestated in 2007 after the announcement of our former Chairman, Ronald Langley, to enter into employment agreements with themretire in order to secure their employment on a long-term basis.

The original employment agreements with Messrs. Langley and Hart expired on December 31, 2005. Several months before that date, the Compensation Committee consulted with Silverton Bank and requested that Silverton Bank provide the committee with market research and analysis, comparative studies based on the peer

companies listed above under“Our Compensation Philosophy and Programs” and independent compensation recommendations. After review of Silverton Bank’s report, the Compensation Committee determined that it was in the best interests of the company to enter into new employment agreements with Mr. Langley and Mr. Hart for five year terms beginning January 1, 2006 and ending December 31, 2010 and with the terms and conditions described under “Elements of Compensation” below.

In May 2007, Mr. Langley announced his retirement effective December 31, 2007. TheIn anticipation of that retirement, the Compensation Committee consulted with Silverton Bank regarding the terms of Mr. Hart’s then existing employment agreement (See “The Role of Consultants and Management in anticipation of his increase in responsibilities at Mr. Langley’s retirement. Silverton Bank performed a study, again using the peer companies describedExecutive Compensation Process,” above.) Based on the recommendations of Silverton Bank, the Compensation Committee approved an amended and restated employment agreement with Mr. Hart that became effective on May 7, 2007. This amended and restatedAn additional amendment to the employment agreement extendswas entered into in December 2008 to comply with the termrequirements of Section 409A of the United States Internal Revenue Code of 1986, as amended.

The compensation packages of Messrs. Sharpe, M. Webb, Georgino, and R. Webb for 2008, in general, were based on the compensation packages for 2007 and increased by a 5% cost of living adjustment. The material terms of Mr. Hart’s employment agreement, including an analysis of those terms, and additional details of the named executive officers are described in more detail below under “—Elements of Executive Officer Compensation.”

Assessment of 2009 Compensation and Retrospective on 2008 Compensation Paid

In the latter half of 2008, the Compensation Committee decided to December 31, 2012.review and reassess the compensation packages offered to our named executive officers for 2009. As part of that process, the Compensation Committee engaged Silverton Bank again to review our compensation structure. Silverton Bank completed their report in early 2009. While the 2007 review focused on the compensation of Mr. Hart, the survey finalized by Silverton Bank in 2009 was intended to compare our 2008 pay levels with our peers and analyze our equity based compensation practices for all of our named executive officers. The Compensation Committee extended the term of Mr. Hart’s agreement by two years because italso determined that it is critical to retain him at least until that date because of his knowledge and expertise in the company’s business, particularly in light of Mr. Langley’s retirement. Accordingly, Mr. Hart’stotal compensation for 2007our named executive officers should be targeted at the top 25th percentile of our peers.

Though each of the named executive officers is directly responsible for the effective management of a discrete aspect of our operations and administration, the named executive officers are jointly responsible for the execution of our plans and strategies.

Accordingly, the Compensation Committee requested that Silverton Bank provide a variety of comparative metrics by which the committee would assess compensation:

(3)	a comparison of the individual base salary, other cash compensation and stock and option awards of our chief executive officer against chief executive officers of our peer group; and

Based on the results of the survey that was governedcompleted in 2009, the Compensation Committee determined that the overall 2008 compensation of our named executive officers was below market. To promote retention of those executive officers, we entered into employment agreements (the form of which was approved by his January 1, 2006 employment agreement from January 1, 2007 through May 6, 2007the Compensation Committee) with Mr. Sharpe (our Executive Vice President and by his May 7, 2007 amendedChief Operating Officer), Mr. M. Webb (our Executive Vice President, Chief Financial Officer and restated employment agreement from May 7, 2007 to December 31, 2007. TheTreasurer), and Mr. Georgino (our Executive Vice President—Corporate Development and Chief Legal Officer) in March 2009. A discussion of the terms and conditions of his amended and restated agreementthese recent employment agreements are describeddiscussed under ““—Elements of CompensationEntry into Certain Employment Agreements in 2009” below.

As a result of Mr. Langley’s retirement, his. We did not enter into an employment agreement terminated on December 31, 2007.with Mr. R. Webb. Though Mr. R. Webb participates and works with our other executive management team, the Compensation Committee determined that his role in overseeing our insurance company investments did not necessitate an employment agreement.

Elements of Executive Officer Compensation

As stated above, we believe that cash compensation along with long-term incentives are critical and influential factors in attracting, retaining, and motivating qualified executives with the skill sets needed to maximize shareholder value. Cash compensation comprises two parts: (1) base salary and (2) annual incentive awards and discretionary bonuses.

Base Salary

Base salaries are an important element of compensation because they provide a specified minimum level of cash compensation to our named executive officers for their services. We seek to provide base compensation that is competitive for the duties and responsibilities of our named executive officers. See “—Summary Compensation Table” below for base salaries paid to our named executive officers during 2007.2008.

Langley and Hart. The base salaries for Mr. Langley and Mr. Hart are governed by their employment contracts.

Mr. Langley’s and Mr. Hart’s January 1, 2006 employment agreements provided that their base salaries would be $1,075,000 in 2006, and would each be subject to an annual adjustment on January 1 of each subsequent year during the term of their agreements. The annual adjustment is the same percentage applicable to our other staff members, which is an amount deemed adequate to provide for increases in the cost of living, based on several major compensation studies and subject to the Compensation Committee’s approval. ForIn 2007, Silverton Bank consultants provided compensation analysis to the Compensation Committee reviewed the results of Silverton Bank’s analysis and found that focused on peer group salaries andour chief executive officer’s total cash compensation (the sum of salary, bonus and non-equity incentive compensation) was in the top 25th percentile of our peer group. Assuming an annual incentive payout for their2007 and 2008 to Mr. Hart under his employment contract (see “Annual Incentive Awards and Discretionary Bonus,” below), Silverton Bank projected that total cash compensation (including a $500,000 increase for Mr. Hart’s additional responsibilities in 2008 after our Chairman, Mr. Langley, retired at the end of 2007) would be in the top two executives as input for25^th percentile of our peer group. As a result, the Compensation Committee’s determinationCommittee determined that Mr. Hart’s total cash compensation would be competitive with the pay of other chief executive officers of our peer group.

Using the results of the 2007 total cash compensation review, we amended and restated Mr. Hart’s employment agreement to, among other things, incorporate the recommendation of the Compensation Committee to increase Mr. Hart’s salary during the transition period in 2007 andby $500,000 for 2008. The resulting adjustment percentage was 5.0%.

In accordance with that amended and restated employment agreement, Mr. Hart’s May 7, 2007 employment agreement provides for a base salary in 2007 of $1,228,800, subject to an annual cost of living adjustment. For the yearincreased for 2008 Mr. Hart’s compensation will increase by $500,000 to $1,728,800, subject to anplus the 2008 annual cost of living adjustment which will becomeof 5%. On January 1, 2009 and on each January 1 until the expiration of his new base salary. The annual adjustment is the same percentage applicable to our other staff members, which is an amount deemed adequate to provide for increasesagreement in the cost of living, based on several major compensation studies and subject to the Compensation Committee’s approval. For the years 2009 through 2012, Mr. Hart’s base salary will only increase by anthe amount of the annual cost of living adjustment on January 1 of each subsequentfor that year.

The survey completed in 2009 found that for the year ended December 31, 2008, Mr. Hart’s base salary ranked in the top 25th percentile among other chief executive officers in our peer group. This results primarily from the additional $500,000 in Mr. Hart’s base salary over his 2007 base salary, which was intended to compensate him for the additional duties and responsibilities that he would undertake following Mr. Langley’s retirement.

