PICO HOLDINGS INC /NEW
10-K405, 1999-03-30
FIRE, MARINE & CASUALTY INSURANCE
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K

  (MARK ONE)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 [FEE REQUIRED]

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [NO FEE REQUIRED]

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-18786
     
                         ------------------------------

                               PICO HOLDINGS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

         CALIFORNIA                                               94-2723335
 (STATE OR OTHER JURISDICTION OF                             (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                             IDENTIFICATION NO.)

                         875 PROSPECT STREET, SUITE 301
                           LA JOLLA, CALIFORNIA 92037
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (619) 456-6022

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          COMMON STOCK, $.001 PAR VALUE
                                (TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [ X ]

Approximate aggregate market value of the registrant's common stock held by
non-affiliates of the registrant (based on the closing sales price of such stock
as reported in the Nasdaq National Market) on March 26, 1999 was $176,722,822.
Excludes shares of common stock held by directors, officers and each person who
holds 5% or more of the registrant's common stock.

Number of shares of common stock, $.001 par value, outstanding as of March 26,
1999 was 13,328,770. As of such date, 4,380,779 shares of common stock were held
by the registrant and subsidiaries of the registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  None.

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<PAGE>   2



                              PICO HOLDINGS, INC.
                                        
                           ANNUAL REPORT ON FORM 10-K
                                        
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                                      Page
                                                                                                                      No.
                                                                                                                      ---
<S>                                                                                                               <C>
PART I..............................................................................................................     3

    Item 1.  BUSINESS...............................................................................................     3
    Item 2.  PROPERTIES.............................................................................................    20
    Item 3.  LEGAL PROCEEDINGS......................................................................................    20
    Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................    21

PART II.............................................................................................................    21

    Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................................    21
    Item 6.  SELECTED FINANCIAL DATA................................................................................    22
    Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS..............................................................................    23
        7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS............................................    44
    Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................    44
    Item 9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE...............................................................................    82

PART III............................................................................................................    82

    Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................    82
    Item 11.  EXECUTIVE COMPENSATION................................................................................    84
    Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT............................................................................................    89
    Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................    91

PART IV.............................................................................................................    92

    Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.......................................    92

SIGNATURES..........................................................................................................   104
</TABLE>



<PAGE>   3



                                     PART I

    THIS FORM 10-K CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS, INCLUDING,
WITHOUT LIMITATION, STATEMENTS ABOUT THE COMPANY'S PLANS FOR EXPANSION,
INVESTMENT PHILOSOPHY, THE YEAR 2000 COMPUTING SYSTEMS COMPATIBILITY, BUSINESS
EXPECTATIONS AND REGULATORY UNCERTAINTIES, WHICH STATEMENTS REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS THAT WILL HAVE AN EFFECT
ON THE COMPANY'S FINANCIAL PERFORMANCE. THE COMPANY CAUTIONS INVESTORS THAT ANY
FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE
HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
FORWARD-LOOKING STATEMENTS OR FROM HISTORICAL RESULTS. READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.

ITEM 1.  BUSINESS

INTRODUCTION

    PICO Holdings, Inc. ("PICO") and subsidiaries (the "Company") is a
diversified holding company with operations in wholesale water and storage
through its subsidiary Vidler Water Company, Inc.; real estate and minerals
through its subsidiary Nevada Land and Resource Company, LLC; insurance through
its subsidiaries Sequoia Insurance Company and Citation Insurance Company; and
investment management though its subsidiary Summit Global Management, Inc. In
addition, PICO has a number of strategic value investments. The Company's
objective is to use its resources to increase shareholder value through
investments in businesses which the Company believes are undervalued or will
benefit from additional capital, restructuring of operations or management, or
improved competitiveness through operational efficiencies with the Company's
existing operations. This business strategy was implemented beginning in 1994
and was not fully in place until 1996.

    PICO was incorporated in 1981 and began operations in 1982 as an insurance
holding company. PICO was known as Citation Insurance Group prior to the
November 20, 1996 reverse merger between a wholly-owned subsidiary and
Physicians Insurance Company of Ohio ("the Merger"). PICO's principal executive
office is located at 875 Prospect Street, Suite 301, La Jolla, California 92037,
and its telephone number is (619) 456-6022.

    Subsidiaries

    Unless otherwise indicated, each subsidiary is directly or indirectly
wholly-owned by PICO. The Company's operating subsidiaries and their principal
subsidiaries or affiliates are as follows:

    Global Equity Corporation ("GEC")

    In September 1995, the Company acquired approximately 38.2% of GEC. In July
1997, the Company purchased an additional 11.7% of GEC from the Mackenzie Fund,
increasing its holdings to approximately 49.9%. On August 18, 1997 GEC issued
shares through a secondary public offering and PICO subscribed additional shares
increasing its ownership of GEC to approximately 51.2%. For a number of reasons,
including the simplification of the structure of the combined companies, on
December 16, 1998, PICO acquired the remaining 48.8% minority interest of GEC
through a combination (the "PICO/GEC Combination") in exchange for PICO common
stock. See the PICO and GEC Joint Management Information Circular and Proxy
Statement dated October 13, 1998 on file with the Securities and Exchange
Commission ("SEC") with Form DEFM14A on October 16, 1998 for additional
information regarding the PICO and GEC Combination approved by shareholders on
November 20, 1998.

    Incorporated under the laws of the Province of Ontario, Canada, GEC operates
primarily, both directly and indirectly through its various subsidiaries, as an
international investment and operating company. The emphasis of GEC's investment
strategy is to increase shareholder value through the long-term appreciation of
its assets. GEC's investment portfolio comprises holdings in public equity
securities, strategic investments and convertible instruments in North American,
Asian and European corporations, as well as a diversified portfolio of surface,
water and mineral rights in the western United States, and oil and gas lease
interests in North America.

                                       3

<PAGE>   4



    Vidler Water Company, Inc. (Vidler")

    Effective November 14, 1995, a wholly-owned subsidiary of GEC acquired all
of the outstanding common stock of Vidler. The purchase price was $5.8 million
in cash. Vidler, a corporation formed under the laws of the state of Colorado,
changed its state of domicile to Delaware in 1998. Vidler is engaged in the
water marketing and transfer business. The business plan calls for Vidler to
identify areas where water supplies are needed in the southwestern United States
and then facilitate the transfer from current ownership to Vidler, and
subsequently to municipalities, water districts, developers and others. This
process requires knowledge and skills in the identification, certification,
upgrading, managing, transfer, marketing and financing of water projects. Vidler
has created opportunity through its ability to aggregate water supplies from
disparate owners and locations and redirect the water to its highest and best
use. In 1998, a former employee of Vidler exercised stock options to purchase
approximately 1.9% of Vidler. SEE NOTE 17 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, "OTHER RELATED-PARTY TRANSACTIONS."

    As a comprehensive provider of water services, Vidler performs the following
functions:

- -    Water asset acquisitions, purchasing appropriate water rights, upgrading
     the priority and functionality wherever possible, and marketing the product
     to the end-user; and

- -    Development and operation of water recharge (storage) facilities directed
     to municipalities and water districts in the southwestern United States.
     Storage provides flexibility. Surplus supplies can be stored inexpensively
     and can be sold and delivered to meet peak demands.

    Since its acquisition by GEC, Vidler and its immediate parent company have
made further acquisitions of water rights through the purchase of additional
properties with appurtenant water rights in Arizona, California, Colorado, and
Nevada. In October 1998, Vidler's Arizona groundwater recharge pilot program
construction was completed and recharging began on schedule. Vidler's
underground water storage facility is located adjacent to the Central Arizona
Project in Arizona. Vidler has begun implementing the full-scale design and
permitting process and will be meeting with potential state and federal recharge
customers. Vidler estimates that the total storage capacity of the aquifer
underlying this property is in excess of 1,000,000 acre-feet (one acre of water
one foot deep) and the "put" and "take" recharge/recovery capacity of the
aquifer to be in excess of 100,000 acre-feet per year. In November 1998 Vidler
reached an agreement with the Semitropic Water Storage District ("Semitropic")
to acquire 185,000 acre-feet of underground water storage and associated rights
to recharge and recover water at Semitropic located near the California Aqueduct
northwest of Bakersfield, California. The strategic location of Semitropic
relative to other water delivery systems and storage facilities will enable
Vidler to complete exchanges and water transfers in California.

    Nevada Land and Resource Company, LLC ("NLRC")

    On April 23, 1997, PICO and GEC acquired a 100% membership interest in NLRC.
The total purchase price for NLRC was $48.6 million. NLRC's principal asset
consists of approximately 1.3 million acres of deeded land located in northern
Nevada, together with appurtenant water and mineral rights. NLRC is actively
engaged in activities which it believes will maximize the property's value in
relation to water rights, mineral rights and land sales, exchanges and
development. NLRC is the largest private landowner in the state. NLRC
anticipates that revenues will be generated from the asset by land sales,
exchanges and development and exploration of mineral and water rights. NLRC's
mineral exploration strategy is to identify potential gold discoveries (or other
high unit resources), develop them to the point where a meaningful data set can
be established and then to vend the properties to advanced stage exploration or
production companies.

    Citation Insurance Company ("Citation")

    Citation is a California-domiciled insurance company licensed to write
property and casualty insurance in Arizona, California, Colorado, Nevada,
Hawaii, New Mexico and Utah. Citation primarily writes commercial property and
casualty insurance. Citation has also written Workers Compensation insurance;
however, Citation sold that line of business through a transfer to and sale of
its wholly-owned subsidiary, Citation National Insurance Company ("CNIC"),
effective June 30, 1997. CNIC wrote no new business in 1997 prior to its sale.

                                       4

<PAGE>   5


    Sequoia Insurance Company ("Sequoia")

    Sequoia is a California-domiciled insurance company licensed to write
insurance coverage for property and casualty risks within the State of
California and Nevada. Sequoia writes business through independent agents and
brokers covering risks located primarily within northern and central California
and Nevada. Although multiple line underwriting is conducted and at one time or
another all major lines of property and casualty insurance except workers'
compensation and ocean marine have been written, Sequoia has transitioned from
writing primarily personal lines of business (automobile, homeowners, etc.) to
commercial lines.

    Physicians Insurance Company of Ohio ("Physicians")

    Physicians, an Ohio licensed insurance corporation, operates primarily as a
diversified investment and insurance company. Its operations and those of its
direct and indirect subsidiaries include investment operations, property and
casualty insurance, the wind down of the settlement of insurance claims
liabilities arising from Physicians' terminated medical professional liability
("MPL") insurance business (the "runoff"), and other. Through December 4, 1998,
an indirect subsidiary of Physicians, American Physicians Life Insurance Company
("APL"), engaged in life and health insurance. Physicians has been licensed as a
property and casualty insurer by the Ohio Department of Insurance ("Ohio
Department") since 1976 and is also licensed by the Kentucky Department of
Insurance. During 1995, there was another overall shift in the strategic
direction of Physicians when it sold its existing MPL insurance business. See
"REGULATORY INSURANCE DISCLOSURES -- REINSURANCE -- MPL." Physicians continues
to administer and adjust its remaining claims and LAE reserves. Based upon
careful analysis of various alternative scenarios for handling the runoff of the
remaining claims reserves, management determined that the best option was to
process the existing claims internally with existing staff, rather than through
a third party administrator or through an outright sale of the claims and LAE
reserves. In addition, although there can be no assurance, it is expected that
shareholders' equity may be better served by retaining the investments necessary
to fund the payment of these claims and LAE reserves, managing them along with
the rest of the Company's investment holdings, as opposed to selling or fully
reinsuring these reserves and giving up the corresponding funds.

    Physicians Investment Company ("PIC")

    PIC is a holding company that owned 100% of APL prior to its sale on
December 4, 1998. The Company entered into an agreement to sell APL and APL's
wholly-owned subsidiary, Living Benefit Administrators Agency, Inc. On June 16,
1997. APL offered critical illness insurance through "Survivor Key" policies as
well as other life and health insurance products. Physicians owns approximately
65.1% of PIC. Sequoia and Citation own approximately 9.1% and 25.8%,
respectively.

    The Professional Insurance Company ("PRO")

    PRO is an Ohio domiciled insurance company first licensed to write property
and casualty insurance in Ohio in 1979. It is also licensed in Kentucky, West
Virginia and Wisconsin. PRO primarily offered MPL insurance to doctors, dentists
and other medical professionals in Ohio until the sale of its MPL business in
1995. See "REGULATORY INSURANCE DISCLOSURES -- REINSURANCE -- MPL."

    Summit Global Management ("Summit")

    Summit is a Securities and Exchange Commission ("SEC") registered investment
advisor that offers investment management services in a number of states
including California, Florida, Kansas, Iowa, Louisiana, Oregon, Virginia and
Wisconsin. Summit provides investment management services to PICO and its
subsidiaries. Summit also offers its services to other individuals and
institutions in the jurisdictions in which it is registered as an investment
adviser and in other states where registration is not required. As a registered
investment adviser, Summit is subject to regulation by, and files annual reports
with, the SEC and the securities administrators in some of the jurisdictions in
which it is registered to do business.


                                       5

<PAGE>   6


SIGNIFICANT MERGERS AND ACQUISITIONS

    Merger of Citation and Physicians to form PICO Holdings, Inc.

    The following describes the history of PICO, which was previously known as
"Citation Insurance Group", prior to the November 20, 1996 Merger. On November
20, 1996, Citation Holdings, Inc., an Ohio corporation and a wholly-owned
subsidiary of Citation ("Sub"), merged with and into Physicians, pursuant to an
Agreement and Plan of Reorganization (the "Merger Agreement") dated as of May 1,
1996, as amended by and among Citation Insurance Group, Physicians and Sub. All
references to "CIG" are references to PICO as it existed prior to the Merger.
CIG was a holding company principally engaged in writing workers' compensation
and commercial property and casualty insurance through its wholly-owned
subsidiaries, Citation and CNIC. "Citation Group" refers to CIG and its
subsidiaries, excluding Citation General Insurance Company ("CGIC"), as they
existed before the Merger. The State of California placed CGIC, a wholly-owned
subsidiary of CIG, into conservation in July 1995. Citation Group had
effectively written off its investment in CGIC in November 1994.

    Pursuant to the Merger, each outstanding share of Class A Common Stock of
Physicians (the "Physicians Stock") was converted into the right to receive
5.0099 shares of PICO's Common Stock. As a result, (i) the former shareholders
of Physicians owned approximately 80% of the outstanding Common Stock of PICO
immediately after the Merger and controlled the Board of Directors of PICO and
(ii) Physicians became a wholly-owned subsidiary of PICO. Pursuant to the Merger
Agreement, PICO also assumed all outstanding options to acquire Physicians
Stock. As a result of the Merger, the business and operations of Physicians and
its subsidiaries became a substantial majority of the business and operations of
the Company. Effective upon the Merger, PICO's name, which was previously
"Citation Insurance Group", was changed to "PICO Holdings, Inc." and the Nasdaq
symbol for the Company's stock was changed from "CITN" to "PICO."

    Combination of PICO and GEC

    On December 16, 1998, following the requisite regulatory and shareholder
approvals, PICO and GEC announced completion of the combination of the two
corporations through PICO's acquisition of GEC's remaining 48.8% minority
interest. PICO acquired the remaining shares through the issuance to GEC
shareholders of PICO common stock. Immediately following the closing, PICO
effected a 1-for-5 reverse stock split (the "Reverse Stock Split"), reducing the
number of PICO shares issued and outstanding to approximately 9.3 million, net
of approximately 4 million treasury shares.

MAJOR OPERATING SEGMENTS

    The Company is a diversified holding company engaged in five major operating
segments: Investment Operations; Surface, Water and Mineral Rights Operations;
Property and Casualty Insurance Operations; Medical Professional Liability
Insurance Operations and Other Operations.

    Investment Operations

    PICO holds a number of strategic and portfolio investments in both publicly
and privately held corporations. These investments may be passive or they may
represent positions where PICO is able to exert significant influence over the
operating, financing and management strategies and decisions of the corporation.
PICO invests in businesses that it believes to be undervalued or may benefit
from additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with existing PICO operations.
The Company makes investments for the purpose of enhancing and realizing
additional value by means of appropriate levels of shareholder influence and
control. This may involve restructuring of the financing or management of the
entities in which the Company invests and initiating or facilitating mergers and
acquisitions. The investments tend to be long term in nature; however, if
returns are not as anticipated, there is an attractive exit, or a more
productive use of capital is identified, the Company divests its position.
Revenues are derived from interest, dividends and realized gains or losses upon
sale of investments. In addition, the change in unrealized gains and losses for
available for sale securities is used as a performance measurement. The Company
invests in a number of industry segments and geographic regions and does not
limit itself in either of these categories but rather uses criteria based on
fundamental value principles in selecting investment targets. Investments
directly related to the insurance operations are included within those segments.

                                       6


<PAGE>   7



    Surface, Water and Mineral Rights Operations

    PICO is engaged in surface, water and mineral rights operations through its
subsidiaries, Vidler and NLRC. Vidler is a comprehensive provider of water
services and, through the acquisition of water assets, water rights and
upgrading priority and functionality of these rights generates revenues by
marketing water to end-users. In addition, Vidler is developing water recharge
(storage) facilities for future operation that will be directed to
municipalities and water districts in the southwestern United States. Surplus
supplies of water will be stored in the facilities and will generate revenues
from storage fees and sales and deliveries to end-users.

    NLRC owns approximately 1.3 million acres of deeded land in northern Nevada
together with appurtenant water and mineral rights. NLRC produces revenue by
land sales, land development, land exchanges and leasing for grazing,
agricultural and other uses. As well as the exploration and development of water
rights and mineral rights through outright sales and royalty streams, NLRC is
actively engaged in activities which it believes will maximize the property's
value in relation to water rights, mineral rights, and land development.
Together, GEC and PICO own 100% of the membership interests in NLRC.

    Property and Casualty Insurance Operations

    PICO owns two property and casualty insurance companies, Citation and
Sequoia. These companies write commercial property and casualty insurance and,
to a lesser extent personal lines of insurance. Workers Compensation insurance
was written until 1997, when the business was sold to a third party. Revenues
are derived from premiums earned on policies written as well as investment
income on assets and investments held by the insurance operations.

    MPL Operations

    PICO's subsidiaries, Physicians and PRO ceased writing policies in 1995;
however, they continue to administer and adjust remaining claims. Management
continues to handle the runoff of the remaining claims reserves internally. The
operation has retained the investments necessary to fund the payment of claims
and loss adjustment expense ("LAE") reserves as opposed to selling or fully
reinsuring these reserves and giving up the corresponding funds. Revenues are
derived from the investments retained.

    Other Operations

    PICO provides investment management services through its wholly-owned
subsidiary, Summit. Other operations also are currently, or in prior years were,
conducted by Raven Development Corp., CLM Insurance Agency, and others.

EMPLOYEES

    At December 31, 1998, the Company had 155 employees. A total of 7 employees
were engaged in surface, water and mineral rights operations; 114 in property
and casualty insurance operations; 8 in MPL operations; 6 in Summit's investment
management operations and 20 in holding company activities.

EXECUTIVE OFFICERS

  The executive officers of PICO are as follows:

                    Name           Age                  Position
                    ----           ---                  --------
             Ronald Langley        54   Chairman of the Board, Director
             John R. Hart          39   President,  Chief  Executive  Officer 
                                        and Director
             Richard H. Sharpe     43   Chief Operating Officer
             Gary W. Burchfield    52   Chief Financial Officer and Treasurer
             James F. Mosier       51   General Counsel and Secretary
             A. Judson Hill        44   Executive Vice President
             Sheila C. Ferguson    37   Financial Controller
             Maxim C. W. Webb      37   Vice President, Investments

                                       7

<PAGE>   8



     Except for A. Judson Hill, Sheila C. Ferguson and Maxim C. W. Webb, each
executive officer of PICO was an executive officer of Physicians prior to the
Merger and became an officer of PICO in November 1996 as a result of the Merger.
Sheila C. Ferguson and Maxim C. W. Webb were officers of GEC and became officers
of PICO upon the effective date of the PICO/GEC Combination. A. Judson Hill
joined PICO in 1998 as Executive Vice President.

     Mr. Langley has been Chairman of the Board of PICO since November 1996 and
of Physicians and PRO since July 1995, Chairman of the Board of Summit since
November 1994, and a Director and Chairman of the Board of GEC since September
1995. Mr. Langley has been a Director of PICO since November 1996 and a Director
of Physicians since 1993. Mr. Langley has been a Director of Sequoia since
August 1995 and a Director of Citation since November 1996. Mr. Langley has been
a Director of PC Quote, Inc. since 1995.

     Mr. Hart has been President and Chief Executive Officer of PICO since
November 1996 and of Physicians and PRO since July 1995 and President and Chief
Executive Officer and a Director of GEC since September 1995. Mr. Hart has been
a Director of PICO since November 1996 and a Director of Physicians since 1993.
Mr. Hart has been a director of Summit since 1994. Mr. Hart has been a Director
and Chairman of the Board of Sequoia since August 1995 and a Director and
Chairman of the Board of Citation since November 1996. Mr. Hart has been a
Director of PC Quote, Inc. since 1997.

     Mr. Sharpe has been Chief Operating Officer of PICO since November 1996 and
of Physicians since June 1994, an officer of APL for more than 10 years, and a
Director of APL from June 1993 until December 1998. Mr. Sharpe has been a
Director of Sequoia since August 1995 and a Director of Citation since November
1996.

     Mr. Burchfield has been Chief Financial Officer and Treasurer of PICO since
November 1996 and Chief Financial Officer of Physicians since November 1995 and
Treasurer of Physicians since November 1994. Mr. Burchfield was Controller of
Physicians from March 1990 to November 1995 and Chief Accounting Officer of
Physicians from December 1993 to November 1995.

     Mr. Mosier has served as General Counsel and Secretary of PICO since
November 1996 and of Physicians since October 1984 and in various other
executive capacities since joining Physicians in 1981.

     Mr. Hill joined PICO in November 1998. Prior to joining PICO, he was a
managing director of HSBC Securities, Inc. in 1997 and 1998. For three years
prior to that, he was executive vice president of Thermatrix, Inc., an
industrial controls manufacturing firm.

     Ms. Ferguson has served in various capacities with the GEC group of
companies since 1993, including Director, Treasurer and Financial Controller of
Forbes Ceylon Limited from 1993 through 1996. Ms. Ferguson has also served as
Financial Controller for GEC since September 1995 and an officer of GEC since
June 1997. Ms. Ferguson became Financial Controller of PICO November 20, 1998.

     Mr. Webb has served in various capacities with the GEC group of companies
since 1993, including Vice President, Investments of Forbes Ceylon Limited from
1994 through 1996. Mr. Webb became an officer of GEC in November 1997 and Vice
President, Investments of PICO on November 20, 1998.

REGULATORY INSURANCE DISCLOSURES

    Premiums

     The following table shows the total net premiums written (gross premiums
less premiums ceded pursuant to reinsurance treaties) by line of business by the
Company for the periods indicated as reported in financial statements filed with
the Ohio Department and the California Department using statutory accounting
principles:


                                       8
<PAGE>   9
                    NET PREMIUMS WRITTEN BY LINE OF BUSINESS

<TABLE>
<CAPTION>
                                                           1998                1997               1996
                                                       --------------       ------------      -------------
                                                                            (in millions)
<S>                                                    <C>                  <C>               <C>
Property and Casualty-Commercial and Other             $        35.5        $      40.1       $       35.2
Medical Professional Liability                                  (0.2)               0.2
Workers Compensation and Other                                                     (0.6)               2.4
                                                       --------------       ------------      -------------
     Total Property and Casualty Premiums                       35.3               39.7               37.6
                                                       --------------       ------------      -------------
Property & Casualty Excluding
    Workers Compensation Insurance and other            $       35.3        $      40.3       $       35.2
                                                       ==============       ============      =============
</TABLE>


        Commercial property and casualty insurance premiums written by Sequoia
and Citation account for principally all of the Company's property and casualty
premiums in recent years, with the exception of workers' compensation premiums
written prior to July 1997 when that line of business was fully reinsured and
sold along with CNIC. Physicians and PRO ceased writing MPL risks in 1995, but
continue to administer the runoff of the existing claims exposures. PRO and
Physicians entered into a 100% quota share reinsurance treaty effective October
1, 1997 whereby PRO ceded and Physicians assumed all of PRO's existing claims
liabilities, net of existing reinsurance. See "REINSURANCE." Citation's premiums
are included for periods after November 20, 1996, the effective date of the
Merger. See "SIGNIFICANT MERGERS AND ACQUISITION."

    Property and Casualty Insurance

    On March 7, 1995, Physicians executed a stock purchase agreement with Sydney
Reinsurance Corporation ("SRC") to acquire all of the outstanding stock of SRC's
wholly-owned subsidiary, Sequoia. All policy and claims liabilities of Sequoia
prior to closing are the responsibility of SRC and have been unconditionally and
irrevocably guaranteed by QBE Insurance Group Limited ("QBE"), an Australian
corporation of which SRC indirectly is a wholly-owned subsidiary. Physicians is
required to maintain a minimum surplus in Sequoia of $7.5 million and, through a
management agreement, is supervising the run-off of SRC's liabilities. As part
of the management agreement, Physicians was reimbursed for certain expenses
incurred in the servicing of the business existing prior to closing.

    Sequoia writes primarily light commercial and multiperil insurance in
northern and central California and a small amount in Nevada. Sequoia's
principal sources of premium production represent farm insurance and small to
medium-sized commercial accounts, most of which are located outside of large
urban areas. A small amount of earthquake coverage is provided, either as an
endorsement to an existing insurance policy or as a result of participation in a
state-mandated pool. Most business is written at independently filed rates.

    Citation currently underwrites principally the same types of business as
Sequoia, but only in states where Sequoia does not write. Prior to the
centralization of underwriting activities and the implementation of more
stringent underwriting guidelines, Citation wrote general liability and property
insurance for small and medium-sized businesses, including restaurants, hotels
and motels, retail stores, owners of small commercial centers, and until October
1994, artisan contractors, with uniform risk characteristics and coverage needs.
Citation targets specific types of accounts within predetermined business
classifications containing certain characteristics including low potential for
loss severity, no long delay between loss occurrence and loss reporting, and a
relatively short and uncomplicated claim settlement process. Citation typically
provides general liability, theft, inland marine, property, glass, commercial
automobile, incidental product liability coverage and umbrella liability.
Citation sells policies through independent producers located in its operating
territories.

    In an effort to improve the exposure to risks underlying Citation's book of
insurance business and to take advantage of synergies inherent within the two
insurance companies, Sequoia and Citation moved both operations into common
facilities in Monterey, California in 1997. Essentially all new and renewal
insurance business is being underwritten by Sequoia using Sequoia's more
stringent risk selection criteria. However, risks located in states not covered
by Sequoia continue to be written directly by Citation. Effective January 1,
1998, Sequoia and Citation entered into a pooling agreement whereby both
insurance companies pool all their business in force at, or written or renewed
after, the effective date. Both companies share equally in the allocation of
premiums, losses and LAE and insurance expenses.

                                       9

<PAGE>   10




    Net earned premiums, incurred losses and the corresponding loss ratio
(excluding loss adjustment expense) for Sequoia and Citation for 1998 were
$36,000, $17,000 and 45.7%, respectively, excluding workers' compensation
insurance. This compares to $50,000, $24,000 and 47.7%, respectively, in 1997.
The decline in earned premium from 1997 to 1998 is principally a result of the
more stringent underwriting of Citation's former book of insurance business
following its change in control in November 1996. Increased competition for
commercial property and casualty insurance premiums within northern and central
California has also contributed to the decrease.

    Sequoia's and Citation's combined results for 1998 by line of business were
as follows:

                        Property and Casualty Insurance
                       Net Loss Ratio by Line of Business
<TABLE>
<CAPTION>

                                                      1998
                                  ---------------------------------------------
                                      Net
                                   Premiums        Net Losses          Net Loss
                                    Earned         Incurred*            Ratio*
                                    ------       -------------          ------
                                                 (in thousands)

<S>                                <C>            <C>                 <C>
Fire                                 $496             $212               42.7%
Allied lines                          151               76               50.3%
Homeowners multiperil                  30                4               13.3%
Commercial multiperil              26,285           10,582               40.3%
Inland marine                                            3
Earthquake                            286               17                5.9%
Other liability                       644            2,553              396.4%
Auto liability                      5,125            2,058               40.2%
Auto physical damage                3,274            1,071               32.7%
                                    -----            -----
     Total                        $36,291          $16,576               45.7%
                                  =======          =======
</TABLE>

* Net losses incurred and net loss ratio shown exclude LAE.


   The loss ratio for the Sequoia and Citation combined improved two full
percentage points from 1997 to 1998. However, Sequoia's total net loss ratio
decreased 5.6 percentage points from 1997 principally as a result of
redundancies in prior year reserves in the commercial multiperil and other
liability lines of business. Citation's results continue to be significantly
influenced by extremely poor claims experience in artisan/contractors
(classified above under "other liability") insurance which is no longer offered
by Citation.

    The underwriting staffs of Sequoia and Citation are solely responsible for
the ultimate acceptance, underwriting and pricing of applications for commercial
insurance. Premium pricing levels are based on a variety of factors, including
industry historical loss costs, anticipated loss costs, acceptable profit
margins and anticipated operating expenses.

    The objective of pricing structures in all product lines is to provide
sufficient funds to pay all costs of policy issuance and administration, premium
taxes and losses and related claims handling expenses and provide a profit
margin as well. Because pricing structures are based on estimates of future loss
patterns developed from historical information and because losses and expenses
may differ substantially from estimates, product pricing may ultimately prove
inadequate. Factors causing inadequate rates may include catastrophic losses or
a lack of correlation between the loss forecast for the market and that
applicable to the customers which actually purchase the policies. In addition,
if underlying statistical information understates the value of known claims,
forecasts may understate prospective claims patterns.

    The policy at Sequoia and Citation is to settle valid claims promptly and
equitably. Sequoia and Citation employ claim technicians, located in various
locations throughout California, to administer the claim settlement process. It
is Sequoia's and Citation's policy to limit the number of claims assigned to
each technician, based in part on the complexity of the individual claims. It is
also a policy to assign the most experienced technicians to handle the most
complex claims. In general, claims in litigation are the most complex and
require the most experienced personnel.

    The Company's claim staff, working closely with claim department
supervisors, may retain independent adjusters, appraisers and defense counsel,
based on the nature of the claim. In addition, Sequoia and Citation have
implemented procedures and programs to detect


                                       10

<PAGE>   11




and investigate claim fraud. To date, it appears these programs resulted in
substantial savings relative to the claimed amounts involved.

     Citation and Sequoia write property and casualty insurance policies. Most
of Citation's and Sequoia's net premiums are derived from property and casualty
insurance. The property and casualty insurance industry has been highly
cyclical, and the industry has been in a cyclical downturn over the last several
years due primarily to premium rate competition, which has resulted in lower
profitability. Premium rate levels are related to the availability of insurance
coverage, which varies according to the level of capacity in the industry. The
level of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Increases in surplus have
generally been accompanied by increased price competition among property and
casualty insurers. The cyclical trends in the industry and the industry's
profitability can also be affected significantly by volatile and unpredictable
developments, including natural disasters (such as hurricanes, windstorms,
earthquakes and fires), fluctuations in interest rates and other changes in the
investment environment which affect market prices of insurance companies'
investments and the income from those investments, inflationary pressures that
affect the size of losses and judicial decisions affecting insurers'
liabilities. The demand for property and casualty insurance can also vary
significantly, generally rising as the overall level of economic activity
increases and falling as such activity decreases.

    MPL

     Prior to the sale of the MPL insurance business to Mutual Assurance Inc.
("Mutual") in August 1995, Physicians and PRO primarily wrote MPL coverage.
Physicians and PRO were represented by approximately 40 independent insurance
agents and by Physicians' wholly-owned subsidiary insurance agency, PICO
Insurance Agency, Inc. While Physicians and PRO were licensed collectively in
the states of Ohio, Kentucky, Michigan, West Virginia and Wisconsin, MPL
coverage was actively written only in Ohio and Kentucky. Physicians and PRO
continue to administer the adjustment of claims and the investment of related
assets for policies written or renewed prior to July 16, 1995, the effective
date of a 100% quota share reinsurance agreement with Mutual.

     As part of the agreement with Mutual, Physicians and PRO agreed not to sell
the following insurance products for a period of five years ending August 27,
2000 in any state in which Physicians, PRO or Mutual was licensed to offer MPL
insurance products as of August 28, 1995: professional liability insurance for
physicians, surgeons, dentists, hospitals, ambulatory surgical clinics, and
other health care providers (collectively, "Health Care Providers"); reinsurance
for insurers writing professional liability insurance for such Health Care
Providers; comprehensive general liability insurance for Health Care Providers;
stop loss insurance for Health Care Providers who have contracted to provide
health care services at a fixed rate; and managed care liability insurance
providing coverage for liability arising from errors and omissions of a managed
care organization, for the vicarious liability of a managed care organization
for acts and omissions by contracted and employed providers, and for liability
of directors and officers of a managed care organization.

     Physicians will continue to administer the runoff of claims on policies
written or renewed prior to July 16, 1995. Physicians estimates based upon
actuarial indications that approximately 75% of Physicians' claim liabilities,
which existed at the end of 1995, should be paid out by the end of the year
2000.

     Liabilities for Unpaid Loss and Loss Adjustment Expenses

     Liabilities for unpaid loss and LAE are estimated based upon actual and
industry experience, and assumptions and projections as to claims frequency,
severity and inflationary trends and settlement payments. Such estimates may
vary from the eventual outcome. The inherent uncertainty in estimating reserves
is particularly acute for lines of business for which both reported and paid
losses develop over an extended period of time.

     Several years or more may elapse between the occurrence of an insured MPL
or casualty loss, the reporting of the loss and the final payment of the loss.
Loss reserves are estimates of what an insurer expects to pay claimants, legal
and investigative costs and claims administrative costs. The Company's
subsidiaries are required to maintain reserves for payment of estimated losses
and loss adjustment expense for both reported claims and claims which have
occurred but have not yet been reported ("IBNR"). Ultimate actual liabilities
may be materially more or less than current reserve estimates.

     Reserves for reported claims are established on a case-by-case basis. Loss
and loss adjustment expense reserves for IBNR are estimated based on many
variables including historical and statistical information, inflation, legal
developments, the regulatory environment, benefit levels, economic conditions,
judicial administration of claims, general trends in claim severity and
frequency, medical costs and other factors which could affect the adequacy of
loss reserves. Management reviews and adjusts IBNR reserves regularly.

                                       11

<PAGE>   12


    The liabilities for unpaid losses and LAE of Physicians, PRO, Sequoia, and
Citation (the "Insurance Group") were $155 million at December 31, 1998, $196.1
million in 1997, and $252.0 million in 1996, net of discount on MPL reserves and
before reinsurance reserves, which reduce net unpaid losses and LAE. Of those
amounts, the liabilities for unpaid loss and LAE of prior years increased by
$7.3 million in 1998, $0.9 million in 1997, and $2.3 million in 1996. These
reserve changes for prior years' reserves were due to the following:

                     CHANGE IN UNPAID LOSS AND LAE RESERVES

<TABLE>
<CAPTION>

                                                              1998           1997           1996
                                                           ------------   ------------   ------------
<S>                                                             <C>           <C>            <C>
Increase (decrease) in provision for prior year claims          7.0           (1.0)          (2.6)
Retroactive reinsurance                                        (0.4)           1.2
Accretion of reserve discount                                   0.7            3.1            4.9
                                                           ------------   ------------   ------------
    Net increase in liabilities for unpaid loss
   and LAE of prior years                                       7.3            3.3            2.3
                                                           ============   ============   ============
</TABLE>


    See schedule in Note 13 of Notes to the Company's Consolidated Financial
Statements, "Reserves for Unpaid Loss and Loss Adjustment Expenses" for
additional information regarding reserve changes.

Although the Company's Insurance Group's reserves are certified annually by
independent actuaries for each insurance company as required by state law,
significant fluctuations in reserve levels can occur based upon a number of
variables used in actuarial projections of ultimate incurred losses and LAE.

    Physicians' liability for unpaid MPL losses and LAE is discounted to reflect
investment income as permitted by the Ohio Department. The method of discounting
is based upon historical payment patterns and assumes an interest rate at or
below Physicians' investment yield, and is the same rate used for statutory
reporting purposes. A discount rate of 4% is used for MPL reserves.

    All members of the Company's Insurance Group seek to reduce the loss that
may arise from individually significant claims or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk with other
insurance carriers.

    Various reinsurance treaties remain in place to limit the Company's
Insurance Group's exposure levels. See "Reinsurance" following this section and
Note 12 of Notes to Consolidated Financial Statements, "Reinsurance."

    Reconciliation of Unpaid Loss and Loss Adjustment Expenses

    An analysis of changes in the liability for unpaid losses and LAE for 1998,
1997 and 1996 is set forth in Note 13 of Notes to the Company's Consolidated
Financial Statements, "Reserve for Unpaid Loss and Loss Adjustment Expenses."

