UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-K

____________________________

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, ~~2012~~2015

Commission File No. 001-12257

____________________________

MERCURY GENERAL CORPORATION

(Exact name of registrant as specified in its charter)

____________________________



California		95-2211612
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4484 Wilshire Boulevard, Los Angeles, California		90010
(Address of principal executive offices)		(Zip Code)

____________________________

Registrant’s telephone number, including area code: (323) 937-1060

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE

____________________________

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of ~~“large~~"large accelerated filer,~~” “accelerated~~" "accelerated filer,”" and ~~“smaller~~"smaller reporting ~~company”~~company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x		Accelerated filer	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the Registrant’s common equity held by non-affiliates of the Registrant at June ~~29, 2012~~30, 2015 was ~~$1,117,845,545~~$1,508,221,904 (which represents ~~26,826,147~~27,101,854 shares of common equity held by non-affiliates multiplied by $~~41.67~~,$55.65, the closing sales price on the New York Stock Exchange for such date, as reported by the Wall Street Journal).

At February ~~1, 2013~~2, 2016, the Registrant had issued and outstanding an aggregate of ~~54,921,877~~55,164,462 shares of its Common Stock.

____________________________

Documents Incorporated by Reference

Certain information from the Registrant’s definitive proxy statement for the ~~2013~~2016 Annual Meeting of Shareholders is incorporated herein by reference into Part III hereof.

~~Table of Contents~~

MERCURY GENERAL CORPORATION

INDEX TO FORM 10-K



		Page
PART I.

Item 1	Business	1
	General	1
	Website Access to Information	2
	Organization	2
	Production and Servicing of Business	3
	Underwriting	34
	Claims	34
	Losses and Loss Adjustment Expenses Reserves and Reserve Development	34
	Statutory Accounting Principles	67
	Investments	78
	Competitive Conditions	9
	Reinsurance	910
	Regulation	10
	Executive Officers of the Company	1213
Item 1A	Risk Factors	1314
Item 1B	Unresolved Staff Comments	25
Item 2	Properties	25
Item 3	Legal Proceedings	25
Item 4	Mine Safety Disclosures	25

PART II.

Item 5	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6	Selected Financial Data	28
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A	Quantitative and Qualitative Disclosures about Market Risks	4852
Item 8	Financial Statements and Supplementary Data	5154
Item 9	Changes in and Disagreements ~~with~~With Accountants on Accounting and Financial Disclosure	8186
Item 9A	Controls and Procedures	8186
Item 9B	Other Information	8187

PART III.

Item 10	Directors, Executive Officers, and Corporate Governance	8288
Item 11	Executive Compensation	8288
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	8288
Item 13	Certain Relationships and Related Transactions, and Director Independence	8288
Item 14	Principal Accounting Fees and Services	8288

PART IV.

Item 15	Exhibits and Financial Statement Schedules	8389

SIGNATURES		8694
Report of Independent Registered Public Accounting Firm		S-1
Financial Statement Schedules		~~S-7~~S-2

~~Table of Contents~~

PART I


Item 1.	Business

General

Mercury General Corporation (“("Mercury ~~General”~~General") and its subsidiaries (referred to herein collectively as the ~~“Company”~~"Company") are primarily engaged in writing personal automobile insurance through 1314 insurance subsidiaries (referred to herein collectively as the ~~“Insurance Companies”~~"Insurance Companies") in ~~a number of~~13 states, principally California. The Company also writes homeowners, commercial automobile, ~~and~~commercial property, mechanical breakdown, ~~fire,~~ and umbrella insurance.

The direct premiums written for the years ended December 31, ~~2012~~2015, ~~2011~~2014, and ~~2010~~2013 by state and line of insurance business were:

Year Ended December 31, 2015

(Dollars in thousands)



	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	1,946,922		$	333,397		$	78,735		$	96,791		$	2,455,845		81.5	%
Florida ⁽¹⁾	153,206			9			27,281			738			181,234			6.0	%
Other states ⁽²⁾	245,645			68,843			47,495			13,834			375,817			12.5	%
Total	$	2,345,773		$	402,249		$	153,511		$	111,363		$	3,012,896		100.0	%
	77.9		%	13.3		%	5.1		%	3.7		%	100.0		%

Year Ended December 31, ~~2012~~2014

(~~Amounts~~Dollars in thousands)


	Private Passenger Auto			Homeowners			Commercial Auto			Other Lines			Total					Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	1,670,025		$	255,418		$	41,200		$	65,474		$	2,032,117		76.5	%	$	1,852,291		$	302,493		$	69,129		$	84,374		$	2,308,287		80.9	%
Florida ⁽¹⁾	161,720			(181		)	14,783			7,118			183,440			6.9	%	131,281			7			26,234			4,676			162,198			5.7	%
Texas	61,477			10,149			9,181			24,496			105,303			4.0	%
New Jersey	72,299			3,479			0			407			76,185			2.9	%
Other states	175,010			49,430			9,491			24,744			258,675			9.7	%
Other states⁽²⁾																		239,501			71,936			40,565			30,682			382,684			13.4	%
Total	$	2,140,531		$	318,295		$	74,655		$	122,239		$	2,655,720		100	%	$	2,223,073		$	374,436		$	135,928		$	119,732		$	2,853,169		100.0	%
	80.6		%	12.0		%	2.8		%	4.6		%	100		%			77.9		%	13.1		%	4.8		%	4.2		%	100.0		%