Sharpe, M. Webb, Georgino, and R. Webb. As stated above,The base salaries of Messrs. Sharpe, M. Webb and R. Webb have generally increased from year to year based on cost of living adjustments. For 2008, the cost of living adjustment was 5%. Because Mr. Hart, our chief executive officer, annually recommends to the Compensation Committee theGeorgino joined us in September 2007, his initial base salary amounts for our three other named executive officers: Richard H. Sharpe, Chief Operating Officer, Maxim C. W. Webb, Chief Financial Officer and Treasurer, and W. Raymond Webb, Vice President, Investments. Mr. Hart reviews comparable companies and recommends the base salary amounts towas determined by the Compensation Committee based on positionshis level of similar scopeexperience, accountability and responsibilities.responsibility. Other than the cost of living adjustment, the 2008 base salaries for Messrs. Sharpe, Georgino and R. Webb remained the same. However, to equalize internal pay among our named executive officers, the Compensation Committee decided to increase Mr. M. Webb’s base salary by approximately $45,000 after the cost of living adjustment over his 2007 base salary.

The Silverton Bank survey completed in 2009 found that for the 2008 fiscal year, the aggregate base salaries of Messrs. Sharpe, M. Webb, Georgino and R. Webb ranked in the bottom 50th percentile among other similarly positioned executive officers in our peer group.

Annual Incentive Awards and Discretionary Bonuses

We provide annual incentive awards that are based on the company’s performance to motivate our named executive officers to increase our book value per share. These awards motivate our executives and align their interests with those of stockholdersour shareholders by increasing the executive’s annual compensation as our earnings increase, resulting in an increasebook value per share increases. We believe increases in book value per share which in turn we believe increases shareholder value by increasing the trading value of our stock. In determining the incentive award mechanism, the Compensation Committee decided to use our book value per share as a measure for growth because such measure is not as sensitive to short-term market fluctuations and external events beyond our control that may affect the price of our common stock. Our annual incentive awards, if any, are paid in cash, less applicable tax withholdings.

Langley and Hart. For Mr. Langley and Mr. Hart, annual incentive awards are generally governed by their employment agreements.

The January 1, 2006his employment agreement, ofbut the Compensation Committee may also grant additional annual incentive awards or bonuses as it deems appropriate. Mr. Langley and the May 7, 2007Hart’s employment agreement of Mr. Hart each provideprovides for incentive compensation when our growth in book value per share exceeds a pre-determined threshold. The threshold is equal to 80% of the S&P 500’s annualized total return for the previous five calendar years.years, but not less than zero. If our growth in book value per share in a fiscal year exceeds the threshold amount, Mr. Langley is entitled to receive 5% of the increase in book value per share over such threshold multiplied by the number of shares of our common stock outstanding at the beginning of the fiscal year, and Mr. Hart is entitled to receive 7.5% of the increase in book value per share over such threshold multiplied by the number of shares of our common stock outstanding at the beginning of the fiscal year. In prior years under the January 1, 2006 employment agreement, Mr. Hart was entitled to receive 5% (instead of 7.5%) of the increase in book value per share over the threshold amount multiplied by the number of shares outstanding at the beginning of the fiscal year. His May 7, 2007 employment agreement increased the percentage to 7.5% to reflect his increased responsibilities in connection with Mr. Langley’s retirement.

In determining the incentive award mechanism, the Compensation Committee decided to useBecause our book value per share as a measure for growth because such measure is not sensitive to external market fluctuations and is therefore a better indicator of internal organic growth, net of tax.

We calculateddecreased in 2008, the threshold percentage (that is, 80% of the S&P’s annualized total return for the five previous calendar years, including 2007) as 10.3%. Since our book value per share increased by 9.4% in 2007 prior to the accrual of bonus incentive compensation, and for Mr. Langley, prior to ⁷/8 of the expenses related to stock appreciation rights, neither Mr. Langley nor2008) was not exceeded. Accordingly, Mr. Hart receiveddid not receive any incentive compensation in 2007 under their employment agreements.

In January 2008 the Compensation Committee awarded Mr. Hart a one-time discretionary bonus of $1,500,000, which is payable in March 2008, for assuming and fulfilling significantly increased responsibilities following the announced retirement of Mr. Langley. The discretionary bonus was contingent on Mr. Hart not receiving any incentive compensation under his employment agreement foragreement. Mr. Hart’s 2008 total cash compensation (base salary and bonus/incentive award) was in the transition period beginning May 2007 (when Mr. Langley announced his retirement) and December 31, 2007. Mr. Hart has indicated he will defer this compensation underbottom 50^th percentile of our Trust for PICO Holdings, Inc. Executive Deferred Compensation. See “—Pension Benefits, Nonqualified Deferred Contributions and Other Nonqualified Deferred Compensation Plans.”peers according to the Silverton Bank survey completed in 2009.

Sharpe, M. Webb, Georgino and R. Webb. ThePrior to 2009, the annual incentive awards for Mr. Sharpe, Mr. Maxim Webb, Mr. Georgino and Mr. Raymond Webb arewere discretionary. IfGenerally, if Mr. Hart received an annual incentive award under his employment agreement, he recommended that Messrs. Sharpe, M. Webb, and when Mr. Langley and Mr. HartR. Webb (Mr. Georgino joined our company in 2007) each also receive an incentive award Mr. Hart may recommend tothat was consistent with his incentive payment. That is, the Compensation Committee that discretionary incentive bonuses be paid to these

named executive officers. Neither Mr. Hart nor the Compensation Committee is obligated to provide such incentive awards to these named executive officers.

In past years, Mr. Hart has recommended that Mr. Sharpe, Mr. M. Webb and Mr. R. Webb eachofficer would receive an incentive award based on the incentive formula found in Mr. Hart’s and Mr. Langley’s employment agreements and inequal to the same ratiopercentage of such person’s base salary to bonus as wasthe percentage of the annual incentive award paid to Mr. Langley andHart was to Mr. Hart.Hart’s base salary. In 2007,2008, no incentive awards were paid to these named executive officers because no incentive awards wereaward was paid to Mr. LangleyHart. The total cash compensation (base salary and bonus/incentive awards) of these executive officers as a group was in the bottom 25^th percentile of our peers.

As described above under “Assessment for 2009 Compensation” the annual incentive compensation for Messrs. Sharpe, M. Webb, and Georgino starting in 2009 will be determined in accordance with their employment agreements. These new employment agreements generally formalize the prior practice of paying each executive officer an annual incentive award that is the same percentage of such person’s base salary as the

percentage of the annual incentive award paid to Mr. Hart is to Mr. Hart’s base salary. In addition, the new employment agreements provide that these executive officers are also entitled to similarly proportionate amounts of discretionary and other incentive awards paid to Mr. Hart.

Our long-term incentive plan has been designed to align executive compensation with the long-term interests of our shareholders and to retain our named executive officers through potential wealth accumulation.

Prior to 2005, we granted awards of cash-settled stock appreciation rights under our 2003 Stock Appreciation Rights Program to our named executive officers as well as to directors, officers and certain employees. The primary purpose of these stock appreciation rights was to align the interests of our named executive officers and the holders of such rights with those of our shareholders by providing awards that would allow our named executive officers and other holders to participate in the increase in the value of our stock. We used cash-settled stock appreciation rights rather than stock-settled stock appreciation rights or stock options in order to provide our named executive officers with sufficient liquidity to pay income taxes on the exercise of their awards. We were concerned that any sales of stock in the market by our named executive officers to pay income taxes would adversely affect the price of our stock.

In 2005, Silverton Bank recommended that we change our equity grant program to allow other forms of equity grants, including stock-settled stock appreciation rights. Silverton Bank recommended the change from cash- settled stock appreciation rights to stock-settled appreciation rights in part because of the accounting advantages that stock-settled stock appreciation rights would have over cash-settled stock appreciation rights under FAS 123(R) and to enhance the linkage between participants in our equity plans and shareholders’ interests by distributing gains as shares of stock rather than cash. In addition, the availability of other types of awards would give the Compensation Committee more flexibility in designing compensation packages from time to time to meet its compensation objectives and to maintain competitive compensation packages. As a result, on September 21, 2005, the Compensation Committee adopted the 2005 Long-Term Incentive Plan. At the same time, the Compensation Committee amended the 2003 Stock Appreciation Rights Program to cash out all outstanding cash-settled stock appreciation rights, all of which were fully vested, to avoid any future accounting expenses with respect to cash-settled stock appreciation rights.