                                       12

<PAGE>   13



            ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT

The following table presents the development of balance sheet liabilities for
1988 through 1998 for all property and casualty line of business including MPL.
The "Net liability as originally estimated" line shows the estimated liability
for unpaid losses and LAE recorded at the balance sheet date on a discounted
basis for each of the indicated years. Reserves for other lines of business that
Physicians ceased writing in 1989, which are immaterial, are excluded. The
"Gross liability as originally estimated" represents the estimated amounts of
losses and LAE for claims arising in all prior years that are unpaid at the
balance sheet date on an undiscounted basis, including losses that had been
incurred but not reported. 
<TABLE> 
<CAPTION>

                                                                          Year Ended December 31,
                                          ---------------------------------------------------------------------------------------
                                            1988           1989           1990           1991           1992            1993
                                          -----------   ------------   ------------   ------------   ------------    ------------
                                                                              (In thousands)

<S>                                         <C>            <C>            <C>            <C>            <C>             <C>
Net Liability as originally estimated:      $109,435       $126,603       $128,104       $129,768       $159,804        $179,390
Discount                                      37,100         36,806         30,230         30,647         31,269          32,533
Gross liability as originally estimated:     146,535        163,409        158,334        160,413        191,073         211,923
Cumulative payments as of:
     One year later                           27,229         43,725         42,488         42,986         41,550          34,207
     Two years later                          69,335         84,463         81,536         81,489         73,012          69,037
     Three years later                       105,274        110,291        108,954        103,505        103,166          90,904
     Four years later                        122,589        128,737        120,063        120,073        116,278         118,331
     Five Years later                        136,454        135,170        126,100        127,725        139,028         128,773
     Six years later                         138,907        138,912        130,146        142,973        143,562
     Seven years later                       140,451        141,854        142,484        147,142
     Eight years later                       141,641        152,706        146,112
     Nine years later                        146,841        154,659
     Ten years later                         149,034
Liability re-estimated as of:
     One year later                          148,847        162,653        160,200        188,811        197,275         183,560
     Two years later                         148,932        162,371        179,915        184,113        179,763         184,138
     Three years later                       154,177        176,123        172,715        174,790        182,011         175,308
     Four years later                        165,596        169,488        170,847        177,811        176,304         178,544
     Five Years later                        163,676        171,532        171,968        172,431        181,721         178,584
     Six years later                         165,996        170,873        165,255        175,830        181,868
     Seven years later                       166,144        167,341        168,185        177,603
     Eight years later                       161,328        170,941        170,710
     Nine years later                        163,426        173,630
     Ten years later                         166,527
Cumulative Redundancy (Deficiency)          ($19,992)      ($10,221)      ($12,376)      ($17,190)        $9,205         $33,339
</TABLE>


RECONCILIATION TO FINANCIAL STATEMENTS Gross Liability - end of year 

     Reinsurance recoverable 

     Net liability before discount - end of year 

     Net discount Discounted net liability - end of year 

     Discounted reinsurance recoverable


     Discontinued personal lines insurance

     Balance sheet liability (discounted)

     Gross re-estimated liability - latest

     Re-estimated recoverable - latest

     Net re-estimated liability before discount - latest 
  
     Net re-estimated discount - latest 

     Discounted net re-estimated liability - latest 

     Net cumulative redundancy (deficiency) before discount



                                       13

<PAGE>   14


<TABLE>
<CAPTION>



                                                                               Year Ended December 31,
                                                    -----------------------------------------------------------------
                                                       1994         1995          1996         1997          1998
                                                    -----------   ----------   -----------  -----------   -----------
                                                                                   (In thousands)

<S>                                                   <C>          <C>           <C>          <C>           <C>
Net Liability as originally estimated:                $153,212     $137,523      $165,629     $128,205      $102,877
Discount                                                20,144       16,568        12,216        9,159         8,515
Net liability before discount as originally estimated: 173,356      154,091       177,845      137,364       111,392
Cumulative payments as of:
     One year later                                     35,966       27,128        59,918       44,750
     Two years later                                    61,263       65,062        95,574
     Three years later                                  93,908       86,865
     Four years later                                  110,272
     Five Years later
     Six years later
     Seven years later
     Eight years later
     Nine years later
     Ten years later
Liability re-estimated as of:
     One year later                                    170,411      147,324       177,734      144,367
     Two years later                                   163,472      146,653       185,366
     Three years later                                 162,532      151,752
     Four years later                                  165,696
     Five Years later
     Six years later
     Seven years later
     Eight years later
     Nine years later
     Ten years later
Cumulative Redundancy (Deficiency)                      $7,660       $2,339       ($7,521)     ($7,003)

RECONCILIATION TO FINANCIAL STATEMENTS
     Gross Liability - end of year                                               $266,320     $208,351      $166,131
     Reinsurance recoverable                                                      (88,474)     (70,987)      (54,740)
                                                                               -----------  -----------   -----------
     Net liability before discount - end of year                                  177,846      137,364       111,391
     Net discount                                                                 (12,217)      (9,159)       (8,515)
                                                                               -----------  -----------   -----------
     Discounted net liability - end of year                                       165,629      128,205       102,876
     Discounted reinsurance recoverable                                            85,217       67,654        52,000
                                                                               -----------  -----------   -----------
                                                                                  250,846      195,859       154,876
     Discontinued personal lines insurance                                          1,178          237           145
                                                                               ===========  ===========   ===========
     Balance sheet liability (discounted)                                        $252,024     $196,096      $155,021
                                                                               ===========  ===========   ===========

     Gross re-estimated liability - latest                                       $284,817     $212,564
     Re-estimated recoverable - latest                                            (99,450)     (68,197)
                                                                               -----------  -----------
     Net re-estimated liability before discount - latest                          185,367      144,367
     Net re-estimated discount - latest                                            (8,515)      (8,515)
                                                                               ===========  ===========
     Discounted net re-estimated liability - latest                              $176,852     $135,852
                                                                               ===========  ===========
     Net cumulative redundancy (deficiency) before discount                       ($7,521)     ($7,003)
                                                                               ===========  ===========
</TABLE>

    Each decrease or increase amount includes the effects of all changes in
amounts during the current year for prior periods. For example, the amount of
the redundancy related to losses settled in 1991, but incurred in 1988 will be
included in the decrease or increase amount for 1988, 1989 and 1990. Conditions
and trends that have affected development of the liability in the past may not
necessarily occur in the future. For example, Physicians commuted reinsurance
contracts in several different years that significantly increased the estimate
of net reserves for prior years by reducing the recoverable loss and LAE
reserves for those years. Accordingly, it may not be appropriate to extrapolate
future increases or decreases based on this table.


                                       14


<PAGE>   15

    The data in the above table is based on Schedule P from each of the
Company's Insurance Group's 1988 to 1998 Annual Statements, as filed with state
insurance departments; however, the development table above differs from the
development displayed in Schedule P, Part-2, of the insurance Annual Statements
as Schedule P, Part-2, excludes unallocated LAE.

    LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating loss
reserves are greater for some insurance products than for others, and are
dependent on the length of the reporting lag or "tail" associated with a given
product (i.e. the lapse of time between the occurrence of a claim and the report
of the claim to the insurer) of the diversity of historical development patterns
among various aggregations of claims, the amount of historical information
available during the estimation process, the degree of impact that changing
regulations and legal precedents may have on open claims, and the consistency of
reinsurance programs over time, among other things. Because MPL and commercial
casualty claims may not be fully paid for several years or more, estimating
reserves for such claims can be more uncertain than estimating reserves in other
lines of insurance. As a result, precise reserve estimates cannot be made for
several years following a current accident year for which reserves are initially
established.

    There can be no assurance that the insurance subsidiaries in the Company's
Insurance Group have established reserves adequate to meet the ultimate cost of
losses arising from such claims. It has been necessary, and will over time
continue to be necessary, for the insurance companies to review and make
appropriate adjustments to reserves for estimated ultimate losses and LAE. To
the extent reserves prove to be inadequate, the insurance companies would have
to adjust their reserves and incur a charge to income, which could have a
material adverse effect on the financial results of the Company.

REINSURANCE

    MPL

    On July 14, 1995, Physicians and PRO entered into an Agreement for the
Purchase and Sale of Certain Assets (the "Mutual Agreement") with Mutual
Assurance Inc. This transaction was approved by Physicians' shareholders on
August 25, 1995 and closed on August 28, 1995. Pursuant to the Mutual Agreement,
Physicians and PRO sold their professional liability insurance business and
related liability insurance business for physicians and other health care
providers (the "Book of Business"). Physicians and PRO were engaged in, among
other things, the business of offering MPL insurance and related insurance to
physicians and other health care providers principally located in Ohio. Mutual
acquired the Book of Business in consideration of the payment of $6.0 million,
plus interest at a rate of 6% per annum from July 1, 1995 until the date of
closing, or an aggregate of $6.1 million.

    Simultaneously with execution of the Mutual Agreement, Physicians and Mutual
entered into a Reinsurance Treaty pursuant to which Mutual agreed to assume all
risks attaching after July 15, 1995 under medical professional liability
insurance policies issued or renewed by Physicians on physicians, surgeons,
nurses, and other health care providers, dental practitioner professional
liability insurance policies including corporate and professional premises
liability coverage issued by Physicians, and related commercial general
liability insurance policies issued by Physicians (the "Policies"), net of
inuring reinsurance.

    Prior to July 16, 1995, Physicians ceded a portion of the insurance it wrote
to unaffiliated reinsurers through reinsurance agreements. Physicians'
reinsurers for insurance policies with effective dates between July 1, 1993 and
July 15, 1995, were TIG Reinsurance Company (rated A (Excellent) by Best),
Transatlantic Reinsurance Company (rated A++ (Superior) by Best) and Cologne
Reinsurance Company of America (rated NR-3 (Rating Procedure Inapplicable) by
Best). Physicians ceded insurance to these carriers on an automatic basis when
retention limits were exceeded. Physicians retained all risks up to $200,000 per
occurrence. All risks above $200,000, up to policy limits of $5 million, were
transferred to reinsurers, subject to the specific terms and conditions of the
various reinsurance treaties. Physicians remains primarily liable to
policyholders for ceded insurance should any reinsurer be unable to meet its
contractual obligations. Physicians has not incurred any material loss resulting
from a reinsurer's breach or failure to comply with the terms of any reinsurance
agreement.

    Property and Casualty

    Effective January 1, 1996, Citation and CNIC have an excess of loss treaty
with National Reinsurance Corporation for property and casualty loss occurring
on or after January 1, 1996. This treaty provides $4.8 million of coverage in
excess of $250,000 per occurrence. An automatic facultative agreement with
Munich American Reinsurance Company provides coverage up to $6.0 million in
excess of $5.0 million per occurrence. Property catastrophe reinsurance, which
is provided by several reinsurers, was increased to provide 95% of $18.5 million
of coverage in excess of a $1.5 million per occurrence retention. Citation has a
commercial umbrella liability agreement with American Reinsurance Company which
reinsures 95% of the first $1 million of umbrella coverage and 100% of any
limits purchased above $1 million, up to $10 million.

                                       15



<PAGE>   16

    Effective January 1, 1998, Sequoia and Citation entered into an
inter-company reinsurance pooling agreement for business in force as of January
1, 1998 and business written thereafter. Per the agreement, Citation ceded 100%
of its net premium and losses to Sequoia and Sequoia then ceded 50% of its net
premiums and losses to Citation. Sequoia and Citation share equally in the
underwriting expenses.

    Effective January 1, 1997, Citation cancelled its reinsurance contracts and
replaced them with the following coverages. For policies in force at December
31, 1996 and for policies written with effective dates from January 1, 1997
through February 28, 1997, Citation has reinsurance providing coverage for both
property and casualty business, excluding umbrella coverage, of $4.8 million
excess of $250,000. For policies written with effective dates March 1, 1997 and
after, Citation has the same reinsurance as Sequoia's 1997 and 1998 reinsurance
program which is outlined as follows. For property business, reinsurance
provides coverage of $10.4 million excess of $150,000. For casualty business,
excluding umbrella coverage, reinsurance provides coverage of $4.9 million
excess of $150,000. Umbrella coverages are reinsured $9.9 million excess of
$100,000. The catastrophe treaties for 1997 provide coverage of 95% of $19
million excess of $1 million per occurrence for the combined losses of Citation
and Sequoia. The catastrophe treaties for 1998 provide coverage of 95% of $14
million excess of $1 million per occurrence. Facultative reinsurance is placed
with various reinsurers.

    Effective June 30, 1997, immediately prior to the sale of CNIC, Citation
ceded and CNIC assumed all of Citation's historical workers' compensation net
reserves and inforce workers' compensation policies. CNIC then ceded and
Citation assumed all of CNIC's net commercial property and casualty reserves and
inforce commercial property and casualty insurance policies (other than workers'
compensation).

    Where the reinsurers are "not admitted" for regulatory purposes, Sequoia and
Citation presently maintain sufficient collateral with approved financial
institutions to secure cessions of paid losses and outstanding reserves.

    With regard to Sequoia, all policy and claims liabilities prior to August 1,
1995 have been 100% reinsured with SRC and unconditionally guaranteed by QBE.
Sequoia, however, retains primary responsibility to its policyholders and
claimants should SRC and QBE fail. Sequoia's net retention for both property and
casualty business, excluding umbrella coverage, is $150,000 per risk or
occurrence. The working layers provide coverage up to $5.5 million excess of
$150,000 per risk on property losses subject to occurrence limits and unlimited
reinstatements. General liability coverage, excluding umbrella coverage, is
provided up to $3 million excess of $150,000 per occurrence. Two excess
catastrophe treaties provide additional property reinsurance up to $10 million
each occurrence, excess of $500,000 each occurrence, with allowances for one
full reinstatement each at pro rata pricing. Sequoia retains the first $100,000
of each umbrella loss up to $5 million. Facultative reinsurance is placed with
various reinsurers.

Reinsurance recoverable concentration for all property and casualty lines of
business, including MPL, as of December 31, 1998 is summarized in the following
table:

                     REINSURANCE RECOVERABLE CONCENTRATION
<TABLE>
<CAPTION>


                                              Unearned       Reported      Unreported      Reinsurer
                                              Premiums        Claims         Claims        Balances
                                              --------        ------         ------        --------
                                                                  (in millions)
<S>                                                            <C>           <C>            <C>
Sydney Reinsurance Corporation                                 $ 6.5         $ 10.7         $ 17.2
Kemper Reinsurance Company                                     $ 0.6                         $ 0.6
Continental Casualty Company                                   $ 0.9          $ 1.0          $ 1.9
Hartford RE Co.                                                $ 0.1                         $ 0.1
Hartford Fire Insurance Company                 $ 0.3          $ 0.7          $ 0.2          $ 1.2
TIG Reinsurance Group                                          $ 1.7          $ 6.1          $ 7.8
Transatlantic Reinsurance Company                                             $ 8.6          $ 8.6
Cologne Reinsurance Company of America                                        $ 0.9          $ 0.9
Mutual Assurance, Inc.                                         $ 5.3          $ 1.6          $ 6.9
General Reinsurance                                            $ 1.8                         $ 1.8
National Reinsurance Corporation                $ 0.4          $ 1.8          $ 0.6          $ 2.8
</TABLE>


    The Company remains contingently liable with respect to reinsurance
contracts in the event that reinsurers are unable to meet their obligations
under the reinsurance agreements in force.

                                       16

<PAGE>   17



    Reinsurance Risks

    As with other property and casualty insurers, Citation's and Sequoia's
operating results and financial condition can be adversely affected by volatile
and unpredictable natural and man-made disasters, such as hurricanes,
windstorms, earthquakes, fires and explosions. Citation and Sequoia generally
seek to reduce their exposure to such events through individual risk selection
and the purchase of reinsurance. Citation's and Sequoia's estimates of their
exposures depend on their views of the possibility of a catastrophic event in a
given area and on the probable maximum loss to Citation or Sequoia should such
an event occur. While Citation and Sequoia attempt to limit their exposure to
acceptable levels, it is possible that an actual catastrophic event or multiple
catastrophic events could significantly exceed the probable maximum loss
previously assumed, resulting in a material adverse effect on the financial
condition and results of operations of the Company.

    The future financial results of the insurance subsidiaries could be
adversely affected by disputes with their respective reinsurers with respect to
coverage and by the solvency of such reinsurers. The Company's insurance
subsidiaries are not aware of actual or potential disputes with any of their
respective reinsurers that could materially and adversely impact the financial
results of the Company or is aware of any insolvent reinsurer whose current
obligations to Citation, Physicians, PRO, or Sequoia are material to such
companies.

    Competition

    There are several hundred property and casualty insurers licensed in
California, many of which are larger and have greater financial resources than
Sequoia and Citation and offer more diversified types of insurance coverage,
have greater financial resources and have greater distribution capabilities than
Sequoia and Citation.

    A.M. BEST COMPANY ("Best") has assigned Sequoia a rating of B++ (Very Good)
and APL has had a Best rating of B+ (Very Good) since 1983. Citation is
currently rated B+ (Very Good) by Best. Physicians and PRO are currently rated,
and have been for a number of years, NR-3 (Rating Procedure Inapplicable).
Best's ratings reflect the assessment of Best of the insurer's financial
condition as well as the expertise and experience of its management. Therefore,
Best ratings are important to policyholders. Best ratings are subject to review
and change over time. There can be no assurance that Sequoia or Citation will
maintain their ratings. If Sequoia or Citation fail to maintain their current
ratings, it would possibly have a material adverse effect on their ability to
write new insurance policies as well as potentially reduce their ability to
maintain or increase market share.

    As a result of the reported losses and the increase in reserves, primarily
from construction defect claims, in 1995, Best at that time reduced its rating
of Citation from B+ to B-. Best recently upgraded Citation's rating to B+ (Very
Good). Management believes that many potential customers will not insure with an
insurer that carries a Best rating of less than B+, and that customers who do so
will demand lower rate structures. There can be no assurances that Citation's
Best ratings will be maintained or increased.

    There is fierce competition in the property and casualty insurance industry
that is populated by large insurers doing business on a countrywide basis, as
well as regional and local insurers. Insurers compete on the basis of price,
product, and service. Many of the competitors in the market have higher ratings
from Best as well as other financial rating services and offer a broader array
of coverages than do Citation and Sequoia.

    Commercial insurance markets are commodity-oriented, highly fragmented and
reflective of intense price competition. Nevertheless, because each commercial
risk is somewhat unique in terms of insurance exposure, different insurers can
develop widely divergent estimates of prospective losses. Most insurers attempt
to segment classes within commercial markets so that they target the more
profitable sub-classes with lower, although adequate rates, given the estimated
profitability of the segment. In some cases, no statistics are available for the
sub-classes involved, and the insurer implements discounted rate structures
based solely on theoretical judgment. Finally, different insurers have widely
divergent internal expense positions, due to method of distribution, scale
economies and efficiency of operations. Therefore, although insurance is a
commodity, the price of insurance does not necessarily reflect commodity
pricing.

    Sequoia's and Citation's ability to attract and retain customers results
from price structures which have been tailored to attract certain sub-segments
of the commercial insurance market. In addition, several of their competitors
have either restricted writings in California or have withdrawn from the state
due to a variety of competitive pressures and adverse litigation and regulatory
climates.


                                       17

<PAGE>   18


    However, Citation's and Sequoia's marketing is focused in a limited number
of commercial business classifications. In general, these classifications are
considered preferred by most competitors because of historically profitable
results realized from underwriting such classifications. Citation's and
Sequoia's customer bases and prospective revenues are vulnerable to the pricing
actions of larger or more efficient competitors who target Citation's and
Sequoia's desired classifications or individual policyholders and offer
substantially lower rates.

    Physicians and its subsidiaries no longer compete in the MPL industry.
Citation sold its workers' compensation businesses in 1997. On December 4, 1998,
the Company sold its life and health insurance subsidiary, APL.

    Regulation

    Physicians, PRO, Sequoia, and Citation are subject to extensive state
regulatory oversight in the jurisdictions in which they are organized and in the
jurisdictions in which they do business.

    The investments held by Physicians, PRO, Sequoia, and Citation are strictly
regulated by investment statutes in their states of domicile. In general, these
investment laws place limits on the diversification, the total percentage owned
of any one company and quality of the investment and seek to ensure the
claims-paying ability of the insurer.

    Ohio has enacted legislation that regulates insurance holding company
systems, including Physicians and PRO. Physicians and PRO are required to
register with the Ohio Department and furnish information concerning the
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of the insurers within
the system. Pursuant to these laws, the Ohio Department may examine Physicians
and/or its insurance subsidiaries at any time and require disclosure of and/or
approval of material transactions involving the insurers within the system, such
as extraordinary dividends from Physicians' or any of its insurance
subsidiaries. All material transactions within the holding company system
affecting Physicians or its Ohio-domiciled insurance subsidiaries must be fair
and reasonable. Sequoia and Citation are subject to similar legislation in
California.

    Ohio insurance law provides that no person may acquire direct or indirect
control of Physicians or PRO unless it has obtained the prior written approval
of the Ohio Superintendent of Insurance for such acquisition unless such
transaction is exempt. Similarly, California insurance law provides that no
person may acquire direct or indirect control of Sequoia or Citation unless it
has obtained the prior written approval of the California Insurance Commissioner
of such acquisition.

    Since Physicians and PRO are domiciled in Ohio, the Ohio Department is the
principal supervisor and regulator of each of these companies. Since Sequoia and
Citation are domiciled in California, the California Insurance Commissioner is
its principal supervisor and regulator. However, each of the companies are also
subject to supervision and regulation in the states in which they transact
business, and such supervision and regulation relate to numerous aspects of an
insurance company's business and financial condition. The primary purpose of
such supervision and regulation is to ensure financial stability of insurance
companies for the protection of policyholders. The laws of the various states
establish insurance departments with broad regulatory powers relative to
granting and revoking licenses to transact business, regulating trade practices,
required statutory financial statements, and prescribing the types and amount of
investments permitted. Although premium rate regulations vary among states and
lines of insurance, such regulations generally require approval of the
regulatory authority prior to any changes in rates.

    Insurance companies are required to file detailed annual reports (statutory
Annual Statements) with the insurance departments in each of the states in which
they do business, and their financial condition and market conduct are subject
to examination by such agencies at any time.

    Physicians and PRO are restricted by the insurance laws of Ohio as to the
amount of dividends they may pay without prior approval. The maximum dividend
that may be paid during any 12-month period without the prior approval of the
Ohio Department is limited to the greater of 10% of the insurer's surplus as
regards policyholders as of the preceding December 31 or the net income of the
insurer for the year ended the previous December 31. Any dividend paid from
other than earned surplus is considered to be an extraordinary dividend and must
be approved.

                                       18

<PAGE>   19



    The California Insurance Code limits the amount of dividends or
distributions an insurance subsidiary may pay in any 12-month period without 30
days prior written notice to the Commissioner to the greater of (a) net income
for the preceding year as determined under statutory accounting principles or
(b) 10% of statutory policyholders' surplus as of the preceding December 31.
Insurers may pay dividends only from earned surplus. Payments of dividends in
excess of these amounts may only be made if the Commissioner has not disapproved
such payment, or specifically approves such payment, within the 30 day-period.

    The insurance industry is also affected by court decisions. Premium rates
are actuarially determined to enable an insurance company to generate an
underwriting profit. These rates contemplate a certain level of risk. The courts
may undercut insurers' expectations with respect to the level of risk being
assumed in a number of ways, including eliminating exclusions, multiplying
limits of coverage and creating rights for policyholders not set forth in the
contract. These decisions can adversely affect an insurer's profitability.

    In recent years, the NAIC and state insurance regulators have been examining
existing laws and regulations, with an emphasis on insurance company investment
and solvency issues, risk-based capital guidelines, interpretations of existing
laws, the development of new laws and the implementation of non-statutory
guidelines. From time to time, legislation has also been introduced in Congress
that would result in the federal government assuming some role in the regulation
of the insurance industry. Each of the Company's insurance subsidiaries are also
subject to assessment by state guaranty associations to fund the insurance
obligations of insolvent insurers. There can be no assurance that such
assessments will not have an adverse effect on the financial condition of the
Company and its insurance subsidiaries. However, assessments are calculated
based upon market share and none of the Company's insurance subsidiaries has a
significant market share in any line of business in any jurisdiction.

    The regulation and supervision of insurance companies by state agencies is
designed principally for the benefit of their policyholders, not their
stockholders. In addition, Madison Acceptance Corporation ("MAC"), a
wholly-owned subsidiary of Citation is subject to regulation by the California
Department of Corporations, which includes various requirements relating to the
financial condition of MAC as well as all aspects of the marketing of premium
financing. MAC is currently totally dormant.

    The California Department of Insurance completed its latest market conduct
examination of Sequoia and CNIC in 1992 and of Citation in 1993. The California
Department also completed a financial examination of Citation in 1997 covering
the three years ended December 31, 1995. The California Department's final
examination report did not require Citation to take any significant action.

    The California Department also completed in 1997 a financial examination of
Sequoia covering 1993 through 1996. The Ohio Department completed its regular
triennial examinations of Physicians and PRO for the three-year period
1993-1995. Nothing of significance was reported for any of the companies
examined. The Ohio Department began its regular triennial examination of
Physicians and PRO for the years 1996, 1997 and 1998 in March 1999.

    Proposed federal legislation has been introduced from time to time in recent
years that would provide the federal government with substantial power to
regulate property and casualty insurers, primarily through the establishment of
uniform solvency standards. Proposals also have been discussed to modify or
repeal the antitrust exemption for insurance companies provided by the
McCarran-Ferguson Act. The adoption of such proposals could have a material
adverse impact upon the operations of the Company.

    Proposition 103, a ballot initiative passed by California voters on November
8, 1988, also subjects the insurance industry to California antitrust and unfair
business practices laws (although the relevant provision of Proposition 103 may
only apply to automobile and certain other insurers), prohibits cancellation or
nonrenewal of insurance policies except for specified reasons and provides that
the Insurance Commissioner shall be an elected official.

    Beginning in 1994, Physicians, PRO, Citation, and Sequoia became subject to
the provisions of the Risk-Based Capital for Insurers Model Act (the "Model
Act") which has been adopted by the NAIC for the purpose of helping regulators
identify insurers that may be in financial difficulty. The Model Act contains a
formula which takes into account asset risk, credit risk, underwriting risk and
all other relevant risks. Under this formula, each insurer is required to report
to regulators using formulas which measure the quality of its capital 

                                       19


<PAGE>   20


and the relationship of its modified capital base to the level of risk assumed
in specific aspects of its operations. The formula does not address all of the
risks associated with the operations of an insurer. The formula is intended to
provide a minimum threshold measure of capital adequacy by individual insurance
company and does not purport to compute a target level of capital. Companies
which fall below the threshold will be placed into one of four categories:
Company Action Level, where the insurer must submit a plan of corrective action;
Regulatory Action Level, where the insurer must submit such a plan of corrective
action, the regulator is required to perform such examination or analysis the
Superintendent of Insurance considers necessary and the regulator must issue a
corrective order; Authorized Control Level, which includes the above actions and
may include rehabilitation or liquidation; and Mandatory Control Level, where
the regulator must rehabilitate or liquidate the insurer.

    The Model Act is not expected to cause any material change in any of the
insurance companies' future operations. All companies' risk-based capital
results as of December 31, 1998 exceed the requirements of the Company Action
Level except for Physicians which was at the Regulatory Action Level. Physicians
has been in communication with the Ohio Department of Insurance and will submit
a plan of corrective action within the prescribed period. The Ohio Department
may require additional action to be taken based upon its ongoing regular
triennial examination of Physicians that began March 15, 1999. The decline in
Physicians' Risk-Based Capital level in 1998 was primarily due to the decline in
the year-end market value of PICO common stock.

ITEM 2.  PROPERTIES

    The Company leases approximately 5,354 square feet in La Jolla, California
for its principal executive offices.

    Physicians owns a facility with approximately 40,708 square feet in
Pickerington, Ohio. Sequoia leases office space for its and Citation's
headquarters in Monterey, California and for regional claims and underwriting
offices in Modesto, Monterey, Rancho Cordova, Ventura, Visalia, Oceanside,
Orange, Pleasanton, and San Jose, California, as well as Reno, Nevada. CLM's
only office space consists of a leased facility in Monterey, California. GEC and
Summit share office space with PICO in La Jolla, California. NLRC leases office
space in Carson City, Nevada. Vidler and NLRC hold significant investments in
land, water and mineral rights in the western United States. F&WUSA leases
office space in New York City, New York. See "ITEM 1-BUSINESS-INTRODUCTION."

ITEM 3.  LEGAL PROCEEDINGS

    Members of the Company's Insurance Group are frequently a party in claims
proceedings and actions regarding insurance coverage, all of which the Company
considers routine and incidental to its business. Neither PICO nor its
subsidiaries are parties to any potential material pending legal proceedings
other than the following:

    On January 10, 1997, GEC commenced an action in British Columbia against MKG
Enterprises Corp. ("MKG"), Vignoble Wines Agency Inc. ("Vignoble") to enforce
repayment of a loan made by GEC to MKG. On the same day, the Supreme Court of
British Columbia granted an order preventing MKG from disposing of certain
assets pending resolution of the action. GEC subsequently brought a motion to
have a receiver-manager appointed for MKG and Vignoble, which motion has been
adjourned. In addition, in March 1999 GEC filed an action in the Supreme Court
of British Columbia against a third party. This action states the third party
had fraudulently entered into loan agreements with MKG. Accordingly, under this
action GEC is claiming damages from the third party and restraining the third
party from further action.

    In connection with the sale of their interests in NLRC by the former
members, a limited partnership agreed to act as consultant to NLRC in connection
with the maximization of the development, sales, leasing, royalties or other
disposition of land, water, mineral and oil and gas rights with respect to the
Nevada property. In exchange for these services, the partnership was to receive
from NLRC a consulting fee. Either party could terminate this consulting
agreement in April 2002 if by that time, the partnership had not received or
become entitled to receive any amount of the consulting fee. By letter dated
March 13, 1998, NLRC gave notice of termination of the consulting agreement
based on NLRC's determination of a default by the partnership under the terms of
the agreement. In November 1998, the partnership sued NLRC for wrongful
termination of the consulting contract. On March 12, 1999, NLRC filed a
cross-complaint against the partnership for breach of written contract, breach
of fiduciary duty and seeking declaratory relief.

See Note 17 of Notes to Consolidated Financial Statements, "Commitments and
Contingencies."

                                       20


<PAGE>   21




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

     On November 20, 1998, the Company's shareholders voted to approve the
PICO/GEC combination at the Company's annual meeting of shareholders. The vote
on this matter was 20,021,931 shares in favor and 69,811 shares opposed.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The common stock of PICO is traded on the Nasdaq National Market under the
symbol PICO. The following table sets forth the high and low sale prices as
reported on the Nasdaq National Market. These reported prices reflect
inter-dealer prices without adjustments for retail markups, markdowns or
commissions. 

<TABLE> 
<CAPTION>

                                      1997                               1998
                        -------------------------------       --------------------------
                           High                Low              High             Low
                        ------------       ------------       ----------      ----------
<S>                      <C>                <C>              <C>             <C>
1st Quarter              $ 23.75            $ 18.125         $ 35.31         $ 28.44
2nd Quarter              $ 23.125           $ 18.4375        $ 30.00         $ 20.00
3rd Quarter              $ 31.875           $ 21.875         $ 21.88         $ 11.56
4th Quarter              $ 32.1875          $ 29.375         $ 18.75         $ 12.75
</TABLE>




NOTE: AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE 1-FOR-5 REVERSE STOCK SPLIT
EFFECTIVE DECEMBER 16, 1998.

As of December 31, 1998, the closing sale price of PICO's common stock was
$13.25 and there were 1,492 holders of record.

PICO has not declared or paid any dividends in the last two years and does not
expect to pay any dividends in the foreseeable future.


                                       21

<PAGE>   22



ITEM 6.  SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data of the
Company. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Form 10-K and the consolidated financial
statements and the related notes thereto included elsewhere in this document
<TABLE>
<CAPTION>


                                                                                            Year Ended December 31,
                                                      ------------------------------------------------------------------------------
                                                       1998             1997              1996              1995               1994
                                                      ----------    --------------    -------------     -------------     ----------
                                                                                   (In thousands, except share data)
<S>                                                    <C>               <C>              <C>               <C>            <C>
OPERATING RESULTS
Revenues
     Premium income earned                             $ 36,131          $ 49,876         $ 38,761          $ 19,542       $ 20,026
     Net investment income                               10,244            11,686            8,086             9,165         12,452
     Other income                                         1,845            26,623           29,889            12,482          1,596
                                                      ----------    --------------    -------------     -------------     ---------
Total revenues                                         $ 48,220          $ 88,185         $ 76,736          $ 41,189       $ 34,074
                                                      ==========    ==============    =============     =============     =========
Income (loss) from continuing operations before
     cumulative effect of changes in accounting
     principle                                         $ (8,230)         $ 19,035         $ 21,019          $ 14,895       $ 16,348
Income from discontinued operations, net                  1,075               456            3,301               778          2,483
Cumulative effect of change in accounting principle                                                                          (4,110)
                                                      ----------    --------------    -------------     -------------     ----------
Net income (loss)                                      $ (7,155)         $ 19,491         $ 24,320          $ 15,673       $ 14,721
                                                      ==========    ==============    =============     =============     ==========
PER COMMON SHARE RESULTS--BASIC:
  Income (loss) from continuing operations             $  (1.38)         $   3.02         $   3.80          $   2.70       $   3.00
  Income from discontinued operations                      0.18              0.07             0.59              0.15           0.45
  Loss from cumulative effect of change in
     accounting principle                                                                                                     (0.75)
                                                      ----------    --------------    -------------     -------------     ---------
  Net income (loss)                                    $  (1.20)         $   3.09         $   4.39           $  2.85       $   2.70
                                                      ==========    ==============    =============     =============     =========
WEIGHTED AVERAGE SHARES OUTSTANDING                   5,981,814         6,302,401        5,538,199         5,487,238      5,487,238
                                                      ==========    ==============    =============     =============     =========
PER COMMON SHARE RESULTS--DILUTED:
  Income (loss) from continuing operations              $ (1.38)         $   2.91         $   3.66            $ 2.70         $ 2.95
  Income from discontinued operations                      0.18              0.07             0.57              0.15           0.45
  Loss from cumulative effect of change in
     accounting principle                                                                                                     (0.75)
                                                      ----------    --------------    -------------     -------------     ---------
  Net income (loss)                                     $ (1.20)         $   2.98         $   4.23            $ 2.85         $ 2.65
                                                      ==========    ==============    =============     =============     =========
WEIGHTED AVERAGE SHARES OUTSTANDING                   5,981,814         6,540,264        5,748,414         5,487,238      5,517,733
                                                      ==========    ==============    =============     =============     =========
</TABLE>

Note:    Prior year share values have been adjusted to reflect the 1-for-5
         Reverse Stock Split effective December 16, 1998 and the November 20,
         1996 reverse acquisition between Physicians Insurance Company of Ohio
         and Citation Insurance Group. Additionally, prior year operating
         results have also been adjusted to reflect the treatment of APL as a
         discontinued operation.

         For the year ended December 31, 1994, Physicians recorded the
         cumulative effect of a change in accounting principle related to the
         discount rate associated with loss and loss adjustment expense. The
         change was applied retroactively to 1993.

         As of August 19, 1997 the Company consolidated GEC. Prior to this
         treatment, GEC was accounted for using the equity method. SEE NOTE 3 OF
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "SIGNIFICANT ACQUISITIONS"
         FOR ADDITIONAL DISCUSSION.

<TABLE>
<CAPTION>

                                                                          Years Ended December 31
                                               -------------------------------------------------------------------------------
                                                  1998             1997             1996            1995             1994
                                               ------------     ------------    -------------    ------------     ------------
                                                                     (In thousands, except per share data)
<S>                                              <C>              <C>              <C>             <C>              <C>
FINANCIAL CONDITION
Assets                                           $ 395,914        $ 430,293        $ 490,425       $ 421,816        $ 297,163
Unpaid losses and loss adjustment expenses,
     net of discount                             $ 155,021        $ 196,096        $ 252,024       $ 229,797        $ 180,691
Total liabilities and minority interest          $ 221,819        $ 318,142        $ 380,222       $ 342,466        $ 261,419
Shareholders' equity                             $ 174,095        $ 112,151        $ 110,203       $  79,350        $  35,744
Book value per share                             $   19.46        $   18.63        $   18.04       $   15.22        $    6.99
</TABLE>

Note: Prior year book value per share values have been adjusted to reflect the
1-for-5 Reverse Stock Split effective December 16, 1998 and the November 20,
1996 reverse acquisition between Physicians Insurance Company of Ohio and
Citation Insurance Group. Book value per share is computed by dividing
shareholders' equity by the net of total shares issued less shares held as
treasury shares.

SEE NOTE 3 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "SIGNIFICANT
ACQUISITIONS" FOR ADDITIONAL DISCUSSION.

                                       22


<PAGE>   23

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

COMPANY SUMMARY AND RECENT DEVELOPMENTS

INTRODUCTION

    The PICO Holdings, Inc. and subsidiaries group of today has very little in
common with its predecessor, Citation Insurance Group and subsidiaries.
Consequently, these financial statements differ greatly from those presented for
periods prior to November 20, 1996, the date of the reverse acquisition between
Physicians Insurance Company of Ohio and a subsidiary of Citation Insurance
Group in which Physicians Insurance Company of Ohio was the surviving
corporation.

RECENT DEVELOPMENTS AND FUTURE OUTLOOK

     ACQUISITION OF REMAINING GEC SHARES

     Effective December 16, 1998, PICO Holdings, Inc. acquired the remaining
outstanding shares of Global Equity Corporation through the PICO/GEC Combination
approved by the shareholders of both corporations at shareholders' meetings held
on November 20, 1998. Prior to the consummation of the PICO/GEC Combination,
PICO and its subsidiaries owned approximately 51.2% of GEC. Under the terms of
the PICO/GEC Combination, GEC shareholders received .4628 of a PICO common share
for each GEC common share. Immediately thereafter, PICO effected a 1-for-5
Reverse Stock Split. The PICO/GEC Combination and Reverse Stock Split are
expected to benefit shareholders from a number of perspectives, including, among
other things:

- -    simplification of PICO's corporate structure and elimination of
     cross-ownership of investments between companies;

- -    elimination of public confusion, costs and duplication of efforts inherent
     in maintaining two public entities with similar business strategies,
     management and investment philosophies;

- -    providing a single publicly traded corporation with a distinct value
     investment philosophy;

- -    resulting in a larger, more liquid publicly traded corporation which is
     expected to bring about increased analyst coverage; an increased ability to
     utilize PICO shares as a currency for future transactions and acquisitions;
     an increased ability for the combined company to access capital markets;
     and increased liquidity of PICO shares through an increase in the public
     float; and

- -    increased book value per share.

     INVESTMENT IN PC QUOTE

     PICO, with PQT's agreement, converted its outstanding debt and accrued
interest into convertible preferred stock and common stock warrants. The average
cost of our investment, including exercise of our warrants, is approximately
$1.52 per share and at December 31, 1998, the carrying value of our investment
in PC Quote is approximately $11.8 million.

     DEVELOPMENT OF SURFACE WATER AND MINERAL RIGHTS

     During 1998, PICO added significant assets to its portfolio of surface,
     water and mineral rights.

     In October 1998, Vidler, a 98% owned subsidiary of PICO completed its
Arizona groundwater recharge pilot program construction at its MBT Ranch
facilities and recharging began on schedule. Vidler has begun implementing the
full-scale design and permitting process and will be meeting with potential
state and federal recharge customers. Vidler estimates that the total storage
capacity of the aquifer underlying this property is in excess of 1,000,000
acre-feet and the "put" and "take" recharge/recovery capacity of the aquifer to
be in excess of 100,000 acre-feet per year. This underground water storage
facility is located adjacent to the Central Arizona Project in Arizona. In
November 1998, Vidler reached an agreement with the Semitropic Water Storage
District ("Semitropic"") to acquire 185,000 acre-feet of underground water
storage and associated rights to recharge and recover water at Semitropic,
located near the California Aqueduct northwest of Bakersfield, California. The
strategic location of Semitropic relative to other water delivery systems and
storage facilities will enable Vidler to complete exchanges and water transfers
in California. The acquisition also complements Vidler's underground water
storage facility in Arizona.

