PICO Holdings: An Opportunistic Value Investor

Includes: CTO, PICO, RDI
by: Alex B. Gray

PICO Holdings, Inc. (PICO) is a diversified holding company with a combination of investments and operating companies. Its operating holdings include water resources and storage, real estate, insurance in "Run Off", and agribusiness.

If you are looking for a company that plays to the investment community and keeps analysts informed with earnings estimates, PICO is not your company. PICO looks to allocate capital into operations or investments where it believes value can be created. Rather than focus on short-term earnings from quarter to quarter, the goal of management is to increase shareholder value through the growth of book value with a long-term prospective. This modus operandi is similar to that of Leucadia (LUK) and even Berkshire Hathaway (BRK.A).

Below is a breakdown of the major operating segments of Pico Holdings.


This operation may be what many consider will be the most valuable asset of PICO Holdings over the long-term. Through its wholly owned subsidiary, Vidler Water Company, Inc, PICO owns water assets and operations in the states of Nevada, Arizona, Idaho, Colorado and New Mexico. Vidler primarily develops water resources for use by water utilities, municipalities, real estate developers, and industrial users. The company primarily focuses on the Southwest where water resources are known to be limited. The company also develops waters storage facilities as part of a distribution infrastructure to allow for more efficient use of the developed water supplies. The company also seeks out joint development opportunities where their knowledge and capital can be leveraged.

In order to generate revenue, the company sells its water resources to primarily real estate developers and industrial end-users. The company also generates revenues by selling its stored water or future rights to developers and/or municipalities.

As part of acquiring the water rights, the company has also acquired about 14,400 acres of real estate that is prominently leased for farming operations and to a smaller degree planned for development.

Real Estate

PICO Holdings operates its real estate business primarily through two subsidiaries, UCP, LLC (UCP) and Nevada Land and Resource Company, LLC (NLRC).

UCP was formed to take advantage of plummeting land prices primarily in California. The company has focused on land in the Central Valley, Central Coast and the Bay Area of California that it believes are being sold at attractive valuations. UCP has purchased lots in areas where the company believes demand will be positively impacted by limited supply as the homes for sale inventory declines. As of December 31, 2010, the company owned or controlled 490 finished lots and 4,711 potential lots that remain in various stages of entitlement. Of the 490 finished lots, 21 have completed homes and 10 have partially completed homes.

NLRC is one of the largest private land owners in the State of Nevada. In 1997, the company acquired 1.35 million acres of land located in northern Nevada. This deeded real estate contained certain water, mineral and geothermal rights. Since the acquisition, the company has routinely sold parcels the land and has 440,000 acres remaining at December 31, 2010. The company intends to make the highest use of the land by selling the land and water rights, developing the water rights, management of the mineral rights and the development of geothermal rights. The company has moved forward on the development of the water rights by applying for approximately 41,500 acre-feet of water rights. So far 14,400 acre-feet have been certificated and permitted.

Insurance in "Run Off"

In 1995 Physicians Insurance of Ohio discontinued its practice of writing medical professional liability insurance and was placed into "Run Off". During a "Run Off" period an insurance company continues to pay claims, but does not write any new policies. The claims are paid from existing loss reserves and investments. Claims related to policies written by Physicians Insurance can be filed until 2017 for events occurring only during the period the company provided coverage. The company is currently managing its own claims as well as the associated investment portfolio.

In 1996, Physicians Insurance acquired Citation Insurance Company which wrote commercial property and casualty as well as worker's compensation insurance. In 2000, Citation discontinued writing new policies and was placed into "Run Off". The worker's compensation claims are handled by a third party administrator.


PICO recently funded a new operating segment, PICO Northstar Hallock, LLC (PNH) with $60 million. PNH plans to construct and operate a canola seed processing plant with an initial crushing capacity of 1,000 tons per day. The plant will be located in northern Minnesota, approximately 25 miles south of the Canadian border. Approximately 1 million acres planted in canola are within a 100 mile radius of the plant. PNH is raising an additional $100 million to complete construction and operate the plant. Construction of the plant is already underway and production is expected to begin by the end of 2012. PNH already has agreements in place with Land O' Lakes Purina Feed, LLC to guarantee the sale of 100% of the plants output for a period of five years.


PICO regularly invests capital in publicly traded and privately held companies. PICO currently owns a 31% stake in Spigit, Inc. Spigit is the a developer of enterprise software for social productivity within an organizations social network of customers, employees and partners. According to SEC filings, the company also has acquired a 6.52% stake in publicly traded Reading International, Inc. (NASDAQ:RDI) and a 1.72% stake in publicly traded Consolidated-Tomoka Land Co. (NYSEMKT:CTO).


Until recently, the company's performance has been enviable. Until the downturn in the economy, the company had been increasing pre-tax book value approximately 15% annually since 1994. However, it is not uncommon for such companies to go through periods where their asset base is not growing- especially in down economies and markets. This is when many managers, such as those of PICO Holdings, become very active and start looking for undervalued assets. This is exactly what PICO has done during the housing crisis as it started snapping up residential building lots in California. Most of PICO's holdings have a very long-term time horizon. Without an unexpected catalyst, I would expect the stock of PICO to trade in a tight range over the near-term, but long-term investors with a 3-5 year time horizon should be rewarded handsomely.

Disclosure: I am long PICO.