Under the 2005 Long-Term Incentive Plan, which was approved by our shareholders on December 8, 2005, the Compensation Committee may award to participants various forms of incentives, including stock-settled stock appreciation rights, stock options, restricted stock, performance awards, deferred compensation awards, and other stock-based awards, though it is not anticipated that all these forms of awards will be granted simultaneously. The Compensation Committee decides which form of incentive to award based on a review of comparable companies and consultation with independent consulting firms, such as Silverton Bank. Grants of equity based awards under the 2005 Long-Term Incentive Plan may be made by the Compensation Committee periodically. In determining the amounts of equity incentives to be granted to our named executive officers, including the stock appreciation rights, the Compensation Committee considers and grants awards in a relative proportion to the named executive officers’ base salaries.

On December 12, 2005, the Compensation Committee awarded grants of stock-settled stock appreciation rights to the named executive officers, the non-employee directors and various other employees at fair market value, which was the closing price of our common stock on the Nasdaq Global Market on the day of grant. The Compensation Committee decided to issue stock-settled stock appreciation rights rather than restricted stock, because it wanted to reward the named executive officers only if there was an increase in stock price. The

Compensation Committee decided to award stock-settled stock appreciation rights rather than stock options because participants dodid not need to pay cash to exercise a stock appreciation right. Moreover, the stock appreciation rights have a lower dilutive impact on our shareholders’ equity because they require the issuance of fewer shares upon exercise. Additionally, the stock appreciation rights qualified as performance basedgrant any long-term incentive compensation for purposes of Section 162(m) of the Internal Revenue Code.

Langley and Hart. As part of the December 15, 2005 grants, the Compensation Committee awarded Mr. Langley and Mr. Hart the same number of stock-settled stock appreciation rights that they had held as cash-settled stock appreciation rights under the 2003 Long-Term Incentive Program (838,356 each). Mr. Hart’s May 7, 2007 employment agreement provides that the Compensation Committee will grant to Mr. Hart no later than December 31, 2008, an additional 419,178 stock-settled stock appreciation rights under the 2005 Long-Term Incentive Plan in recognition of his increased responsibilities as a result of Mr. Langley’s retirement as Chairman.

Sharpe, M. Webb and R. Webb. As part of the December 15, 2005 grants, the Compensation Committee awarded Messrs. Sharpe, M. Webb and R. Webb stock-settled stock appreciation rights of 190,454, 163,799 and 60,000, respectively. On August 2, 2007 the Compensation Committee granted 419,178 stock appreciation rights to Mr. Hart, 17,292 stock appreciation rights to Mr. M. Webb and 20,000 stock appreciation rights to Mr. R. Webb at an exercise price of $42.71, the closing price of our common stock on the Nasdaq Global Market on the day of grant. The expiration date for these awards is August 2, 2017. One-third of the awards granted on August 2, 2007 were immediately vested, one-third will vest on August 2, 2008, and one-third will vest on August 2, 2009. The number of shares issued upon exercise of the stock appreciation rights will be based on the net exercise value (that is, the market value price per share on the date of exercise, minus the exercise price of $42.71) times the number of stock appreciation rights exercised, minus applicable taxes. See “Grants of Plan-Based Awards”. As stated above, the Compensation Committee considers the distribution of stock appreciation rights among its participants and granted these stock appreciation rights to Mr. M. Webb and Mr. R. Webb to proportionally allocate such stock appreciation rights with the base salary of otherany named executive officersofficer in the plan, such as Mr. Sharpe, who was granted 190,454 stock appreciation rights in 2005.2008.

We maintain the PICO Holdings, Inc. 401(k) Employees Retirement Plan and Trust to provide tax-deferred means to save for retirement. The named executive officers have the opportunity to participate in this 401(k) Planplan on the same basis as all of our other employees. We also maintain the Trust for PICO Holdings, Inc. Executive Deferred Compensation Plan, which allows our executives to elect to defer compensation and receive the tax benefits associated with delaying the income tax on the compensation deferred. The amounts deferred under the plan are held in a grantor trust, the assets of which are subject to the claims of our creditors. We provide those plans to be competitive with other employers because most employers in our peer group provide these types of plans. See “—Pension Benefits, Nonqualified Deferred Contributions and Other Nonqualified Deferred Compensation Plans.”

We generally provide insurance and other benefits to provide for the safety and wellness of our employees. These benefits include health insurance, life insurance, dental insurance, vision insurance, and disability insurance, which are available to all employees, including our named executive officers, on a nondiscriminatory basis. We also provide paid parking for employees in our La Jolla, California office. We provide these benefits to be competitive with other employers, because most employers in our peer group provide these types of benefits.

We provide certain termination and change in control benefits to help recruit and retain our named executive officers. We provide these benefits to be competitive with other employers.our peer group. We believe that the benefits we provide are consistent with those provided by the peer companies described above under“Our Compensation Philosophy and Programs.”

Termination.Termination.

Officers Other Than Mr. Hart. We generally offer a severance benefit for all of our officers, including our named executive officers (other than Mr. Hart, whose severance benefits are determined by his employment

agreement), of two weeks of base salary for each full year of employment with us if we terminate his or her employment for any reason other than “cause.” SeveranceStarting in 2009, however, Messrs. Sharpe, M. Webb and Georgino will be entitled to additional termination and severance benefits for Mr. Langley and Mr. Hart, however, are governed by their employment agreements.

Mr. Langley. Under Mr. Langley’s January 1, 2006 employment agreements, if Mr. Langley terminated his employment as a result of death or permanent and total disability before January 1, 2008, he (or his beneficiary in the case of death or disability) would be paid a lump sum in amount equal to $3,225,000 minus applicable tax withholdings. If Mr. Langley terminated his employment as a result of death or permanent and total disability on or after January 1, 2008, but prior to December 31, 2010, he (or his beneficiary in the case of death or disability) would be paid a lump sum equal to $3,225,000 minus applicable tax withholdings and minus the amount previously paid to him as base salary under his employment agreement from January 1, 2008 to the date of termination. The lump sum amount of $3,225,000 is equal to three times Mr. Langley’s base salary, which is consistent with his prior employment agreement and, based on information provided by Silverton Bank, the Compensation Committee believes to be consistent with the market. We begin decreasing the lump sum amount after January 1, 2008 because the payment is intended to cover Mr. Langley’s salary for a period equal to the lesser of (i) three years or (ii) the remaining term of his employment agreement. In addition to the amount set forth above, Mr. Langley would receive the pro rata portion of the annual incentive award that would have been payable to him under his employment agreement for the year in which termination occurs.

If Mr. Langley terminated employment for any reason prior to December 31, 2010, he would receive a lump sum payment (minus applicable tax withholdings) of $500,000 minus $100,000 for each calendar year after 2006 that he remained employed by the company. The payment of $500,000 and corresponding reductions of $100,000 per year are based on the Compensation Committee’s determination that the formula for cash-settled stock appreciation rights under the 2003 Long-Term Incentive Plan improperly reduced the cash bonus if the book value per share increased. The Compensation Committee agreed that additional compensation would be due to Mr. Langley if he voluntarily terminated before receiving the ultimate cash benefit pursuant to the applicableterms of their respective employment agreement.

In May 2007, Mr. Langley announced his retirement as an employee of our company, effective December 31, 2007. As a result, on December 31, 2007, Mr. Langley received a lump sum payment of $400,000 pursuant to his employment agreement, less applicable tax withholdings, which represents the $500,000 voluntary termination benefit reduced by $100,000 for the year 2007.agreements. See “—Entry into Employment Agreements” below.