     One of the most critical issues regarding water in the southwest is
allocation -- that is, transferring water from areas of excess supply to areas
of accelerating demand and instituting the infrastructure to facilitate it. This
is Vidler's primary business.

                                       23


<PAGE>   24

     Vidler owns and acquires water that has immediate or near term demand and
both the institutional and practical means exists to satisfy this demand. Vidler
purchases the water acting as an aggregator, wholesaler and developer. In
addition, Vidler is developing the underground storage potential of its property
at MBT Ranch in Arizona. Storage is critical for the efficient allocation of
water in a number of ways:

     1.   Water that is wasted or commandeered (California taking water that has
          been allocated to Nevada and Arizona, for example) is captured for
          future use; and

     2.   Water can be stored when there is a surplus and used when there is a
          scarcity.

For the service that a storage facility supplies, fees are charged for recharge
(inflow), storage and recovery (outflow).

     Management believes that MBT Ranch is ideally located to provide storage to
facilitate interstate transfers of water. It is anticipated that MBT Ranch will
be the first privately operated storage facility in operation.

     In 1998, Vidler entered into agreements to acquire additional 42,000
acre-feet of water, which should make Vidler the largest private owner of
readily transferable water. It is uncertain how long it will take Vidler's
assets to generate cash flow. Vidler operates within an industry that is
regulated by local and state government, with an overlay of federal regulations.
Similar to land development permits, the process can be slow.

     NLRC is the largest private landowner in the state of Nevada. NLRC's
principal asset consists of approximately 1.3 million acres of deeded land
located in northern Nevada, together with appurtenant water and mineral rights.
NLRC is actively engaged in attempting to maximize the property's value in
relation to water rights, mineral rights and land development. PICO acquired
NLRC for $39 per acre. Through December 31, 1998, a total of 19,528 acres have
been sold, or are in escrow, for an average price per acre of $161. The lowest
price per acre received for land where the highest and best use is for grazing
was $62. NLRC completed one land exchange of 1,900 acres valued at $224 per acre
in which NLRC's wilderness property was exchanged for residential property. In
December 1998, NLRC sold 4,777 acres of undeveloped and remote land in Desert
Valley, near Winnemucca, Nevada for $1.3 million, or approximately $272 per
acre.

    INVESTMENT IN JUNGFRAUBAHN HOLDING A.G.

    During 1997, 1998 and early 1999, the Company acquired an approximate 18%
shareholding in Jungfraubahn Holding AG ("Jungfraubahn") based in Interlaken,
Switzerland. The average cost of the investment is 216.48 Swiss francs ($153.75)
per share. Jungfraubahn shares have a book value in excess of 430 Swiss francs
per share and the Company's purchase is at the multiple of 4.5 times 1997's cash
flow. Jungfraubahn is in the transportation, tourism and recreational sectors.

    INVESTMENT IN AUSTRALIAN OIL AND GAS CORPORATION LTD.

    During 1998 and the first quarter of 1999, the Company acquired stock in
Australian Oil and Gas Corporation Ltd. ("AOG"), whose shares are traded on the
Australian Stock Exchange. As of March 1999, the Company has acquired
approximately 14.9% of the outstanding shares of AOG for approximately $7.1
million. Our average purchase price per share is at a multiple of 3.8 times
AOG's fiscal 1998 operating cash flow per share.

    AOG is an onshore drilling contractor, drilling for oil, gas, geothermal
energy and coal seam methane in Australia and overseas. AOG has a fleet of
approximately 29 rigs in 7 countries but has no North American presence. AOG
recorded a return on shareholders' equity of 10.7% for the year ended June 30,
1998. AOG's interim results at December 31, 1998 displayed an increase in net
income by 72% over the corresponding period.

    In addition to the operation of its subsidiaries, the Company's objective is
to use its resources and those of its subsidiaries and affiliates to increase
shareholder value through investments in businesses that the Company believes
are undervalued. The Company's acquisition philosophy is to make selective
investments, predominantly in public companies, for the purpose of enhancing and
realizing additional value by means of appropriate levels of shareholder
influence and control. This could involve the restructuring of the financing or
management of the companies in which the Company invests. It may also encompass
initiating and facilitating mergers and acquisitions within the relevant
industry to achieve constructive rationalization. This business strategy was
adopted in late 1994, but was not fully implemented until 1996. Therefore, the
results of this business strategy are not fully reflected in the historical
financial statements prior to 1996. 

                                       24

<PAGE>   25


There can be no assurance that sufficient opportunities will be found or that
this business strategy will be successful. This strategy may negatively impact
the business and financial condition and results of the Company.

    See Notes to Consolidated Financial Statements for additional information
regarding events affecting PICO subsequent to the date of these financial
statements and the Company's website at www.picoholdings.com.

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

SUMMARY

    PICO reported a net loss of $7.2 million, or $1.20 per share, for 1998
compared with net income of $19.5 million, or $3.09 per share, during 1997 and
$24.3 million, or $4.39 per share, in 1996. Per share amounts are expressed as
basic income or loss per share.

    Shareholders' equity at December 31, 1998 was $174.1 million, representing
an increase of $61.9 million over December 31, 1997. Book value per share
calculated on an undiluted basis, net of treasury shares, increased to $19.46 at
year end 1998, compared to $18.63 at December 31, 1997. The increase in book
value per share during 1998 resulted primarily from the PICO/GEC Combination and
the purchase of 412,846 PICO treasury shares during the 1998 third quarter at an
average cost of $0.78 per share. On December 31, 1998 options representing
57,307 of the shares were exercised. The remaining shares are held in treasury
subject to option agreements. SEE NOTE 17 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, "OTHER RELATED PARTY TRANSACTIONS."

    Income from discontinued operations included in net income for 1998, 1997
and 1996, was $1.1 million, $0.5 million and $3.3 million, respectively. Income
from discontinued operations in 1998 includes a $1.1 million pre-tax gain from
the sale of APL, the Company's former life and health insurance subsidiary, on
December 4, 1998. Discontinued operations include the results of APL as well as
Global Equity Corporation's ("GEC") discontinued Sri Lankan operations. SEE NOTE
6 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "DISCONTINUED OPERATIONS," for
additional information.

    The 1998 net loss included an $11 million loss from continuing operations
and $1.8 million in income tax expenses, partially offset by minority interests
of $4.5 million and income from discontinued operations of $1.1 million.
Compared to 1998's $11 million loss from continuing operations before income
taxes and minority interests, 1997 and 1996 produced income of $23.5 million and
$34 million, respectively. Of these amounts, net realized gains on investments
accounted for $21.4 million and $27.1 million in 1997 and 1996, respectively.
This compares to net realized investment losses in 1998 of $4.4 million.

Significant contributors to the Company's $11 million loss from continuing
operations before taxes and minority interests included:

*      A $5 million strengthening of Physicians' insurance reserves based upon
       year-end actuarial studies;

         This one-time addition to loss and loss adjustment expense reserves was
         required as a result of individuals being able to claim for occurrences
         during childbirth or infancy. Prior to attainment of age 18, these
         individuals were unable to file medical professional liability claims
         on their own behalf. The statute of limitations limits the time period
         for making such claims to one to two years from age 18, depending upon
         the type of claim. Because Physicians did not begin to write
         significant medical professional liability insurance until the late
         1970's, this phenomenon did not materialize in past claims experience.
         This addition to reserves, based upon actuarial projections by year,
         strengthens virtually all years that Physicians insured medical
         professionals.

*      Permanent write-downs of two of GEC's investments by $5.9 million:


         1)       A write-off of $3 million from a convertible note that has
                  fallen into default. Management became aware in the fourth
                  quarter of 1998 of substantial additional debt incurred and
                  assets pledged by the borrower in violation of the loan
                  agreement which has resulted in a dispute over collateral.

         2)       In exiting the inherited assets in Sri Lanka, GEC received
                  bonds and shares as part consideration. Liquidation of these
                  assets created a loss. Including gains taken in 1997, the sale
                  of Sri Lankan assets was approximately at cost.

                                       25

<PAGE>   26



*      Permanent write-down of Physicians' investments by $2.2 million;

         A non-strategic equity investment was written down.

*      And a $1.8 million loss attributable to Vidler Water Company, Inc.
       ("Vidler") and Nevada Land and Resources Company LLC ("NLRC");

         Land sales were limited until an overall assessment was completed.
         Realized gains on land sales totaled $1.2 million during this period.

         The costs incurred by Vidler were principally normal operating costs
         with the exception of $800,000 absorbed from the attempted initial
         public offering and private placement.

*      PICO overhead costs of approximately $2.1 million, net of revenues.

Taken into account in the operating loss were the following positive factors:

*    Approximately $3 million in realized investment gains from the sale of
     European equity securities;

*    Property and casualty insurance income of $2.8 million after an estimated
     $1 million in increased costs due to the effects of the 1997-98 El Nino
     phenomenon;

*    A $1.1 million realized gain from the sale of the Company's life and health
     insurance subsidiary, American Physicians Life Insurance Company; and

*    An $0.8 million realized gain from the sale of Physicians' home office
     building.

    Income tax provisions decreased 1998 net income by $1.8 million compared to
$7.7 million in 1997 and $13 million in 1996. Although the Company recorded a
pre-tax loss in 1998, it was unable to utilize the operating losses generated by
GEC in 1998 to reduce income taxes. GEC does not have sufficient prior years
taxable income to enable GEC to carry back the current year's tax loss to reduce
taxes. In addition, it is uncertain that GEC will be able to generate sufficient
Canadian taxable income in the future to offset the current year losses. Changes
in estimates of prior deferred tax assets previously recorded by GEC primarily
resulted in 1998 income tax expense of $1.8 million.

Revenues for 1998 were $48.2 million, compared to $88.2 million in 1997 and
$76.7 million in 1996. Excluding realized investment gains, revenues declined
$14.2 million from 1997 and increased $3 million over 1996. A $13.7 million, or
27.6%, decline in P&C insurance earned premiums was primarily responsible for
the decline from 1997. Premium income for 1998 of $36.1 million was $2.6
million, or 6.8%, less than in 1996, which included less than two months of
Citation's premium income. Property and casualty insurance premium writings
declined in 1998 primarily due to more stringent underwriting of CIC's P&C
insurance business since its change in ownership, as well as continued
aggressive competition for commercial multiple peril insurance business within
California. SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "NATURE OF
OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES."

    Total expenses for 1998 were $58.4 million compared to $ 64.7 million in
1997 and $43.8 million in 1996. Included in the 1998 total were loss and loss
adjustment expenses of $30.5 million, compared to $34.3 million during the same
1997 period, and $22.9 million during 1996. Insurance underwriting and other
expenses were $16 million, $19.7 million and $19 million for 1998, 1997 and
1996, respectively. These 1998 improvements over 1997 principally resulted from
reduced P&C premiums and reduced claims exposure brought about by increased
selectivity at CIC and increased competition.

     Total assets at December 31, 1998 were $395.9 million. This compares to
$430.3 million at the end of 1997. Most of the 1998 decline resulted from the
payment of insurance claims by Physicians and was reflected in investments and
cash and cash equivalent balances which decreased by approximately $27.9 million
compared to 1997. Surface, water and mineral rights increased $41.5 million as a
result of the Combination with GEC and further acquisitions. Net assets of
discontinued operations declined from $15.9 million at December 31, 1997 to zero
as a result of the sale of APL. Total liabilities declined $28.1 million between
years with year end 1998 loss and loss adjustment expense reserves dropping by
more than $41.1 million, principally as a result of payment of insurance claims.

    Shares outstanding and per share calculations for prior years have been
adjusted to reflect the December 16, 1998 1-for-5 Reverse Stock Split following
the PICO/GEC Combination. Prior year amounts also reflect the November 20, 1996
Merger between Physicians and the Citation Insurance Group.

                                       26


<PAGE>   27


    
     The Company's ongoing operations are organized into five segments:
INVESTMENT OPERATIONS; SURFACE, WATER, AND MINERAL RIGHTS; PROPERTY AND CASUALTY
INSURANCE; MEDICAL PROFESSIONAL LIABILITY INSURANCE AND OTHER OPERATIONS.
Revenues and income before taxes and minority interests from CONTINUING
OPERATIONS, by business segment, are shown in the following schedules:

OPERATING REVENUES--CONTINUING OPERATIONS

<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                                      ---------------------------------------
                                                        1998           1997           1996
                                                      ---------      ---------      ---------
                                                                   (in millions)
<S>                                                    <C>            <C>            <C>
Investment Operations                                  $ (1.0)        $ 24.1         $ 27.0
Surface, Water and Mineral  Rights                        3.4            3.1
Property and Casualty Insurance                          42.9           57.0           35.3
Medical Professional Liability Insurance                  2.4            3.9           12.2
Other Operations                                          0.5            0.1            2.2
                                                      ---------      ---------      ---------
      Total Revenues-Continuing Operations             $ 48.2         $ 88.2         $ 76.7
                                                      =========      =========      =========
</TABLE>

    INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST--CONTINUING OPERATIONS:

INVESTMENT OPERATIONS

<TABLE>
<CAPTION>

                                                                     Year Ended December 31,
                                                            ---------------------------------------
                                                              1998           1997           1996
                                                            ---------      ---------      ---------
                                                                         (in millions)
<S>                                                         <C>            <C>            <C>
Investment Operations                                       $ (7.2)        $ 17.8         $ 23.3
Surface, Water and Mineral Rights                             (1.8)          -
Property and Casualty Insurance                                2.8            5.6            3.3
Medical Professional Liability Insurance                      (4.4)           0.8            8.5
Other Operations                                              (0.4)          (0.7)          (1.1)
                                                            ---------      ---------      ---------
 Income (Loss) Before Tax and Minority Interest            $ (11.0)        $ 23.5         $ 34.0
                                                            =========      =========      =========
</TABLE>

     INVESTMENT OPERATIONS include strategic and passive investment operations
conducted primarily by PICO, Physicians, GEC and Physicians Investment Company.
However, not all investment activities are included within the Investment
Operations business segment. For example, investment revenues and INVESTMENT
income generated by Physicians are first allocated to the MEDICAL PROFESSIONAL
LIABILITY Insurance segment based upon the amount of invested assets to support
Physicians' outstanding insurance reserves. The remainder is classified as part
of the INVESTMENT OPERATIONS business segment. (See the MEDICAL PROFESSIONAL
LIABILITY INSURANCE segment below.) In addition, investment revenues and
investment income generated by Sequoia and CIC are included in the PROPERTY AND
CASUALTY INSURANCE business segment and those from PRO, in the MEDICAL
PROFESSIONAL LIABILITY INSURANCE segment, and not in the INVESTMENT OPERATIONS
business segment. SEE NOTE 19 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS,
"SEGMENT REPORTING."

     INVESTMENT OPERATIONS revenues for 1998 were negative at $1.0 million
representing a decrease of $25.1 million compared to $24.1 million in revenue
recorded in 1997 and a decrease of $28 million compared to $27 million in
revenues in 1996. Realized investment gains and losses accounted for nearly all
of these decreases compared to prior years. Excluding realized investment gains,
INVESTMENT OPERATIONS revenues increased approximately $0.6 million over 1997
and $2.8 million as compared to 1996. Revenues from INVESTMENT OPERATIONS are
summarized below: 

                                       27

<PAGE>   28







                         INVESTMENT OPERATIONS REVENUES
<TABLE> 
<CAPTION>



                                                                Year Ended December 31,
                                                        --------------------------------------
                                                          1998          1997          1996
                                                        ----------    ----------    ----------
                                                                    (in millions)
<S>                                                       <C>           <C>           <C>
INVESTMENT OPERATIONS REVENUES (CHARGES):
   Realized Investment Gain (Loss)                        $ (4.4)       $ 21.3        $ 26.4
   Investment Income                                         2.9           2.3           0.6
   Other Income                                              0.5           0.5
                                                        =========    ==========    ==========
       Investment Operations Revenues (Charges)           $ (1.0)       $ 24.1        $ 27.0
                                                        =========    ==========    ==========
</TABLE>


     Included in 1998 INVESTMENT OPERATIONS revenues were approximately $8.2
million in write downs of equity investments, partially offset by realized
investment gains from the sale of equity securities. Included in the $21.3
million in 1997 realized investment gains was approximately $27 million before
taxes, resulting from the exercise of the Company's warrants to buy common stock
of Resource America Inc. and the subsequent sale of that stock. Realized
investment gains in 1996, principally from the sale of Physicians' holdings in
Fairfield Communities common stock amounted to $26.4 million. Resource America
Inc. and Fairfield Communities Inc. were two of the Company's original "value
investments" acquired in 1994 and 1995.

     Although investment income from the INVESTMENT OPERATIONS segment in 1998
exceeded those amounts reported for the comparable prior year periods, the
actual level of investment income has declined from that of 1997 and 1996,
excluding non-recurring adjustments and the allocation to MPL. This decrease is
due to reduced levels of interest- and dividend-paying securities and the
reduction in the size of Physicians' portfolio due to the payment of MPL claims.
The INVESTMENT OPERATIONS segment included an approximate $0.8 million increase
in investment income recorded during the first quarter of 1998 relating to the
elimination of a capitalized interest asset.

     At December 31, 1998, the consolidated investment portfolio was in a net
unrealized loss position of approximately $2.9 million, net of taxes compared to
$2.7 million in unrealized losses at December 31, 1997.

     Net of expenses, but before taxes, INVESTMENT OPERATIONS reduced 1998
pre-tax operating income by $7.2 million loss compared to income of $17.8
million in 1997 and $23.3 million in 1996. Realized investment losses, as
discussed previously and shown in the previous table, accounted for nearly $4.4
million of the 1998 amount and realized investment gains of $21.3 million and
$26.4 million were included in 1997 and 1996, respectively. As shown in the
table below, the Company's INVESTMENT OPERATIONS income can fluctuate greatly
from year to year. A number of factors contribute to these fluctuations,
including, among other things, the mix of the Company's portfolio, timing of the
Company's realization of capital gains, the volume of trading and demand for
individual securities the Company owns and fluctuations in the U.S. and world
stock and bond markets in general. Therefore, future results cannot and should
not be predicted based upon past performance alone. See "RISK FACTORS."

    The breakdown of operating income before tax from INVESTMENT OPERATIONS is
as follows:

                     INVESTMENT OPERATIONS INCOME BEFORE TAX

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                     -------------------------------
                                        1998        1997      1996
                                     ---------   --------   --------
                                             (in millions)
<S>                                  <C>         <C>        <C>   
INVESTING INCOME (LOSS) BEFORE TAX:                         
   PICO, GEC and Physicians          $   (6.5)   $   17.8   $  22.3
   Income (loss) in Investee             (0.7)                  1.0
                                     ========    ========   ========
Investing Income (Loss) Before Tax   $   (7.2)   $   17.8   $   23.3
                                     ========    ========   ========
</TABLE>


    Equity in unconsolidated investee for 1996 represents the Company's share of
GEC's net income prior to its consolidation with PICO. GEC's financial results
were first consolidated with those of the Company in 1997. The 1998 amount
represents GEC's share of the loss in its unconsolidated affiliate, Conex.

                                       28




<PAGE>   29


SURFACE, WATER, AND MINERAL RIGHTS

    Effective November 14, 1995, a wholly-owned subsidiary of GEC acquired all
the outstanding common stock of Vidler, a Colorado corporation engaged in the
water marketing and transfer business. Vidler's business plan calls for Vidler
to identify areas where water supplies are needed in the southwestern United
States and then facilitate the transfer from current ownership to Vidler, and
subsequently to municipalities, water districts, developers and others. Since
its acquisition, Vidler has purchased or leased water rights and related assets
in Colorado, Nevada, Arizona and California. On April 23, 1997, GEC acquired a
74.77% membership interest in NLRC and PICO acquired the remaining 25.23%
interest. NLRC owns approximately 1.3 million acres of deeded land located in
northern Nevada, together with appurtenant surface, water and mineral rights.
NLRC is actively engaged in activities it believes will maximize the property's
value in relation to water rights, mineral rights and land development.

    As these subsidiaries of the Company were not part of the consolidated group
until 1997, results prior to 1997 are not included with those of the Company.
Following is a breakdown of revenues and pre-tax losses before minority interest
from SURFACE, WATER, AND MINERAL RIGHTS operations for the periods shown:

                       SURFACE, WATER, AND MINERAL RIGHTS

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              -----------------------
                                                                1998           1997
                                                              -----------   ---------
                                                                  (in millions)
<S>                                                            <C>            <C>
REVENUES - SURFACE, WATER AND MINERAL RIGHTS:                               
   Sale of Surface, Water, Mineral Rights - Vidler             $ 0.2
   Operating Revenues - Vidler                                   0.4          $ 0.3
   Sale of Surface, Water, Mineral Rights - NLRC                 2.0            1.5
   Operating Revenues - NLRC                                     0.8            1.3
                                                               -----          -----
      Segment Total Revenues                                   $ 3.4          $ 3.1
                                                               =====          =====

INCOME (LOSS) BEFORE TAX AND MINORITY INTEREST:
   Vidler Water Company, Inc.                                  $(2.0)         $(0.6)
   Nevada Land and Resources Company LLC                         0.2            0.6
                                                               -----          -----
      Loss Before Tax and Minority Interest                    $(1.8)         $   -
                                                               =====          =====
</TABLE>

    As shown above, revenues from SURFACE, WATER, AND MINERAL RIGHTS generated
by Vidler and NLRC were approximately $3.4 million and $3.1 million during 1998
and 1997, respectively. Sales of surface, water and mineral rights accounted for
$2.2 million in revenue in 1998 and $1.5 million in 1997. Operating revenues
made up the remainder of the total. Other revenues include land leases,
principally for grazing, agricultural, communications and easement purposes,
water sales and leasing and other income. Operating and overhead expenses
exceeded revenues for 1998 producing a loss before taxes and minority interests
of $1.8 million compared to income of $ 12,000 for 1997.

    During 1998, Vidler has, through the acquisition of additional agricultural
water assets and the continued development of its underground storage
facilities, established itself as the leader in the private water development
and storage business in the Southwestern United States. With control over
approximately 56,000 acre-feet of readily transferable water rights in Arizona,
Nevada, and Colorado, Vidler is the largest owner of marketable water in this
region. In addition, Vidler has an ability to develop 57,000 additional
acre-feet of water rights in Nevada through ownership of 57,000 acre-feet of
water rights applications. Vidler currently leases water rights in Colorado and
anticipates initiating leasing activity in Arizona and Nevada within twelve
months.

    Vidler's Arizona groundwater recharge pilot program construction has been
completed and recharging began on schedule in October 1998. Accordingly, Vidler
has begun implementing the full-scale design and permitting process and will be
meeting with potential state and federal recharge customers. Vidler estimates
that the total storage capacity of the aquifer underlying Vidler's Arizona
property, is in excess of 1,000,000 acre-feet and the "put" and "take"
recharge/recovery capacity of the aquifer to be in excess of 100,000 acre-feet
per year. Vidler expects that it will be able to enter into agreements to lease
storage capacity to potential customers within twelve months after the
completion of the full-scale design and permitting process. In November 1998,
Vidler reached an agreement with the Semitropic 

                                       29
<PAGE>   30
Water Storage District to acquire 185,000 acre-feet of underground water storage
and associated rights to recharge and recover water at the District, located
near the California Aqueduct northwest of Bakersfield, California. The strategic
location of the District relative to other water delivery systems and storage
facilities will enable Vidler to complete exchanges and water transfers in
California. The acquisition also complements Vidler's underground water storage
facility located adjacent to the Central Arizona Project in Arizona.

     NLRC holds title to 1.3 million acres located in northern Nevada, at an
average cost of $39 per acre, and is the largest private landowner in the state.
NLRC anticipates that revenues will be generated from the asset by land sales,
exchanges and development and exploitation of mineral and water rights. During
1997 and 1998, NLRC completed, or has in escrow, sales of 19,528 acres of land
with an average price of $161 per acre. As NLRC progresses with its land
assessment and is able to further prioritize properties, NLRC anticipates
increasing its land available for sale, exchange, or development.

     NLRC's mineral exploitation strategy is to identify potential gold
discoveries (or other high unit resources), develop them to the point where a
meaningful data set can be established and then vend the properties to advanced
stage exploration or production companies. To date, exploration work continues
to advance over a dozen areas that have been identified as containing anomalous
gold values. Several companies have expressed an interest in receiving data
packages from NLRC for the purpose of analyzing potential mineral exploration
opportunities. In addition, Santa Fe Pacific Gold Corporation has leased 4,320
acres from NLRC, which includes a 3.5% net smelter royalty on production.

PROPERTY AND CASUALTY INSURANCE

    Sequoia and Citation account for all of the ongoing revenues of the PROPERTY
AND CASUALTY ("P&C") INSURANCE business segment. These companies write
predominately light commercial and multiple peril insurance coverage in central
and northern California and Nevada. Sequoia and Citation are continually seeking
ways to realize savings and take advantage of synergies and to combine
operations, wherever possible. To this end, Sequoia and Citation consolidated
their home office operations in Monterey, California in July 1997. Prior to June
30, 1997, Citation and CNIC wrote workers' compensation insurance policies. CNIC
is no longer a part of the group following its sale on June 30, 1997 along with
Citation's workers compensation business.

    Since Citation became part of the group in November 1996, Citation's
activities are not included in the Company's financial results prior to that
date. Sequoia has been part of the group since August 1, 1995.

    As shown below, earned premiums made up most of the PROPERTY AND CASUALTY
INSURANCE segment revenues. Premiums are earned pro-rata throughout the year
according to the coverage dates of the underlying policies.

                                       30

<PAGE>   31



                         PROPERTY AND CASUALTY INSURANCE

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                         -----------------------
                                                     1998          1997          1996
                                                     ----          ----          ----
P & C INSURANCE REVENUES:                                    (in millions)
<S>                                                   <C>           <C>            <C>  
     Earned Premiums - Sequoia                        $18.1         $32.8          $26.3
     Earned Premiums - Citation                        18.1          17.4            5.1
     Investment Income                                  5.5           5.6            2.6
     Realized Investment Gains                          0.2           0.2            0.7
     Other                                              1.0           1.0            0.6
                                                        ---           ---            ---
          Total P&C Revenues                          $42.9         $57.0          $35.3
                                                      =====         =====          =====

P & C INSURANCE INCOME (LOSS) BEFORE TAXES:
    Sequoia Insurance Company                         $ 3.6         $ 4.3          $ 2.3
     Citation Insurance Company                        (0.8)          1.3            1.0
                                                       ----           ---            ---
          Total P&C Income Before Taxes               $ 2.8         $ 5.6          $ 3.3
                                                      =====         =====          =====
</TABLE>


    Total PROPERTY AND CASUALTY INSURANCE revenues for 1998 of $42.9 million
were $14.1 million less than the $57 million recorded in 1997 and $7.6 million
greater than the $35.3 million of 1996, which included less than two months of
Citation's revenues. Declining earned premiums accounted for most of this
decrease between years, principally as a result of continuing increased
underwriting selectivity applied to Citation's business and aggressive
competition for commercial multiple peril business within the state of
California. Total PROPERTY AND CASUALTY INSURANCE earned premiums for 1998 were
$36.2 million compared to $50.2 million in 1997 and $31.4 million in 1996. All
new P&C insurance applications and policies scheduled to renew are now being
processed through Sequoia and subjected to Sequoia's underwriting standards
which are much tighter than those previously employed by Citation. As a result,
a significant portion of Citation's prior book of business has not been renewed.
As previously mentioned, increased competition within the state of California
for commercial insurance has also decreased 1998 earned premiums. Direct premium
writings in 1998 for Sequoia were $40.7 million, down $0.3 million from the
$41.0 million of 1997 and up $3 million from the $37.7 million reported for
1996. Citation wrote $1.9 million in direct premiums in 1998, compared to $ 14.9
million in 1997 and $57.4 million for the full year of 1996, including the
period prior to the Merger. Citation's 1997 direct written premiums declined
from those of 1996 due to the renewal of qualified policies of Citation into
Sequoia effective March 1, 1997 and the subsequent sale of CNIC and the workers
compensation business on June 30, 1997.

     Sequoia's $18.1 million 1998 earned premiums decreased $14.7 million, or
44.8% compared to those of 1997 and $8.2 million, or 31.2% compared to 1996's
$26.3 million. Citation earned $18.1 million in premiums in 1998 compared to
$17.4 million in 1997 and $5.1 million in 1996 ($50.5 million for the full year
1996, including the period prior to the Merger). Much of the decline in
Sequoia's 1998 earned premiums resulted from a reinsurance pooling agreement
effective January 1, 1998 which provides for the pooling of all insurance
premiums, losses, loss adjustment expenses ("LAE") and administrative and other
insurance operating expenses between Sequoia and Citation. The reinsurance
pooling agreement calls for these items to be split equally between the two
companies. However, the decline in Sequoia's earned premiums due to the
reinsurance pooling agreement produced a corresponding increase in Citation's
earned premiums. The decline in Citation's earned premiums from 1996 to 1997
resulted from the reinsurance and sale of Citation's workers' compensation
business and the renewal of qualified policies of Citation into Sequoia
effective March 1, 1997.

    Investment income and realized investment gains from PROPERTY AND CASUALTY
INSURANCE operations of $5.7 million in 1998 declined slightly from the $5.8
million recorded during 1997 and exceeded those of 1996 by $2.4 million. The
increase from 1996 to 1997 principally resulted from an increase in Sequoia's
capital.

    PROPERTY AND CASUALTY INSURANCE operations produced $2.8 million in income
before taxes during 1998, down $2.8 million from the $5.6 million of 1997 and
down $0.5 million from the $3.3 million of 1996. As shown above, $0.7 million of
the decline from 1997 was attributable to Sequoia, principally due to its higher
1998 expense ratio. Citation produced an $0.8 million loss in 1998 compared to
income of $1.3 million, and $1 million in 1997 and 1996, respectively. The
primary reason for the Citation 1998 downturn was poor loss experience,
principally in the artisan-contractors coverage no longer written by Citation.
Consequently, Citation strengthened claims and LAE reserves during 1998 by
approximately $3.7 million. The 1997-98 "El Nino" phenomenon had a significant
impact on the first and second quarter 1998 results. Although difficult to
quantify, Sequoia and Citation management estimate the cost of storm losses
incurred by the companies as a result of the 1998 El Nino phenomenon to be
approximately $1 million. Loss experience improved significantly 

                                       31


<PAGE>   32



during the second half of 1998, however. Due to favorable claims experience
based upon year end actuarial studies, Sequoia reduced loss and LAE reserves by
approximately $2.1 million. In addition to being impacted by El Nino, Sequoia's
1998 loss and LAE ratio was also negatively affected by the reinsurance pooling
agreement between Sequoia and Citation since Citation's direct business has not
been as profitable as that of Sequoia. Conversely, Citation's incurred losses
and LAE and its loss and LAE ratio benefited from the reinsurance pooling
agreement. Despite the negative pressures of El Nino and the reinsurance pooling
agreement Sequoia's loss and LAE ratio improved five full percentage points over
1997 and 10.6 percentage points over 1996, principally due to improved claims
experience from prior years. Higher expense ratios for both Sequoia and Citation
resulted from the reduced level of premiums, resulting in a higher ratio of
overhead expenses to earned premiums. SEE GAAP INDUSTRY RATIOS BELOW.

    Industry ratios as determined on the basis of generally accepted accounting
principles ("GAAP") for Citation are shown in the following chart:


                         CITATION'S GAAP INDUSTRY RATIOS
                         -------------------------------

<TABLE>
<CAPTION>
                                           1998           1997
                                           ----           ----
<S>                                      <C>            <C>  
Loss and LAE Ratio                         84.9%          84.8%
Underwriting Expense Ratio                 41.5%          32.9%
                                           ----           ---- 
     Combined Ratio                       126.4%         117.7%
                                          =====          ===== 
</TABLE>

         Industry ratios as determined on a GAAP basis for Sequoia were:

                         SEQUOIA'S GAAP INDUSTRY RATIOS
                         ------------------------------

<TABLE>
<CAPTION>
                                   1998      1997      1996
                                  --------  -------  ---------
<S>                                <C>      <C>        <C>  
Loss and LAE Ratio                 52.3%    57.3%      62.9%
Underwriting Expense Ratio         43.4%    38.1%      38.0%
                                  --------  -------  ---------
     Combined Ratio                95.7%    95.4%     100.9%
                                  ========  =======  =========
</TABLE>


    Loss and LAE Ratios, Underwriting Expense Ratios and Combined Ratios are
calculated using net earned premiums as a denominator. Theoretically, a combined
ratio of less than 100% indicates that the insurance company is making a profit
on its base insurance business before consideration of investment income,
realized investment gains or losses, extraordinary items, taxes and other
non-insurance items.

    Sequoia's loss experience continued to be favorable in 1998 producing a GAAP
loss and LAE ratio of 52.3% compared to 57.3% in 1997 and 62.9% in 1996. As
previously discussed, Sequoia's loss ratio improved during 1998 even after the
negative pressures of the 1997-98 El Nino effect and the reinsurance pooling
agreement between Sequoia and Citation. Sequoia's 1997 loss and LAE ratio
improved over 1996 principally due to management's efforts to reduce exposure to
risk through re-underwriting existing business during 1995 and 1996, tighter
underwriting and careful selection of risks. Much of Citation's improved loss
and LAE ratio resulted from the reinsurance pooling agreement previously
discussed, producing a corresponding decline in Sequoia's individual company
results.

MEDICAL PROFESSIONAL LIABILITY INSURANCE

    Physicians' and PRO's MPL insurance business was sold to Mutual Assurance
Inc. ("Mutual") on August 28, 1995. All new and renewal MPL insurance policies
written between July 16 and December 31, 1995 were 100% reinsured by Mutual.
Physicians and PRO ceased writing new and renewal MPL insurance policies
effective January 1, 1996. Physicians continues to administer and adjust the
remaining claims and LAE reserves. Based upon careful analysis of various
alternative scenarios for handling the runoff of the remaining claims reserves,
management decided that the best option was to process the existing claims
internally with existing staff, rather than through a third party administrator
or through an outright sale of the claims and LAE reserves. In addition, it is
expected that shareholders' equity may be better served by retaining the
investments necessary to fund the payment of these claims and LAE reserves,
managing them along with the rest of the Company's investment holdings, as
opposed to selling or fully reinsuring these reserves and giving up the
corresponding funds. However, there can be no assurance that funds generated by
such retained investments will exceed claims. Accordingly, although the
companies effectively ceased writing MPL insurance in 1995, MEDICAL PROFESSIONAL
LIABILITY INSURANCE is treated as a separate business segment of continuing
operations due to the continued management of claims and associated investments.

                                       32

<PAGE>   33


    Physicians' and PRO's assets are not designated on an individual security
basis as belonging either to the MEDICAL PROFESSIONAL LIABILITY INSURANCE or the
INVESTMENT OPERATIONS business segment. Consequently, Physicians' invested
assets produce income in both the MEDICAL PROFESSIONAL LIABILITY INSURANCE and
INVESTMENT OPERATIONS segments. All of PRO's revenues and pre-tax income are
assigned to the MEDICAL PROFESSIONAL LIABILITY INSURANCE segment. However, all
investment income and realized investment gains generated by Physicians from
assets in excess of those needed to support the MPL claims are allocated to the
Investment Operations segment. SEE NOTE 19 OF NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS, "SEGMENT REPORTING."

    Revenues and pre-tax income or loss from MEDICAL PROFESSIONAL LIABILITY
INSURANCE operations included the following:

                    MEDICAL PROFESSIONAL LIABILITY INSURANCE

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                              --------------------------------------
                                                1998           1997          1996
                                              ---------      ---------     ---------
                                                             (in millions)
<S>                                           <C>             <C>           <C>  
MPL REVENUES:
   Earned Premiums                            $ (0.2)         $ 0.2         $ 7.4
   Investment Income, Net of Expenses            2.6            3.7           4.8
                                              -------        ------        -------  
     MPL Revenues                             $  2.4          $ 3.9         $12.2
                                              =======        ======        ======   

MPL INCOME (LOSS) BEFORE TAX:                 $ (4.4)         $ 0.8         $ 8.5
                                              =======        ======        ======   
</TABLE>

    Since the withdrawal of Physicians and PRO from their personal automobile
and homeowners lines of business in the late 1980's, MPL has been these two
companies' only sources of insurance premiums.

    MPL premiums continued to be earned during 1996 based upon premiums written
prior to July 16, 1995, the effective date of the 100 percent quota share
reinsurance treaty with Mutual. Investment income revenues will continue to
accrue to the MPL runoff.

    MPL insurance revenues were $2.4 million in 1998 compared to $3.9 million
during 1997 and $12.2 million during 1996. The decline in MPL earned premiums
accounted for most of the variance as compared to 1996. Declining investment
income was the principal contributor to the difference between 1998 and 1997 MPL
revenues. Investment income continued to decline in 1998 as it had in 1997 and
1996, principally as a result of the reduced level of MPL claims and,
correspondingly, the resultant reduced level of invested assets allocated to the
MEDICAL PROFESSIONAL LIABILITY INSURANCE business segment.

    MPL operations produced a 1998 pre-tax loss of approximately $4.4 million
compared to income of $0.8 million in 1997 and $8.5 million in income in 1996.
Results for 1998 and 1997 were negatively impacted by additions to loss and LAE
reserves, approximately $5 million in 1998 and $2.2 million in 1997. These
additions to reserves during the third quarter of 1997 and the fourth quarter of
1998 were based upon actuarial analyses indicating some deterioration of
Physicians' loss experience. The addition to 1998 reserves included additions to
loss and LAE reserves for virtually all loss years (years in which losses were
incurred). These additions primarily were necessitated by an increased incidence
of claims reported on behalf of claimants that allegedly were injured as minors
and had now attained the age of majority. Pre-tax operating results for 1996
were aided by a $1.4 million reduction in MPL death, disability and retirement
unearned premium reserves related to the Mutual transaction, and loss and LAE
reserve reductions of approximately $6.0 million due to favorable development of
MPL reserves. As discussed above, MPL investment income and earned premiums
continually declined from 1996 through 1998 due to the runoff of the MPL
business and the decreasing level of loss and LAE reserves.

