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You can tell a lot about a manager by the securities in which he invests, and that being said, this week we take an off the beaten look at PICO holdings. PICO has recently become a darling of the investment world as the focus on its water business goes from the underground to the mainstream. (Fidelity taking a stake and a push from a major newsletter provider will tend to turn the spotlight on you.)

You don’t hear a great deal about PICO’s insurance subsidiary, Physicians Insurance Co of Ohio. Currently in run-off, Physicians does not write any new policies, but must still settle claims of existing policies. The company generates revenue and pays claims from its investment portfolio. Typically, this contributes income to PICO, as the portfolio generates more income than the liabilities consume.

From PICO's website:

Administering our own “run off” also provides us with the following opportunities:

we retain management of the associated investment portfolios. After we resumed direct management of our insurance company portfolios in 2000, we believe that the return on our portfolio assets has been attractive in absolute terms, and very competitive in relative terms. Since the claims reserves of the “run off” insurance companies effectively recognize the cost of paying and handling claims in future years, the investment return on the corresponding investment assets, less non-insurance expenses, will accrue to PICO. We aim to maximize this source of income; and to participate in favorable development in our claims reserves if there is any, although this entails the corresponding risk that we could be exposed to unfavorable development.

Thanks to the Schedule D filing, as reported to the NAIC, and available on Bloomberg, we were able to take a gander at Physician’s portfolio as of 12/31/06. The most striking thing about this $69 million+ portfolio was that some of the names are high-quality pink sheet (or OTCBB) companies, including the following:

Bank Utica NY (OTCQB:BKUT)
JG Boswell (OTCPK:BWEL)
Case Pomeroy (recently acquired)
Farmers & Merchant/CA (OTCQB:FMBL)
Hanover Foods (OTCPK:HNFSA)
Laaco (OTC:LAACZ)
Limoneira (NASDAQ:LMNR)
Ohio Savings Finl (OHSF)
Queen City Investments (OTCPK:QUCT)

While we make no specific judgement on these companies (we do currently own BWEL, and have reported on HNFSA in the past), we find it interesting that PICO management continues to find value in some interesting places. This is one of the reasons we were attracted to PICO in the first place.

The stock has had a nice run up since the market pullback and private placement in February, but may be a bit ahead of itself. As we mentioned earlier, after going unrecognized for years, there has recently been a PICO frenzy of sorts. The focus is on water, the “new oil,” and while we believe there is a great deal of value there, we would not be surprised to see the shares pull back a bit in the short-term.

Other Random PICO Notes: Going Mainstream
For their part, a couple of equity research firms have joined the party. In a May 11th research report Merriman, Curhan and Ford analysts Jesse Herrick and Brion Tanous suggested that PICO is fairly valued in the $58-$64 range. ThinkEquity Parnters recently initiated coverage, and analyst David Edwards rated the stock a “buy”, with a $59 target. As a shareholder, we like those numbers…but still believe the stock may getting ahead of itself.

Major Departure
Chairman Robert Langley, half of the dynamic duo (CEO John Hart, is the other half), recently announced his retirement, effective 12/31/07. He will remain on the Board through at least 2008. It remains to be seen how this will effect PICO, but suffice it to say that this management team, whether or not you believe they are grossly overpaid, has made some brilliant moves (Hyperfeed aside) over the years. Stay tuned as PICO names a successor. I’d be happy to throw my name into the hat.

Disclosure: author has a long position in PICO and BWEL.

PICO 1-yr chart:

PICO 1-yr chart

Source: Viewing PICO Holdings Through Pink Sheet Covered Glasses