Mr. Hart. Mr. Hart’s January 1, 2006 employment agreement contained the same termination provisions as Mr. Langley’s January 1, 2006 employment agreement. Under Mr. Hart’s employment agreement, dated May 7, 2007,as amended, if Mr. Hart ishad been terminated for any reason other than cause prior to January 1, 2009, he (or his beneficiary in the case of death or disability) will bewould have been paid a lump sum of $3,686,400. If Mr. Hart is terminated for any reason other than cause after January 1, 2009, but prior to December 31, 2012, he (or his beneficiary, as appropriate) will be paid a lump sum equal to $3,686,400 minus the amount of base salary paid to Mr. Hart after January 1, 2009 to the date of termination. The lump sum amount of $3,686,400 iswas equal to three times Mr. Hart’s base salary which is consistent with Mr. Hart’s prioras of the beginning of his May 7, 2007 employment agreement and was based on information provided by Silverton Bank, the Compensation Committee believes to beit was consistent with the market.our peer group. We beginbegan decreasing the lump sum amount after January 1, 2009 because the payment is intended to cover Mr. Hart’s salary for a period equal to the lesser of (i) three years or (ii) the remaining term of his employment agreement. In addition, Mr. Hart (or his beneficiary, as appropriate) will receive the pro rata portion of any annual incentive award that would have been payable for the year in which termination occurs.

Also, if Mr. Hart terminates his employment for any reason, even if he voluntarily terminates his employment, prior to December 31, 2010, we will be required to pay aan additional lump sum payment to him. This lump sum amount would have been $400,000$300,000 had he terminated

employment during the calendar year 20072008 and will decrease by $100,000 for each subsequent calendar year thereafter. The payment of $500,000$300,000 and corresponding reductions of $100,000 per year are based on the Compensation Committee’s determination that the formula for cash-settled stock appreciation rights under our prior long-term incentive plan (the 2003 Long-Term Incentive PlanPlan) improperly reduced the cash bonus ifwhen the book value per share increased. The Compensation Committee agreed that additional compensation was due to Mr. Hart if he voluntarily terminated before receiving the ultimate cash benefit pursuant to his employment agreement.

Change in Control.

Except as described below with respect to equity awards, we dodid not providehave any arrangements that would have provided change in control benefits to our named executive officers.officers in 2008. We believe that in the event of a change in control, our named executive officers will likely be retained by the acquisition company because of their expertise in the management and function of our businesses.

Upon a However, in its review for 2009, Silverton Bank recommended that change in control provisions be included in employment contracts because they are typical among employment contracts of our peer group. Accordingly, we entered into employment contracts in 2009 with Messrs. Sharpe, M. Webb and Georgino with such provisions. The Compensation Committee may in the future, but has not done so, recommend that Mr. Hart’s employment agreement should be amended to conform with the employment contracts of these named executive officers. See “—Potential Payments upon Termination or Change in Control.”

Under our 2005 Long-Term Incentive Plan, all outstanding options and stock-settled stock appreciation rights under our 2005 Long-Term Incentive Plan will vest immediately and become fully exercisable.exercisable upon a change in control. Further, the vesting conditions, restriction periods or performance goals applicable to any shares subject to a restricted stock award or other award under our 2005 Long-Term Incentive Plan will be accelerated and/or waived. As a result, any award agreement or other award issued under the 2005 Long-Term Incentive Plan to a participant who is employed by us at the time of the change in control will become immediately payable.

We provide for accelerated vesting under our 2005 Long-Term Incentive Plan in order that participants might appropriately share in the value they created for our shareholders to the full extent of our prior grants of options and stock-settled stock appreciation rights. While a change in control transaction accelerates the creation of value for shareholders, it may also eliminate any future value creation through our stock price. We believe accelerated vesting of grants aligns the shareholder value-based compensation received by grant recipients with the gains received by our shareholders. This acceleration feature is also consistent with prevailing marketthe practices as determined byof our own analysis and that of Silverton Bank.peer group.

Generally, a change in control occurs if: (1) the members of the board of directors serving as of December 8, 2005 (including any director serving thereafter whose election by the shareholders was approved by at least a majority of the then serving directors) cease to constitute at least a majority of the members of the board; (2) certain entities, directly or indirectly, become beneficial owners of more than 50% of the voting power of our outstanding common stock; (3) we merge or combine with or into another entity in which our shareholders will own less than 50% of the voting power of the surviving business entity after the merger or combination; (4) we sell or dispose of substantially all of our assets to another entity in which our shareholders will own less than 50% of the voting power after the sale or disposition; or (5)  we liquidate or dissolve. See “—Potential Payments upon Termination or Change in Control.”

Company Stock Ownership Policy

The Committee has never established guidelines or requirements for ownership of the Company’scompany’s stock by directors or officers.

Tax Deductibility of Executive Compensation

Under Section 162(m) of the Internal Revenue Code, annual compensation in excess of $1,000,000 to each of a company’s chief executive officer and four other most highly compensated executive officers that is not paid pursuant to a plan approved by shareholders and does not satisfy the performance-based exception of Section 162(m) is not deductible as compensation expense for federal income tax purposes. The stock settled stock appreciation rights have been the preferred type of award under the 2005 Long-Term Incentive Plan in part because they qualify as performance-based compensation. However, in structuring the base salaries and annual

incentive awards for our named executive officers, the company determined that shareholder interest would best be served by not restricting the company’s discretion and flexibility by trying to qualify the named executive officer’s compensation as “performance-based.” Therefore, the amount of salary and annual incentive bonus paid in excess of $1,000,000 to any one of our named executive officers will not qualify for a corporate tax deduction for the amount over $1,000,000.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis of this Executive Compensation Report with management. Based on that review and discussion, the Committeecommittee has recommended to the Board,board, and the Boardboard has approved, that this Report be included in the Company’scompany’s annual report on Form 10-K for the fiscal year ended December 31, 20072008 and the Company’s 2008company’s 2009 proxy statement.statement on Schedule 14A.

Compensation Committee:

John D. Weil, Chairman

Carlos C. Campbell

Richard D. Ruppert, MD

Kenneth J. Slepicka

Summary Compensation Table

calculated as 80% of the S&P 500’s annualized total return for the previous five calendar years. If our growth in book value per share in a fiscal year exceeds the threshold amount, Mr. Langley is entitled to receive 5% of the increase in book value per share over such threshold multiplied by the number of shares of our common stock outstanding at the beginning of the fiscal year and Mr. Hart is entitled to receive 7.5% of the increase in book value per share over such threshold multiplied by the number of shares of our common stock outstanding at the beginning of the fiscal year. Mr. Langley and Mr. Hart did not receive any incentive compensation in 2007 because our growth in book value per share did not exceed the threshold amount. For the years ended December 31, 2005 and 2006, Mr. Hart was entitledan amount equal to receive 5% (instead of 7.5%) of the increase in book value per share over the threshold amount multiplied by the number of shares outstanding at the beginning of the fiscal year.

(4)	Amounts in this column include contributions made by us on behalf of the officers to the PICO Holdings, Inc. 401(k) Employees Retirement Plan and Trust in the following amounts:

The amounts for 2007 in the table above do not include an annual profit-sharing contribution made by us because the amount of those contributions has yet to be determined. We intend, however, to make profit sharing contributions for 2007 in amounts similar to those contributed in 2006. None of the life insurance premiums paid by us for any one name executive officer exceeded $10,000 in 2007, 2006, or 2005 and our health insurance plans do not discriminate in favor of the named executive officers and are available to all employees.

Grants of Plan-Based Awards

Grants of Plan-Based Awards

The Compensation Committee made no grants of any awards to our named executive officers under the PICO Holdings, Inc. 2005 Long-Term Incentive Plan in 2008.