    Physicians' claims department staff continues to process the runoff of the
remaining MPL loss and loss adjustment expense claims which is progressing
routinely. At December 31, 1998, MPL reserves totaled $60.9 million, net of
reinsurance and discount. This compares to $77.5 million and $112.9 million at
December 31, 1997 and 1996, respectively. MPL loss and LAE reserves continue to
decline as a result of the disposition of claims.

                                       33


<PAGE>   34



                     MPL INSURANCE -- LOSS AND LAE RESERVES

<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                    ---------------------------------------
                                       1998          1997           1996
                                    ---------     ----------     ----------
                                                (in millions)
<S>                                   <C>            <C>            <C>   
Direct Reserves                       $ 97.1         $121.4         $158.4
Ceded Reserves                         (27.7)         (34.8)         (33.3)
Discount of Net Reserves                (8.5)          (9.1)         (12.2)
                                    ---------     ----------     ----------
     Net MPL Revenues                 $ 60.9         $ 77.5         $112.9
                                    =========     ==========     ==========
</TABLE>


    Although MPL reserves are certified annually by two independent actuaries,
as required by Ohio insurance regulations, significant fluctuations in reserve
levels can occur based upon a number of variables used in actuarial projections
of ultimate incurred losses and LAE.

OTHER OPERATIONS

    OTHER OPERATIONS consists principally of Summit's investment management
operations, the activities of Raven Development Company ("Raven"), a now
inactive real estate development subsidiary.

    Revenues (charges) and pre-tax losses from other operations are summarized
below for the past three years:

                                OTHER OPERATIONS
<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                          ------------------------------------
                                                           1998         1997           1996
                                                          --------     --------      ---------
                                                                       (in millions)
<S>                                                        <C>          <C>            <C>  
REVENUES FROM OTHER OPERATIONS:
   Investment Management Services                          $ 1.1        $ 1.1          $ 0.8
     Less:  Intercompany Portfolio Mgmt. Charges            (0.4)        (0.5)          (0.5)
   Other                                                    (0.2)        (0.5)           1.9
                                                          --------     --------      ---------
          Revenue from Other Operations                    $ 0.5        $ 0.1          $ 2.2
                                                          ========     ========      =========

OTHER OPERATIONS-LOSS BEFORE TAX:
   Investment Management Services                          $ 0.1        $ 0.2          $ 0.1
     Less:  Intercompany Portfolio Mgmt. Charges            (0.4)        (0.5)          (0.5)
   Other                                                    (0.1)        (0.4)          (0.7)
                                                          --------     --------      ---------
         Other Operations-Loss Before Tax                  $(0.4)       $(0.7)         $(1.1)
                                                          ========     ========      =========
</TABLE>

    Revenues from OTHER OPERATIONS were $0.5 million in 1998 compared to $0.1
million in 1997 and $2.2 million in 1996. Nearly all the decline from 1996 was
due to the wind down of real estate development operations of Physicians'
subsidiary, Raven, which had virtually no activity in 1997 and little activity
in 1998. Raven sold its final real estate holdings in early 1998.

    Revenues for 1998 included approximately $0.7 million in Summit's investment
management fees, excluding those billed to related parties, compared to $0.6
million during 1997 and $0.3 million in 1996. In addition, although offset by
miscellaneous charges in other areas, 1998 revenues included $0.1 million in
real estate sales generated by Raven and $0.2 million in insurance commissions
recorded by CLM. There were no real estate sales or commission income recorded
by Raven and CLM during 1997. Raven and CLM recorded $1.6 million and $0.2
million, respectively, in revenues during 1996.

    Pre-tax, OTHER OPERATIONS showed a $0.4 million loss for 1998 compared to a
$0.7 million loss in 1997 and a $1.1 million loss during 1996. The improvement
in the performance of OTHER OPERATIONS during 1998 compared to 1997 was
attributable to approximately $0.1 million in income from CLM compared to a $0.3
million loss during 1997.

                                       34

<PAGE>   35

DISCONTINUED OPERATIONS

    Discontinued operations consists of the operations of APL, the Company's
life and health insurance subsidiary and GEC's former Sri Lankan subsidiaries
which engaged in various activities including stock and commodity brokerage and
agricultural services.

    APL, Physicians' wholly-owned life insurance subsidiary, produced revenues
of $9.2 million and pre-tax income of $0.3 million in 1998 prior to its sale.
This compares to $5.3 million and $9.0 million in revenues in 1997 and 1996,
respectively, and a pre-tax loss of $112,000 in 1997 and $4 million of pre-tax
income in 1996. Revenues and income before tax for 1996 included realized
investment gains of approximately $3.9 million from the sale of APL's investment
in Fairfield Communities common stock.

    On June 16, 1997, Physicians announced the signing of a binding agreement to
sell APL subject to certain closing conditions. The closing took place on
December 4, 1998. The Company received $9 million in cash from the sale in
addition to an $8 million dividend prior to the sale, and recorded a gain of
$1.1 million, included in discontinued operations on the consolidated statements
of operations.

    GEC elected to treat its Sri Lankan operations as discontinued in
recognition of their sale in November and December 1997. These operations
produced approximately $3.3 million in pre-tax income during 1997 as recorded in
GEC's financial results, prior to the elimination of minority interests when
consolidated with PICO. This included approximately $3.5 million of realized
pre-tax gain in 1997 on the sale and reversal of a foreign currency translation
adjustment relating to those operations of approximately $2.3 million, prior to
recognition of minority interest. SEE NOTE 6 OF NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS, "DISCONTINUED OPERATIONS."

LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

    In the past, the assets of the insurance subsidiaries had been a major
source of funds for the Company. However, due to the use of those assets to
satisfy claims, and to adhere to the stringent guidelines of the state insurance
departments, these funds are no longer as readily available. Since the
acquisition of GEC, the Company has used the cash acquired to carry out the
investment acquisitions, and other operations of PICO. In addition, the $45
million public offering of GEC provided the funds necessary to acquire GEC's
interest in NLRC, as well as the initial European investments.

    The Company continually evaluates its existing operations and searches for
new opportunities to maximize shareholder value. This strategy causes
significant fluctuations in the cash needs of the Company. The Company may need
to sell investments, or borrow funds to meet operating cash requirements. In
addition, it may become necessary or advantageous for the Company to offer stock
or debt through a public or private offering. At times the Company may have
excess cash. The Company attempts to invest such cash to provide maximum returns
within the constraint of remaining liquid enough to meet expected cash
requirements. The Company's primary sources of funds are its available cash,
cash from operations, the sale of invested assets, bank borrowings, public and
private debt and equity offerings, and management and other fees.

     Each company within the group is operated to sustain its own operations
without the need for long-term borrowings or additional capital infusions from
within the Company, with the possible exceptions of additional capital
requirements of Sequoia and CIC to maintain or improve their Best ratings or to
meet minimum capital requirements. Physicians contributed an additional $5.5
million to Sequoia in 1997 for this purpose. Nevertheless, funds may be needed
to cover short-term operating shortfalls, to purchase investments or proceed
with an acquisition.

    Physicians initially provided virtually all the funding necessary for the
Company. Since the acquisition of Sequoia in 1995, management made significant
strides in improving Sequoia's operating performance. Management has taken a
number of steps to improve Citation's profitability and cash flow since its
acquisition in November 1996, including the June 1997 sale of its workers'
compensation business and its subsidiary, Citation National Insurance Company.
During the past several years, Physicians' cash flow had the greatest impact on
the consolidated group and should continue to do so for the foreseeable future
due to the wind down of the MPL business. At December 31, 1998, Physicians,
Sequoia and Citation had a combined cash and cash equivalent balance of $60.6
million compared to $46.5 million at December 31, 1997. Due to the relatively
short lag period between the receipt of premiums and payment of claims in the
commercial property and casualty insurance business lines written by Sequoia and
Citation, a significant amount of their investment balances is in cash and cash
equivalents.

                                       35


<PAGE>   36

     Physicians' operating cash flows, as a result of ceasing to write MPL
insurance, are negative and should continue to be negative for the foreseeable
future. Positive cash flows from other sources within Physicians, primarily
reinsurance recoveries, and the sale of invested assets may partially or fully
offset uses of cash. Major cash outflows will likely include the funding of
claims and loss adjustment expenses, investment purchases, and operating costs.

    As of December 31, 1995, when Physicians and PRO ceased writing MPL,
Physicians and PRO reported unpaid loss and loss adjustment expense reserves of
approximately $136.2 million, net of reinsurance. Based upon projections from
past actuarial information, more than 75%, or $102 million, of the reserve is
expected to be settled by the end of the year 2000. Past experience indicates
that funding requirements are typically greatest in years one through three
(1996 through 1998), accounting for more than 60% of the total eventual reserve
and loss adjustment expense payments. As expected, loss and LAE reserves at
December 31, 1996 declined more than 17.1% to $112.9 million after payment of
more than $30 million in claims and LAE. During 1997, MPL reserves decreased
$35.4 million, or 31.4%, to $77.5 million as of December 31, 1997 after payment
of more than $38 million in losses and LAE. MPL reserves declined $16.6 million
during 1998 to $60.9 million as of December 31, 1998. This represents a 55.3%
decline in net discounted loss and LAE reserves since December 31, 1995.

    The Company's insurance subsidiaries attempt to structure the duration of
invested assets to match the cash flows required to settle the related unpaid
claims liabilities. Invested assets provide adequate liquidity to fund projected
claims and LAE payments for the coming years. The Ohio and California Insurance
Departments monitor and set guidelines for the insurance companies' investments.
The Ohio and California Insurance Departments also set minimum levels of
policyholder capital and surplus and monitor these levels through various means.

    To the extent that funds necessary for settling claims and paying operating
expenses are not provided by existing cash and cash equivalents, investment
income, reinsurance recoveries, and rental and other income, then invested
assets will be liquidated. Short term and fixed maturity investments are managed
to mature according to projected cash flow needs. Equity securities will be
converted to cash, as additional funds are required, with an anticipated maximum
liquidation lead-time of approximately six months.

    At December 31, 1998, the investment portfolios of Physicians and PRO
contained invested assets of approximately $122.3 million, plus cash and cash
equivalents of $9.3 million. These invested assets are in excess of the present
value of expected future payouts of losses and loss adjustment expenses of
approximately $61 million.

     Management attempts to maximize the return on all assets, including those
needed to fund the eventual wrap-up of the MPL reserves through, among other
things, value investing and managing the invested assets internally rather than
liquidating assets to pay a third party to oversee the runoff of the existing
claims. Management also elected to handle the runoff of the MPL claims
internally to continue to maintain a high standard of claims handling and to
maximize shareholder values. While management expects that certain of the
Company's current and future investments may increase in value, offsetting some
of the decline in assets during the period of runoff, the impact of future
market fluctuations on the value of the Company's invested assets cannot be
accurately predicted. Although assets will be managed to mature or liquidate
according to expected payout projections, at times some invested assets may need
to be sold when the stock market is depressed. Such forced sales are expected to
occur infrequently and only under extreme circumstances; however, this cannot be
guaranteed.

    The Company's active P&C insurance subsidiaries, Sequoia and Citation,
should provide cash flows from operations once industry combined ratios (SEE
"PROPERTY AND CASUALTY INSURANCE.") stabilize below 100% and premiums remain at
a constant or increasing levels. At times, it may be necessary to liquidate
invested assets to provide the additional funds necessary to cover operating
expenses. Summit produces positive cash flow from operations, which is expected
to continue.

    The Company anticipates that Vidler will continue to incur operating losses
until they are able to generate significant revenues from development of
projects, including water storage and supply programs, leases, royalties, and
property sales. Further, Vidler may require funding for acquisitions of surface,
water and mineral rights, and other activities. These additional cash needs may
require debt or equity funding from sources outside the Company.

    As shown in the accompanying consolidated statements of cash flows,
operating activities used $21.2 million of cash during 1998 compared to cash
used of $62.1 million during 1997 and $10.9 million in 1996. The decline in cash
used by operations between 1997 and 1998 of $40.9 million principally consisted
of reductions in claims and LAE payments (both property and casualty and MPL)
and insurance operating expenses, partially offset by a decreased level of
premiums received. Federal income taxes paid in 1998 were $10.5 

                                       36

<PAGE>   37
million less than in 1997, primarily due to the differences in pre-tax income
between years. The $62.1 million in cash used by operations in 1997 also
included a $9.7 million use of funds from reclassification of APL's year-end
1996 cash balances to discontinued operations in 1997. The $10.4 million
decrease in cash from operations comparing 1998 to 1996 was a direct result of
increased cash outflow from insurance operations and increased operating
expenses in other areas, including the start-up and operation of NLRC in 1997
and 1998 and increased activities within Vidler in 1997 and 1998.

    The primary use of operating cash flow during 1998 was $56.3 million in
insurance claims and LAE, net of reinsurance recoveries. This compares to $69.6
million in 1997 and $39.2 million in 1996. Other expenses for 1998, including
insurance and other operating costs, accounted for $26.9 million in additional
cash outflows compared to $29.1 million and $19 million in 1997 and 1997,
respectively. Premiums received amounted to $35.5 million in 1998, $41.6 million
in 1997 and $29.2 million in 1996, net of ceded reinsurance payments. The
increase in premiums from 1996 to 1997 was due to the November 20, 1996 Merger
resulting in the inclusion of Citation for a full year beginning in 1997. The
decrease in premiums from 1997 to 1998 was due to increased selectivity of
Citation's insurance risks following its change in control and increased
competition for commercial property and casualty insurance in California.
Investment income, other than realized investment gains and losses, amounted to
$10.7 million in 1998, compared to $13.1 million and $7.8 million in 1997 and
1996, respectively.

    Cash flow from investing activities for 1998 was $40.8 million compared to
$68.1 million provided in 1997 and $31.4 million in 1996. For 1998, cash
investing activities included $17 million of cash received from the sale of APL,
and $10.1 million receipt from the disposition of the Sri Lankan investments. In
addition, the Company sold property, generating approximately $6.5 million. The
Company used cash to pay $1.7 million in direct costs associated with the
acquisition of the remaining shares of GEC. Purchases of $4.1 million were made
for additional surface, water and mineral rights, offset by sales of $518,000.
The cash provided by investing activities in 1997 resulted primarily from $52
million of cash provided by net investment transactions, and $18.1 million of
cash provided by consolidation of GEC. Specifically, significant uses of
investment cash in 1997 include the purchase of NLRC for $48.6 million, and
$36.7 million used to acquire shares of GEC common stock. Cash provided by
investing activities in 1996 principally reflected the maturity of fixed income
securities and investment proceeds from the sale of Fairfield Communities, Inc.

    Financing activities during 1998 used cash of $3.8 million, primarily due
the purchase of the Company's own stock for $1.6 million, offset by $200,000 in
proceeds received from the exercise of options on treasury shares, as discussed
in NOTE 17 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "OTHER RELATED PARTY
TRANSACTIONS." In addition, $2.4 million was paid to Semitropic for water
storage. These payments are required annually through the year 2008. During
1997, financing activities used $14.3 million primarily to repay borrowings,
offset by proceeds of $2 million from the sale of GEC warrants. In 1996,
financing activities provided cash of $69,000.

    At December 31, 1998, the Company has no significant commitment for future
capital expenditures, other than in the ordinary course of business and as
discussed herein. The Company is committed to maintaining Sequoia's capital and
statutory policyholder surplus at a minimum of $7.5 million. At December 31,
1998, Sequoia was well above this level. The Company is also committed to
maintain Sequoia's Best Rating at or above the "B++" (Very Good) level, which
may at some time in the future require additional capital infusions into
Sequoia. SEE NOTE 16 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, "COMMITMENTS
AND CONTINGENCIES."

    During 1998, the Company purchased 857,000 shares of common stock of
Australian Oil and Gas Corporation Ltd. ("AOG"), whose shares are traded on the
Australian Stock Exchange, for $803,000. During 1999, an additional 5.9 million
shares were acquired for $6.3 million. As of March 1999, the Company owns a
14.9% interest in AOG. Also during 1997 and 1998, the Company purchased 16,350
shares of Jungfraubahn Holding AG ("Jungfraubahn") based in Interlaken,
Switzerland. In February 1999, an additional 70,000 shares were acquired. In
total the Company holds a 17.6% shareholding for $15.9 million. The acquisition
was financed with $7 million in cash and the remaining balance in debt.

CAPITAL RESOURCES

    The Company's principal sources of funds are its available cash resources,
operating cash flow, liquidation of non-essential investment holdings,
borrowings, public and private debt and equity offerings, funds from
consolidated tax savings, and investment management and other fees. At December
31, 1998, the Company had $71.7 million in cash and cash equivalents compared to
$56.4 million at December 31, 1997.
                                       37

<PAGE>   38



THE COMPANY'S STATE OF READINESS FOR THE YEAR 2000

     The Company continues to progress in its efforts to define the scope and
magnitude of the Year 2000 ("Y2K") problem and to execute its plans to ensure
information technology and non-information technology systems are Y2K ready.
There is an evolving plan to achieve compliance that is currently divided into
four phases. As the project has proceeded, overlap of the different phases has
occurred.

     The initial phase of planning, inventorying and evaluating all information
technology systems, and non-information technology systems and their components,
for Y2K compliance is approximately 90% complete. The evaluation has not
disclosed any significant Y2K processing difficulties or concerns. The focus is
primarily on the insurance operations of the Company because of the custom
applications software used to process insurance policies, policy claims, and
insurance underwriting. After internal review and communication with system
vendors, the majority of the non-insurance information and non-information
technology systems are deemed Y2K compliant and do not require any significant
alterations. The focus of remediation is on the insurance specific applications.

     The secondary phase of the project, which primarily includes implementing
corrections to remedy Y2K deficiencies, is approximately 90% complete. As noted
above, the insurance systems software has been the primary focus of such
efforts. To renovate the insurance systems to a Y2K ready state, the Company's
internal information systems staff is re-writing lines of existing code to
function with a four-digit date field. The Company also replaced existing DOS
software with a current Y2K compliant version.

     Testing and validation of each system comprises phase three. As hardware
and software changes are made to the systems, they are tested for compliance.
This phase continues as insurance specific applications are reprogrammed and
tested. Final completion of this phase should be by the end of the second
quarter of 1999. Despite the best efforts by management, problems will arise
requiring the Company to quickly respond while there is still time. Phase four,
when completed, will set forth contingency plans addressing potential business
interruption and failure, is expected to be finalized during the last half of
1999.

THIRD PARTY RELATIONSHIPS

     The Company has relationships with several banks and other financial
institutions and service providers that provide business information on a
regular basis. In addition, the Company reports financial results on a regular
basis to state and federal agencies. While these relationships are important to
the Company's business, should any third parties be adversely affected by the
Y2K problem, the resulting risk of business interruption should not be
significant to the Company. The Company however, has no means of ensuring that
these parties will be Year 2000 ready. The inability of those parties to
complete their Y2K readiness process could materially impact the Company.

THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES

     The financial impact of making the required systems changes has not been
material, nor is it expected to be material, to the Company's consolidated
financial position, results of operations or cash flows. For the year ending
December 31, 1998 the Company incurred approximately $85,000 for hardware and
computer programming. The Company expects to incur another $40,000 to $60,000 to
complete the project.

THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND CONTINGENCY PLANS

     A reasonable, most likely worst case scenario of the Y2K impact would be a
slow down in internal and external reporting, and insurance related processing
of policies, claims and underwriting functions. It is unlikely the Company would
experience any material business cessation or significant business disruption.

     The Company is completing its specific plans to continue operations in case
of unexpected delays in completing remediation or if Y2K problems impact the
Company in unforeseen ways. It appears many business systems could function
manually for a limited amount of time. The Company anticipates completing its
contingency plan during the last half of 1999. Overall, the Company is
approximately 85% complete in its Y2K project.

                                       38

<PAGE>   39



                                  RISK FACTORS

     In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this document, the following risk
factors should be considered carefully in evaluating PICO and its business. The
statements contained in this prospectus that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Exchange
Act, including statements regarding our expectations, beliefs, intentions, plans
or strategies regarding the future. All forward looking statements included in
this document are based on information available to us on the date thereof, and
we assume no obligation to update any such forward-looking statements.

WE MAY ACQUIRE OR INVEST IN A COMPANY THAT FAILS

     We invest in businesses that we believe are undervalued or that will
benefit from additional capital, restructuring of operations or improved
competitiveness through operational efficiencies.

     We will continue to make selective investments, enhance and realize
additional value to these acquired companies through our influence and control.
This could involve the restructuring of the financing or management of the
entities in which we invest and initiating and facilitating mergers and
acquisitions. Any acquisition could result in the use of a significant portion
of our available cash, significant dilution to you, and significant acquisition
related charges. Acquisitions may also result in the assumption of liabilities,
including liabilities that are unknown or not fully known at the time of the
acquisition, which could have a material adverse effect on us. Furthermore, we
may not obtain the anticipated or desired benefits of such transactions. You
will be relying on the experience and judgment of management to locate, select
and develop new acquisition and investment opportunities. Sufficient
opportunities may not be found and this business strategy may not be successful.
Failure to successfully implement this strategy could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

     Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.

     Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.

     We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect our ability to
dispose of an investment in a public company.

     To successfully manage newly acquired companies, we must, among other
things, continue to attract and retain key management and other personnel. The
diversion of the attention of management from the day-to-day operations, or
difficulties encountered in the integration process, could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.

MEDICAL MALPRACTICE INSURANCE CLAIMS MAY BE GREATER THAN THE RESERVES WE
ESTABLISH TO PAY THEM

     Under the terms of our medical malpractice liability policies, there is an
extended reporting period for claims. Under Ohio law the statute of limitations
is one year after the cause of action accrues. Also, under Ohio law a person
must make a claim within four years; however, the courts have determined that
the period may be longer in situations where the insured could not have
reasonably discovered the injury in that four-year period. Claims of minors must
be brought within one year of the date of majority. As a result, some claims may
be reported a number of years following the expiration of the medical
malpractice liability policy period.

     Physicians Insurance Company and Professionals Insurance Company have
established reserves to cover losses on claims incurred under the medical
malpractice liability policies including not only those claims reported to date,
but also those that may have been incurred but not yet reported. The reserves
for losses are estimates based on various assumptions and, in accordance with
Ohio law, have been discounted to reflect the time value of money. These
estimates are based on actual and industry experience and assumptions and
projections as to claims frequency, severity and inflationary trends and
settlement payments. In accordance with Ohio law, Physicians Insurance 

                                       39
<PAGE>   40


Company and Professionals Insurance Company annually obtain a certification from
an independent actuary that their respective reserves for losses are adequate.
They also obtain a concurring actuarial opinion. Due to the inherent
uncertainties in the reserving process, there is a risk that Physicians
Insurance Company's and Professionals Insurance Company's reserves for losses
could prove to be inadequate. This could result in a decrease in income and
shareholders' equity. If we underestimate our reserves, they could reach levels
which are lower than required by law.

     Reserves are money that we set aside to pay insurance claims. We strive to
establish a balance between maintaining adequate reserves to pay claims while at
the same time using our cash resources to invest in new companies.

WE MAY UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS

     Our insurance subsidiaries may not have established reserves adequate to
meet the ultimate cost of losses arising from claims. It has been, and will
continue to be, necessary for our insurance subsidiaries to review and make
appropriate adjustments to reserves for losses, future policy benefits, claims,
and annuity and other policyholder funds. Inadequate reserves could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

     The inherent uncertainties in estimating loss reserves are greater for some
insurance products than for others, and are dependent on:

     *    the length of time in reporting claims;

     *    the diversity of historical losses among claims;

     *    the amount of historical information available during the estimation
          process;

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

     *    the consistency of reinsurance programs over time.

     Because medical malpractice liability and commercial casualty claims may
not be completely paid off for several years, estimating reserves for these
types of claims can be more uncertain than estimating reserves for other types
of insurance. As a result, precise reserve estimates cannot be made for several
years following the year for which reserves were initially established.

     During the past several years, the levels of the reserves for our insurance
subsidiaries have been very volatile. As a result of our claims experience, we
have had to significantly increase these reserves in the past several years.

     Significant increases in the reserves may be necessary in the future, and
the level of reserves for our insurance subsidiaries may be volatile in the
future. These increases or volatility may have an adverse effect on our
business, financial condition, results of operations and cash flows.

THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH
NEGATIVELY AFFECTS OUR BUSINESS

     The property and casualty insurance industry has been highly cyclical, and
the industry has been in a cyclical downturn over the last several years. This
is due primarily to competitive pressures on pricing, which has resulted in
lower profitability for us. Pricing is a function of many factors, including the
capacity of the property and casualty industry as a whole to underwrite
business, create policyholders' surplus and generate positive returns on their
investment portfolios. The level of surplus in the industry varies with returns
on invested capital and regulatory barriers to withdrawal of surplus. Increases
in surplus have generally been accompanied by increased price competition among
property and casualty insurers.

     The cyclical trends in the industry and the industry's profitability can
also be affected by volatile and unpredictable developments, including natural
disasters, fluctuations in interest rates, and other changes in the investment
environment which affect market prices of investments and the income generated
from those investments. Inflationary pressures affect the size of losses and
court decisions affect insurers' liabilities. These trends may adversely affect
our business, financial condition, results of operations and cash flows.

STATE REGULATORS COULD TAKE OVER OUR INSURANCE SUBSIDIARIES IF WE FAIL TO
MAINTAIN ADEQUATE RESERVE LEVELS

     In the past few years, the National Association of Insurance Commissioners
has developed risk-based capital measurements for both property and casualty and
life and health insurers. These measurements proscribe the reserve levels that
insurance companies must maintain. The Commissioners have delegated to the state
regulators varying levels of authority based on the adequacy of an insurer's
reserves. The insurance companies' reserve levels are reported annually in their
statutory annual statements to the insurance departments. 

                                       40

<PAGE>   41


Failure to meet one or more reserve levels may result in state regulators
requiring the insurance company to submit a business plan demonstrating
achievement of the required reserve levels. This may include the addition of
capital, a restructuring of assets and liabilities, or changes in operations. At
or below certain lower reserve levels, state regulators may supervise the
operation of the insurance company and/or require the liquidation of the
insurance company. Failing to meet reserve levels could adversely affect our
business, financial condition, results of operations and cash flows.

WE MAY BE INADEQUATELY PROTECTED AGAINST MAN MADE AND NATURAL CATASTROPHES

     As with other property and casualty insurers, operating results and
financial condition can be adversely affected by volatile and unpredictable
natural and man made disasters, such as hurricanes, windstorms, earthquakes,
fires, and explosions. Our insurance subsidiaries generally seek to reduce their
exposure to catastrophic events through individual risk selection and the
purchase of reinsurance. Our insurance subsidiaries' estimates of their
exposures depend on their views of the possibility of a catastrophic event in a
given area and on the probable maximum loss created by that event. While our
insurance subsidiaries attempt to limit their exposure to acceptable levels, it
is possible that an actual catastrophic event or multiple catastrophic events
could significantly exceed the maximum loss anticipated, resulting in a material
adverse effect on our business, financial condition, results of operations and
cash flows.

     We insure ourselves against catastrophic losses by obtaining insurance
through other insurance companies known as reinsurers. The future financial
results of our insurance subsidiaries could be adversely affected by disputes
with their reinsurers with respect to coverage and by the solvency of the
reinsurers.

OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS

     Our insurance subsidiaries' ratings may not be maintained or increased, and
a downgrade would likely adversely affect our business, financial condition,
results of operations and cash flows. A.M. Best and Company's ("A.M. Best")
ratings reflect the assessment of A.M. Best of an insurer's financial condition,
as well as the expertise and experience of its management. Therefore, A.M. Best
ratings are important to policyholders. A.M. Best ratings are subject to review
and change overtime. Failure to maintain or improve our A.M. Best ratings could
have a material adverse effect on the ability of our insurance subsidiaries to
underwrite new insurance policies, as well as potentially reduce their ability
to maintain or increase market share. Management believes that many potential
customers will not insure with an insurer that carries an A.M. Best rating of
less than B+, and that customers who do so will demand lower rates.

     Our insurance subsidiaries are currently rated as follows:

      *  Sequoia Insurance Company         B++ (Very Good)
      *  Citation Insurance Company        B+ (Very Good)
      *  Physicians Insurance Company      NR-3 (rating procedure inapplicable)
      *  Professionals Insurance Company   NR-3 (rating procedure inapplicable)

POLICY HOLDERS MAY NOT RENEW THEIR POLICIES

     Insurance policy renewals have historically accounted for a significant
portion of our net revenue. We may not be able to sustain historic renewal rates
for our products in the future. A decrease in renewal rates could adversely
affect our business, financial condition, results of operations and cash flows.

IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN

     We at all times intend to conduct our business so as to avoid being
regulated as an investment company under the Investment Company Act of 1940.
However, if we were required to register as an investment company, our ability
to use debt would be substantially reduced, and we would be subject to
significant additional disclosure obligations and restrictions on our
operational activities. This would adversely affect our business, financial
condition, results of operations and cash flows.

SUBSTANTIAL REGULATION MAY PREVENT US FROM REALIZING A PROFIT FROM OUR WATER
RIGHTS

     The water rights held by us and the transferability of these rights to
other uses and places of use are governed by the laws concerning water rights in
the states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from these rights may vary considerably based upon physical
availability and may be further limited by applicable legal restrictions. As a
result, the amounts of acre 

                                       41

<PAGE>   42
feet anticipated do not in every case represent a reliable, firm annual yield of
water, but in some cases describe the face amount of the water right claims or
management's best estimate of such entitlement. Legal impediments exist to the
sale or transfer of some of these water rights which in turn may affect their
commercial value. If we were unable to transfer or sell our water rights, it
could adversely affect our business, financial condition, results of operations
and cash flows.

WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS

     As a result of global investment diversification, our business, financial
condition, results of operations and cash flows may be adversely affected by:

 *   exposure to fluctuations in exchange rates;
 *   the imposition of governmental controls;
 *   the need to comply with a wide variety of foreign and U.S. export laws;
 *   political and economic instability;
 *   trade restrictions;
 *   changes in tariffs and taxes;
 *   volatile interest rates;
 *   changes in certain commodity prices;
 *   exchange controls which may limit our ability to withdraw money;
 *   the greater difficulty of administering business overseas; and
 *   general economic conditions outside the United States.

OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES

   The trading price of our common stock has historically been, and is expected
to be, subject to fluctuations. The market price of the common stock may be
significantly impacted by:
 *   quarterly variations in financial performance;
 *   shortfalls in revenue or earnings from levels
 *   forecast by securities analysts; changes in
 *   estimates by such analysts; product introductions;
 *   our competitors' announcements of extraordinary events such as
 *   acquisitions;
 *   litigation; and
 *   general economic conditions.

     Our results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and our future results of operations could
fluctuate significantly from quarter to quarter and from year to year. Causes of
such fluctuations may include the inclusion or exclusion of operating earnings
from newly acquired or sold operations.

     Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we do
business or relating to us specifically could result in an immediate and adverse
effect on the market price of our common stock.

WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT PERSONNEL WE NEED TO SUCCEED

     We have several key executive officers. If they leave PICO, it could have a
significant adverse effect on us. In particular, Ronald Langley, our Chairman,
and John R. Hart, our President and Chief Executive Officer, play key roles in
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with us dated as of December 31, 1997, for a period of four years.
Messrs. Langley and Hart are key to the implementation of our strategic focus,
and our ability to successfully develop our current strategy is dependent upon
our ability to retain the services of Messrs. Langley and Hart.


                                       42

<PAGE>   43
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER, PREVENTING YOU FROM RECEIVING A
PREMIUM ON YOUR STOCK

     The Board of Directors has authority to issue up to 2 million shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. Your rights as common stock holders will be subject to, and
may be adversely affected by, the rights of the holders of the preferred stock.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring or preventing a
change in control of PICO. Furthermore, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.

WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED

     Many currently installed computer systems and software products are not
capable of distinguishing 20th century dates from 21st century dates. As a
result, in less than one year, computer systems and/or software used by many
companies in a very wide variety of applications may experience operating
difficulties unless they are modified or upgraded to adequately process
information involving, related to or dependent upon the century change.
Significant uncertainty exists in the software and information services
industries concerning the scope and magnitude of problems associated with the
century change. In light of the potentially broad effects of the year 2000 on a
wide range of business systems, we may be affected.

     We continue to progress in our efforts to define the scope and magnitude of
the Year 2000 ("Y2K") problem and to execute our plans to ensure information
technology and non-information technology systems are Y2K ready. There is an
evolving plan to achieve compliance that is currently divided into four phases.
As the project has proceeded, overlap of the different phases has occurred. For
the year ending December 31, 1998 the Company incurred approximately $85,000 for
hardware and computer programming. The Company expects to incur another $40,000
to $60,000 to complete the project.

     The initial phase of planning, inventorying and evaluating all information
technology systems, and non-information technology systems and their components,
for Y2K compliance is approximately 90% complete. The evaluation has not
disclosed any significant Y2K processing difficulties or concerns. The focus is
primarily on the insurance operations because of the custom applications
software used to process insurance policies, policy claims, and insurance
underwriting. After internal review and communication with system vendors, the
majority of the non-insurance information and non-information technology systems
are Y2K compliant and do not require any significant alterations. The focus of
remediation is on the insurance specific applications.

     The secondary phase of the project, which primarily includes implementing
corrections to remedy Y2K deficiencies, is approximately 85% complete. As noted
above, the insurance system software has been the primary focus of such efforts.
To renovate the insurance systems to a Y2K ready state, our internal information
systems staff is in the process of re-writing lines of existing code to function
with a four-digit date field. We also replaced existing DOS software with a
current Y2K version. Completion of this phase is estimated to be June 30, 1999.

     Testing and validation of each system comprises phase three. As hardware
and software changes are made to the systems, they are tested for compliance.
This phase, however, will continue as insurance specific applications are
reprogrammed and tested. Final completion of phase three is planned for second
quarter of 1999. Despite the best efforts by management, problems will arise
requiring us to quickly respond while there is still time. Phase four, when
completed, will set forth contingency plans addressing potential business
interruption and failure, is expected to be finalized during the last half of
1999.

     The likely worst case scenario is a partial failure of some accounting and
reporting functions that could be corrected by manually recording and delivering
the required information.

     The foregoing factors, individually or in the aggregate, could materially
adversely affect our operating results and could make comparison of historic
operating results and balances difficult or not meaningful.

                                       43

<PAGE>   44

ITEM 7.A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

    The Company is exposed to certain market risks that are inherent in the
Company's financial instruments arising from transactions entered into in the
normal course of business. Although the Company does not currently use
derivative financial instruments that expose the Company to significant market
risk, the Company is exposed to cash flow and fair value risk associated with
fluctuating interest rates and market values.

     The Company invests in many foreign entities. As a result, it is subject to
foreign currency exchange risk related to the buying, selling and operating
investments in foreign countries. More specifically, the Company is exposed to
the uncertainty of future income and various asset values denominated in foreign
currencies. The Company's most significant foreign currency exposure is in
Europe, Asia and Australia. As of December 31, 1998 the fair value of
investments exposed to this risk was approximately $32.7 million.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Company's financial statements as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 and the
independent auditors' reports are included in this report as listed in the index
of this report.

                        SELECTED QUARTERLY FINANCIAL DATA

Summarized unaudited quarterly financial data (in thousands, except share and
per share amounts) for 1998 and 1997 are shown below. In management's opinion,
the interim financial data contains all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of results for such
interim periods. Prior period share and per share amounts have been adjusted to
conform to the current period presentation reflecting the December 16, 1998
1-for-5 Reverse Stock Split.

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED
                             -------------------------------------------------------------------------------------------------------
                             March 31,    June 30,   September 30, December 31, March 31,    June 30,   September 30,  December 31,
                                1997        1997         1997         1997       1998          1998         1998          1998
                             ----------  ---------    ---------    ----------  ----------   ----------  -----------    ------------
<S>                             <C>        <C>          <C>            <C>         <C>          <C>          <C>           <C>   
Net premium income           $   14,503    $13,976   $   11,622    $    9,775  $    9,138   $    8,455  $     8,805    $    9,733
Net investment income and
  net realized gains (losses)     6,208      2,839       29,461        (5,429)      3,880        3,775        2,236         2,862
Total revenues                   21,050     17,181       43,808         6,146      13,734       13,654       12,180         8,652
Net income (loss)                 1,992      1,824       17,860        (2,184)       (927)       1,082          729        (8,039)
                             ---------- ----------   ----------    ----------  ----------   ----------  -----------    ----------  
Basic:
                             ---------- ----------   ----------    ----------  -----------  ----------  -----------    ----------  
  Net income (loss) per share     $0.31      $0.28   $     2.97    $    (0.36) $    (0.15)  $     0.18  $      0.13    $    (1.30)
                              --------- ----------   ----------    ----------  ----------   ----------  -----------    ----------  
  Weighted average common
   and equivalent shares
   outstanding                6,434,860  6,445,790    6,018,466     6,019,817   6,019,817    6,019,817    5,711,304     6,178,675
Diluted:
  Net income (loss) per share $    0.30 $     0.27        $2.84    $    (0.36) $    (0.15)  $     0.17  $      0.12    $    (1.30)
                              --------- ----------   ----------    ----------  ----------   ----------  -----------    ----------  
  Weighted average common
  and equivalent shares
  outstanding                 6,609,817  6,639,827    6,278,038     6,019,817   6,019,817    6,254,573    6,158,606     6,178,675
                             ---------- ----------   ----------    ----------  ----------   ----------  -----------    ----------  
</TABLE>

                                       44
<PAGE>   45

                      PICO HOLDINGS, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 1998 AND 1997
                               AND FOR EACH OF THE
                            THREE YEARS IN THE PERIOD
                             ENDED DECEMBER 31, 1998



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S>                                                                       <C>
Independent Auditors' Reports...........................................  46-48
Consolidated Balance Sheets as of December 31, 1998 and 1997............  49-50
Consolidated Statements of Operations for the Years Ended
      December 31, 1998, 1997 and 1996..................................     51
Consolidated Statements of Shareholders' Equity for the
     Years Ended December 31, 1998, 1997, and 1996......................  52-54
Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1998, 1997 and 1996...................................     55
Notes to Consolidated Financial Statements..............................  56-82
</TABLE>


                                       45

<PAGE>   46

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
         PICO Holdings, Inc.:


    We have audited the accompanying consolidated balance sheets of PICO
Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
1997 consolidated financial statements of Global Equity Corporation (all
expressed in Canadian dollars), a 51.2% owned consolidated subsidiary as of
December 31, 1997, which constituted 42% of consolidated total assets as of
December 31, 1997. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Global Equity Corporation (all expressed in Canadian dollars), is
based solely on the report of such other auditors. The consolidated financial
statements of the Company for the year ended December 31, 1996 were audited by
other auditors whose report, dated April 7, 1997, expressed an unqualified
opinion on those statements.