Option Exercises During Last Fiscal Year

Pension Benefits, Nonqualified Deferred Contributions and Other Nonqualified Deferred Compensation Plans

We did not maintain a defined benefit plan or an actuarial pension plan in 2005, 2006,2008, 2007 or 2007.2006. Executive officers, however, may defer compensation from theirmake voluntary deferrals of salary, bonus and other cash compensation.compensation through a nonqualified deferred compensation plan. We do not make any contributions to the nonqualified deferred compensation plan. Each named executive officer who chooses to defer compensation hasmay elect, in accordance with applicable tax laws, to receive payment in the option, pursuant to federal rules, to receiveform of a lump sum payment on a date certain or on separation from service, or to receivein the form of up to ten substantially equal paymentsinstallments beginning on a certain date.date or separation from service.

On December 23, 2008, effective January 1, 2009, the Compensation Committee amended and restated the Company’s non-qualified deferred compensation plan. The Compensation Committee adopted the revised non-qualified deferred compensation plan to comply with the requirements of Section 409A of the United States Internal Revenue Code of 1986, as amended.

Nonqualified Deferred Compensation

Outstanding Equity Awards Atat Fiscal Year-End

The following table provides information on the outstanding equity awards as of December 31, 20072008 for our named executive officers.

Potential Payments upon Termination or Change in Control

During 2008, the only change of control benefits that would have been payable to our named executive officers upon a change in control would have been pursuant to the 2005 Long-Term Incentive Plan, as described below. We dodid not provide specialany other change in control benefits to our named executive officers, and none of ourMr. Hart’s employment agreementsagreement does not contain such a provision. Our onlyHowever, if Mr. Hart were terminated without cause, including in connection with a change in control, arrangement applieshe would be entitled to alla severance payment equal to $3,686,400 less the amount of our employees whobase salary paid to Mr. Hart after January 1, 2009 to the date of termination. Also, pursuant to the employment agreements entered into in 2009, Messrs. Sharpe, M. Webb and Georgino are eligiblecurrently entitled to participateseverance benefits upon termination without cause or upon resignation for good reason, including in our connection with a change in control. See “—Entry into Certain Employment Agreements in 2009” below.

2005 Long-Term Incentive Plan. Plan—Upon a change in control, all outstanding options and stock-settled stock appreciation rights, or SARs, will vest immediately and become fully exercisable. Further, the vesting conditions, restriction periods or performance goals applicable to any shares subject to a restricted stock award or other award will be accelerated and/or waived. As a result, any award agreement or other award issued under the 2005 incentive plan

Long-Term Incentive Plan to a participant who is employed by us at the time of the change in control will become immediately payable. Generally, a change in control under the 2005 incentive planLong-Term Incentive Plan occurs if: (1) the members of the board of directors serving as of December 8, 2005 (including any director serving thereafter whose election by the shareholders was approved by at least a majority of the then serving directors) cease to constitute at least a majority of the members of the board; (2) certain entities, directly or indirectly, become beneficial owners of more than 50% of the voting power of our outstanding common stock; (3) we merge or combine with or into another entity in which our shareholders will own less than 50% of the voting power of the surviving business entity after the merger or combination; (4) we sell or dispose of substantially all of our assets to another entity in which our shareholders will own less than 50% of the voting power after the sale or disposition; or (5) we liquidate or dissolve.

If a change in control occurs (as defined inDuring 2008, the only awards held by our 2005 incentive plan), all of the unvested and outstanding SARs would accelerate and become immediately exercisable.named executive officers were SARs. Using the Black-Scholes model or “in-the-money” value model, as applicable, the value of those awards for our named executive officers (assuming a change in control

had occurred as of December 31, 2007)2008) would be as follows: John R.$0 because the exercise price of all SARs granted before December 31, 2008 was greater than $26.58, the closing price of our stock on the Nasdaq Global Market on December 31, 2008.

Termination and Severance—For our employees other than Mr. Hart, $4,933,807; Maxim C.W. Webb, $206,005; and W. Raymond Webb, $238,267.

Weincluding, during 2008, the other named executive officers, we generally offermaintain a severance benefit arrangement for all of our officers to provideplan that provides for two weeks of base salary for each full year of employment with us if we terminate his or her employment for any reason other than “cause.” Severance(For 2009 and subsequent years, Messrs. Sharpe, M. Webb and Georgino will also be entitled to severance benefits for Mr. Langley andunder their respective employment agreements see “—Entry into Certain Employment Agreements in 2009,” below.) Mr. Hart however, arewas the only named executive officer with an employment agreement in 2008. The terms of any potential termination or severance were governed by their employment agreements. In May 2007, Mr. Langley announced his retirement as an employee of our company, effective as of December 31, 2007. As a result, Mr. Langley received a lump sum payment of $400,000 pursuant to his employment agreement on December 31, 2007, less applicable tax withholdings. Mr. Langley also received a cash payout for accrued vacation and personal days in accordance with our employment policies. At December 31, 2007, Mr. Langley will not be eligible for any future benefits under the employment agreement as the agreement is no longer in effect.agreement.

Under Mr. Hart’s employment agreement, dated May 7, 2007, if Mr. Hart ishad been terminated for any reason other than for cause prior to January 1, 2009, he (or his beneficiary in the case of death or disability) will bewould have been paid a lump sum of $3,686,400. If Mr. Hart is terminated after January 1, 2009, but prior to December 31, 2012, he (or his beneficiary, as appropriate) will be paid a lump sum equal to $3,686,400 minus the amount of base salary paid to Mr. Hart after January 1, 2009 to the date of termination. In addition, Mr. Hart (or his beneficiary, as appropriate) shallwould receive the pro rata portion of any annual incentive award that would have been payable for the year in which termination occurs. If we had terminated Mr. Hart’s employment on December 31, 2007,2008, we would have been required to pay $3,686,400 as no$3,686,400. No incentive award was payable to Mr. Hart in 2007.2008.

Also, if Mr. Hart terminates his employment for any reason prior to December 31, 2010, we will be required to pay a lump sum payment to him. This lump sum amount would have been $400,000$300,000 had he terminated employment during the calendar year 20072008 and will decrease by $100,000 for each subsequent calendar year thereafter.

Entry into Certain Employment Agreements in 2009

As described above under “—Compensation Discussion and Analysis,” as part of its executive compensation review process for 2009, the Compensation Committee engaged Silverton Bank, our executive compensation consultant, to review total compensation paid to our executive officers. Based on the results of that review and analysis, the Compensation Committee determined that the overall compensation of certain executive officers was below market among our peer group. To promote retention of those executive officers, the Compensation Committee approved of a form of employment agreement and authorized our officers to enter into employment agreements with certain named executive officers. Accordingly, on March 3, 2009, we entered into agreements with each of Messrs. Sharpe, M. Webb and Georgino. The general terms and provisions of the employment agreements of Messrs. Sharpe, M. Webb and Georgino are identical and summarized below.

Term. Each employment agreement is for a term of three years, commencing March 3, 2009.

Base Salary. For the 2009 fiscal year, the base salaries will be $363,323, $344,510 and $329,002 for Mr. Sharpe, Mr. Webb and Mr. Georgino, respectively, which reflect their 2008 base salaries plus a cost of living adjustment

of 5.5%. The base salary will be reviewed no less frequently than annually in accordance with our normal and customary practices and may be increased, but not decreased, by the board of directors or the Compensation Committee.

Annual Incentive, Performance or Discretionary Awards. Consistent with our past practices, so long as he remains employed by us, Mr. Sharpe, Mr. Webb or Mr. Georgino, as the case may be, will be entitled to an annual cash performance award that equals his base salary multiplied by the ratio of the annual award (performance, incentive and discretionary, though the Compensation Committee will likely award only one form of annual award to the chief executive officer) paid to our chief executive officer to Mr. Hart’s base salary. In addition, the executive officer will be entitled to receive annual or other periodic awards as determined by the Compensation Committee in its sole discretion. The executive officer’s award(s), whether annual incentive, performance, discretionary or otherwise, will be paid within 2 ¹/2 months after the end of the fiscal year in which earned.