    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, based on our audits and the report of the other auditors,
the 1998 and 1997 consolidated financial statements present fairly, in all
material respects, the consolidated financial position of PICO Holdings, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the consolidated results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.


DELOITTE & TOUCHE LLP


San Diego, California
March 26, 1999

                                       46
<PAGE>   47
AUDITORS' REPORT TO THE SHAREHOLDERS


We have audited the consolidated statement of financial position of Global
Equity Corporation ("GEC") as at December 31, 1997 and the consolidated
statements of operations, deficit and changes in financial position for the year
then ended. These financial statements are the responsibility of GEC's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of GEC as at December 31, 1997 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles in
Canada.

Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States in
GEC's circumstances, as described in note 14 to GEC's consolidated financial
statements.


KPMG LLP
Chartered Accountants


Toronto, Canada

March 17, 1998

                                       47
<PAGE>   48
                        REPORT OF INDEPENDENT ACCOUNTANTS
                        ---------------------------------

To the Shareholders and Board of Directors of
         PICO Holdings, Inc.

We have audited the consolidated statements of operations, shareholders' equity
and cash flows of PICO Holdings, Inc. and subsidiaries for the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and the
cash flows of PICO Holdings, Inc. and subsidiaries for the year ended December
31, 1996, in conformity with generally accepted accounting principles.


                           PricewaterhouseCoopers LLP

San Diego, California
April 7, 1997


                                       48
<PAGE>   49

                      PICO HOLDINGS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS  
                            DECEMBER 31, 1998 AND 1997

                                     ASSETS

<TABLE>
<CAPTION>
                                                                1998                        1997
                                                           --------------              --------------
Investments:
     Available for sale:
<S>                                                        <C>                         <C>         
          Fixed maturities                                 $  32,642,140               $  43,266,291
          Equity securities and other investments             61,362,838                  85,067,951
     Short-term investments                                   21,098,702                  28,757,220
     Real estate                                               2,046,685                   3,205,754
                                                           --------------              --------------
          Total investments                                  117,150,365                 160,297,216

Cash and cash equivalents                                     71,654,196                  56,435,789
Premiums and other receivables, net                           10,414,017                  20,681,568
Reinsurance receivables                                       55,624,830                  75,025,576
Prepaid deposits and reinsurance premiums                      2,187,387                   2,234,688
Accrued investment income                                      1,295,550                   1,722,282
Surface, water and mineral rights                            116,653,211                  75,177,015
Property and equipment, net                                    1,851,502                   8,550,807
Deferred policy acquisition costs                              5,548,634                   5,320,716
Income taxes receivable                                        6,522,454
Other assets                                                   7,011,957                   5,932,248
Net deferred income taxes                                                                  2,965,080
Net assets of discontinued operations                                                     15,949,989
                                                           ==============              ==============
     Total assets                                          $ 395,914,103               $ 430,292,974
                                                           ==============              ==============
</TABLE>


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

                                       49

<PAGE>   50


                      PICO HOLDINGS, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS, CONTINUED

                           DECEMBER 31, 1998 AND 1997

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                            1998                   1997
                                                                                      -----------------      -----------------
<S>                                                                                      <C>                    <C>          
Policy liabilities and accruals:
     Unpaid losses and loss adjustment expenses, net of discount                         $ 155,020,696          $ 196,095,518
     Unearned premiums                                                                      20,804,432             21,634,897
     Reinsurance balance payable                                                            12,068,890              8,076,659
Deferred gain on retroactive reinsurance                                                     1,800,994              2,168,393
Other liabilities                                                                           20,216,707             15,380,716
Taxes payable                                                                                                         968,059
Integration liability                                                                          152,000                546,147
Net deferred income taxes                                                                    7,258,949
Excess of fair value of net assets acquired over purchase price                              4,496,551              5,064,536
                                                                                      -----------------      -----------------
     Total liabilities                                                                     221,819,219            249,934,925
                                                                                      -----------------      -----------------
Minority Interest                                                                                                  68,207,311
                                                                                                             -----------------
Commitments and Contingencies (Notes 11, 12, 13, 14, 15, 16, 17 and 20)

Preferred stock, $.01 par value, authorized 2,000,000; none issued
Common stock, $.001 par value; authorized 100,000,000; issued 13,328,778
     and 6,497,344 shares in 1998 and 1997, respectively                                        66,644                 32,592
Additional paid-in capital                                                                 183,101,273             43,147,105
Accumulated other comprehensive loss                                                        (8,097,965)            (4,918,341)
Retained earnings                                                                           76,562,974             83,718,335
                                                                                      -----------------      -----------------
                                                                                           251,632,926            121,979,691
Less treasury stock (4,380,780 common shares in 1998 and 388,063 in 1997)                  (77,538,042)            (9,828,953)
                                                                                      -----------------      -----------------
     Total shareholders' equity                                                            174,094,884            112,150,738
                                                                                      -----------------      -----------------
     Total liabilities and shareholders' equity                                          $ 395,914,103          $ 430,292,974
                                                                                      =================      =================
</TABLE>

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

                                       50
<PAGE>   51


                      PICO HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                          1998            1997           1996
                                                                      ------------    ------------   ------------
<S>                                                                   <C>             <C>            <C>         
Revenues:
 Premium income                                                       $ 36,131,415    $ 49,876,404   $ 38,760,705
 Net investment income                                                  10,243,774      11,686,072      8,086,156
 Net realized gain (loss) on investments                                (4,411,805)     21,393,331     27,080,236
 Sale of surface, water, and mineral rights                              2,242,200       1,494,088
 Other income                                                            4,014,692       3,735,447      2,809,183
                                                                      ------------    ------------   ------------
      Total revenues                                                    48,220,276      88,185,342     76,736,280
                                                                      ------------    ------------   ------------
Expenses:
 Loss and loss adjustment expenses                                      30,528,007      34,330,327     22,932,490
 Amortization of policy acquisition costs                               10,877,142      10,069,308      1,875,324
 Cost of surface, water, and mineral rights sold                         1,067,503         605,578
 Insurance underwriting and other expenses                              15,977,129      19,677,124     18,965,258
                                                                      ------------    ------------   ------------
      Total expenses                                                    58,449,781      64,682,337     43,773,072
                                                                      ------------    ------------   ------------
Equity in earnings (losses) of investee                                   (771,117)                     1,013,385
                                                                      ------------    ------------   ------------
       Income (loss) from continuing operations before income taxes
         and minority interest                                         (11,000,622)     23,503,005     33,976,593
Provision for federal, foreign and state income taxes                    1,762,395       7,670,128     12,957,811
                                                                      ------------    ------------   ------------
       Income (loss) from continuing operations
         before minority interest                                      (12,763,017)     15,832,877     21,018,782
Minority interest in loss of subsidiary                                  4,532,632       3,202,461
                                                                      ------------    ------------   ------------
       Income (loss) from continuing operations                         (8,230,385)     19,035,338     21,018,782
Income from discontinued operations, net (Note 6)                        1,075,024         456,283      3,301,229
                                                                      ============    ============   ============
Net income (loss)                                                     $ (7,155,361)   $ 19,491,621   $ 24,320,011
                                                                      ============    ============   ============
Net income (loss) per common share - basic:
       Continuing operations                                          $      (1.38)   $       3.02   $       3.80
       Discontinued operations                                                0.18            0.07           0.59
                                                                      ------------    ------------   ------------
        Net income (loss) per common share                            $      (1.20)   $       3.09   $       4.39
                                                                      ============    ============   ============
               Weighted average shares outstanding                       5,981,814       6,302,401      5,538,199
                                                                      ============    ============   ============

Net income (loss) per common share - diluted:
       Continuing operations                                          $      (1.38)   $       2.91   $       3.66
       Discontinued operations                                                0.18            0.07           0.57
                                                                      ------------    ------------   ------------
            Net income (loss) per common share                        $      (1.20)   $       2.98   $       4.23
                                                                      ============    ============   ============
               Weighted average shares outstanding                       5,981,814       6,540,264      5,748,414
                                                                      ============    ============   ============
</TABLE>

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

                                       51
<PAGE>   52

                      PICO HOLDINGS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY, CONTINUED
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                           Accumulated Other
                                                                                          Comprehensive Income
                                                                                    ---------------------------------
                                                                                     Net Unrealized                    
                                                  Additional                          Appreciation        Foreign      
                                     Common         Paid-In          Retained        (Depreciation)       Currency     
                                     Stock          Capital          Earnings        on Investments     Translation    
                                   -----------  ----------------  ----------------  -----------------   -------------  

<S>                                  <C>           <C>               <C>                <C>                <C>         
Balance, January 1, 1996             $ 27,436      $ 17,382,279      $ 39,906,703       $ 23,827,817       $ (14,792)  

Comprehensive Income for 1996
   Net income                                                          24,320,011                        
   Net unrealized depreciation on investments
net of adjustments to policy acquisition
cost of $17,556 and deferred taxes of $6.6 million                                       (11,990,306)
   Foreign currency translation                                                                              (12,367)
Total Comprehensive Income                                                                                             

   Equity changes of investee
       company                                                                                                         
                                                                                                         
  Purchase of common stock by affiliate                                                                                

  Retirement of treasury stock in
      connection with CIG merger       (1,330)         (779,122)                                                       

  Issuance of common stock in
      connection with CIG merger        6,381        26,287,986                                                        

   Issuance of common stock
       upon exercise of options                          73,920                                                        
                                   ===========  ================  ================  =================   =============  
Balance, December 31, 1996           $ 32,487      $ 42,965,063      $ 64,226,714       $ 11,837,511       $ (27,159)  
                                   ===========  ================  ================  =================   =============  
</TABLE>
<TABLE>
<CAPTION>
                                                                                           Accumulated Other
                                                  
                                                  
                                                       Equity
                                                       Changes
                                                     of Investee       Treasury
                                                       Company          Stock             Total
                                                    --------------  ---------------  -----------------

<S>                                                    <C>              <C>              <C>         
Balance, January 1, 1996                               $ (979,066)      $ (801,032)      $ 79,349,345

Comprehensive Income for 1996
   Net income                                     
   Net unrealized depreciation on investments
net of adjustments to policy acquisition
cost of $17,556 and deferred taxes of $6.6 million
   Foreign currency translation                   
Total Comprehensive Income                                                                 12,317,338

   Equity changes of investee
       company                                             (7,295)                             (7,295)
                                                  
  Purchase of common stock by affiliate                                 (5,844,600)        (5,844,600)

  Retirement of treasury stock in
      connection with CIG merger                                           780,452

  Issuance of common stock in
      connection with CIG merger                                        (2,000,075)        24,294,292

   Issuance of common stock
       upon exercise of options                                             20,580             94,500
                                                    ==============  ===============  =================
Balance, December 31, 1996                             $ (986,361)    $ (7,844,675)     $ 110,203,580
                                                    ==============  ===============  =================
</TABLE>

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

                                       52
<PAGE>   53
                      PICO HOLDINGS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY, CONTINUED
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                                                   Accumulated Other
                                                                                                   Comprehensive Loss
                                                                                             -------------------------------
                                                                                             Net Unrealized                   
                                                           Additional                        Appreciation        Foreign      
                                             Common          Paid-In          Retained       (Depreciation)     Currency      
                                              Stock          Capital          Earnings       on Investments    Translation    
                                           ------------  ----------------  ---------------   --------------   --------------  

<S>                                           <C>           <C>              <C>              <C>                 <C>         
Balance, December 31, 1996                    $ 32,487      $ 42,965,063     $ 64,226,714     $ 11,837,511        $ (27,159)  

Comprehensive Income for 1997
   Net income                                                                  19,491,621
   Net unrealized depreciation on investments
       net of deferred taxes of $6.1 million
       and reclassification adjustment of
       $9.3 million                                                                            (14,554,759)
   Foreign currency translation                                                                                  (2,173,934)
Total Comprehensive Income                                                                                                    

   Equity changes of investee
       company                                                                                                                

   Issuance of common stock
       upon exercise of options                    105           344,895                                                      

   Increase in ownership of
        subsidiary holding common
        stock of the Company                                                                                                  

   Purchase of common stock
       in connection with CIG merger                            (162,853)                                                     
                                           ------------  ----------------  ---------------   --------------   --------------  

Balance, December 31, 1997                    $ 32,592      $ 43,147,105     $ 83,718,335     $ (2,717,248)    $ (2,201,093)  
                                           ============  ================  ===============   ==============   ==============  
</TABLE>
<TABLE>
<CAPTION>
                                                
                                                
                                                
                                                  Equity
                                                  Changes
                                                of Investee      Treasury
                                                  Company         Stock             Total
                                                ------------  ---------------  -----------------

<S>                                               <C>           <C>               <C>          
Balance, December 31, 1996                        $(986,361)    $ (7,844,675)     $ 110,203,580

Comprehensive Income for 1997
   Net income                                   
   Net unrealized depreciation on investments
       net of deferred taxes of $6.1 million
       and reclassification adjustment of
       $9.3 million                             
   Foreign currency translation                 
Total Comprehensive Income                                                            2,762,928

   Equity changes of investee
       company                                      986,361                             986,361

   Issuance of common stock
       upon exercise of options                                                         345,000

   Increase in ownership of
        subsidiary holding common
        stock of the Company                                      (1,984,278)        (1,984,278)

   Purchase of common stock
       in connection with CIG merger                                                   (162,853)
                                                 -----------  ---------------  -----------------

Balance, December 31, 1997                              $ -     $ (9,828,953)     $ 112,150,738
                                                 ===========  ===============  =================
</TABLE>

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

                                       53
<PAGE>   54
                      PICO HOLDINGS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY, CONTINUED
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                                                      Accumulated Other
                                                                                                     Comprehensive Loss
                                                                                            -------------------------------------
                                                          Additional                         Net Unrealized          Foreign
                                                Common      Paid-In         Retained          Depreciation          Currency        
                                                Stock       Capital         Earnings         on Investments        Translation      
                                              ----------- ---------------  ---------------  ------------------  ------------------  

<S>                                             <C>         <C>              <C>                 <C>                 <C>            
Balance, December 31, 1997                      $ 32,592    $ 43,147,105     $ 83,718,335        $ (2,717,248)       $ (2,201,093)  

Comprehensive Loss for 1998
   Net loss                                                                    (7,155,361)
   Net unrealized depreciation on investments
       net of deferred tax of $100,085 and
       reclassification adjustment of $2.4 million                                                   (187,339)
   Foreign currency translation                                                                                        (2,992,285)
Total Comprehensive Loss                                                                                                            

   Issuance of common stock
       upon acquisition of minority
        interest of GEC, net of costs
        of $1.7 million                           34,052     131,354,168                                                            

Acquisition of 412,846 shares of
      treasury stock                                           8,400,000                                                            

Exercise of 57,307 options on
      treasury stock                                             200,000                                                            
                                              ----------- ---------------  ---------------  ------------------  ------------------  

Balance, December 31, 1998                      $ 66,644   $ 183,101,273     $ 76,562,974        $ (2,904,587)       $ (5,193,378)  
                                              =========== ===============  ===============  ==================  ==================  
</TABLE>
<TABLE>
<CAPTION>
                                                         
                                                         
                                                         
                                                         
                                                             Treasury
                                                               Stock              Total
                                                          -----------------  -----------------

<S>                                                           <C>               <C>          
Balance, December 31, 1997                                    $ (9,828,953)     $ 112,150,738

Comprehensive Loss for 1998
   Net loss                                              
   Net unrealized depreciation on investments
       net of deferred tax of $100,085 and
       reclassification adjustment of $2.4 million       
   Foreign currency translation                          
Total Comprehensive Loss                                                          (10,334,985)

   Issuance of common stock
       upon acquisition of minority
        interest of GEC, net of costs
        of $1.7 million                                        (57,709,089)        73,679,131

Acquisition of 412,846 shares of
      treasury stock                                           (10,000,000)        (1,600,000)

Exercise of 57,307 options on
      treasury stock                                                                  200,000
                                                          -----------------  -----------------
 
Balance, December 31, 1998                                   $ (77,538,042)     $ 174,094,884
                                                          =================  =================
</TABLE>

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

                                       54
<PAGE>   55
                      PICO HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                                             1998            1997            1996
                                                                         ------------    ------------    ------------
<S>                                                                      <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                        $ (7,155,361)   $ 19,491,621    $ 24,320,011
Adjustments to reconcile net income (loss)  to net cash used in
  operating activities:
    Deferred taxes                                                          6,819,066         440,656       1,990,334
    Depreciation and amortization                                           1,492,097       1,181,495       2,131,742
    (Gain) loss on sale of investments                                      4,411,805     (21,393,331)    (27,080,236)
    Gain on disposal of discontinued operations                            (1,105,012)     (1,413,012)
    Gain on sale of real estate                                            (1,174,697)
    Equity in (earnings) losses of investee                                   771,117                      (1,013,385)
    Minority interest                                                      (4,532,632)     (3,202,461)
    Changes in assets and liabilities, net of effects of acquisitions:
                    Premiums and other receivables                         (6,276,903)      4,878,240       4,803,716
                    Reinsurance receivables and payables                   23,392,977      20,528,708      23,417,931
                    Accrued investment income                                 426,732       1,370,499        (302,998)
                    Deferred policy acquisition costs                        (227,918)         56,623       4,034,743
                    Unpaid losses and loss adjustment expenses            (41,074,822)    (57,033,716)    (31,097,669)
                    Future policy benefits                                                                 (2,011,233)
                    Discontinued operations                                                (2,186,355)
                    Unearned premiums                                        (830,465)    (13,173,128)    (14,378,764)
                    Other adjustments, net                                  3,851,032     (11,602,112)      4,327,851
                                                                         ------------    ------------    ------------
    Net cash used in operating activities                                 (21,212,984)    (62,056,273)    (10,857,957)
                                                                         ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale investments:
    Fixed maturities                                                       15,215,844      53,988,484      23,236,398
    Equity securities                                                       9,602,798      94,473,149      88,415,361
Proceeds from maturity of available for sale investments                    2,925,000       9,250,000      10,731,369
Purchases of available for sale investments:
    Fixed maturities                                                       (5,935,894)    (23,082,301)    (40,871,986)
    Equity securities                                                      (9,685,616)    (95,175,078)    (59,995,893)
Net sales of short-term investments                                         4,627,225      13,388,506       8,314,267
Proceeds from the sales of real estate                                         74,761         270,978       1,564,389
Purchases of surface, water and mineral rights                             (4,143,988)     (2,336,851)
Proceeds from the sale of surface, water and mineral rights                   518,943
Proceeds from sale of property and equipment                                6,510,166         215,882         106,996
Purchases of property and equipment                                          (859,267)       (984,623)       (106,110)
Purchased cash from consolidated subsidiary                                                18,108,171
Proceeds from sale of business                                             27,130,343
Acquisition costs for purchase of minority interest in GEC                 (1,665,613)
Investments in and advances to affiliates                                  (1,886,714)
Other investing activities, net                                            (1,635,197)
                                                                         ------------    ------------    ------------
    Net cash provided by investing activities                              40,792,791      68,116,317      31,394,791
                                                                         ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank and other borrowings                                                    (16,489,329)       (331,895)
Payment of lease obligations                                               (2,400,150)
Net increase in annuity and other policyholders' funds                                                        306,179
Proceeds from the sale of warrants issued by GEC                                            2,006,567
Proceeds from the sale of treasury stock                                      200,000
Repurchase of treasury stock                                               (1,600,000)
Proceed from exercise of stock options                                                        182,147          94,500
                                                                         ------------    ------------    ------------
  Net cash provided by (used in) financing activities                      (3,800,150)    (14,300,615)         68,784
                                                                         ------------    ------------    ------------
Effect of exchange rate changes on cash                                      (561,250)         95,304         (12,367)
                                                                         ------------    ------------    ------------
  Net increase (decrease) in cash and cash equivalents                     15,218,407      (8,145,267)     20,593,251

Cash and cash equivalents, beginning of year                               56,435,789      64,581,056      43,987,805
                                                                         ------------    ------------    ------------
  Cash and cash equivalents, end of year                                 $ 71,654,196    $ 56,435,789    $ 64,581,056
                                                                         ============    ============    ============
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Interest, net of amounts capitalized                                 $    380,000    $    200,959
                                                                         ============    ============    ============
    Income taxes (recovered) paid                                        $    440,000    $ 10,895,019    $ (1,546,045)
                                                                         ============    ============    ============
</TABLE>

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

                                       55
<PAGE>   56
                      PICO HOLDINGS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

       Organization and Operations:

          PICO Holdings, Inc. and subsidiaries (collectively, the "Company") is
       a diversified holding company with operations in wholesale water and
       storage through its subsidiary Vidler Water Company, Inc., real estate
       and minerals through its subsidiary Nevada Land and Resource Company,
       LLC, insurance through its subsidiaries Sequoia Insurance Company and
       Citation Insurance Company, and investment management though its
       subsidiary Summit Global Management, Inc. In addition, the Company has a
       number of strategic value investments. Also two subsidiaries, Physicians
       Insurance Company of Ohio and The Professionals Insurance Company, are in
       the process of winding down their medical professional liability
       insurance operations.

          Effective December 16, 1998, PICO Holdings Inc. ("PICO") acquired the
       remaining 48.8% of the outstanding stock of Global Equity Corporation
       ("GEC") through a Plan of Arrangement (the "PICO/GEC Combination")
       whereby GEC shareholders received .4628 of a newly issued PICO common
       share for each GEC share surrendered. Immediately following the close of
       the transaction, PICO consummated a 1-for-5 reverse stock split (the
       "Reverse Stock Split"). Accordingly, all share amounts included herein
       are restated to reflect the Reverse Stock Split.

          The Company's primary subsidiaries as of December 31, 1998 are as
       follows:

          Global Equity Corporation ("GEC"). Prior to the PICO/GEC Combination,
       GEC was a publicly held corporation listed on the Toronto Stock Exchange
       and The Montreal Exchange under the symbol "GEQ". Following the PICO/GEC
       Combination, PICO owns 100% of GEC. The Chairman of the Board of
       Directors ("Chairman") and the President and Chief Executive Officer
       ("CEO") of the Company are the Chairman and CEO of GEC, respectively. GEC
       is a Canadian corporation engaging in strategic investments; surface,
       water, and mineral rights; and other activities, operating primarily in
       the United States, but also with investments in Canada, Asia, Europe, and
       the Caribbean. GEC holds a portfolio of equity and debt securities, and
       interests in surface, water and mineral rights through Vidler Water
       Company, Inc. and Nevada Land and Resource Company, LLC.

          Vidler Water Company, Inc. ("Vidler"). Vidler is a majority-owned
       Delaware corporation that was originally formed under the laws of the
       state of Colorado. Vidler is engaged in the acquisition, aggregation,
       marketing, storage and transfer of water and water rights for municipal
       and private industry use in the southwestern United States. Vidler
       attempts to identify areas where water supplies are needed in the
       southwestern United States and then to facilitate the transfer from
       current ownership to Vidler, and subsequently to municipalities, water
       districts, developers and others. Since its acquisition, Vidler has
       purchased water rights and related assets in California, Colorado, Nevada
       and Arizona.

          Nevada Land and Resource Company, LLC ("NLRC"). NLRC's primary asset
       is approximately 1.3 million acres of deeded land with appurtenant water,
       and mineral rights in northern Nevada. NLRC is actively engaged in
       maximizing the property's value in relation to water rights, mineral
       rights, and land development. GEC owns a 74.77% membership interest, and
       PICO owns the remaining 25.23%.

          Sequoia Insurance Company ("Sequoia"). Sequoia is a California
       insurance company licensed to write insurance coverage for property and
       casualty risks ("P&C") within the states of California and Nevada.
       Sequoia writes business through independent agents and brokers covering
       risks located primarily within northern and central California and
       Nevada. Although multiple line underwriting is conducted, and at one time
       or another all major lines of property and casualty insurance except
       workers' compensation and ocean marine have been written, over the past
       few years Sequoia transitioned from writing primarily personal lines of
       business (automobile, homeowners, etc.) to commercial lines.

          Citation Insurance Company ("Citation"). Citation is a
       California-domiciled insurance company licensed to write commercial
       property and casualty insurance in Arizona, California, Colorado, Nevada,
       Hawaii, New Mexico and Utah.

                                       56
<PAGE>   57

          Physicians Insurance Company of Ohio ("Physicians"). Prior to selling
       its book of medical professional liability ("MPL") insurance business in
       1995, Physicians engaged in providing MPL insurance coverage to
       physicians and surgeons, primarily in Ohio. On August 28, 1995,
       Physicians entered into an agreement with Mutual Assurance, Inc.
       ("Mutual") pursuant to which Physicians sold its recurring MPL insurance
       business to Mutual. Physicians still holds MPL unpaid losses and loss
       adjustment expense liabilities that are being settled.

          Summit Global Management, Inc. ("Summit"). Summit is an investment
       advisory company, which provides investment management services in a
       number of states throughout the United States. The majority of Summit's
       assets under management are those of affiliates.

       Unconsolidated Affiliates:

          Conex Continental Inc. ("Conex"). Formed under the laws of the
       Province of Ontario, Canada and re-domiciled in Delaware on April 6,
       1998, shares of Conex trade on the Canadian Dealer Network. The principal
       asset of Conex is a 60% interest in a foreign joint venture, Guizhou
       Jonyang Machinery Industry Co., Ltd. The joint venture operates a
       manufacturing plant in Guiyang City, Guizhou Province, China, producing
       wheeled and tracked hydraulic excavators.

       Principles of Consolidation:

          The accompanying consolidated financial statements include the
       accounts of the Company and its majority owned subsidiaries, and have
       been prepared in conformity with generally accepted accounting
       principles. All significant intercompany balances and transactions have
       been eliminated.

       Use of Estimates in Preparation of Financial Statements:

          The preparation of financial statements in conformity with generally
       accepted accounting principles requires management to make estimates and
       assumptions that affect the reported amounts of assets and liabilities
       and disclosure of contingent assets and liabilities at the date of the
       financial statements and the reported amounts of revenues and expenses
       for each reporting period. The significant estimates made in the
       preparation of the Company's consolidated financial statements relate to
       the assessment of the carrying value of unpaid losses and loss adjustment
       expenses, future policy benefits, deferred policy acquisition costs,
       deferred income taxes and contingent liabilities. While management
       believes that the carrying value of such assets and liabilities are
       appropriate as of December 31, 1998 and 1997, it is reasonably possible
       that actual results could differ from the estimates upon which the
       carrying values were based.

       Investments:

          The Company's investment portfolio at December 31, 1998 and 1997 is
       comprised of investments with fixed maturities, including U.S. government
       instruments, certificates of deposit, and corporate bonds; equity
       securities, including investments in common and preferred stocks, and
       warrants; other investments, including debentures of public and private
       companies and oil and gas leases; short term investments, including,
       certificates of deposit, U.S. Treasuries and mortgage securities: and
       real estate.

          Investments in which the Company owns between 20% to 50% of the voting
       interest, has the ability to exercise significant influence and which are
       made for long term operating purposes, are accounted for under the equity
       method of accounting. Accordingly, the Company's share of income or
       losses are included in consolidated results. Currently, the Company
       classifies its 32% common stock ownership in Conex as an equity
       investment.

          The Company applies the provisions of Statement of Financial
       Accounting Standards ("SFAS") No. 115, "Accounting for Certain
       Investments in Debt and Equity Securities." This statement, among other
       things, requires investment securities to be divided into three
       categories: held to maturity, available for sale, and trading. The
       Company classifies all investments that are not made for long term
       operating purposes as available for sale. Investments with a readily
       determinable fair value are carried at fair value, while other
       investments are carried at cost. Unrealized gains or losses on
       investments recorded at fair value are recorded net of tax and included
       in accumulated other comprehensive income or loss.


                                       57
<PAGE>   58


          The Company regularly reviews the carrying value of its investments
       for impairment. A decline in the market value of any investment below
       cost that is deemed other than temporary is written down to net
       realizable value. Adjustments for write-downs are reflected in realized
       gains or losses on investments in the consolidated statements of
       operations.

          Investment income includes amortization of premium and accretion of
       discount on the level yield method relating to bonds acquired at other
       than par value. Realized investment gains and losses are included in
       income and are determined on the identified certificate basis and are
       recorded on a trade date basis.

          The Company invests domestically and abroad. Approximately $32.7
       million and $46.2 million of the Company's investments at December 31,
       1998 and 1997, respectively, were invested internationally. The Company's
       most significant foreign currency exposure is in Europe, Asia and
       Australia.

          Real estate represents the carrying value of real property held for
       investment.

       Cash and Cash Equivalents:

          Cash and cash equivalents include highly liquid debt instruments
       purchased with original maturities of three months or less.

       Surface, Water and Mineral Rights:

          Water rights consist of various water interests acquired independently
       or in conjunction with the acquisition of real properties. Water rights
       are stated at cost and, when applicable, consist of an allocation of the
       original purchase price between water rights and other assets acquired
       based on their relative fair values. In addition, costs directly related
       to the acquisition and development of water rights are capitalized.
       Surface and mineral rights and land improvements are carried at cost.
       This cost includes, when applicable, the allocation of the original
       purchase price, costs directly related to acquisition, and interest and
       other costs directly related to developing land for its intended use.
       Amortization of land improvements is computed on the straight-line method
       over the estimated useful lives of the improvements ranging from 5 to 15
       years. Provision is made for any diminution in value that is considered
       to be other than temporary.

       Property and Equipment:

          Property and equipment are carried at cost, net of accumulated
       depreciation. Depreciation is computed on the straight-line method over
       the estimated lives of the assets ranging from 5 to 45 years. Maintenance
       and repairs are charged to expense as incurred, while significant
       improvements are capitalized. Gains or losses on the sale of property and
       equipment are included in other income.

       Deferred Acquisition Costs:

          Costs of the insurance companies that vary with and are primarily
       related to the acquisition of new and renewal insurance contracts, net of
       reinsurance ceding commissions, are deferred and amortized over the terms
       of the policies for property and liability insurance. Future investment
       income has been taken into consideration in determining the
       recoverability of such costs.

       Goodwill:

          Goodwill represents the difference between the purchase price and the
       fair value of the net assets (including tax attributes) of companies
       acquired in purchase transactions. The Company recorded negative goodwill
       (i.e., excess of fair value of assets acquired over purchase price) as a
       result of the acquisition of Citation Insurance Group in November 1996.
       Negative goodwill is included in "Other Liabilities" in the accompanying
       consolidated balance sheets, and is being amortized on the straight line
       method over 10 years. For the years ended December 31, 1998, 1997 and
       1996 amortization of negative goodwill was approximately $568,000.

                                       58

<PAGE>   59

       Impairment of Long-Lived Assets:

          The Company applies the provisions of SFAS No. 121 "Accounting for the
       Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
       Of" and periodically evaluates whether events or circumstances have
       occurred that may affect the estimated useful life or the recoverability
       of long-lived assets. Impairment of long-lived assets is triggered when
       the estimated future undiscounted cash flows (excluding interest charges)
       do not exceed the carrying amount. If the events or circumstances
       indicate that the remaining balance may be permanently impaired, such
       potential impairment will be measured based upon the difference between
       the carrying amount and the fair value of such assets determined using
       the estimated future discounted cash flows (excluding interest charges)
       generated from the use and ultimate disposition of the respective
       long-lived asset.

       Reinsurance:

          The Company records all reinsurance assets and liabilities on the
       gross basis, including amounts due from reinsurers and amounts paid to
       reinsurers relating to the unexpired portion of reinsured contracts
       (prepaid reinsurance premiums).

       Unpaid Losses and Loss Adjustment Expenses:

          Reserves for MPL and property and casualty insurance unpaid losses and
       loss adjustment expenses include amounts determined on the basis of
       actuarial estimates of ultimate claim settlements, which include
       estimates of individual reported claims and estimates of incurred but not
       reported claims. The methods of making such estimates and for
       establishing the resulting liabilities are continually reviewed and
       updated based on current circumstances, and any adjustments resulting
       therefrom are reflected in current operations. Reserves for MPL unpaid
       losses and loss adjustment expenses for MPL insurance claims have been
       adjusted to reflect the time value of money (discounting).

       Recognition of Premium Revenue:

          MPL and other property and casualty insurance premiums written are
       earned principally on a monthly pro rata basis over the lives of the
       policies. The premiums applicable to the unexpired terms of the policies
       are included in unearned premiums.

       Income Taxes:

          The Company's provision for income tax expense includes federal,
       state, local and foreign income taxes currently payable and those
       deferred because of temporary differences between the income tax and
       financial reporting bases of the assets and liabilities. The liability
       method of accounting for income taxes also requires the Company to
       reflect the effect of a tax rate change on accumulated deferred income
       taxes in income in the period in which the change is enacted.

          In assessing the realization of deferred income taxes, management
       considers whether it is more likely than not that any deferred income tax
       assets will be realized. The ultimate realization of deferred income tax
       assets is dependent upon the generation of future taxable income during
       the period in which temporary differences become deductible. If future
       income does not occur as expected, a deferred income tax valuation
       allowance may be established or modified.

       Earnings per Share:

          In February 1997, the Financial Accounting Standards Board ("FASB")
       issued SFAS No. 128, "Earnings Per Share," effective for financial
       statements issued after December 15, 1997. SFAS No. 128 requires dual
       presentation of "Basic" and "Diluted" earnings per share ("EPS") by
       entities with complex capital structures, replacing "Primary" and "Fully
       Diluted" EPS under Accounting Principles Board ("APB") Opinion No. 15.
       Basic EPS excludes dilution from common stock equivalents and is computed
       by dividing income available to common stockholders by the
       weighted-average number of common shares outstanding for the period.
       Diluted EPS reflects the potential dilution from common stock
       equivalents, similar to fully diluted EPS, but uses only the average
       stock price during the period as part of the computation. The Company
       adopted the new method of reporting EPS for the year ended December 31,
       1997, and the 1996 financial statements were restated in 1997 to reflect
       the change.

                                       59
<PAGE>   60


     Reconciliation of the Basic and Diluted EPS is as follows:

<TABLE>
<CAPTION>
                                                             Year ended December 31,
                                                   -----------------------------------------
                                                       1998           1997          1996
                                                   ------------    -----------   -----------

<S>                                                <C>             <C>           <C>        
Net income (loss)                                  $ (7,155,361)   $19,491,621   $24,320,011
                                                   ============    ===========   ===========
Basic earnings (loss) per share                    $      (1.20)   $      3.09   $      4.39
                                                   ============    ===========   ===========

Basic weighted average common shares outstanding      5,981,814      6,302,401     5,538,199
Options                                                      --        237,863       210,215
                                                   ------------    -----------   -----------
Diluted weighted average common and
        common equivalent shares outstanding          5,981,814      6,540,264     5,748,414
                                                   ============    ===========   ===========
Diluted earnings (loss) per share                  $      (1.20)   $      2.98   $      4.23
                                                   ============    ===========   ===========
</TABLE>

     Stock options of 1,096,972, 276,543 and 339,218 for 1998, 1997 and 1996,
respectively and 223,187 warrants in 1998, were not included in the calculation
of weighted average shares because the impacts of such instruments were
anti-dilutive.

Comprehensive Loss

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established requirements for disclosure of comprehensive
income and is effective for the Company for the year ended December 31, 1998.
The Company adopted the new standard for the year ended 1998, and has
reclassified previous financial statements to conform to the new presentation.
Comprehensive income or loss includes foreign currency translation, and
unrealized holding gains and losses on available for sale securities, which
prior to adoption were reported separately in stockholders' equity. 

<TABLE>
<CAPTION>
                                                  December 31,
                                             1998           1997
                                         -----------    -----------

<S>                                      <C>            <C>         
     Net unrealized loss on securities   $(2,904,587)   $(2,717,248)
     Foreign currency translation         (5,193,378)    (2,201,093)
                                         -----------    -----------
Accumulated other comprehensive loss     $(8,097,965)   $(4,918,341)
                                         ===========    ===========
</TABLE>

   Accumulated other comprehensive loss is net of deferred income tax benefit of
$1.5 million for the years ended December 31, 1998 and 1997.

Translation of Foreign Currency:

   Financial statements of foreign operations are translated into U.S. dollars
using average rates of exchange in effect during the year for revenues,
expenses, gains and losses, and the exchange rate in effect at the balance sheet
date for assets and liabilities. Unrealized exchange gains and losses arising on
translation are reflected within accumulated other comprehensive loss.

Reclassifications:

   Certain amounts in the financial statements for prior periods have been
reclassified to conform to the current year presentation.

                                       60

<PAGE>   61

Recent Accounting Pronouncements:

      In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
   an Enterprise and Related Information". SFAS No. 131 establishes standards
   for disclosure about operating segments in annual statements and selected
   information in interim financial reports. It also establishes standards for
   related disclosures about products and services, geographic areas and major
   customers. This statement supersedes SFAS No. 14, "Financial Reporting for
   Segments of a Business Enterprise". The new standard is effective for the
   year ended December 31, 1998, and comparative information from earlier years
   has been restated to conform to the requirements of this standard.

      In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
   Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
   reporting standards for derivative instruments, including instruments
   embedded in other contracts and for hedging activities. It requires
   recognition of all derivatives as either assets or liabilities in the
   consolidated balance sheet, and measure those instruments at fair value. The
   new standard becomes effective for fiscal years beginning after June 15,
   1999. Management does not expect this statement to have a material effect on
   the Company's consolidated financial statements.

2.  SIGNIFICANT ACQUISITIONS:

      On December 16, 1998, PICO acquired the remaining 48.8% of GEC, making it
   a wholly-owned subsidiary. This was accomplished through an exchange of PICO
   shares for GEC shares at the exchange ratio of .4628 of a PICO share for each
   share of GEC. PICO issued a total of 6,810,426 shares of PICO common stock to
   former GEC shareholders. PICO subsidiaries hold 3,110,837 of these newly
   issued shares which are recorded as treasury stock in the consolidated
   balance sheets of the Company. In addition, PICO exchanged 223,187 PICO
   warrants with an exercise price of $23.80 per share for all the outstanding
   GEC warrants using the same exchange ratio. PICO also exchanged 484,967 stock
   options to GEC officers, two current GEC directors and a former GEC director
   in exchange for surrendering their GEC stock options. These grants placed the
   participants in a substantially similar position regarding shares and
   exercise price and vesting.

      The acquisition was accounted for using the purchase method of accounting.
   Accordingly, a portion of the purchase price was allocated to the net assets
   acquired based on their estimated fair values as noted in the following
   table:

<TABLE>
<S>                                                                     <C>
Purchase Price:
     Value of approximately 3.7 million PICO shares exchanged           $ 81,760,917
     Direct costs of acquisition                                           1,665,613
     Value of GEC options assumed                                          2,731,975
                                                                        ------------
                                                                        $ 86,158,505
                                                                        ============

Allocation of Purchase Price:
     Historic GEC shareholders' equity acquired                         $ 58,801,561
     Adjustments to assets and liabilities acquired:
          Increase in book value of surface, water and mineral rights     36,945,129
          Increase in book value of PICO common stock owned by GEC         3,342,610
          Deferred income tax liability                                  (12,930,795)
                                                                        ------------
                                                                        $ 86,158,505
                                                                        ============
</TABLE>

                                       61

<PAGE>   62
      The following table reflects unaudited pro forma combined results of
   operations of the Company and GEC on the basis that the acquisition had taken
   place at the beginning of the fiscal year for each of the periods presented:

<TABLE>
<CAPTION>
                                               (Unaudited)
                                            1998            1997
                                        ------------    ------------
<S>                                     <C>             <C>         
Total revenues                          $ 49,325,288    $ 87,579,764
Income (loss) before income taxes        (15,533,254)     20,300,544
Net income (loss)                        (16,220,625)     13,086,699
Net income (loss) per share - basic           ($1.81)          $1.37
Net income (loss) per share - diluted         ($1.81)          $1.33
</TABLE>

      These unaudited pro forma results have been prepared for comparative
   purposes and do not purport to be indicative of the results of operations
   which actually would have resulted had the combinations been in effect at the
   beginning of the period or of future results of operations of the
   consolidated entities.

      On April 23, 1997, GEC and PICO acquired 100% of the membership interest
   of NLRC, a Delaware limited liability company. The total purchase price was
   approximately $48.6 million. A wholly-owned subsidiary of GEC, Global Nevada
   Land Resource Corporation, owns 74.77% of the membership interests of NLRC.
   PICO paid approximately $12 million for the remaining 25.23% membership
   interest. GEC financed its portion of the acquisition in part by issuing to
   the Company a 7% debenture in the principal amount of approximately $25
   million. The debenture was subsequently repaid along with accrued interest.

3. INVESTMENTS:

      At December 31, the cost and carrying value of available for sale
   investments are as follows:

<TABLE>
<CAPTION>
                                                        Gross           Gross
                                                      Unrealized       Unrealized       Carrying
1998:                                   Cost            Gains           Losses          Value
                                    ------------   ------------    ------------    ------------
<S>                                 <C>            <C>             <C>             <C>         
Fixed maturities:
     U.S. Treasury securities
          and obligations of U.S. 
          government corporations
          and agencies              $  6,991,162   $     63,105    $    (43,919)   $  7,010,348

     Corporate securities             12,943,949        184,032                      13,127,981

     Mortgage-backed and
          other securities            12,503,811                                     12,503,811
                                    ------------   ------------    ------------    ------------
                                      32,438,922        247,137         (43,919)     32,642,140
Equity securities                     66,855,493      4,422,499      (9,915,154)     61,362,838
                                    ------------   ------------    ------------    ------------
          Total                     $ 99,294,415   $  4,669,636    $ (9,959,073)   $ 94,004,978
                                    ============   ============    ============    ============
</TABLE>


                                       62

<PAGE>   63
<TABLE>
<CAPTION>
                                                       Gross            Gross
                                                     Unrealized       Unrealized      Carrying
1997:                                  Cost            Gains            Losses         Value
                                    ------------   ------------    ------------    ------------
<S>                                 <C>            <C>             <C>             <C>         
Fixed maturities:
     U.S. Treasury securities
          and obligations of U.S. 
          government corporations
          and agencies              $ 13,147,587   $    130,540    $   (190,174)   $ 13,087,953

     Corporate securities             18,270,118        197,166        (288,946)     18,178,338

     Mortgage-backed and
          other securities            12,000,000                                     12,000,000
                                    ------------   ------------    ------------    ------------
                                      43,417,705        327,706        (479,120)     43,266,291
Equity securities                     78,648,715     12,921,373      (6,502,137)     85,067,951
                                    ------------   ------------    ------------    ------------

          Total                     $122,066,420   $ 13,249,079    $ (6,981,257)   $128,334,242
                                    ============   ============    ============    ============
</TABLE>


   The amortized cost and carrying value of investments in fixed maturities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                          Amortized      Carrying
                                             Cost         Value
                                         -----------   -----------
<S>                                      <C>           <C>        
Due in one year or less                  $ 3,778,239   $ 3,787,630
Due after one year through five years     13,959,770    14,156,407
Due after five years through ten years     2,197,102     2,194,292
Mortgage-backed and other securities      12,503,811    12,503,811
                                         -----------   -----------
                                         $32,438,922   $32,642,140
                                         ===========   ===========
</TABLE>

   Investment income is summarized as follows for each of the years ended
December 31:

<TABLE>
<CAPTION>
                                    1998            1997            1996
                               ------------    ------------    ------------
<S>                            <C>             <C>             <C>         
Investment income from:
     Available for sale:
          Fixed maturities     $  1,694,345    $  3,665,643    $  4,883,162
          Equity securities         585,330       1,122,274       1,546,020
     Short-term investments
          and other               8,352,729       7,412,342       2,332,626
                               ------------    ------------    ------------
     Total investment income     10,632,404      12,200,259       8,761,808
Investment expenses                (388,630)       (514,187)       (675,652)
                               ------------    ------------    ------------
     Net investment income     $ 10,243,774    $ 11,686,072    $  8,086,156
                               ============    ============    ============
</TABLE>

                                       63

<PAGE>   64
      Pre-tax net realized gains (losses) on investments were as follows for
   each of the years ended December 31:

<TABLE>
<CAPTION>
                                     1998            1997            1996
                                ------------    ------------    ------------
<S>                             <C>             <C>             <C>         
Gross realized gains:
     Available for sale:
          Fixed maturities      $    201,665    $    300,167    $     36,123
          Equity securities        3,825,708      31,083,312      27,469,731
                                ------------    ------------    ------------
     Total gain                    4,027,373      31,383,479      27,505,854
                                ------------    ------------    ------------
Gross realized losses:
     Available for sale:
          Fixed maturities          (178,770)     (1,253,139)       (292,612)
          Equity securities       (8,260,408)     (8,737,009)       (133,006)
                                ------------    ------------    ------------
     Total losses                 (8,439,178)     (9,990,148)       (425,618)
                                ------------    ------------    ------------
     Net realized gain (loss)   $ (4,411,805)   $ 21,393,331    $ 27,080,236
                                ============    ============    ============
</TABLE>

      During 1998, the Company recorded $8.2 million in permanent write downs of
   investments to recognize what is expected to be other than temporary declines
   in the market values of those securities.

      Approximately $26.8 million of the total gross realized gains for the year
   ended December 31, 1997 were generated from the conversion of Resource
   America, Inc. warrants and the immediate sale of the converted common stock.
   For the year ended December 31, 1997, GEC recorded a permanent write down of
   $8.0 million (of which approximately $3.8 million represented the realization
   of accumulated foreign currency translation adjustments recorded by GEC) in
   the value of its investment in Korean securities in recognition of what is
   expected to be an other than temporary decline in the market value of those
   securities. These write-downs have been recorded as a realized loss.

      In December 1998, the Company converted its $2.5 million PC Quote
   debenture, $3.3 million line of credit and $969,000 in accrued interest into
   1,907,463 shares of PC Quote Series A preferred shares, 2,879,077 series B
   preferred shares, and 3,106,163 million warrants to purchase PC Quote common
   shares, expiring in 2006. The Company owns approximately 18% of the
   outstanding common stock of PC Quote. The common stock is carried at a market
   value of $5 million at December 31, 1998. At acquisition, the value of the
   series A and B preferred shares and warrants was determined using the Black
   Scholes pricing model and are carried at approximately $6.9 million.

      During 1998, the Company purchased 857,000 shares of Australian Oil and
   Gas ("AOG") for $803,000. During 1999, an additional 5.9 million shares were
   acquired for $6.3 million. As of March 1999, the Company owns a 14.9%
   interest in AOG. Also during 1998, the Company purchased 5,000 shares of
   Jungfraubahn Holding AG ("Jungfraubahn") based in Interlaken, Switzerland. In
   February 1999, an additional 70,000 shares were acquired. In total the
   Company purchased a 17.6% shareholding for $15.9 million. The acquisition was
   financed with $7 million in cash and the remaining balance in debt.

4. INVESTMENT IN CONEX:

      At December 31, 1998, the Company's investment in Conex consisted of
   ownership of 32% of Conex's outstanding common stock, $5 million in preferred
   stock and $2.1 million in advances. In addition, the Company owns warrants to
   purchase additional Conex common stock. The common stock investment at
   December 31, 1998 is accounted for using equity method accounting, while the
   remaining investment balances are carried at cost. At December 31, 1998, the
   Company's equity method investment had been reduced to zero due to recurring
   Conex losses. For the year ended December 31, 1998 the Company's equity in
   losses of this investee totaled $771,000. The Company's interest in the
   stand-alone Conex balances is not currently material to the Company's
   financial position or results of operations.


                                       64

<PAGE>   65
5. SURFACE, WATER AND MINERAL RIGHTS:

      Through its subsidiaries Vidler and NLRC, PICO owns surface, water and
   mineral rights consisting of various real properties, surface rights, water
   rights and mineral rights in California, Arizona, Colorado and Nevada. The
   costs assigned to the various components of surface and mineral rights, water
   rights, and land improvements at December 31, were as follows:

<TABLE>
<CAPTION>
                                            1998           1997
                                       ------------   ------------
<S>                                    <C>            <C>         
NLRC:
 Surface and mineral rights            $ 53,905,167   $ 55,713,051
Vidler:
 Water rights                            20,012,797      9,745,657
 Land improvements, net                   2,499,189      1,619,259
 Surface rights                          40,236,058      8,099,048
                                       ------------   ------------
   Surface, water and mineral rights   $116,653,211   $ 75,177,015
                                       ============   ============
</TABLE>

6. DISCONTINUED OPERATIONS:

      On June 16, 1997, the Company announced a definitive agreement to sell its
   life and health insurance subsidiary, American Physicians Life ("APL"). The
   closing was completed on December 4, 1998. Proceeds from the sale were $17
   million in cash. On August 21, 1997, GEC announced an agreement to sell its
   Sri Lankan subsidiaries. The closings occurred during 1997 for consideration
   of $17.3 million in cash and $7.7 million in marketable securities.
   Approximately $15 million of the $25 million purchase price was received in
   1997, and the remaining balance was received in 1998.

      Because these subsidiaries represented major segments of the Company's
   business, in accordance with APB No. 30 "Reporting the Results of
   Operations--Reporting the Effects of Disposal of a Segment of a Business,"
   operations for all of 1998, 1997 and 1996 have been classified as
   discontinued operations. The net assets are shown as a single line item in
   the accompanying balance sheet as "Net assets of discontinued operations."

      The following reconciles income (loss) from continuing operations to net
   income (loss) :

<TABLE>
<CAPTION>
                                                                        1998            1997            1996
                                                                    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>         
Income (loss) from continuing operations
  before income taxes and minority interest                         $(11,000,622)   $ 23,503,005    $ 33,976,593
Provision for income taxes                                             1,762,395       7,670,128      12,957,811
Minority interest                                                      4,532,632       3,202,461
                                                                    ------------    ------------    ------------
  Income (loss) from continuing operations                            (8,230,385)     19,035,338      21,018,782
                                                                    ------------    ------------    ------------

  Income from discontinued operations, net of
   income taxes of $86,000 in 1998, $965,000 in 1997
   and $701,000 in 1996 and minority interest of $489,000 in 1997        345,716         892,275       3,301,229
  Gain (loss) on disposal of discontinued operations, net of
   income tax of $375,000 in 1998 and $1.3 million in 1997
   and foreign currency of $1.2 million in 1997                          729,308        (160,250)
  Minority interest                                                                     (275,742)
                                                                    ------------    ------------    ------------
   Income from discontinued operations                                 1,075,024         456,283       3,301,229
                                                                    ------------    ------------    ------------
  Net income (loss)                                                 $ (7,155,361)   $ 19,491,621    $ 24,320,011
                                                                    ============    ============    ============
</TABLE>

                                       65

<PAGE>   66

        Following is an unaudited summary of APL's stand alone financial results
    for the periods included in the statements of operations as discontinued
    operations:

<TABLE>
<CAPTION>
                                            1998          1997           1996
                                        -----------   -----------    -----------
<S>                                     <C>           <C>            <C>        
Total revenues                          $ 9,172,435   $ 5,310,330    $ 9,031,846
Income (loss) before taxes                  431,650      (112,012)     4,002,406
Net income (loss)                           345,716      (167,327)     3,301,229
Net income (loss) per share - basic           $0.07        ($0.03)         $0.60
Net income (loss) per share - diluted         $0.07        ($0.03)         $0.57
</TABLE>

      Following is an unaudited summary of these Sri Lankan companies stand
   alone financial results for the period included as discontinued operations in
   the accompanying financial statements. Operating results for 1996 are not
   shown since this period was prior to the effective date of consolidation of
   GEC with PICO

<TABLE>
<CAPTION>
                                                1997
                                            -----------
<S>                                         <C>        
Total revenues                              $12,449,347
Income before taxes
    and minority interests                    3,309,699
Minority interest in income of subsidiary       764,418
Net income                                      288,956
Net income per share - basic                      $0.05
Net income per share - diluted                    $0.04
</TABLE>

7. PREMIUMS AND OTHER RECEIVABLES:

       Premiums and other receivables consisted of the following at December 31:

<TABLE>
<CAPTION>
                                              1998            1997
                                         ------------    ------------
<S>                                      <C>             <C>         
Agents' balances and unbilled premiums   $  7,513,754    $ 20,723,259
Other accounts receivable                   2,994,788          77,333
                                         ------------    ------------
                                           10,508,542      20,800,592
Allowance for doubtful accounts               (94,525)       (119,024)
                                         ------------    ------------
                                         $ 10,414,017    $ 20,681,568
                                         ============    ============
</TABLE>

                                       66
<PAGE>   67


8. FEDERAL INCOME TAX:

      The Company and its U.S. subsidiaries, excluding U.S. subsidiaries of GEC,
   file a consolidated life/non-life federal income tax return. Non-U.S.
   subsidiaries file tax returns in various foreign countries.

      Deferred income taxes reflect the net tax effects of temporary differences
   between the carrying amounts of assets and liabilities for financial
   reporting purposes and the amounts used for income tax purposes.

      Significant components of the Company's deferred tax assets and
   liabilities are as follows at December 31:

<TABLE>
<CAPTION>
                                                             1998            1997
                                                        ------------    ------------
<S>                                                     <C>             <C>         
Deferred tax assets:
     Net operating loss carryforwards                   $ 10,358,223    $  6,800,000
     Loss reserves                                        11,142,641      17,312,601
     Unearned premium reserves                             1,265,960       1,319,214
     Unrealized depreciation on securities                 2,609,826
     Deferred gain on retroactive reinsurance                612,338         758,938
     Integration liability                                    51,680         185,690
     Other, net                                            1,557,275       1,713,417
                                                        ------------    ------------
          Total deferred tax assets                       27,597,943      28,089,860
                                                        ------------    ------------
Deferred tax liabilities:
     Reinsurance receivables                               8,484,586      10,868,442
     Deferred policy acquisition costs                     1,886,536       1,809,043
     Unrealized appreciation on securities                   243,775         125,801
     Revaluation of surface, water and mineral rights     14,880,795       4,986,358
     NLRC land sales                                         455,000
     Accretion of bond discount                               62,888          72,076
     Depreciation                                            153,339         463,060
                                                        ------------    ------------
          Total deferred tax liabilities                  26,166,919      18,324,780
                                                        ------------    ------------
     Net deferred tax assets before
          valuation allowance                              1,431,024       9,765,080
     Less valuation allowance                             (8,689,973)     (6,800,000)
                                                        ------------    ------------
          Net deferred tax asset (liability)            $ (7,258,949)   $  2,965,080
                                                        ============    ============
</TABLE>

      The deferred tax asset valuation allowance as of December 31, 1998 and
   1997 relates to the net operating loss carryforwards (NOL's) of Citation,
   PICO, GEC and its subsidiaries. NOL's for U.S. corporations, and to a similar
   extent Canadian tax NOL's, are subject to the separate return limitation
   rules. Therefore, certain of these NOL's can only be used to offset the
   respective future taxable income generated by Citation, PICO, GEC and its
   subsidiaries, individually. Due to the uncertainty related to future income
   of these subsidiaries, the Company recorded a valuation allowance to reflect
   the estimated amount of deferred tax assets that may not be realized.
   Deferred tax assets and liabilities, the recorded valuation allowance and
   federal income tax expense in future years can be significantly affected by
   changes in enacted tax rates or by changes in circumstances that would
   influence management's conclusions as to the ultimate realization of deferred
   tax assets.

                                       67
<PAGE>   68

   Pre-tax income (loss) from continuing operations for the years ended December
31 was under the following jurisdictions:

<TABLE>
<CAPTION>
                                      1998            1997            1996
                                 ------------    ------------    ------------
<S>                              <C>             <C>             <C>         
Domestic                         $ (6,919,561)   $ 35,990,469    $ 34,006,819
Foreign                            (4,081,061)    (12,487,464)        (30,226)
                                 ------------    ------------    ------------
    Total                        $(11,000,622)   $ 23,503,005    $ 33,976,593
                                 ============    ============    ============
</TABLE>

    Income tax expense (benefit) from continuing operations for each of the
years ended December 31 consists of the following:

<TABLE>
<CAPTION>
                                      1998           1997           1996
                                  -----------    -----------    -----------
<S>                               <C>            <C>            <C>        
Current tax expense (benefit):
U.S. federal                      $(5,415,430)   $ 9,292,120    $11,042,744
Foreign                               358,759
                                  -----------    -----------    -----------
    Total tax expense (benefit)    (5,056,671)     9,292,120     11,042,744
                                  -----------    -----------    -----------

Deferred tax expense:
U.S. federal                      $ 3,675,971    $ 1,930,457    $ 1,915,067
Foreign                             3,143,095     (3,552,449)
                                  -----------    -----------    -----------
    Total tax expense (benefit)     6,819,066     (1,621,992)     1,915,067
                                  -----------    -----------    -----------

    Total income tax expense      $ 1,762,395    $ 7,670,128    $12,957,811
                                  ===========    ===========    ===========
</TABLE>

   The difference between income taxes provided at the Company's effective tax
rate and federal statutory rate is as follows:


<TABLE>
<CAPTION>
                                                              1998            1997            1996
                                                         ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>         
Federal income tax expense (benefit) at statutory rate   $ (3,611,105)   $  8,226,052    $ 11,891,807
Change in valuation allowance                               1,889,973        (136,000)        (53,323)
Investment valuation                                        3,434,307
Other                                                          49,220        (419,924)      1,119,327
                                                         ------------    ------------    ------------
     Federal income tax expense                          $  1,762,395    $  7,670,128    $ 12,957,811
                                                         ============    ============    ============
</TABLE>


   Provision has not been made for U.S. or additional foreign tax on the
undistributed earnings of foreign subsidiaries. It is not practical to estimate
the amount of additional tax that might be payable. At December 31, 1998 and
1997, the Company had a $6.5 million income tax receivable and a $1 million
income tax payable, respectively. The aggregate NOL's of approximately $24.2
expire between 1999 and 2013. There is an annual limitation on the utilization
of PICO's, Citation's and Sequoia's NOL's of approximately $1.4 million.

                                       68
<PAGE>   69

9.  PROPERTY AND EQUIPMENT:

    The major classifications of property and equipment are as follows at
December 31:

<TABLE>
<CAPTION>
                                                1998            1997
                                           ------------    ------------
<S>                                        <C>             <C>
Land                                                       $  1,923,015
Buildings                                                     7,012,657
Office furniture, fixtures and equipment   $  5,796,110       6,265,524
Building and leasehold improvements              22,988          12,499
                                           ------------    ------------
                                              5,819,098      15,213,695
Accumulated depreciation                     (3,967,596)     (6,662,888)
                                           ------------    ------------
     Net book value                        $  1,851,502    $  8,550,807
                                           ============    ============
</TABLE>

    Depreciation expense was $1.3 million, $873,000, and $751,000 in 1998, 1997,
and 1996, respectively.

10. DEFERRED POLICY ACQUISITION COSTS:

    Changes in deferred policy acquisition costs were as follows:

<TABLE>
<CAPTION>
                                               1998            1997            1996
                                          ------------    ------------    ------------
<S>                                       <C>             <C>             <C>         
Balance, January 1                        $  5,320,716    $  5,377,339    $  2,894,644
     Additions:
          Commissions                       12,949,841       7,677,146       4,158,421
          Other                              4,540,307       2,933,501       1,860,247
          Acquired in merger                                                 1,593,930
          Ceding commissions                (6,281,908)        (13,596)       (397,698)
                                          ------------    ------------    ------------
               Deferral of expense          11,208,240      10,597,051       7,214,900
                                          ------------    ------------    ------------
     Adjustment for expected gross
          profits on investment and
          life-type contracts resulting
          from SFAS 115 mark-to-market                                          17,556
     Adjustment for premium
          deficiency                          (103,180)       (584,366)
     Amortization to expense               (10,877,142)    (10,069,308)     (2,205,530)
                                          ------------    ------------    ------------
Balance, December 31                      $  5,548,634    $  5,320,716    $  7,921,570
                                          ============    ============    ============
</TABLE>

    The difference between the December 31, 1996 ending balance of $7,921,570
and the January 1, 1997 beginning balance of $5,377,339 is equal to the amount
of deferred policy acquisition costs attributable to 1997 discontinued
operations of APL.

                                       69

<PAGE>   70

11. SHAREHOLDERS' EQUITY (ALL SHARE AMOUNTS HAVE BEEN RESTATED TO GIVE EFFECT 
    TO THE DECEMBER 16, 1998 1-FOR-5 REVERSE STOCK SPLIT):

    On December 16, 1998, PICO acquired the remaining shares of GEC. This was
accomplished through an exchange of PICO shares for GEC shares at the exchange
ratio of .4628 of a PICO share for each share of GEC. PICO issued a total of
6,810,426 shares of PICO common stock to former GEC shareholders. PICO
subsidiaries hold 3,110,837 of these newly issued shares which are recorded as
treasury stock in the consolidated balance sheets of the Company. Following the
transaction, PICO has approximately 13,328,770 shares of common stock issued and
outstanding of which approximately 4,380,779 million are accounted for as
treasury stock in the consolidated balances sheets. In addition, PICO exchanged
223,187 PICO warrants with an exercise price of $23.80 per share for all the
outstanding GEC warrants using the same exchange ratio. The original October 23,
1998 expiration date of the warrants was extended to June 30, 1999. No other
warrants exist. PICO also exchanged 484,967 stock options to GEC officers, two
current GEC directors and a former GEC director in exchange for surrendering
their GEC stock options. These grants placed the participants in a substantially
similar position regarding shares and exercise price, vested according to their
original terms.

    On May 9, 1996, the Company, Guinness Peat Group plc ("GPG") and GEC entered
into an agreement whereby GPG agreed to sell 851,683 common shares of the
Company's common stock to GEC at an average price of approximately $18.00 per
share. Prior to the sale, GPG owned approximately 40% of the Company's common
stock. Following the sale, GPG and GEC owned approximately 23% and 16% of the
Company's common stock, respectively. Subsequent to the Merger with CIG in
November 1996, GPG and GEC owned approximately 19% and 13.1%, respectively. The
shares of the Company owned by GEC are recorded as treasury stock in the
Company's consolidated balance sheet. GPG sold 64,800 PICO shares in May 1997
pursuant to Securities Exchange Commission Rule 144 on the open market,
decreasing its ownership of the Company to approximately 17.6%. On July 23,
1998, GPG sold 672,517 unregistered shares of PICO common stock to several
institutional investors, representing substantially all of GPG's holdings in
PICO. PICO acquired 412,846 shares from GPG at a cost of $1.6 million, and
assumed call option obligations for the delivery of these shares when the
options are exercised. These call options expire on December 30, 2003 and are
held by PICO's chairman of the board and president and chief executive officer.
On December 31, 1998, 57,307 of these options were exercised for a total of
$200,000.

    On November 30, 1998, the Company eliminated the 1991 Shareholder Rights
Plan, which had been adopted by Citation Insurance Group prior to its
acquisition by PICO. The action was taken by unanimous vote of PICO's
independent directors, as required by the terms of the Plan, and on the
recommendation of management.

    Pursuant to direction by the Board of Directors in the last quarter of 1997,
management is in the process of terminating the CIG ESOP. No contributions were
made to the plan in 1998, 1997 or 1996.

   Stock Option Plans

    PICO Holdings' 1995 Non-Qualified Stock Option Plan. PICO was authorized to
issue 521,030 shares of common stock pursuant to awards granted in various
forms, including incentive stock options (intended to qualify under Section 422
of the Internal Revenue Code of 1986, as amended), non-qualified stock options,
and other similar stock-based awards to full-time employees (including officers)
and directors. The options granted to employees vest either (i) at the rate of
25%, 33% or 50% per year on each of the first four, three or two year
anniversaries of the date of grant, as applicable, or (ii) at a rate of 33% upon
grant and 33% per year on each of the first two anniversaries of the date of
grant. A total of 512,005 options have been issued from this plan. No options
were granted from the plan in 1998. The Company granted stock options in 1996
and 1995 under this plan in the form of incentive stock options and
non-qualified stock options. All issued options from this plan are fully vested.

    PICO Holdings' 1998 Option Plan. PICO is authorized to issue 100,000 shares
of common stock pursuant to awards granted in various forms, including incentive
stock options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended), non-qualified stock options, and other similar
stock-based awards. On October 22, 1998, PICO granted 100,000 non-qualified
common stock options to an officer of the Company at an exercise price of
$15.625 per share. The options granted vest monthly over three years, expiring
October 22, 2008.

                                       70
<PAGE>   71
     PICO Holdings' 1998 GEC/PICO Option Plan. As discussed above, PICO assumed
  484,967 options to existing GEC option holders pursuant to the acquisition of
  the remaining shares of GEC by exchanging PICO options for GEC options. The
  options granted from this plan placed the participants in an economically
  equivalent position regarding the number of shares, exercise price, and with
  vesting according to their original terms.

     A summary of the status of the Company's stock options is presented below
for the years ended December 31:

<TABLE>
<CAPTION>
                                                 1998                           1997                         1996
                                    ------------------------------  --------------------------  ---------------------------
                                                         Weighted                     Weighted                     Weighted
                                    # Shares of          Average    # Shares of        Average   # Shares of       Average
                                     Underlying          Exercise    Underlying       Exercise   Underlying        Exercise
                                       Options            Prices      Options          Prices      Options          Prices
                                   --------------     -----------   -----------      ---------- -------------    -----------
<S>                                  <C>                  <C>         <C>              <C>         <C>              <C>   
Outstanding at beginning of year         514,405          $13.55      551,901          $14.15      516,019          $13.45
Granted                                  100,000           15.63                                    14,028           13.45
Exercised                                                             (21,000)          16.45       (7,014)          13.45
Canceled                                  (2,400)          30.00      (16,496)          33.20      (14,028)          13.45
Options assumed in merger                484,967           18.41                                    42,896           22.45
Outstanding at end of year             1,096,972           15.88      514,405           13.55      551,901           14.15
Exercisable at end of year             1,002,528           15.91      514,405           13.55      499,130           13.45
Weighted-average fair value
     of options granted during
     the year                                             $10.23                                                    $18.10
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                           Options Outstanding                                 Options Exercisable
- --------------------------------------------------------------------    --------------------------------
                                            Weighted
                                             Average     Weighted
                            Number          Remaining     Average          Number          Weighted
   Range of               Outstanding      Contractual    Exercise       Exercisable        Average
Exercise Prices           at 12/31/98         Life         Price         at 12/31/98     Exercise Price
- ----------------        -------------      ----------    ---------       -----------     --------------
<S>                     <C>                  <C>           <C>           <C>                <C>
$13.45 to $14.40            512,005           6.64         $13.55           512,005           $13.55
$15.63 to $18.40            584,967           3.37         $17.93           490,523           $18.38
                          ---------                                       ---------
$13.45 to $18.40          1,096,972           4.89         $15.89         1,002,528           $15.91
                          =========                                       =========
</TABLE>

     The fair value of each stock option granted is estimated on the date of
  grant using the Black-Scholes option-pricing model with the following
  weighted-average assumptions for grants in 1998, 1997 and 1996, respectively:
  no dividend yield for all years; risk-free interest rates are different for
  each grant and range from 5.94% to 6.97%; the expected lives of options are
  estimated at 7 years; and a volatility of 62% for 1998 grants, and 50% for
  1997 and 1996 grants.

     Had compensation cost for the Company's stock-based compensation plans been
  determined consistent with SFAS No. 123, the Company's net income (loss) and
  net income (loss) per share would approximate the following pro forma amounts
  for the years ended December 31:

<TABLE>
<CAPTION>
                                                         1998               1997               1996
                                                     ------------       ------------       ------------
<S>                                                  <C>                <C>                <C>         
Reported net income (loss)                           $ (7,155,361)      $ 19,491,621       $ 24,320,011
SFAS No. 123 charge                                       (56,836)        (1,462,477)        (1,954,185)
                                                     ------------       ------------       ------------
Pro forma net income (loss)                          $ (7,212,197)      $ 18,029,144       $ 22,365,826
                                                     ============       ============       ============

Pro forma net income (loss) per share - basic        $      (1.20)      $       2.86       $       4.04
                                                     ============       ============       ============

Pro forma net income (loss) per share - diluted      $      (1.20)      $       2.76       $       3.89
                                                     ============       ============       ============
</TABLE>

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.

                                       71
<PAGE>   72

12. REINSURANCE:

        In the normal course of business, the Company's insurance subsidiaries
    have entered into various reinsurance contracts with unrelated reinsurers.
    The Company's insurance subsidiaries participate in such agreements for the
    purpose of limiting their loss exposure and diversifying their business.
    Reinsurance contracts do not relieve the Company's insurance subsidiaries
    from their obligations to policyholders.

        All reinsurance assets and liabilities are shown on a gross basis in the
    accompanying consolidated financial statements. Amounts recoverable from
    reinsurers are estimated in a manner consistent with the claim liability
    associated with the reinsured policy. Such amounts are included in
    "reinsurance receivables" in the consolidated balance sheets as follows:

<TABLE>
<CAPTION>
                                                                  1998             1997
                                                               -----------      -----------
<S>                                                            <C>              <C>        
Estimated reinsurance recoverable on:
Unpaid losses and loss adjustment expense (net of
     discount of $2,739,332 and $3,332,309, respectively)      $52,000,444      $67,654,430
Reinsurance recoverable on paid losses and loss expenses         1,126,785        4,671,146
                                                               -----------      -----------
                                                                53,127,229       72,325,576
Other balances receivable from reinsurers                        2,497,601        2,700,000
                                                               -----------      -----------
     Reinsurance receivables                                   $55,624,830      $75,025,576
                                                               ===========      ===========
</TABLE>

        Unsecured reinsurance risk is concentrated in the companies shown in the
    table below. The Company remains contingently liable with respect to
    reinsurance contracts in the event that reinsurers are unable to meet their
    obligations under the reinsurance agreements in force.

                          CONCENTRATION OF REINSURANCE
                                  (in millions)

<TABLE>
<CAPTION>
                                             Unearned       Reported    Unreported     Reinsurer
                                             Premiums       Claims        Claims       Balances
                                             --------       ------        ------       --------
<S>                                         <C>           <C>           <C>           <C>       
Sydney Reinsurance Corporation                            $      6.5    $     10.7    $     17.2
Kemper Reinsurance Company                                $      0.6                  $      0.6
Continental Casualty Company                              $      0.9    $      1.0    $      1.9
Hartford RE Co.                                           $      0.1                  $      0.1
Hartford Fire Insurance Company             $      0.3    $      0.7    $      0.2    $      1.2
TIG Reinsurance Group                                     $      1.7    $      6.1    $      7.8
Transatlantic Reinsurance Company                                       $      8.6    $      8.6
Cologne Reinsurance Company of America                                  $      0.9    $      0.9
Mutual Assurance, Inc.                                    $      5.3    $      1.6    $      6.9
General Reinsurance                                       $      1.8                  $      1.8
National Reinsurance Corporation            $      0.4    $      1.8    $      0.6    $      2.8
</TABLE>

    Immediately prior to the sale of Sequoia to Physicians by Sydney Reinsurance
Corporation ("SRC") in 1995, Sequoia and SRC entered into a reinsurance treaty
whereby all policy and claims liabilities of Sequoia prior to the date of
purchase by Physicians are the responsibility of SRC. Payment of SRC's
reinsurance obligations under this treaty has been unconditionally and
irrevocably guaranteed by QBE Insurance Group Limited should SRC be unable to
meet its obligations under the reinsurance agreement.

                                       72

<PAGE>   73

       The Company entered into a reinsurance treaty in 1995 with Mutual
    Assurance Inc. ("Mutual") in connection with the sale of Physicians' MPL
    business to Mutual. This treaty is a 100% quota share treaty covering all
    claims arising from policies issued or renewed with an effective date after
    July 15, 1995. At the same time, Physicians terminated two treaties entered
    into in 1994 and renewed in 1995. The first of these was a claims-made
    agreement under which Physicians' retention was $200,000, for both
    occurrence and claims-made insurance policies. Claims are covered up to $1
    million. The second treaty reinsured claims above $1 million up to policy
    limits of $5 million on a true occurrence and claims-made basis, depending
    on the underlying insurance policy.

       In 1994, the Company entered into a retroactive reinsurance arrangement
    with respect to its MPL business. As a result, Physicians initially recorded
    a deferred gain on retroactive reinsurance of $3.4 million in 1994. Deferred
    gains are being amortized into income over the expected payout of the
    underlying claims using the interest method. The unamortized gain as of
    December 31, 1998 and 1997 was $1.8 million and $2.2 million, respectively.

       Effective October 1, 1997, PRO and Physicians entered into a 100% quota
    share reinsurance treaty wherein PRO agreed to cede and Physicians agreed to
    assume all of PRO's existing claims liabilities including allocated loss
    adjustment expenses, but excluding unallocated loss adjustment expenses.
    Physicians is to administer the settlement of all claims under PRO's
    policies issued prior to the effective date of the 100% quota share treaty
    for which Physicians will be reimbursed for direct expenses incurred in
    adjusting PRO's claims. This 100% quota share reinsurance treaty is
    secondary to all of PRO's reinsurance treaties in effect prior to its
    effective date.

       The following is a summary of the net effect of reinsurance activity on
    the consolidated financial statements for 1998, 1997, and 1996:

<TABLE>
<CAPTION>
                                                        1998               1997               1996
                                                   ------------       ------------       ------------
<S>                                                <C>                <C>                <C>         
Direct premiums written                            $ 41,792,175       $ 46,634,157       $ 44,423,399
Reinsurance premiums assumed                             93,277            183,945            274,296
Reinsurance premiums ceded                           (6,598,800)        (7,125,152)        (7,140,634)
                                                   ------------       ------------       ------------
     Net premiums written                          $ 35,286,652       $ 39,692,950       $ 37,557,061
                                                   ============       ============       ============

Direct premiums earned                               42,760,312         60,474,680         58,059,587
Reinsurance premiums assumed                            141,734            220,564            281,019
Reinsurance premiums ceded                           (6,770,631)       (10,818,840)       (19,579,901)
                                                   ------------       ------------       ------------
     Net premiums earned                           $ 36,131,415       $ 49,876,404       $ 38,760,705
                                                   ============       ============       ============
Losses and loss adjustment expenses incurred:
     Direct                                          32,124,801         47,890,333         35,969,535
     Assumed                                            261,504            427,371             69,541
     Ceded                                           (2,501,772)       (17,045,189)       (17,458,446)
                                                   ------------       ------------       ------------
                                                     29,884,533         31,272,515         18,580,630
     Effect of discounting on losses and
         loss adjustment expenses (Note 13)             643,474          3,057,812          4,351,860
                                                   ------------       ------------       ------------
Net losses and loss adjustment expenses            $ 30,528,007       $ 34,330,327       $ 22,932,490
                                                   ============       ============       ============
</TABLE>

13. RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:

       Reserves for unpaid losses and loss adjustment expenses on MPL and
    property and casualty business represent management's estimate of ultimate
    losses and loss adjustment expenses and fall within an actuarially
    determined range of reasonably expected ultimate unpaid losses and loss
    adjustment expenses.

       Reserves for unpaid losses and loss adjustment expenses are estimated
    based on both company-specific and industry experience, and assumptions and
    projections as to claims frequency, severity, and inflationary trends and
    settlement payments. Such estimates may vary significantly from the eventual
    outcome. In management's judgment, information currently available has been
    appropriately considered in estimating the loss reserves and reinsurance
    recoverable of the insurance subsidiaries.

                                       73

<PAGE>   74
        Physicians and PRO prepare their statutory financial statements in
    accordance with accounting practices prescribed or permitted by the Ohio
    Department of Insurance ("Ohio Department"). Citation and Sequoia prepare
    their statutory financial statements in accordance with accounting practices
    prescribed or permitted by the California Department of Insurance.
    Prescribed statutory accounting practices include guidelines contained in
    various publications of the National Association of Insurance Commissioners
    ("NAIC"), as well as state laws, regulations, and general administrative
    rules. Permitted statutory accounting practices encompass all accounting
    practices not so prescribed. The Ohio Department's prescribed accounting
    practices do not allow for discounting of claim liabilities. However, for
    the years ended December 31, 1998, 1997, and 1996, the Ohio Department
    permitted Physicians to discount its losses and loss adjustment expenses
    related to its MPL claims to reflect anticipated investment income. Such
    permission was granted due primarily to the longer claims settlement period
    related to MPL business as compared to most other types of property and
    casualty insurance lines of business. Property and casualty insurance
    companies are permitted to discount claims liabilities under generally
    accepted accounting principles to the extent that the discounting of claims
    liabilities by such entities is prescribed or permitted by statutory
    accounting principles.