Restricted Stock Units. Pursuant to the terms of their respective employment agreements, we granted 80,000 restricted stock units to each executive officer pursuant to the 2005 Long-Term Incentive Plan on March 3, 2009. The restricted stock units will vest in their entirety on March 3, 2012 (unless earlier as described below).

Termination of Employment. If the executive officer’s employment is terminated for any reason, including death or disability, the executive officer will be entitled to (a) unpaid and accrued base salary up to the effective date of termination; (b) unpaid, but earned and accrued annual cash incentive award for any completed fiscal year; (c) payout of accrued, but unused vacation; (d) benefits and compensation pursuant to the terms of other employee benefit and compensation agreements and plans applicable to the executive officer as of the date of termination; (e) certain unreimbursed business expenses; and (f) rights to indemnification. In addition, the executive officer may be eligible for severance benefits as described below.

Severance Benefits. In addition to the other termination benefits described above, the executive officer may be entitled to receive other severance benefits depending on the reason for the termination of his employment.

Under the employment agreements of Messrs. Sharpe, M. Webb and Georgino, change of control generally occurs when: (a) we merge or consolidate with or into another corporation in which our shareholders will own less than 50% of the voting power of the surviving business entity after the merger or consolidation; (b) our shareholders approves, or if the approval is not required, our board approves, of a plan to liquidate us or an agreement to sell or dispose of all or substantially all of our assets; (c) certain entities, directly or indirectly, become beneficial owners of more than 50% of the voting power of our outstanding common stock; or (d) the members of the board of directors serving as of March 3, 2009 (including any director serving thereafter whose election by the shareholders was approved by at least a majority of the then serving directors) cease to constitute at least a majority of the members of the board.

Gross-Up for Golden Parachute Excise Taxes in the Event of a Change in Control. If any payment or benefit to which an executive officer becomes entitled is subject to an excise tax applicable to “excess parachute payments” upon a change in control, and the aggregate amount of such excise taxes is more than a de minimus amount, the executive officer will receive a tax gross-up payment with respect to such excise taxes.

DIRECTORS’ COMPENSATION

Since January 1, 2005, our non-employee directors received the following as annual compensation for our non-employee directors provides that each non-employee director will receive:their services: (1) an annual retainer of $35,000 (the Chairman of the Audit Committee and the other members of the Audit Committee will each receivereceived an additional annual retainer of $10,000 and $5,000, respectively) and (2) a fee of $2,000 for each board of directors or committee meeting attended by the director in person or by telephone. In addition, any non-employee director attending an educational activity or seminar on our behalf will receivereceived a fee of $1,000 per day plus expenses. This annual compensation program was approved by our board of directors in March 2005 to be effective retroactively to January 1, 2005, as recommended by the Compensation Committee following its director compensation review required by its charter.

In May 2007, John D. Weil was elected by the board of directors as Lead Director. For serving as Lead Director, he was paid an additional $40,000 in 2007. In February 2008, Mr. Weil was elected asThe Chairman of the board of directors.directors received an additional $40,000.

In December 2005, eachOn May 16, 2008 the Compensation Committee approved an increase in director compensation. Effective January 1, 2009 the retainer and fees will increase by the same percentage applicable to the Company’s staff members in an amount deemed adequate to provide for cost of our non-employee directors, Messrs. Campbell, Foulkrod, Ruppert, Slepickaliving adjustments, as determined by the Compensation Committee. The Compensation Committee will analyze and Weil, were granted 5,000 fully vested stock-settledconsider applicable U. S. Department of Labor cost of living adjustments as well as other major compensation studies. For 2009, the Compensation Committee determined that the cost of living adjustment would be 5.5% over 2008. The Compensation Committee also authorized the grant of restrictive stock appreciation rights, or SARs. The exercise price for each SAR granted was $33.76, the closing priceawards of our common stock on December 12, 2005. The number of700 shares to be issued to each non-employee director who exercises the SARs will be based on the net exercise value (that is, the market value price per share of our common stock on the date of exercise, minuseach annual meeting beginning with the exercise priceannual meeting of $33.76) times the number of SARs exercised, minus applicable taxes. No SARs or other awards were grantedCompensation Committee in 20072008, with vesting to non-employee directors.occur one year later.

Our non-employee directors do not participate in any of our deferred compensation plans, including our 401(k) Plan.plans. However, in prior years, some of our directors did have the option, but were not required, to defer all or a portion of their board of directors or committee fees under a deferred compensation plan. The assets of this director deferred compensation plan are held in a rabbi trust.grantor trust subject to the claims of our creditors. If a director opted to defer his fees in such rabbi trust,the deferred compensation plan, the trustee would useused such amounts to make open market purchases of our common stock within two weeks of the deposit of such amounts. The only asset permitted in the directors’ rabbideferred compensation grantor trust wasis our common stock. We did not provide our directors with the option to defer their fees in 2007.2008. For the year ended December 31, 2007,2008, we also did not maintain an actuarial pension plan ora defined benefit pension plan.plan for directors.

The following table sets forth information concerning the compensation earned during the last fiscal year by each non-employee director who served during 2007:2008:

Director Compensation Table For 20072008

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of February 1, 2008,2009, with respect to the beneficial ownership of our common stock by (i) each person who we know to be the beneficial owner of more than 5% of our common stock based upon Schedule 13G and Schedule 13D reports filed with the Securities and Exchange Commission, (ii) each of our directors and director nominees, (iii) each “named executive officer” listed in our Summary Compensation Table, and (iv) all of our current executive officers and directors as a group.

Unless otherwise indicated, the business address for each person is 875 Prospect Street, Suite 301, La Jolla, CA 92037. The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission, or SEC, governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as otherwise noted, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock reflected as beneficially owned, subject to applicable community property laws. As of February 1, 2008, 18,833,7372009, 18,840,392 shares of our common stock were issued and outstanding, excluding 3,218,408 treasury shares held by our subsidiaries.outstanding.

Mr. Langley owns a one-third membership interest in PICO Equity Investors Management, LLC. Accordingly, Mr. Langley has shared voting power over the shares held by PICO Equity Investors, L.P. Mr. Langley disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. Also includes 17,98620,107 shares held in our 401(k) Plan. plan and 700 shares of restricted stock that will not vest until May 16, 2009.

(10)(12)

Beneficial ownership of shares as reported on Schedule 13G filed with the SEC on February 6, 2008.9, 2009. The Schedule 13G reports that Dimensional Fund Advisors LP (formerly, Dimensional Fund Advisors Inc.), an investment advisor, furnishes investment advice to four registered investment companies and serves as investment manager to certain other commingled group trusts and separate accounts. In its role as investment advisor or manager, Dimensional Fund Advisors LP possesses investment and/or voting power over our common stock that are owned by the funds that it managers,manager, and may be deemed to be the beneficial owner of such shares. Dimensional Fund Advisors LP disclaims beneficial ownership of such shares.

EQUITY COMPENSATION PLAN INFORMATION

We currently maintain only one equity compensation plan, the 2005 Long-Term Incentive Plan, which was approved by our shareholders on December 8, 2005. The following table sets forth the number of shares of common stock subject to issuance from the stock-settled SARs granted under the 2005 Long-Term Incentive Plan as of December 31, 2007.2008. For more details regarding our 2005 Long-Term Incentive Plan, see “Executive“Executive Compensation—Elements of Executive Officer Compensation—3.2. Long-Term Incentives.Incentives.”

In addition the Compensation Committee granted restricted stock awards of 700 shares each on May 16, 2008 to our non-employee directors: Messrs. Weil, Campbell, Foulkrod, Langley, Slepicka, and Dr. Ruppert. These restricted stock awards vest on May 16, 2009.

CERTAIN RELATIONSHIPS AND RELATED PERSONS TRANSACTIONS

Related Persons Transactions

Pursuant to our rights offering in March 2000, PICO Equity Investors, L.P., an investment partnership, acquired 3,333,333 newly issued shares of our common stock that were not subscribed for in the rights offering. PICO Equity Investors, L.P. is managed by its general partner, PICO Equity Investors Management, LLC. PICO Equity Investors Management, LLC is owned equally by our director and former Chairman, Mr. Langley, our President, CEOChief Executive Officer and director, Mr. Hart and our director and Chairman, Mr. Weil.