        The method of discounting utilized by Physicians is based on historical
    payment patterns and assumes an interest rate at or below Physicians'
    investment yield, and is the same rate used for statutory reporting
    purposes. Physicians uses a discount rate of 4%. The carrying value of MPL
    reserves gross as to reinsurance was approximately $85.8 million, net of
    discounting of $11.3 million at December 31, 1998 and $108.7 million, net of
    discounting of $12.5 million at December 31, 1997.

        Activity in the reserve for unpaid claims and claim adjustment expenses
    was as follows for each of the years ended December 31:

<TABLE>
<CAPTION>
                                                        1998                1997                1996
                                                   -------------       -------------       -------------
<S>                                                <C>                 <C>                 <C>          
Balance at January 1                               $ 196,095,518       $ 252,023,546       $ 229,796,606
     Less reinsurance recoverables                   (67,654,430)        (89,493,139)        (92,474,112)
                                                   -------------       -------------       -------------
          Net balance at January 1                   128,441,088         162,530,407         137,322,494
                                                   -------------       -------------       -------------
Incurred loss and loss adjustment expenses
     for current accident year claims                 23,242,512          33,440,000          20,806,194
Incurred loss and loss adjustment expenses
     for prior accident year claims                    7,009,420            (980,469)         (2,609,907)
Retroactive reinsurance                                 (367,399)         (1,187,016)
Provision for deferral of gain on retroactive 
     reinsurance                                                                                (145,135)
Accretion of discount                                    643,474           3,057,812           4,881,338
                                                   -------------       -------------       -------------
     Total incurred                                   30,528,007          34,330,327          22,932,490
                                                   -------------       -------------       -------------
Net balances acquired in merger                                                               41,293,239
                                                   -------------       -------------       -------------
Effect of retroactive reinsurance                        367,399           1,187,018             145,135
                                                   -------------       -------------       -------------
Payments for claims occurring during:
     Current accident year                           (11,468,646)        (13,886,002)         (6,964,436)
     Prior accident years                            (44,847,596)        (55,720,662)        (32,198,515)
                                                   -------------       -------------       -------------
          Total paid                                 (56,316,242)        (69,606,664)        (39,162,951)
                                                   -------------       -------------       -------------
Net balance at December 31                           103,020,252         128,441,088         162,530,407
Plus reinsurance recoverables                         52,000,444          67,654,430          89,493,139
                                                   -------------       -------------       -------------
Balance at December 31                             $ 155,020,696       $ 196,095,518       $ 252,023,546
                                                   =============       =============       =============
</TABLE>

14. EMPLOYEE BENEFIT PLAN:

        PICO maintains a 401(k) Defined Contribution Plan covering substantially
    all employees of the Company. Matching contributions are based on a
    percentage of employee compensation. In addition, the Company may make a
    discretionary contribution at the end of the Plan's fiscal year within
    limits established by the Employee Retirement Income Securities Act. During
    1998, 1997, and 1996, expenses for contributions by the Company were
    $618,000, $365,000, and $334,000, respectively. APL, a former subsidiary of
    the Company, holds the Plan assets. Another subsidiary is responsible for
    the management of the assets.

                                       74

<PAGE>   75
15. REGULATORY MATTERS:

        The regulations of the Departments of Insurance in the states where the
    Company's insurance subsidiaries are domiciled generally restrict the
    ability of insurance companies to pay dividends or make other distributions.
    Based upon statutory financial statements filed with the insurance
    departments as of December 31, 1998, $3.2 million was available for
    distribution by the Company's wholly-owned insurance subsidiaries to the
    parent company without the prior approval of the Department of Insurance in
    the states in which the Company's insurance subsidiaries are domiciled,
    through December 31, 1999. On July 31, 1998, APL paid an $8 million dividend
    to Physicians Investment Company. On December 17, 1997, a subsidiary of
    Physicians, The Professional Insurance Company ("PRO"), paid Physicians a
    cash dividend of approximately $5.5 million. A dividend payment of $13.2
    million was made on December 30, 1997 from Physicians to PICO Holdings, Inc.
    in the form of GEC common stock.

16. COMMITMENTS AND CONTINGENCIES:

        The Company leases some of its offices under non-cancelable operating
    leases that expire at various dates through October 2008. Total rent expense
    was $1.5 million, $1.5 million and $1.7 million for the years ended December
    31, 1998, 1997 and 1996, respectively. Future minimum rental payments
    required under the leases for the years ending December 31, are as follows:

<TABLE>
<S>               <C>
1999              $ 3,421,897
2000                3,079,735
2001                2,921,695
2002                2,781,787
2003                2,413,243
Thereafter         11,084,790
                  -----------
Total             $25,703,147
                  ===========
</TABLE>

        In November 1998, Vidler entered into an operating lease to acquire
    185,000 acre-feet of underground water storage privileges and associated
    rights to recharge and recover water located near the California Aqueduct
    northwest of Bakersfield. The agreement requires Vidler to pay for these
    privileges and rights a minimum of $2.3 million per year for 10 years
    beginning October 1998. The agreement calls for the lease payments to be
    adjusted annually by the engineering price index. The $2.3 million minimum
    annual lease payment is included in the above summary of future minimum
    rental payments. On October 7, 1998, PICO signed an agreement guaranteeing
    payment of Vidler's obligations under the agreement. The maximum obligation
    under this guarantee is $3.2 million, adjusted annually by the engineering
    price index. The guarantee expires October 7, 2008.

        On January 10, 1997, GEC commenced an action in British Columbia against
    MKG Enterprises Corp. ("MKG"), Vignoble Wines Agency Inc. ("Vignoble") to
    enforce repayment of a $5 million loan made by GEC to MKG. On the same day,
    the Supreme Court of British Columbia granted an order preventing MKG from
    disposing of certain assets pending resolution of the action. GEC
    subsequently brought a motion to have a receiver-manager appointed for MKG
    and Vignoble, which motion has been adjourned. In addition, in March 1999
    GEC filed an action in the Supreme Court of British Columbia against a third
    party. This action states the third party had fraudulently entered into loan
    agreements with MKG. Accordingly, under this action GEC is claiming damages
    from the third party and restraining the third party from further action.

        In connection with the sale of their interests in NLRC by the former
    members, a limited partnership agreed to act as consultant to NLRC in
    connection with the maximization of the development, sales, leasing,
    royalties or other disposition of land, water, mineral and oil and gas
    rights with respect to the Nevada property. In exchange for these services,
    the partnership was to receive from NLRC a consulting fee calculated as 50%
    of any net proceeds that NLRC actually receives from the sale, leasing or
    other disposition of all or any portion of the Nevada property or
    refinancing of the Nevada property provided that NLRC has received such net
    proceeds in a threshold amount equal to the aggregate of: (i) the capital
    investment by GEC and the Company in the Nevada property (ii) a 20%
    cumulative return on such capital investment, and (iii) a sum sufficient to
    pay the United States federal income tax liability, if any, of NLRC in
    connection with such capital investment. Either party could terminate this
    consulting agreement in April 2002 if the partnership had not received or
    become entitled to receive by that time any amount of the consulting fee. No
    payments have been made under this agreement through December 31, 1998. By
    letter dated March 13, 1998, NLRC gave notice of termination of the
    consulting agreement based on NLRC's determination of default by the
    partnership under the terms of the agreement. In November 1998, the
    partnership sued NLRC for wrongful termination of the consulting contract.
    On March 12, 1999, NLRC filed a cross-complaint against the partnership for
    breach of written contract, breach of fiduciary duty and seeking declaratory
    relief.

                                       75

<PAGE>   76
        The Company is subject to various other litigation that arises in the
    ordinary course of its business. Based upon information presently available,
    management is of the opinion that such litigation will not have a material
    adverse effect on the consolidated financial position, results of operations
    or cash flows of the Company.

17. OTHER RELATED-PARTY TRANSACTIONS:

        Effective September, 1995, the Company entered into consulting contracts
    with two Directors for a three-year period at a combined fee of $300,000
    annually for their services as officers of the Company related to analysis
    of the Company's operations, investment banking activities, and analysis and
    recommendation on the Company's investment portfolio. During 1996, each of
    the Directors received $300,000 in fees and $450,000 in bonuses. The same
    two directors also entered into consulting contracts with a subsidiary of
    GEC for similar services. The compensation paid to each of those Directors
    under that arrangement was $300,000 in 1996. These contracts were superseded
    by the January 1997 contracts described below.

        In January 1997, the consulting arrangements described above were
    terminated and replaced with a revised consulting contract that increased
    the annual base consulting fees for the two directors to $800,000 each
    beginning January 1, 1997. On December 31, 1997, these two directors became
    employees of the Company; the terms of employment were similar to the
    consultant arrangements described above. The employment agreements entered
    into by the two directors superceded the prior consulting agreements. Each
    is entitled to an incentive award based on the growth of the Company's book
    value per share in excess of a threshold that is calculated as 80% of the
    previous five year average return for the S&P 500. No award was paid during
    1998, 1997 or 1996 under this program.

        Summit is a Registered Investment Advisor providing investment advisory
    services to managed accounts including the Company's subsidiaries. On
    January 1, 1995, Summit's President and CEO was granted an option expiring
    December 31, 2004 to purchase 49% of Summit's common shares for a nominal
    amount, which represented the fair value on the grant date. No options have
    been exercised under this agreement. Two of the Company's directors, now
    officers of the Company, were instrumental in establishing the operations of
    Summit and are entitled to receive 50% of the first $1 million of profits
    attributed to PICO's ownership of Summit's common stock. No compensation was
    paid under this arrangement during 1998, 1997, or 1996.

        On March 6, 1996, Charles E. Bancroft, the President and Chief Executive
    Officer of Sequoia entered into an incentive agreement with Sequoia after
    its acquisition by Physicians. Under the terms of this incentive agreement,
    Mr. Bancroft is to receive a payment equal to ten percent of the increase in
    Sequoia's value upon his retirement, removal from office for reasons other
    than cause, or the sale of Sequoia to a third party. For purposes of the
    incentive agreement, the increase in Sequoia's value is to be measured from
    August 1, 1995; the date Physicians acquired Sequoia. Mr. Bancroft was not
    eligible to receive any incentive payment, until he was continuously
    employed by Sequoia from August 1, 1995 through August 1, 1998. On March 20,
    1998 this incentive agreement was clarified to include the combined increase
    in value of Sequoia and Citation. The increase in value of Citation will be
    measured from January 1, 1998. The Company recorded compensation expense of
    $110,000 and $250,000 during the years ended December 31, 1998 and 1997,
    respectively, related to this arrangement.

        Certain of the Company's subsidiaries have stock option arrangements
    with officers and other employees for stock of the respective subsidiary.
    Options are granted under these arrangements at the estimated fair value of
    the subsidiary's stock at the time of grant. Therefore, no compensation has
    been recorded by the Company related to these arrangements. During 1998,
    18,950 options to acquire approximately 1.9% of Vidler were exercised for
    $108,000.

        In 1998, the Company entered into an agreement with its president and
    chief executive officer to defer a portion of his regular compensation in a
    Rabbi Trust account held in the name of the Company. The deferrals are
    included within the Company's consolidated balance sheet. Salary deferrals
    to the trust amounted to $316,000 for 1998.

        The Company acquired 412,846 shares of its common stock at a cost of
    $1.6 million, and assumed call option obligations for the delivery of these
    shares when the options are exercised. These call options expire on December
    30, 2003 and are held by PICO's chairman of the board and president and
    chief executive officer. On December 31, 1998, 57,307 of these options were
    exercised for a total of $200,000

                                       76

<PAGE>   77
18. STATUTORY INFORMATION:

        The Company and its insurance subsidiaries are subject to regulation by
    the insurance departments of the states of domicile and other states in
    which the companies are licensed to operate and file financial statements
    using statutory accounting practices prescribed or permitted by the
    respective Departments of Insurance. Prescribed statutory accounting
    practices include a variety of publications of the NAIC, as well as state
    laws, regulations and general administrative rules. Permitted statutory
    accounting practices encompass all accounting practices not so prescribed.
    Physicians has received written approval from the Ohio Department to
    discount its MPL unpaid loss and loss adjustment expense reserves, including
    related reinsurance recoverable using a 4% discount rate. Statutory
    practices vary in certain respects from generally accepted accounting
    principles. The principal variances are as follows:

    1)  Certain assets are designated as "non-admitted assets" and charged to
        shareholders' equity for statutory accounting purposes (principally
        certain agents' balances and office furniture and equipment).

    2)  Deferred policy acquisition costs are expensed for statutory accounting
        purposes.

    3)  Deferred federal income taxes are not recognized for statutory
        accounting purposes.

    4)  Equity in net income of subsidiaries and affiliates is credited directly
        to shareholders' equity for statutory accounting purposes.

    5)  Fixed maturity securities classified as available for sale are carried
        at amortized cost.

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

        The Company and its wholly-owned insurance subsidiaries' net income
     (loss) for the years ended December 31, 1998, 1997 and 1996 and
     policyholders' surplus as of December 31, 1998, 1997, and 1996 on the
     statutory accounting basis are as follows:

<TABLE>
<CAPTION>
                                                   1998               1997               1996
                                              -----------        ------------       ------------
<S>                                           <C>                <C>               <C>
Physicians Insurance Company of Ohio:          (Unaudited)
     Statutory net income                     $  2,556,946       $ 28,967,115       $ 21,807,610
     Policyholders' surplus                     31,515,421         54,790,265         69,464,034
The Professionals Insurance Company:
     Statutory net income                     $    105,286       $  1,167,208       $  1,330,733
     Policyholders' surplus                      3,516,143          3,922,382          7,684,701
American Physicians Life Insurance:(***)
     Statutory net income                                        $    220,968       $  2,709,570
     Policyholders' surplus                                        12,776,934         11,809,784
Sequoia Insurance Company:(*)
     Statutory net income (loss)              $  4,284,251       $  1,161,670       $   (982,953)
     Policyholders' surplus                     23,568,505         21,069,190         14,445,550
Citation Insurance Company:(**)
     Statutory net loss                       $ (4,395,534)      $ (1,380,920)      $ (3,069,661)
     Policyholders' surplus                     21,811,840         29,112,651         25,596,903
</TABLE>

- -----------
*   Purchased August 1, 1995  
**  Purchased November 20, 1996  
*** Sold December 4, 1998

                                       77

<PAGE>   78
        Certain insurance subsidiaries are owned by other insurance
    subsidiaries. In the table above, investments in such subsidiary- owned
    insurance companies are reflected in statutory surplus of both the parent
    and subsidiary-owned insurance company. As a result, at December 31, 1998,
    1997, and 1996, statutory surplus of approximately $27,084,648, $37,768,506
    and $38,423,146, respectively, is reflected in both the parent and
    subsidiary-owned insurance companies.

19. SEGMENT REPORTING:

        The Company is a diversified holding company engaged in five major
    operating segments: Investment Operations; Surface, Water and Mineral Rights
    Operations; Property and Casualty Insurance Operations; Medical Professional
    Liability ("MPL") Insurance Operations and Other Operations.

        Segment performance is measured by revenues and segment profit before
    tax in addition to changes in shareholders' equity. This information
    provides the basis for calculation of return on shareholders' equity, which
    is the main performance measurement used in analyzing segment performance.
    In addition, assets identifiable with segments are disclosed as well as
    capital expenditures, and depreciation and amortization. The Company has
    operations and investments both in the U.S. and abroad. Information by
    geographic region is also similarly disclosed.

    Investment Operations

    PICO holds a number of strategic and portfolio investments in both publicly
    and privately held corporations. These investments may be passive or they
    may represent positions where PICO is able to exert significant influence
    over the operating, financing and management strategies and decisions of the
    corporation. PICO invests in businesses that it believes to be undervalued
    or may benefit from additional capital, restructuring of operations or
    management or improved competitiveness through operational efficiencies with
    existing PICO operations. The Company makes investments for the purpose of
    enhancing and realizing additional value by means of appropriate levels of
    shareholder influence and control. This may involve restructuring of the
    financing or management of the entities in which the Company invests and
    initiating or facilitating mergers and acquisitions. The investments tend to
    be long term in nature however if returns are not as anticipated, there is
    an attractive exit, or a more productive use of capital is identified, the
    Company divest its position. Revenues are derived from interest, dividends
    and realized gains or losses upon sale of investments. In addition, the
    change in unrealized gains and losses for available for sale securities is
    used as a performance measurement. The Company invests in a number of
    industry segments and geographic regions and does not limit itself in either
    of these categories but rather uses criteria based on fundamental value
    principles in selecting investment targets. Investments directly related to
    the insurance operations are included within those segments.

    Surface, Water and Mineral Rights Operations

        PICO is engaged in surface, water and mineral rights operations through
    its subsidiaries, Vidler and NLRC. Vidler is a comprehensive provider of
    water services and, through the acquisition of water assets, water rights
    and upgrading priority and functionality of these rights generates revenues
    by marketing water to end-users. In addition, Vidler is developing water
    recharge (storage) facilities for future operation that will be directed to
    municipalities and water districts in the southwestern United States.
    Surplus supplies of water will be stored in the facility and storage fees
    will generate revenues, and when water is sold and delivered to the
    end-user.

        NLRC owns a large inventory of surface, water and mineral rights.
    Revenue is generated from surface rights by land sales, land development,
    land exchanges and leasing for grazing, agricultural and other uses. Revenue
    is generated from the exploration and development of water rights and
    mineral rights in the form of outright sales and royalty streams.

    Property and Casualty Insurance

        PICO owns two property and casualty insurance companies, Citation and
    Sequoia. These companies are licensed to write commercial property and
    casualty insurance and, to a lesser extent personal lines of insurance.
    Workers Compensation insurance was written until 1997, when the business was
    sold to a third party. Revenues are derived from premiums earned on policies
    written as well as investment income on assets and investments held by the
    insurance operations.

                                       78

<PAGE>   79
MPL Operations

  PICO's subsidiaries, Physicians and PRO ceased writing policies in 1995;
however continue to administer and adjust remaining claims. Management continues
to handle the runoff of the remaining claims reserves internally. The operation
has retained the investments necessary to fund the payment of claims and LAE
reserves as opposed to selling or fully reinsuring these reserves and giving up
the corresponding funds. Revenues are derived from the investments retained.

  The following is the segment results for December 31, 1998, 1997 and 1996 (in
thousands):

<TABLE>
<CAPTION>
                                                     Surface, Water     Property
                                     Investment        and Mineral        and
                                    Operations (A)       Rights         Casualty         MPL           Other (B)     Consolidated
                                    ---------------------------------------------------------------------------      ------------
<S>                                    <C>             <C>             <C>            <C>             <C>             <C>      
1998: 
Revenues (charges)                     $  (1,048)      $   3,412       $  42,927      $   2,420       $     509       $  48,220
Income (loss) before income taxes         (7,167)         (1,818)          2,825         (4,442)           (398)        (11,000)
Identifiable assets                       76,023         118,288         138,408         62,774             421         395,914
Depreciation and amortization                693             185             496             81              37           1,492
Capital expenditures                         117           4,783             648             86               7           5,641

1997:
Revenues                               $  24,069       $   3,105       $  56,433      $   3,896       $     682       $  88,185
Income (loss) before income taxes         17,748              12           5,556            765            (578)         23,503
Identifiable assets                      116,477          74,737         158,760         78,756           1,563         430,293
Depreciation and amortization                325              34             761             53               8           1,181
Capital expenditures                         271              28             634             44               8             985

1996:
Revenues                               $  26,994                       $  35,280      $  12,244       $   2,218       $  76,736
Income (loss) before income taxes         23,310                           3,307          8,469          (1,109)         33,977
Identifiable assets                       56,264                         204,124        151,341          78,696         490,425
Depreciation and amortization                746                             959                            427           2,132
Capital expenditures                          55                              51                                            106
</TABLE>

                                       79

<PAGE>   80
              Segment information by geographic region follows (in thousands):

<TABLE>
<CAPTION>
                                         United
                                         States          Canada         Europe           Asia         Consolidated
                                      -----------------------------------------------------------     ------------
<S>                                    <C>             <C>             <C>             <C>             <C>      
1998:
- -----
Revenues (charges)                     $  49,119       $  (2,233)      $   3,364       $  (2,030)      $  48,220
Income (loss) before income taxes        (12,106)            560           2,588          (2,042)        (11,000)
Identifiable assets                      362,196           7,811          21,653           4,254         395,914
Depreciation and amortization              1,233             259                                           1,492
Capital expenditures                       5,641                                                           5,641

1997:
- -----
Revenues                               $  92,168       $   3,861       $     175       $  (8,019)      $  88,185
Income (loss) before income taxes         34,135          (2,700)             87          (8,019)         23,503
Identifiable assets                      364,709          37,411          21,080           7,093         430,293
Depreciation and amortization                852             329                                           1,181
Capital expenditures                         985                                                             985

1996:
- -----
Revenues                               $  76,578                       $     158                       $  76,736
Income (loss) before income taxes         34,008       $   1,013          (1,044)                         33,977
Identifiable assets                      462,377          28,048                                         490,425
Depreciation and amortization              2,132                                                           2,132
Capital expenditures                         106                                                             106
</TABLE>


(A) Investment Operations identifiable assets include certain investments held
    by one of the Company's regulated insurance subsidiaries, which is no longer
    writing new business. Management believes that this component of the
    insurance subsidiary's assets is in excess of the amount of the subsidiary's
    assets that will be required to settle its claims liabilities. The amount of
    the insurance subsidiary's assets included in the Investment Operations
    segment at December 31, 1998 was insignificant compared to $6 million and
    $56 million as of December 31, 1997, and 1996, respectively. Investment
    revenues (charges) thereon was approximately $(1.6) million, $2 million and
    $27 million, for the years ended December 31, 1998, 1997, and 1996,
    respectively.

(B) The life and health insurance segment was discontinued in 1997. Included in
    "Other" are amounts of identifiable assets of approximately $68,000 for 1996
    relating to the discontinued life and health insurance segment. Income
    statement amounts for 1998, 1997 and 1996 are classified as discontinued
    operations.

20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

        The following methods and assumptions were used to estimate the fair
    value of each class of financial instruments for which it is practicable to
    estimate that fair value:

    -   CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: The carrying
        amounts for cash, cash equivalents, short-term investments, receivables,
        accounts payable and accrued liabilities approximate fair value because
        of the short maturity of these instruments.

                                       80

<PAGE>   81
    -   INVESTMENTS: Fair values are estimated based on quoted market prices, or
        dealer quotes for comparable securities. Fair value of warrants to
        purchase common stock of publicly traded companies is estimated based on
        values determined by the use of accepted valuation models at the time of
        acquisition. Equity securities that do not have a readily determinable
        fair value are accounted for using the cost method and fair values are
        estimated based on the value of the underlying common stock. The Company
        regularly evaluates the carrying value of securities to determine
        whether there has been any diminution in value that is other than
        temporary and adjusts the value accordingly.

    -   DEPOSITS WITH REINSURERS AND REINSURANCE RECOVERABLES: The carrying
        amounts of deposits with reinsurers and reinsurance recoverable with
        fixed amounts due are reasonable estimates of fair value.

    -   INVESTMENT IN AFFILIATE: Investments in affiliated companies which the
        Company owns between 20% and 50%, and are carried as a long term
        operating investment are carried at equity value. The balance of the
        investment is regularly evaluated to determine whether there has been
        any impairment.

<TABLE>
<CAPTION>
                                              December 31, 1998                 December 31, 1997
                                        -----------------------------       ------------------------------
                                         Carrying          Estimated         Carrying         Estimated
                                          Amount           Fair Value         Amount          Fair Value
                                        ------------      ------------      ------------      ------------
<S>                                     <C>               <C>               <C>               <C>         
Financial assets:
     Cash and cash equivalents and
          short-term investments        $ 92,752,898      $ 92,752,898      $ 85,193,009      $ 85,193,009
     Investment securities                94,004,978       100,334,796       128,334,242       128,334,242
     Deposits with reinsurers and
          reinsurance recoverables         3,624,285         3,624,285         7,371,146         7,371,146
</TABLE>

21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

        Summarized unaudited financial data for 1998 and 1997 are shown below.
    In management's opinion, the interim financial data contains all
    adjustments, consisting of only normal recurring accruals, necessary for a
    fair presentation of results for such interim periods. Prior period amounts
    have been adjusted to conform to the current period presentation, including
    reclassification for discontinued operations, and adjustment to shares and
    net income (loss) per share values due to the acquisition of the minority
    interest of GEC, and the 1-for-5 reverse stock split.

                                       81

<PAGE>   82
        The Company computes income (loss) per common share for each quarter
     independently of income (loss) per share for the year. The sum of the
     quarterly income (loss) per share may not equal the income (loss) per share
     for the year because of: (i) transactions affecting the weighted average
     number of shares outstanding in each quarter; and (ii) the uneven
     distribution of income during the year.

        Fluctuations by quarter in revenues and net income (loss) are primarily
due to realized gains or losses on investments.

<TABLE>
<CAPTION>
                                                 First              Second           Third              Fourth
                                                Quarter             Quarter          Quarter            Quarter
                                              ------------       -----------       ------------      ------------
<S>                                           <C>                <C>               <C>               <C>         
1998:
- -----
Revenues                                      $ 13,734,067       $ 13,654,231      $ 12,179,799      $  8,652,179
Net Income (loss)                             $   (927,480)      $  1,082,355      $    729,261      $ (8,039,497)
Basic:
    Income (loss) per common share            $      (0.15)      $       0.18      $       0.13      $      (1.30)
    Number of shares used in calculation         6,019,817          6,019,817         5,711,304         6,178,675
Diluted:
    Income (loss) per common share            $      (0.15)      $       0.17      $       0.12      $      (1.30)
    Number of shares used in calculation         6,019,817          6,254,573         6,158,606         6,178,675
1997:
- -----
Revenues                                      $ 21,050,205       $ 17,180,640      $ 43,808,203      $  6,146,294
Net Income (loss)                             $  1,991,660       $  1,823,916      $ 17,860,455      $ (2,184,410)
Basic:
    Income (loss) per common share            $       0.31       $       0.28      $       2.97      $      (0.36)
    Number of shares used in calculation         6,434,860          6,445,790         6,018,466         6,019,817
Diluted:
    Income (loss) per common share            $       0.30       $       0.27      $       2.84      $      (0.36)
    Number of shares used in calculation         6,609,817          6,639,827         6,278,038         6,019,817
</TABLE>

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

               During 1997, PICO changed its accountants as described in the
          following documents: 8-K, filed June 12, 1997; 8-K/A, filed June 26,
          1997; 8-K, filed July 16, 1997; 8-K/A, filed September 24, 1997; and
          8-K/A2, filed September 26, 1997. All these reports were filed with
          the SEC concerning the Company's change in accountants.

                                          PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The Board of Directors is divided into three classes, with the terms of office
of each class ending in successive years.

                                       82

<PAGE>   83
The following table sets forth information regarding the Company's directors,
including their ages, a brief description of their business experience, certain
directorships held by each of them and the year in which each became a director
of the Company.

<TABLE>
<CAPTION>
            Director Name                           Business Experience                                 Age   Since
            -------------                           -------------------                                 ---   -----

<S>                            <C>                                                                      <C>    <C>
      Directors with terms ending in 1999:
      John R. Hart             President of Quaker Holdings Limited, an investment company, since        39    1996
                               1991; Principal with Detwiler, Ryan &  Company, Inc., an investment
                               bank, from 1982 to 1991; Director of Physicians since 1993; President
                               and CEO of Physicians since 1995; President and CEO and Director of
                               Global Equity Corporation since 1995; Director of PC Quote, Inc;
                               President and CEO and Director of the Company since 1996.
      Ronald Langley           Director and officer of Pacific Southwest Corporation, a strategic        54    1996
                               investment company, from 1989 to 1992; Director of Physicians since
                               1993; Chairman of Physicians since 1995: Chairman and Director of
                               Global Equity Corporation since 1995; Chairman of Summit Global
                               Management, Inc. since 1994; Director of PC Quote, Inc; Chairman and
                               Director of the Company since 1996.
      John D. Weil             President, Clayton Management Company, a strategic investment             58    1996
                               company; Director of Todd Shipyards Corporation, Oglebay Norton
                               Company, Southern Investors Service Company, Inc., Allied Health
                               Products, Inc., and Baldwin & Lyons, Inc.

      Directors with terms ending in 2000:
      S. Walter Foulkrod, III, Attorney; owner of S. Walter Foulkrod, III & Associates, Attorneys at     57    1996
      Esq.                     Law, Harrisburg, PA, since 1994; President and Chairman of Foulkrod,
                               Reynolds & Havas, PC, from 1984 to 1994; Director of Physicians since
                               1988.
      Richard D. Ruppert, MD   Physician; President of Medical College of Ohio from 1978 to 1993;        68    1996
                               President of American Society of Internal Medicine from 1992 to 1993;
                               Director of Physicians since 1988.

      Directors with terms ending in 2001:
      Robert R. Broadbent      Retail consultant since 1989; Chairman of Higbee Company from 1984        77    1996
                               to 1989; President, CEO, Director and Vice Chairman of the Higbee
                               Company from 1979 to 1984; President and Chief Executive Officer of
                               Liberty House - Mainland from 1976 to 1978; Chairman and CEO of
                               Gimbel's from 1973 to 1976; Director of Physicians from 1993 to 1995.
      Carlos C. Campbell       President of C.C. Campbell & Company, Reston, Virginia, since 1985;       61    1998
                               Director of Resource America, Inc., Fidelity Mortgage Funding, Inc., and
                               Passport Health.
      David A. Williams        CEO of Beutel Goodman & Co. Ltd. From 1991 to 1995; President,            56    1998
                               Roxborough Holdings Limited, Toronto, Ontario since 1995; Director of
                               Global Equity Corporations, Enhanced Marketing Services, Equisure
                               Financial Network, FRI Corporation, Krystal Bond Corporation, Octagon
                               Industries Ltd., Phoenix Duff and Phelps Corp., Pinetree Capital
                               Corporation, Micropulse Inc., Radiant Energy Corporation, and Signature
                               Brands Ltd.
</TABLE>

For information on the executive officers of Registrant, see Part I, Item 1.,
"Executive Officers."

                                       83

<PAGE>   84
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.

Based on a review of the copies of these reports received by the Company and
written representations from certain reporting persons that they have complied
with the relevant filing requirements, the Company believes that all filing
requirements have been complied with on a timely basis for the fiscal year ended
December 31, 1998.

ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation for
fiscal year 1998 of the (i) Chief Executive Officer of the Company (ii) the
executive officers of the Company as of December 31, 1998 (Messrs. Langley,
Hart, Sharpe, Burchfield, and Mosier are sometimes hereinafter referred to as
"Named Officers"). Amounts under the caption "Bonus" are amounts earned for
performance during the year including amounts paid after the end of the year.

                                   SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                      Long-Term
                                                                     Compensation
                                                Annual Compensation      Awards
                                                -------------------      ------
                                                                      Securities
                                                                      Underlying
NAME AND  PRINCIPAL                                                     Options     All Other
POSITION                       Year      Salary            Bonus       (Shares)    Compensation
                               ----      ------            -----       --------    ------------
<S>                            <C>       <C>              <C>          <C>         <C>
Chief Executive Officer:
- ------------------------
John R. Hart(1) (2)            1998      $800,000            -0-          -0-        $ 22,000(7)
  President and Chief          1997      $800,000(3)         -0-          -0-           -0-
  Executive Officer            1996      $300,000         $450,000      175,347(4)      -0-

Executive Officers(2):
- ----------------------
Ronald Langley(5)              1998      $800,000            -0-          -0-        $ 22,000(7)
  Chairman of the              1997      $800,000(3)         -0-          -0-           -0-
  Board of Directors           1996      $300,000         $450,000      175,347(4)      -0-

Richard H. Sharpe(6)           1998      $199,029            -0-          -0-        $ 22,000(7)
  Chief Operating Officer      1997      $165,317         $ 18,340        -0-        $ 18,734(7)
                               1996      $139,376         $ 28,000       60,119(4)   $ 14,362(7)

Gary W. Burchfield(8)          1998      $164,640            -0-          -0-        $ 20,930(7)
  Chief Financial Officer      1997      $135,000         $ 13,500        -0-        $ 15,618(7)
  And Treasurer                1996      $102,170         $ 35,000       42,083(4)   $ 10,506(7)

James F. Mosier(9)             1998      $126,910            -0-          -0-        $ 18,512(7)
  General Counsel              1997      $113,017         $ 12,570        -0-        $ 12,796(7)
  and Secretary                1996      $ 82,835         $ 27,000       42,083(4)   $  8,497(7)
</TABLE>

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

(1)  Mr. Hart became President and CEO of the Company on November 20, 1996.
     Prior to that time he was President and CEO of Physicians since July 15,
     1995.

                                       84

<PAGE>   85
(2)  Includes compensation received from Physicians prior to the Merger, as well
     as compensation received from the Company.

(3)  Mr. Langley and Mr. Hart were each compensated $533,328 by the Company for
     consulting services in 1997 in the areas of investment banking, investment
     portfolio analysis, and analysis of operations. In addition, Mr. Langley
     and Mr. Hart entered into consulting agreements with a subsidiary of Global
     Equity Corporation for annual compensation of $266,672 each for consulting
     services in the areas of investment banking, investment portfolio analysis,
     and analysis of operations. On December 31, 1997, Mr. Langley and Mr. Hart
     each signed employment agreements with the Company on terms substantially
     similar to the consulting agreements.

(4)  Options issued by Physicians prior to the November 1996 Merger under the
     Physicians Insurance Company of Ohio 1995 Non- Qualified Stock Option Plan
     and assumed by the Company upon the Merger. All options are fully vested.

(5)  Mr. Langley became Chairman of the Board of Directors of Physicians on July
     15, 1995. He became Chairman of the Board of Directors of the Company on
     November 20, 1996.

(6)  Mr. Sharpe became Chief Operating Officer of Physicians on June 3, 1994. He
     became Chief Operating Officer of the Company on November 20, 1996.

(7)  Represents amounts contributed by the Company to the PICO Holdings, Inc.
     Employees 401(k) Retirement Plan and Trust. This retirement plan conforms
     to the requirements of the Employee Retirement Income Security Act.

(8)  Mr. Burchfield became Chief Financial Officer and Treasurer of Physicians
     on November 3, 1995. He became Chief Financial Officer and Treasurer of the
     Company on November 20, 1996.

(9)  Mr. Mosier became General Counsel and Secretary of Physicians in 1984. He
     became General Counsel and Secretary of the Company on November 20, 1996.

                        OPTION GRANTS IN LAST FISCAL YEAR

Options to purchase 100,000 shares of the Company's Common Stock were granted
during the year ended December 31, 1998 to A. Judson Hill, Executive Vice
President, as shown in Item 11, Summary Compensation Table.

                 OPTION EXERCISES AND FISCAL 1998 YEAR-END VALUE

The following table provides information concerning options held as of December
31, 1998 by the persons named in the Summary Compensation Table. No options were
exercised in 1998 by such individuals.

 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION 
                                     VALUES

<TABLE>
<CAPTION>
                       Number of Securities Underlying    Value of Unexercised
                                Unexercised              In-the-Money-Options
                            Options at 12/31/98             At 12/31/98 (1)
                        -------------------------  ---------------------------
      Name              Exercisable Unexercisable  Exercisable  Unexercisable
      ----              ----------- -------------  -----------  -------------

<S>                     <C>           <C>          <C>          <C>
Ronald Langley(2)         406,747        -0-           -0-          -0-

John R. Hart(2)           406,747        -0-           -0-          -0-

Richard H. Sharpe          60,119        -0-           -0-          -0-

Gary W. Burchfield         42,083        -0-           -0-          -0-

James F. Mosier            42,083        -0-           -0-          -0-
</TABLE>

                                       85

<PAGE>   86

(1)  Based on the closing price of the Company's Common Stock on December 31,
     1998 on the Nasdaq National Market of $13.25 per share.

(2)  In addition to these options shown above, Mr.Langley and Mr. Hart have a
     right to purchase shares of the Company under Call Option Agreements
     assumed by the Company in August 1998; see Item 12, footnote 4.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Weil and Foulkrod, and Dr. Ruppert, serve as members of the Compensation
Committee. Mr. Langley and Mr. Hart have been directors and executive officers
of GEC since September 5, 1995.

                      REPORT OF THE COMPENSATION COMMITTEE

This report of the Compensation Committee (the "Compensation Committee"), and
the Stock Price Performance Graph set forth below, shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Form 10-K into any filing under the Securities Act of 1933, as amended (the
"Securities Act") or under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") except to the extent that the Company specifically incorporates
this information by reference, and shall not otherwise be deemed filed under the
Securities Act or the Exchange Act.

COMMITTEE MEMBERS

The three-member Compensation Committee of the Board of Directors is a standing
committee composed entirely of outside Directors. Mr. Weil is the chairman and
Mr. Foulkrod and Dr. Ruppert are the other members.

COMMITTEE FUNCTIONS

The Compensation Committee is responsible for assuring that all of the executive
compensation programs of the Company are developed, implemented, and
administered in a way that supports the Company's fundamental philosophy that a
significant proportion of executive compensation should be effectively linked to
company performance.

The Compensation Committee meets on a regularly scheduled basis. It reviews and
approves the overall executive compensation program which includes both base pay
and incentive compensation. It considers and approves individual executive
officer compensation packages based on recommendations of the Company's Chief
Executive Officer. It recommends, for the approval of the full Board, any
modification to the compensation package of the Company's Chief Executive
Officer.

EXECUTIVE COMPENSATION PHILOSOPHY

The Board of Directors of Physicians retained an independent compensation
expert, William M. Mercer, Incorporated ("Mercer"). In 1996, Mercer conducted an
analysis of marketplace executive compensation levels. The scope of Mercer's
study covered the Company's Chairman and President and Chief Executive Officer.
The objectives of Mercer's study were as follows:

*   Analyze the scope, responsibilities and skill requirements of the jobs
    performed by Messrs. Langley and Hart and compare and contrast to comparable
    benchmark executive positions found in the marketplace.

*   Develop an appropriate methodology for selecting comparable benchmark jobs,
    industry categories and a peer group of companies comparable to the Company
    in terms of business focus, industry classification and size; and competing
    for senior executives with the skills, expertise and talent demonstrated by
    the Company's top two executives.

*   For the appropriate benchmark jobs, industry category and peer company
    group, collect information on marketplace compensation levels and practices
    from compensation surveys and peer company proxy statements. The companies
    included in the peer company group are not necessarily those included in the
    Nasdaq Insurance Stock Index. Determine the most relevant marketplace
    compensation levels and to compare actual Company compensation levels.

                                       86

<PAGE>   87
*   Develop alternate approaches for structuring the total compensation package
    for the Company's top two executives, in terms of compensation elements to
    be used, the mix of total pay and how short and long term incentive
    compensation might be structured to accurately reflect performance.

Mercer's study recommended to the Compensation Committee a compensation strategy
with the following objectives:

*  To provide a total compensation package that:

     -    is competitive with market rates for executives with similar skill,
          talent and job requirements.

     -    is closely linked to the Company's strategy and the role of covered
          executives in building shareholder value through growing the book
          value and, ultimately, the market value of the Company.

*  To retain critical executive talent by:

     -    providing a reasonable and competitive level of current income (cash
          flow).

     -    providing for loss of future incentive opportunity if an executive
          terminates employment before unrealized investment gains are realized.

*  To link executive rewards to shareholder interests by:

     -    tying incentive awards to growth in book value which ultimately
          translates into increased market price per share (as investments are
          liquidated for gains, and the Company grows earnings).

     -    granting additional stock options in the future once current options
          are exercised or expire.

The Compensation Committee believes that to accomplish these goals, the
executive compensation program should be based on three distinct components:
base pay, annual incentives, and long-term incentives. The Company obtains
industry and peer group surveys, and consults with independent experts, to
evaluate the Company's executive compensation programs in comparison with those
offered by its comparable competitors.

The Compensation Committee has considered amendments to the Internal Revenue
Code denying deductions for annual compensation to certain executives in excess
of $1 million, subject to certain exceptions. The Company's compensation
structure has been such that it does not believe that it is likely that the $1
million cap will affect the Company in the near future. The Internal Revenue
Service has issued proposed regulations which, among other things, provide for a
transition period of three years for plans previously approved by shareholders.
The Company is studying the proposed regulations, but has not yet determined
what steps may be required or desirable with respect to its existing plans.

EXECUTIVE COMPENSATION PROGRAM

The features of the executive compensation program as recommended by Mercer and
approved by the Compensation Committee are:

BASE COMPENSATION. A fixed rate, to be reviewed annually. Future adjustments
will take into account movement in executive compensation levels, changes in job
responsibilities, and the size of the Company.

INCENTIVE AWARDS. Based on growth of book value per share in a fiscal year.
Awards are earned when a pre-determined threshold is surpassed. If book value
per share of the Company exceeds this threshold, the incentive award is equal to
5% of the increase in book value per share multiplied by the number of shares
outstanding at the beginning of the fiscal year. The threshold for 1998 is 19%.

                                       87

<PAGE>   88
In addition, the Board of Directors of Physicians granted options under the
Physicians Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan. The
options granted under said option plan were designed to reinforce the
relationship between the Company's future performance and the executive's
potential future financial rewards. These options were assumed by PICO Holdings,
Inc. on November 20, 1996. In line with this philosophy of providing incentives
to Executive Officers, the Company agreed to convert the GEC options of said
officers on an economically equivalent basis, to options to purchase shares of
the Company effective with the close of the PICO/GEC Combination.

GOALS OF COMPENSATION COMMITTEE

The Compensation Committee attempts to align executive compensation with the
value achieved by the executives for the Company's shareholders. The Company's
compensation program for executives emphasizes a combination of base salary,
discretionary bonuses, and stock options designed to attract, retain, and
motivate executives who will maximize shareholder value. The Compensation
Committee considers individual and Company performance, as well as compensation
paid by comparable companies.

Executives also participate in other employee benefit programs, including health
insurance, group life insurance, and the Company's 401(k) Plan.

DISCUSSION OF 1998 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER

No bonus was paid with respect to the Company's performance in 1998. In 1997,
the Compensation Committee recommended to the Board of Directors, and the Board
of Directors accepted the recommendation, that it was appropriate for the CEO
and the Chairman to be compensated as employees, rather than as consultants.
Accordingly, effective December 31, 1997, the CEO and Chairman entered into
employment agreements with the Company. The terms of these employment agreements
are substantially similar to the terms of the consulting agreements.

August 3, 1998                              Compensation Committee

                                          John D. Weil, Chairman
                                          S. Walter Foulkrod, III, Esq.
                                          Richard D. Ruppert, MD

    As stated above, the Compensation Committee believes the interest of Company
shareholders is best served by aligning the CEO's short-term compensation, over
and above competitive fixed annual rate of pay, with an increase in the
Company's book value per share which will ultimately be reflected in higher
market values per share. Specifically, a threshold was set at 80% of the S&P
500's annualized total return for the five previous calendar years. For 1998,
this threshold was approximately 19%. Since the increase in the Company's book
values per share in 1998 was approximately 4.5%, and did not exceed the
threshold, no bonus, i.e. short-term incentive, was payable for 1998.

    The Compensation Committee awarded long term incentives in 1995 in the form
of 175,247 non-qualified stock options at the then current market value. In
addition, the Committee recommended that the CEO's options with GEC, initially
granted in 1995, be converted on an economically equivalent basis to purchase
shares of the Company upon consummation of the GEC/PICO transaction, December
16, 1998. Finally the Committee recommended and the Board agreed that the
Company assume in August 1998 GPG's obligations to the CEO and Chairman under
November 1993 Call Option Agreements.

    The Committee believes that the compensation provided by this combination of
fixed annual compensation, and short-term and long term incentives provides a
mechanism to fairly compensate the CEO while providing the CEO with a strong
incentive to maximize shareholder value.

                                       88

<PAGE>   89
                                STOCK PRICE PERFORMANCE GRAPH

The graph below compares cumulative total return of the Company, the Nasdaq
Insurance Stocks Index, and the Nasdaq Stock Market (U.S. Companies) for the
period January 1, 1994 through December 31, 1998.

                     Compare 5-Year Cumulative Total Return
 Among PICO Holdings, Inc., NASDAQ Market Index and NASDAQ Insurance Stock Index

<TABLE>
<CAPTION>
                                                12/31/93      12/31/94      12/31/95      12/31/96      12/31/97      12/31/98
<S>                                             <C>           <C>           <C>           <C>           <C>           <C>     
                          PICO Holding           100.00         28.95         36.84         43.42         67.76         27.89
NASDAQ Market Index (Excluding ADR's)            100.00         97.56        137.12        168.90        206.73        289.90
          NASDAQ Insurance Stock Index           100.00        100.57        140.41        159.18        195.00        195.18
</TABLE>


                      Assumes $100 invested on Jan. 1, 1994
                        Fiscal Year Ending Dec. 31, 1998

The graph assumes $100 was invested on January 1, 1994 in the Company's Common
Stock, the Nasdaq Stock Market (U.S. Companies) Index, and the Nasdaq Insurance
Stocks Index, and that all dividends were reinvested. The performance of PICO
Holdings, Inc. stock on this graph represents the historical performance of
shares of Citation Insurance Group, which was renamed PICO Holdings, Inc. on
November 20, 1996. It does not represent the historical stock performance of
Physicians Insurance Company of Ohio.

EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS

Mr. Langley and Mr. Hart each entered into employment agreements effective
December 31, 1997 with the Company. Total compensation to Mr. Langley and Mr.
Hart under these employment agreements is $800,000 each on an annual basis.
These employment agreements include a change in control clause providing that if
there is a change of control before December 31, 1999, the Company shall
immediately pay each employee a total lump sum of $2.4 million and an amount
equal to three times the highest annual bonus paid to the employee in the last
three years.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of March 26, 1999, with respect
to the beneficial ownership of the Company's Common Stock entitled to vote by
each person known by the Company to be the beneficial owner of more that 5% of
Common Stock, and by each director, each Named Officer (as defined below) and
all executive officers, former chief executive officers, and directors as a
group. Except as otherwise indicated, each person has sole investment and voting
power, subject to community property laws. As of March 26, 1999, there were
13,328,770 shares of the Company issued and outstanding. Of these shares,
4,380,780 are held by the Company and its subsidiaries, and may therefore not be
voted under California law. The following table excludes shares of the Company
held by the Company and its subsidiaries since those shares are not entitled to
vote.

<TABLE>
<CAPTION>
                                                  NUMBER OF SHARES AND NATURE         PERCENTAGE OWNERSHIP OF
   NAME AND ADDRESS OF BENEFICIAL OWNER           OF BENEFICIAL OWNERSHIP (1)              VOTING SHARES
   ------------------------------------           ---------------------------              -------------
<S>                                               <C>                                 <C>
 Ronald Langley(2)(4)                                      621,725                              6.0%

 John R. Hart(3)(4)                                        616,170                              5.9%

 Robert R. Broadbent                                        11,949                                * 
</TABLE>

                                      89

<PAGE>   90
<TABLE>
<CAPTION>
                                                     NUMBER OF SHARES AND NATURE          PERCENTAGE OWNERSHIP OF
       NAME AND ADDRESS OF BENEFICIAL OWNER           OF BENEFICIAL OWNERSHIP (1)              VOTING SHARES
       ------------------------------------           ---------------------------              -------------
<S>                                                   <C>                                 <C>
Carlos C. Campbell                                                -0-                                 * 

S. Walter Foulkrod, III, Esq.                                     2,904                               * 

Richard D. Ruppert, MD (5)                                        6,974                               * 

John D. Weil (6)                                                529,518                             5.1%

David A. Williams                                                78,693                               * 

Richard H. Sharpe (7)                                            67,527                               * 

Gary W. Burchfield (8)                                           47,043                               * 

James F. Mosier (9)                                              47,303                               * 

A. Judson Hill (10)                                             100,000                               * 

Sheila C. Ferguson (11)                                           3,986                               * 

Maxim C. W. Webb (12)                                            29,409                               * 

Executive Officers and Directors as a Group (14 persons)      2,163,201                            20.8%
</TABLE>

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

* Less than one percent (1%)


(1)  Sole voting and investment power unless otherwise indicated.

(2)  Of these shares, 555,863 represent beneficial ownership of currently
     exercisable options. 551 shares are held in the Company's 401(k) Plan. Mr.
     Langley has been Chairman and a Director of GEC since September 5, 1995. He
     has been Chairman, and a Director of the Company since November 20, 1996.

(3)  Of these shares, 613,170 represent beneficial ownership of currently
     exercisable options. Mr. Hart has been President and CEO and a Director of
     GEC since September 5, 1995. He has been President and CEO of the Company
     since November 20, 1996.

(4)  Mr. Langley and Mr. Hart formerly had stock options, granted in 1995, to
     purchase shares of GEC; these shares were converted on December 17, 1998
     into economically equivalent stock options to purchase shares of the
     Company. Mr. Langley and Mr. Hart each had 1993 call option agreements with
     GPG; in August 1998, the Company assumed GPG's obligations with respect to
     these 412,846 options. Mr. Langley exercised 57,307 of his call options in
     December 1998 and has 149,116 call option remaining. Mr. Hart has not
     exercised any call options and has 206,423 call options remaining.

(5)  Dr. Ruppert shares voting and investment power with his wife.

(6)  Of these shares, 495,558 are owned by a partnership which Mr. Weil
     controls.

(7)  Of these shares, 60,119 represent beneficial ownership of currently
     exercisable options. In addition, 2,897 shares are held in the Company's
     401(k) Plan.

(8)  Of these shares, 42,083 represent beneficial ownership of currently
     exercisable options. In addition, 805 shares are held in the Company's
     401(k) Plan.

(9)  Of these shares, 42,083 represent beneficial ownership of currently
     exercisable options. In addition, 2,371 shares are held in the Company's
     401(k) Plan.

                                       90

<PAGE>   91
(10) Mr. Hill has beneficial ownership of 100,000 options to buy shares of the
     Company. Mr. Hill's options vest monthly over three years in equal
     increments beginning November 3, 1998.

(11) Of these shares, 3,702 represent beneficial ownership of currently
     exercisable options. In addition, 284 shares are held in the Company's
     401(k) Plan.

(12) Of these shares, 29,177 represent beneficial ownership of currently
     exercisable options. In addition, 232 shares are held in the Company's
     401(k) Plan.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Langley and Mr. Hart entered into employment agreements with the Company,
effective December 31, 1997. See Part II, Item 8., Note 17. Mr. Langley and Mr.
Hart are entitled to receive 50% of the first $1 million of the profits of
Summit Global Management, Inc. See Part II, Item 8., Note 17.

                                       91

<PAGE>   92
                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

               (a)   FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.

<TABLE>
<CAPTION>
                    1.   FINANCIAL STATEMENTS.

                               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S>                                                                                     <C>
                         Independent Auditors' Reports ..............................       46-48
                         Consolidated Balance Sheets as of December 31, 1998 and 1997       49-50
                         ............................................................
                         Consolidated Statements of Operations for the Years
                               Ended December 31, 1998, 1997 and 1996 ...............        51
                         Consolidated Statements of Shareholders' Equity
                               for the Years Ended December 31, 1998, 1997, and 1996        52-54
                         Consolidated Statements of Cash Flows for the Years
                               Ended December 31, 1998, 1997 and 1996 ...............        55
                         Notes to Consolidated Financial Statements .................       56-82

                    2.   FINANCIAL STATEMENT SCHEDULES.

                         Independent Auditors' Reports ..............................       93-94
                         Schedule I - Condensed Financial Information of Registrant .       95-96
                         Schedule II - Valuation and Qualifying Accounts ............        97
                         Schedule V - Supplementary Insurance Information ...........       98-100
</TABLE>

                                       92

<PAGE>   93
          INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES

To the Shareholders and Board of Directors of
       PICO Holdings, Inc.:

We have audited the consolidated financial statements of PICO Holdings, Inc. and
subsidiaries (the "Company") for the years ended December 31, 1998 and 1997, and
our report thereon appears on page 46. Our audits of the consolidated financial
statements also included the 1998 and 1997 financial statement schedules of the
Company, listed in Item 14. These 1998 and 1997 financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. We did not audit the 1997 consolidated
financial statements of Global Equity Corporation (all expressed in Canadian
dollars), a 51.2% owned consolidated subsidiary as of December 31, 1997, which
constituted 42% of the Company's consolidated total assets as of December 31,
1997. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
in the Company's 1997 financial statement schedules for Global Equity
Corporation (as expressed in Canadian dollars), is based solely on the report of
such other auditors. The consolidated financial statements and the related
financial statement schedules of the Company for the year ended December 31,
1996 were audited by other auditors whose reports, dated April 7, 1997,
expressed an unqualified opinion on those financial statements and schedules. In
our opinion, based on our audits and the report of the other auditors, such 1998
and 1997 financial statement schedules, when considered in relation to the basic
1998 and 1997 consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

San Diego, California
March 26, 1999

                                       93

<PAGE>   94
                        REPORT OF INDEPENDENT ACCOUNTANTS
                        ---------------------------------

To the Shareholders and Board of Directors of
       PICO Holdings, Inc.

Our report on the consolidated statements of operations, shareholders' equity
and cash flows of PICO Holdings, Inc. and subsidiaries (the "Company") for the
year ended December 31, 1996 is included on page 48 of this Form 10-K. In
connection with our audit of such financial statements, we have also audited
the financial statement schedules listed in the index on page 92 of this
Form 10-K.

In our opinion, these financial statement schedules referred to above, when
considered in relation to the basic consolidated statements of operations,
shareholders' equity and cash flows taken as a whole, present fairly, in all
material respects, the information required to be included therein.

                              PricewaterhouseCoopers LLP

San Diego, California
April 7, 1997

                                       94

<PAGE>   95
                                   SCHEDULE I

       CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)

   On December 16, 1998, following the requisite regulatory and shareholder
approvals, PICO Holdings, Inc. ("PICO") and Global Equity Corporation ("GEC")
announced completion of the combination of the two corporations through PICO's
acquisition of GEC's remaining 48.8% minority interest. PICO acquired the
remaining shares through the issuance to GEC shareholders of PICO common stock.
Immediately following the closing, PICO effected a 1-for-5 reverse stock split,
reducing the number of PICO shares issued and outstanding.
 Accordingly, issued and treasury share counts have been restated in the
December 31, 1997 Condensed Balance Sheet which follows.

                                    CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  December 31,       December 31,
                                                                                      1998                  1997
                                                                                 -------------         -------------
ASSETS

<S>                                                                              <C>                   <C>          
Cash and cash equivalents                                                        $     437,303         $      81,820
Investments in subsidiaries                                                        167,796,130           108,378,841
Equity securities and other investments                                              4,193,814             3,035,002
Deferred income taxes                                                                3,077,667             1,924,453
Other assets                                                                        11,358,091             1,226,566
                                                                                 -------------         -------------
     Total assets                                                                $ 186,863,005         $ 114,646,682
                                                                                 =============         =============

LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued expense and other liabilities                                            $  12,768,121         $   2,495,944
                                                                                 -------------         -------------

Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued
Common stock, $.001 par value, authorized 100,000,000 shares: issued
     13,328,778 and 6,497,344 in 1998 and 1997, respectively                            66,644                32,592
Additional paid-in capital                                                         183,101,273            43,147,105
Accumulated other comprehensive loss                                                (8,097,965)           (4,918,341)
Retained earnings                                                                   76,562,974            83,718,335
                                                                                 -------------         -------------
                                                                                   251,632,926           121,979,691
Less treasury stock (4,380,780 shares in 1998 and 388,063 in 1997)                 (77,538,042)           (9,828,953)
                                                                                 -------------         -------------
     Total shareholders' equity                                                    174,094,884           112,150,738
                                                                                 -------------         -------------
     Total liabilities and shareholders' equity                                  $ 186,863,005         $ 114,646,682
                                                                                 =============         =============
</TABLE>

This statement should be read in conjunction with the notes to the consolidated
     financial statements included in the Company's 1998 Form 10-K

                                       95

<PAGE>   96
                                   SCHEDULE I

       CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)

                       CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                                    For the Two-
                                                                         For the Year         For the Year          Month Period
                                                                             Ended                Ended                Ended
                                                                          December 31,         December 31,         December 31,
                                                                              1998                 1997                 1996
                                                                          ------------         ------------         ------------

<S>                                                                       <C>                  <C>         
Investment income, net                                                    $    544,424         $    648,229
Equity in income (loss) of subsidiaries                                     (4,351,601)          20,457,718         $ 19,596,074
                                                                          ------------         ------------         ------------
     Total revenues                                                         (3,807,177)          21,105,947           19,596,074
Expenses                                                                     2,660,813            2,874,895              928,288
                                                                          ------------         ------------         ------------
Income (loss) from continuing operations before income taxes                (6,467,990)          18,231,052           18,667,786
Expense (benefit) for income taxes                                           1,762,395             (804,285)
                                                                          ------------         ------------         ------------
Income (loss) from continuing operations                                    (8,230,385)          19,035,337           18,667,786
Income from discontinued operations of subsidiaries, net                     1,075,024              456,283            3,097,307
                                                                          ------------         ------------         ------------
Net income (loss)                                                         $ (7,155,361)        $ 19,491,620         $ 21,765,093
                                                                          ============         ============         ============

                    CONDENSED STATEMENTS OF CASH FLOWS

Cash flow from operating activities:
     Net income (loss)                                                    $ (7,155,361)        $ 19,491,620         $ 21,765,093
     Adjustments to reconcile net income (loss) to net cash used
       in operating activities:
          Equity in income (loss) of subsidiaries                            4,351,601          (20,457,718)         (19,596,074)
          Income from discontinued operations of subsidiaries, net          (1,075,024)            (456,283)          (3,097,307)
          Changes in assets and liabilities:
               Accrued expenses and other liabilities                       10,270,181           (1,040,789)             811,638
               Other assets                                                (11,284,739)           1,295,484             (437,405)
                                                                          ------------         ------------         ------------

          Net cash used in operating activities                             (4,893,342)          (1,167,686)            (554,055)
                                                                          ------------         ------------         ------------

Cash flow from investing activities:
     Dividends from subsidiary                                                                   22,152,608           13,212,592
     Sale of investments                                                    14,527,455
     Purchase of investments                                                (9,278,630)         (33,561,639)
                                                                          ------------         ------------         ------------
          Net cash provided by (used in) investing activities                5,248,825          (11,409,031)          13,212,592
                                                                          ------------         ------------         ------------
          Increase (decrease) in cash and cash equivalents                     355,483          (12,576,717)          12,658,537

Cash and cash equivalents, beginning of period                                  81,820           12,658,537
                                                                          ------------         ------------         ------------
Cash and cash equivalents, end of year                                    $    437,303         $     81,820         $ 12,658,537
                                                                          ============         ============         ============
</TABLE>

This statement should be read in conjunction with the notes to the consolidated
     Financial statements included in the Company's 1998 Form 10-K

                                          96

<PAGE>   97
                                           SCHEDULE II

                      PICO HOLDINGS, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                              Additions
                                                                   ------------------------------
                                                                        (1)               (2)
                                                 Balance at          Charged to         Charged to                     Balance
                                                  Beginning          Costs and             Other                         at End
               Description                        of Period           Expenses           Accounts       Deductions     of Period
                                                 -----------        -----------         ----------      ----------    ------------
<S>                                              <C>                <C>                <C>             <C>            <C>        
Year-end December 31, 1998
     Allowance for Doubtful Accounts, net        $   119,024        $    61,204                        $   (85,703)   $    94,525

     Valuation Allowance for
          Deferred Federal Income Taxes          $ 6,800,000        $ 1,889,973                                       $ 8,689,973

Year-end December 31, 1997
     Allowance for Doubtful Accounts, net        $   116,917        $   142,789                        $  (140,682)   $   119,024

     Valuation Allowance for
          Deferred Federal Income Taxes          $ 6,664,000        $   136,000                                       $ 6,800,000

Year-end December 31, 1996
     Allowance for Doubtful Accounts, net        $    78,000        $  (117,470)                       $   156,387    $   116,917

     Valuation Allowance for
          Deferred Federal Income Taxes                                                $ 6,664,000                    $ 6,664,000

</TABLE>

(1) Increases and decreases in provisions for the allowance for doubtful
    accounts are charged to expense accounts. Changes in the allowance for
    deferred federal income taxes are charged to provision (benefit) for
    federal, foreign and state income taxes except for amounts relating to
    unrealized investment gains and losses.

(2) Changes in the valuation allowance relating to unrealized investment gains
    and losses are netted against the net unrealized appreciation (depreciation)
    on investments account. The change in the valuation allowance recorded in
    1996 occurred prior to the Merger and was acquired in the Merger.

                                       97

<PAGE>   98
                                   SCHEDULE V

                      PICO HOLDINGS, INC. AND SUBSIDIARIES
                CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
                                 (In thousands)
                                December 31, 1996

<TABLE>
<CAPTION>
                                       Future
                                       Policy
                                      Benefits,                                                  Amortization
                           Deferred    Losses,                                           Losses   of Deferred
                           Policy      Claims                                 Net         and        Policy      Other       Net
                         Acquisition  and Loss     Unearned    Premium    Investment     Loss     Acquisition  Operating   Premiums
                            Costs     Expenses     Premiums    Revenue      Income     Expenses      Costs      Expenses   Written
                         -----------  --------    ---------   ---------   ----------- ---------   -----------  ---------  ---------
<S>                       <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Medical
professional
liability                             $142,965                $  7,362    $  4,881    $  2,605    $    272    $  1,010    $     28

Other property
and casualty              $  5,421     109,058    $ 34,808      31,399       2,540      20,328       1,603      10,100      37,529
                          --------    --------    --------    --------    --------    --------    --------    --------    ---------

Total medical
professional
liability and property
and casualty                 5,421     252,023      34,808      38,761       7,421      22,933       1,875      11,110      37,557

Other operations                                                               665                               7,855
                          --------    --------    --------    --------    --------    --------    --------    --------    ---------

Total continuing             5,421     252,023      34,808    $ 38,761    $  8,086    $ 22,933    $  1,875    $ 18,965    $ 37,557
                                                              ========    ========    ========    ========    ========    ========

Discontinued life
and health (*)               2,501      45,516         489
                          --------    --------    --------
                          $  7,922    $297,539    $ 35,297
                          ========    ========    ========
</TABLE>

* Amounts needed to reconcile to balance sheet accounts from discontinued life
and health insurance segment not reclassified for 1996. In 1997, the Company
entered into a definitive agreement to sell its indirectly wholly-owned life and
health insurance subsidiary, American Physicians Life Insurance Company and its
wholly-owned subsidiary. The closing occurred on December 4, 1998. The Company's
1997 life and health insurance operations have been classified as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business." Net income for 1996 has also been reclassified for
comparative purposes to reflect the discontinued operations. See Note 6 to the
Consolidated Financial Statements, "Discontinued Operations."

                                       98

<PAGE>   99
                                   SCHEDULE V

                      PICO HOLDINGS, INC. AND SUBSIDIARIES
                CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
                                 (In thousands)
                                December 31, 1997

<TABLE>
<CAPTION>
                                       
                                       
                                       Losses,                                                   Amortization
                           Deferred    Claims                                           Losses   of Deferred
                           Policy     and Loss                                Net         and        Policy      Other       Net
                         Acquisition   Expense     Unearned    Premium    Investment     Loss     Acquisition  Operating   Premiums
                            Costs     Reserves     Premiums    Revenue      Income     Expenses      Costs     Expenses    Written
                         -----------  --------    ---------   ---------   ----------- ---------   ---------   ---------   ---------
<S>                       <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Medical
professional
liability                             $108,926                $    239    $  3,656    $  1,244                $  1,887    $    240

Other property
and casualty              $  5,321      87,170    $ 21,635      49,637       5,614      33,086    $ 10,069       7,959      39,453
                         -----------  --------    ---------   ---------   ----------- ---------   ---------    --------   ---------

Total medical
professional
liability and property
and casualty                 5,321     196,096      21,635      49,876       9,270      34,330      10,069       9,846      39,693

Other operations                                                             2,416                              10,437
                         -----------  --------    ---------   ---------   ----------- ---------   ---------   ---------  ---------

Total continuing          $  5,321    $196,096    $ 21,635    $ 49,876    $ 11,686    $ 34,330    $ 10,069    $ 20,283    $ 39,693
                         ===========  ========    =========   =========   =========== =========   =========   =========   ========
</TABLE>

     In 1997, the Company entered into a definitive agreement to sell its
     indirectly wholly-owned life and health insurance subsidiary, American
     Physicians Life Insurance Company and its wholly-owned subsidiary. The
     closing occurred on December 4, 1998. The Company's 1997 life and health
     insurance operations have been classified as discontinued operations in
     accordance with Accounting Principles Board Opinion No. 30, "Reporting the
     Results of Operations--Reporting the Effects of Disposal of a Segment of a
     Business." Net income for 1996 has also been reclassified for comparative
     purposes to reflect the discontinued operations. See Note 6 to the
     Consolidated Financial Statements, "Discontinued Operations."

                                       99

<PAGE>   100
                                   SCHEDULE V

                      PICO HOLDINGS, INC. AND SUBSIDIARIES
                CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
                                 (In thousands)
                                December 31, 1998

<TABLE>
<CAPTION>
                                       
                                       
                                       Losses,                                                          Amortization
                           Deferred    Claims                                           Losses   of Deferred
                           Policy     and Loss                                Net         and        Policy      Other       Net
                         Acquisition   Expense    Unearned    Premium    Investment     Loss     Acquisition  Operating   Premiums
                            Costs     Reserves    Premiums    Revenue      Income     Expenses      Costs     Expenses    Written
                         -----------  --------    ---------   ---------   ----------- ---------   ---------   ---------   ---------
<S>                       <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Medical
professional
liability                             $ 85,877                 $   (159)   $  2,580    $  5,628                 $  1,156    $  (220)

Other property
and casualty              $  5,549      69,144     $ 20,804      36,290       5,500      24,900     $ 10,877       4,325     35,507
                          --------    --------     --------    --------    --------    --------     --------    --------    -------
Total medical
professional
liability and property
and casualty                 5,549     155,021       20,804      36,131       8,080      30,528       10,877       5,481     35,287

Other operations                                                              2,164                               11,564
                          --------    --------     --------    --------    --------    --------     --------    --------    -------
Total continuing          $  5,549    $155,021     $ 20,804    $ 36,131    $ 10,244    $ 30,528     $ 10,877    $ 17,045    $35,287
                          ========    ========     ========    ========    ========    ========     ========    ========    =======
</TABLE>

                                       100

<PAGE>   101
3.       EXHIBITS

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

            +2.2        Agreement and Plan of Reorganization, dated as of May 1,
                        1996, among PICO, Citation Holdings, Inc. and Physicians
                        and amendment thereto dated August 14, 1996 and related
                        Merger Agreement.

            +++++2.3    Second Amendment to Agreement and Plan of Reorganization
                        dated November 12, 1996.

            #2.4        Agreement and Debenture, dated November 14, 1996 and
                        November 27, 1996, Respectively, by and between
                        Physicians and PC Quote, Inc.

            #2.5        Purchase and Sale Agreement by, between and among Nevada
                        Land and Resource Company, LLC, GEC, Western Water
                        Company and Western Land Joint Venture dated April 9,
                        1997.

            +++++3.1    Amended and Restated Articles of Incorporation of PICO.

            +3.2.2      Amended and Restated By-laws of PICO.

            *10.8       Flexible Benefit Plan

            *10.16      Office Lease between Citation and North Block
                        Partnership dated July, 1990.

            ***10.16.1  Amendments Nos. 1 and 2 to Office Lease between Citation
                        and North Block Partnership dated January 6, 1992 and
                        February 5, 1992, respectively.

            ****10.16.2 Amendments Nos. 3 and 4 to Office Lease between Citation
                        and North Block Partnership dated December 6, 1993 and
                        October 4, 1994, respectively.

            -*****10.23 PICO Severance Plan for Certain Executive Officers,
                        Senior Management and Key Employees of the Company and
                        its Subsidiaries, including form of agreement.

            -10.55      Consulting Agreements, effective January 1, 1997,
                        regarding retention of Ronald Langley and John R. Hart
                        as consultants by Physicians and GEC.

            ++10.57     PICO 1995 Stock Option Plan

            -+++10.58   Key Employee Severance Agreement and Amendment No. 1
                        thereto, each made as of November 1, 1992, between PICO
                        and Richard H. Sharpe and Schedule A identifying other
                        substantially identical Key Employee Severance
                        Agreements between PICO and certain of the executive
                        officers of PICO.

            +++10.59    Agreement for Purchase and Sale of Shares, dated May 9,
                        1996, among Physicians, GPG and GEC.

            ++10.60     Agreement for the Purchase and Sale of Certain Assets,
                        dated July 14, 1995 between Physicians, PRO and Mutual
                        Assurance, Inc.

            ++10.61     Stock Purchase Agreement dated March 7, 1995 between
                        Sydney Reinsurance Corporation and Physicians.

            ++10.62     Letter Agreement, dated September 5, 1995, between
                        Physicians, Christopher Ondaatje and the South East Asia
                        Plantation Corporation Limited.

            ++++10.63   Amendment No. 1 to Agreement for Purchase and Sale of
                        Certain Assets, dated July 30, 1996 between Physicians,
                        PRO and Mutual Assurance, Inc.

            +++++16.1.  Letter regarding change in Certifying Accountant from
                        Deloitte & Touche LLP, Independent auditors.

            #21.        Subsidiaries of PICO.

            23.1.       Independent Auditors' Consent - Deloitte & Touche LLP.

            23.2.       Consent of Independent Accountants - 
                        PricewaterhouseCoopers LLP.

            23.3.       Accountants' Consent - KPMG LLP.

            27.         Financial Data Schedule.

            ###28.      Form S-8, Registration Statement under the Securities
                        Act of 1933, for the PICO Holdings, Inc. Employees
                        401(k) Retirement Plan and Trust, Registration No.
                        333-36881.

            ####29.     Form S-8, Registration Statement under the Securities
                        Act of 1933, for the Physicians Insurance Company of
                        Ohio 1995 Non-Qualified Stock Option Plan and assumed by
                        PICO Holdings, Inc., Registration No. 333-32045.

- ----------

                                        101

<PAGE>   102
*       Incorporated by reference to exhibit of same number filed with
        Registration Statement on Form S-1 (File No. 33-36383).

***     Incorporated by reference to exhibit of same number filed With 1992 Form
        10-K.

****    Incorporated by reference to exhibit of same number filed with 1994 Form
        10-K.

*****   Incorporated by reference to exhibit bearing the same number filed with
        Registration Statement on Form S-4 (File No. 33-64328).

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

++      Incorporated by reference to exhibit filed with Physicians' Registration
        Statement No. 33-99352 on Form S-1 filed with the SEC on November 14,
        1995.

+++     Incorporated by reference to exhibit filed with Registration Statement
        on Form S-4 (File no. 333-06671).

++++    Incorporated by reference to exhibit filed with Amendment No. 1 to
        Registration Statement No. 333-06671 on Form S-4.

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

- -       Executive Compensation Plans and Agreements.

#       Incorporated by reference to exhibit of same number filed with Form 10-K
        dated April 15, 1997.

##      Incorporated by reference to exhibit (*) of same number filed with
        10-K/A dated April 30, 1997.

###     Incorporated by reference to Form S-8 filed with the Securities and
        Exchange Commission (File No. 333-36881).

####    Incorporated by reference to Form S-8 filed with the Securities and
        Exchange Commission (File No. 333-32045).

(b) REPORTS ON FORM 8-K.

        On December 22, 1998 and January 8, 1999, PICO filed Form 8-K and Form
    8-K/A, respectively, announcing jointly with GEC the December 16, 1998
    closing of the PICO/GEC Combination and the 1-for-5 Reverse Stock Split.

        On October 9, 1998, PICO filed a Form 8-K announcing the conversion of
    the Company's PC Quote subordinated convertible debenture, working capital
    loans and accrued interest into PC Quote 5% Convertible Preferred Stock and
    common stock warrants.

        On October 9, 1998, PICO filed a Form 8-K announcing jointly with GEC
    the September 18, 1998 filing with the SEC of their Joint Proxy Statement in
    connection with the PICO/GEC Combination.

        On July 21, 1998, PICO filed a Form 8-K announcing the favorable
    response by GEC's independent committee of directors regarding the PICO/GEC
    Combination including disclosure of the share exchange ratio.

        On May 20, 1998, PICO file a From 8-K announcing PICO's consideration of
    the proposed PICO/GEC Combination through a Plan of Arrangement.

                                       102

<PAGE>   103
    On December 4, 1996 and December 30, 1996, PICO filed a Form 8-K and a Form
8-K/A, respectively, with the United States Securities and Exchange Commission.
The Form 8-K reported the consummation of the Merger, the amendment of PICO's
Articles of Incorporation and By-laws and a change in the Company's accountants.
The Form 8-K/A provided the pro forma financial information of PICO for the
quarter ended and as of September 30, 1996 with respect to the Merger. See also
Item 9 of Part II of this report for a listing of additional 8-K documents
filed.

                                       103

<PAGE>   104
                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date:  March 30, 1999
                                             PICO Holdings, Inc.

                                             By:    /s/  John R. Hart
                                               ---------------------------------
                                                        John R. Hart
                                                   Chief Executive Officer
                                                   President and Director

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 30, 1999 by the following persons in the
capacities indicated.

<TABLE>
<S>                                         <C>
/s/ Ronald Langley                          Chairman of the Board
- ------------------------------------
Ronald Langley

/s/ John R. Hart                            Chief Executive Officer, President and Director
- ------------------------------------
John R. Hart

/s/ Gary W. Burchfield                      Chief Financial Officer and Treasurer
- ------------------------------------        (Chief Accounting Officer)
Gary W. Burchfield                  

/s/ S. Walter Foulkrod, III, Esq.           Director
- ------------------------------------
S. Walter Foulkrod, III, Esq.

/s/ Richard D. Ruppert, MD                  Director
- ------------------------------------
Richard D. Ruppert, MD

/s/ David A. Williams                       Director
- ------------------------------------
David A. Williams

/s/ Carlos C. Campbell                      Director
- ------------------------------------
Carlos C. Campbell

/s/ Robert R. Broadbent                     Director
- ------------------------------------
Robert R. Broadbent

/s/ John D. Weil                            Director
- ------------------------------------
John D. Weil
</TABLE>

                                       104




<PAGE>   1
                                                                    EXHIBIT 23.1

                          INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
333-136881 and 333-32045 of PICO Holdings, Inc. (the "Company") on Form S-8 of
our reports dated March 26, 1999, appearing in this Annual Report on Form 10-K
of the Company for the year ended December 31, 1998.

DELOITTE & TOUCHE LLP

San Diego, California
March 26, 1999

                                       105

<PAGE>   1
                                                                    EXHIBIT 23.2

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements on
Form S-8 (File Nos. 333-36881 and 333-32045) of our reports dated April 7, 1997,
on our audit of the consolidated statements of operations, shareholders' equity
and cash flows and consolidated financial statement schedules of PICO Holdings,
Inc. for the year ended December 31, 1996 which report is included in this
annual report on Form 10-K.

                           PricewaterhouseCoopers LLP

San Diego, California
March 26, 1999

                                       106

<PAGE>   1
                                                                    EXHIBIT 23.3

                              ACCOUNTANTS' CONSENT

The Board of Directors
PICO Holdings, Inc.

We consent to the incorporation by reference in the Registration Statements
(Nos. 333-36881 and 333-32045) on Forms S-8 of PICO Holdings, Inc. of our report
dated March 17, 1998 relating to the consolidated statement of financial
position of Global Equity Corporation as at December 31, 1997, and the related
consolidated statements of operations, deficit and changes in financial position
for the year then ended, which report appears in the annual report on Form 10-K
of PICO Holdings, Inc. dated March 31, 1998.

KPMG LLP
Chartered Accountants

Toronto, Canada
March 26, 1999

                                       107


<TABLE> <S> <C>

<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF PICO
HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-END>                               DEC-31-1998
<EXCHANGE-RATE>                                 32,642
<DEBT-HELD-FOR-SALE>                                 0
<DEBT-CARRYING-VALUE>                                0
<DEBT-MARKET-VALUE>                                  0
<EQUITIES>                                      61,363
<MORTGAGE>                                           0
<REAL-ESTATE>                                    2,047
<TOTAL-INVEST>                                 117,150
<CASH>                                          71,654
<RECOVER-REINSURE>                               1,127
<DEFERRED-ACQUISITION>                           5,549
<TOTAL-ASSETS>                                 395,914
<POLICY-LOSSES>                                155,021
<UNEARNED-PREMIUMS>                             20,804
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                                0
<NOTES-PAYABLE>                                      0
                                0
                                          0
<COMMON>                                            67
<OTHER-SE>                                     174,028
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