PICO Equity Investors Management, LLC will exerciseexercises all voting and investment decisions with respect to our shares that are owned by PICO Equity Investors, L.P. until December 8, 2009. The interest of PICO Equity Investors Management, LLC in any profits and losses earned on its investment in our company will be proportional to the capital contributions made to PICO Equity Investors, L.P. by its partners. That is, aggregate capital contributions to PICO Equity Investors, L.P. of $50,001,000 is comprised of capital contributions of $1,000 from PICO Equity Investors Management, LLC and $50,000,000 from the sole limited partner of PICO Equity Investors, L.P., an unaffiliated entity. Accordingly, PICO Equity Investors Management, LLC will receive 1,000/50,001,000 of any profits and losses earned.

There are no other fees or other management compensation of any kind payable to Mr. Langley, Mr. Hart or Mr. Weil in their capacitycapacities as members of PICO Equity Investors Management, LLC. PICO Equity Investors Management, LLC, as general partner, and the sole limited partner of PICO Equity Investors, L.P. made aggregate capital withdrawals of our common stock of 833,333 shares effective May 23, 2006, and 833,333 shares effective May 29, 2007.2007, and 833,333 shares effective June 27, 2008. In each withdrawal, PICO Equity Investors Management, LLC received 17 shares and the sole limited partner received 833,316 shares.

Procedures for Approval of Related Persons Transactions

To ensure the broadest possible compliance with the Nasdaq Global Market listing standards and Regulation S-K, Item 404, the Audit Committee has adopted a policy in which it will review for approval all transactions or proposed transactions (1) in which we are a participant or any of our subsidiaries is a participant, (2) in which the value of the transaction or proposed transactions exceeds $1,000, and (3) in which any of our or our subsidiaries’ directors or director nominees, officers, 5% shareholders, consultants or employees will have an interest, which need not be material. After reviewing a particular transaction or proposed transaction, management and the Audit Committee will determine if disclosure in our public filings is necessary and appropriate under Item 404.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS

Messrs. Weil, Campbell, and Slepicka and Dr. Ruppert serve as members of the Compensation Committee. No member of the Compensation Committee was at any time during the year ended December 31, 20072008 or any other time, an officer or employee of our company, and no member had any relationship with us requiring disclosure of certain relationships and related-person transaction. None of our executive officers has served on the board of directors or compensation committee (or other committee serving an equivalent function) of any other entity that has or has had one or more executive officers who served as a member of our board of directors or Compensation Committee during the year ended December 31, 2007.2008.

REPORT OF THE AUDIT COMMITTEE

The following is a report of the Audit Committee with respect to our audited financial statements for the fiscal year ended December 31, 2007.2008.

The Audit Committee of the board of directors assists the board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and reporting practices. The Audit Committee operates pursuant to a written charter adopted by the board. A copy of this charter is posted on our website at http://www.picoholdings.com/InvestorInformation/PublicInformation/SECFilings/tabid/66/Default.aspx.investors.picoholdings.com/governance.cfm.

The members of the Audit Committee as of December 31, 20072008 are listed at the end of this report. The Audit Committee has discussed with the board the level of financial expertise of its members and themembers. The board has determined that the committee possesses the requisite expertise in the interpretation of financial statements. Pursuant to Section 407 of the Sarbanes-Oxley Act of 2002, the board has determined that Richard D. Ruppert, MD is independent and qualified as an audit committee financial expert as defined in Regulation S-K, Item 407 of the Securities Exchange Act of 1934.

Management is responsible for the internal controls, the financial reporting process and the representations set forth in the statements regarding our financial condition. The independent registered public accounting firm, Deloitte & Touche LLP, is responsible for both auditing the financial statements presented by management and verifying that such statements are produced in accordance with generally accepted accounting principles in the United States. The Audit Committee is responsible for those matters set forth in its charter. In this regard, the Audit Committee meets separately with management, including the Chief Financial Officer, and Deloitte & Touche. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2007,2008, its accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.

In the foregoing context, the Audit Committee has reviewed with Deloitte & Touche both the engagement letter and its fees. The Audit Committee has discussed with Deloitte & Touche, with and without management present, the independent registered public accounting firm’s evaluations of our internal accounting controls and the financial reporting systems, policies, procedures and processes, and the fair and complete presentation of our consolidated financial statements. The Audit Committee discussed with Deloitte & Touche other matters required by the Statement on Auditing Standards No. 61,Communication with Audit Committees, as amended by SAS No. 90,Audit Committee Communications, and Rule 2072-07 of Regulation S-X.

Deloitte & Touche provided to the Audit Committee the written disclosures and the letter required by Independence Standardsthe Public Company Accounting Oversight Board Standard No. 1,Independence Discussionsregarding Deloitte & Touche’s communications with the Audit Committees.Committee concerning independence. The Audit Committee discussed Deloitte & Touche’s independence with both management and the auditor.

Based upon the independent representations of management and Deloitte & Touche, the Audit Committee’s review of such representations and the report of Deloitte & Touche to the Audit Committee, the Audit Committee’s review of the audited consolidated financial statements and its discussions with management and the independent accountants, the Audit Committee recommended to the board of directors that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.2008.

The undersigned members of the Audit Committee have submitted this Report of the Audit Committee:

Richard D. Ruppert, MD, Chairman

Carlos C. Campbell

S. Walter Foulkrod, III, Esq.

Kenneth J. Slepicka

CODE OF ETHICS

We have adopted a Code of Business Conduct and Ethics applicable to all directors, officers, and employees. On February 28, 2008, our board of directors approved the amended Code of Business Conduct and Ethics to remove the insider trading section because we have implemented a separate and more detailed insider trading policy. A copy may be obtained without charge by writing to our corporate secretary at 875 Prospect Street, Suite 301, La Jolla, California 92037. It is also posted on our web site at http://www.picoholdings.com under “Investor Information—Public Information—SEC Filings”.investors.picoholdings.com/governance.cfm.

PROCESS FOR SHAREHOLDERS TO COMMUNICATE WITH BOARD OF DIRECTORS

Individuals may contact our entire board of directors or an individual director by sending a written communication to the board or such director in care of:

Corporate Secretary

PICO Holdings, Inc.

875 Prospect Street, Suite 301

La Jolla, California 92037

Each communication must set forth the name and address of the shareholder on whose behalf the communication is sent. The corporate secretary may review the letter or communication to determine whether it is appropriate for presentation to the board or to the directors or director specified. Advertisements, solicitations or hostile communications will not be presented. Communications determined by the corporate secretary to be appropriate for presentation will be submitted to the board or to the directors or director specified immediately thereafter. If no director is specified, the corporate secretary will immediately forward appropriate letters or communications to the Chairman of the board of directors.

A shareholder wishing to communicate directly with the non-management members of the board may address the communication to “Non-Management Directors, c/o Board of Directors” at the same address above. These communications will be handled by the Chairman of the Audit Committee. Finally, communications can be sent directly to individual directors by addressing letters to the director’s individual name, c/o the Board of Directors, at the address above.

SOLICITATION OF PROXIES

The board of directors is not aware of any matters other than those specifically stated in the Notice of Annual Meeting which are to be presented for action at the meeting. However, should any further matter requiring a vote of the shareholders arise, it is the intention of the persons named in the proxy to vote the proxy in accordance with their judgment.

The cost of this solicitation of proxies is being borne by us. In addition to the solicitation of proxies by use of the mail, we may use the services of one or more of our directors, officers or other regular employees of (who will receive no additional compensation for their services in such solicitation) to solicit proxies personally and by telephone. Arrangements will be made with brokerage firms and other custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of the stock held of record by such persons, and we will reimburse such firms or persons for reasonable expenses actually incurred by them in so doing.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership on Form 3 and reports of changes in beneficial ownership of our common stock on Form 4 with the Securities and Exchange Commission, or SEC. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms filed by such persons.

To our knowledge, based solely on a review of the copies of these reports that we have received and written representations from certain reporting persons that they have complied with the relevant filing requirements, all filing requirements have been complied with on a timely basis for the fiscal year ended December 31, 2007.2008.

SHAREHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING

Generally,Shareholder proposals of shareholdersthat are intended to be presented at the next annual meeting, regardless of whether it is includedfor inclusion in our 2009 proxy materialsstatement and acted upon at our Annual Meeting of our shareholders,Shareholders in 2010 must be received at our principal executive offices at 875 Prospect Street, Suite 301, La Jolla, California 92037, Attention: Corporate Secretary, on or before November 24, 2008,16, 2009, and satisfy Securities and Exchange Commission regulations under Rule 14a-8 regarding the inclusion of shareholder proposals in company-sponsored proxy materials. However,14a-8. Shareholder proposals for shareholder nominations forthe nomination of director candidates for election as directors must be received by March 16, 200960 days prior to our 2010 annual meeting for consideration, at our 2009 annual meeting, but such candidate proposals willmay not be included in our proxy materials if we do not receive them on or before November 24, 2008.16, 2009. As the rules of the Securities and Exchange Commission make clear, simply submitting a proposal does not guarantee that it will be included in our proxy materials.

If the date of our 20092010 annual meeting is a date that is not within 30 days before or after May 15, 2009,14, 2010, the anniversary date of our 20082009 annual meeting, notice by the shareholder of a proposal must be received no later than the close of business on the 10^thcalendar day after the first to occur of (i) the day on which notice of the 20092010 annual meeting of our shareholders is mailed or (ii) public disclosure of the date the 20092010 annual meeting is made, including disclosure in a Quarterly Report on Form 10-Q filed by us with the Securities and Exchange Commission.

Our management may vote proxies in their discretion regarding these proposals if (1) we do not receive notice of the proposal on or prior to November 24, 2008,16, 2009, or (2) we receive written notice of the proposal on or prior to November 24, 2008,16, 2009, describe the proposal in our proxy statement relating to the 20092010 annual meeting of our shareholders and state how the management proxies intend to vote with respect to such proposal.

TRANSACTION OF OTHER BUSINESS

At the date of this Proxy Statement, the only business that the board of directors intends to present or knows that others will present at the meeting is as set forth above. If any other matter or matters are properly brought before the meeting, or any adjournment thereof, it is the intention of the persons named in the accompanying form of proxy to vote the proxy on such matters in accordance with their best judgment.

March 18, 200820, 2009

PICO Holdings, Inc.

000004

000000000.000000 ext              000000000.000000 ext

MR A SAMPLE

000000000.000000 ext              000000000.000000 ext

DESIGNATION (IF ANY)

000000000.000000 ext              000000000.000000 ext

ADD 1 ADD 2 ADD 3 ADD 4 ADD 5 ADD 6

Electronic Voting Instructions

You can vote by Internet or telephone!

Available 24 hours a day, 7 days a week!

Instead of mailing your proxy, you may choose one of the two voting methods outlined below to vote your proxy.

VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.

Proxies submitted by the Internet or telephone must be received by 1:00 a.m., Central Time, on May 16, 2008.

Vote by Internet

•

Log on to the Internet and go towww.investorvote.com

•

Follow the steps outlined on the secured website.

Vote by telephone

•

Call toll free 1-800-652-VOTE (8683) within the United States, Canada & Puerto Rico any time on a touch tone telephone. There isNO CHARGE to you for the call.

Using ablack ink pen, mark your votes with anX as shown in this example. Please do not write outside the designated areas.

x

•

Follow the instructions provided by the recorded message.

¢

C 1234567890        J N T 1 U P X        0 1 67 8 8 1

MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE 140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND

+

PICO Holdings, Inc.

000004

MR A SAMPLE DESIGNATION (IF ANY) ADD 1 ADD 2 ADD 3 ADD 4 ADD 5 ADD 6

C123456789

000000000.000000 ext 000000000.000000 ext 000000000.000000 ext 000000000.000000 ext 000000000.000000 ext 000000000.000000 ext

Electronic Voting Instructions

Available You can vote 24 hours by Internet a day, or 7 days telephone! a week!

Instead methods of outlined mailing below your proxy, to vote you your may proxy. choose Proxies one of granted the two by voting these methods are valid under California law.

VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.

1:00 Proxies a.m. submitted , Central Time, by the on Internet May 15, or 2009. telephone must be received by

Vote by Internet

• Log on to the Internet and go to www.investorvote.com

• Follow the steps outlined on the secured website.

Vote by telephone

• Call toll free 1-800-652-VOTE (8683) within the United States, Canada & Puerto Rico any time on a touch tone telephone. There is NO CHARGE to you for the call.

• Follow the instructions provided by the recorded message.

Using a black ink pen, mark your votes with an X as shown in X this example. Please do not write outside the designated areas.

Annual Meeting Proxy Card 123456 C0123456789 12345

3IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 3

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.

A Proposals — The Board of Directors recommends a vote FOR each of the listed nominees and FOR Proposal 2. +

1. Election of Directors: For Withhold For Withhold

01—S. Walter Foulkrod, III, Esq. 02—Richard D. Ruppert, MD

For Against Abstain

2. Ratification audit of the of Company’s Deloitte & 2009 Touche financial LLP to statements. perform the annual

In their discretion, the proxies are authorized to vote on such other matters that may properly come before the Annual Meeting or any adjournment thereof. This THIS proxy, PROXY when WILL properly BE VOTED executed, FOR will EACH be voted OF THE in the DIRECTOR manner directed NOMINEES herein LISTED by the undersigned IN PROPOSAL shareholder. 1 AND FOR IF PROPOSAL NO DIRECTION 2. IS MADE,

B Non-Voting Items

Change of Address — Please print new address below.

C Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below

Note: Please sign exactly as name appears on this card. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title.

Date (mm/dd/yyyy) — Please print date below. Signature 1 — Please keep signature within the box. Signature 2 — Please keep signature within the box.

C 1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE 140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND

MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND

1 U P X 0 2 0 9 4 4 1 MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND + <STOCK#> 010GMB

3IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 3

Proxy — PICO Holdings, Inc.

Proxy Solicited on Behalf of the Board of Directors

The undersigned hereby appoints Richard H. Sharpe and Damian C. Georgino, or either of them acting alone, as proxies, each with full power to appoint his substitute, and hereby authorizes them to represent, and to vote as designated below, all the shares of Common Stock of PICO Holdings, Inc. (the “Company”) held of record by the undersigned on March 17, 200816, 2009 at the Annual Meeting of Shareholders of the Company to be held at the Museum of Contemporary Art, Coast Room, 700 Prospect Street, La Jolla, California 92037 on May 16, 200815, 2009 at 3:00 p.m. (PDT), and at any adjournment thereof.

The Board of Directors recommends a vote FOR Items 1 and 2.

1. To elect two Directors for terms of three years ending in 2012. The nominees are S. Walter Foulkrod, III, Esq. and Richard D. Ruppert, MD.

2. To ratify Deloitte & Touche LLP as the Company’s independent registered public accounting firm to perform the annual audit of the Company’s 2009 financial statements.

When properly executed, these instructions will be voted in the manner directed on the reverse side of this card. IF YOU DO NOT PROVIDE DIRECTION, THIS PROXY WILL BE VOTED FOR EACH OF THE DIRECTOR NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSAL 2, AND, IN THE DISCRETION OF THE PROXIES APPOINTED ABOVE, SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.

YOUR VOTE IS IMPORTANT!

PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE OR VOTE BY TELEPHONE OR INTERNET PURSUANT TO THE INSTRUCTIONS ON THE REVERSE.

SEE REVERSE SIDE