Year Ended December 31, 2013

(Dollars in thousands)



	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	1,760,352		$	267,563		$	53,488		$	72,617		$	2,154,020		78.7	%
Florida ⁽¹⁾	133,947			—			22,331			7,433			163,711			6.0	%
Other states ⁽²⁾	271,258			72,450			28,870			47,163			419,741			15.3	%
Total	$	2,165,557		$	340,013		$	104,689		$	127,213		$	2,737,472		100.0	%
	79.1		%	12.4		%	3.8		%	4.7		%	100.0		%

_____________


(1)	The Company ~~completed its exit of~~is writing and expects to continue writing nominal premiums in the Florida homeowners ~~market in 2012.~~market.

~~Year Ended~~ ~~December 31, 2011~~

~~(Amounts in thousands)~~

Private
Passenger Auto
Homeowners
Commercial
Auto
Other Lines Total
California $ 1,613,954
$ 234,616
$ 48,161
$ 57,378
$ 1,954,109
75.8 %
Florida 165,506
7,679
14,705
8,974
196,864
7.6 %
Texas 61,373
3,986
5,831
22,860
94,050
3.7 %
New Jersey 88,171
2,396
0
462
91,029
3.5 %
Other states 176,598
36,511
6,945
23,577
243,631
9.4 %
Total $ 2,105,602
$ 285,188
$ 75,642
$ 113,251
$ 2,579,683
100 %
81.6 % 11.1 % 2.9 % 4.4 % 100 %

~~Year Ended~~ ~~December 31, 2010~~

~~(Amounts in thousands)~~

Private
Passenger Auto
Homeowners
Commercial
Auto
Other Lines Total
California $ 1,627,938
$ 219,749
$ 57,451
$ 54,601
$ 1,959,739
76.6 %
Florida 156,959
12,250
13,984
6,225
189,418
7.4 %
Texas 63,788
1,552
5,874
16,678
87,892
3.4 %
New Jersey 86,510
1,144
0
388
88,042
3.4 %
Other states 180,568
26,865
7,194
19,107
233,734
9.2 %
Total $ 2,115,763
$ 261,560
$ 84,503
$ 96,999
$ 2,558,825
100 %
82.7 % 10.2 % 3.3 % 3.8 % 100 %


(2)	No individual state accounts for more than 4% of total direct premiums written.

The Company offers ~~automobile policyholders~~ the following types of automobile coverage: collision, property damage, ~~liability,~~ bodily injury ~~(BI) liability,~~("BI"), comprehensive, personal injury protection ~~(PIP)~~("PIP"), underinsured and uninsured motorist, and other hazards.

The ~~Company’s~~Company offers the following types of homeowners coverage: dwelling, liability, personal property, fire, and other hazards.

The following table presents the Company's published maximum limits of liability, ~~for private passenger automobile insurance are, for BI, $250,000 per person~~net of reinsurance:



Insurance type	Published maximum limits of liability
Private Passenger Automobile - bodily injury (BI)	$250,000 per person; $500,000 per accident ⁽¹⁾
Private Passenger Automobile - property damage	$250,000 per accident ⁽¹⁾
Commercial Automobile (combined policy limits)	$1,000,000 per accident
Homeowner property	no maximum ^{(2) (3)}
Homeowner liability	$1,000,000 ⁽³⁾
Umbrella liability	$5,000,000 ⁽⁴⁾

~~Table of Contents~~

~~and $500,000 per accident, and for property damage, $250,000 per accident.~~(1) The ~~combined policy limits may be as high as $1,000,000 for vehicles written under the Company’s commercial automobile program. However, the~~ majority of the Company’s automobile policies have liability limits that are equal to or less than $100,000 per person and $300,000 per accident for BI and $50,000 per accident for property damage.

(2) The Company obtains facultative reinsurance above a Company retention limit of up to $7 million.

(3) The majority of the Company’s homeowner policies have liability limits of $300,000 or less and a replacement value of $500,000 or less.

(4) The majority of the Company’s umbrella policies have liability limits of $1,000,000.

The principal executive offices of Mercury General are located in Los Angeles, California. The home office of the ~~Company’s California insurance subsidiaries~~Insurance Companies and the ~~Information Technology~~information technology center are located in Brea, California. The Company also owns office buildings in Rancho Cucamonga and Folsom, California, which are used to support California operations and future expansion, and in ~~St. Petersburg,~~Clearwater, Florida and in Oklahoma City, Oklahoma, which house Company employees and several third party tenants. The Company has approximately 4,300 employees. The Company maintains branch offices in a number of locations in California; ~~Richmond, Virginia; Latham, New York;~~Clearwater, Florida; Bridgewater, New Jersey; ~~Vernon Hills, Illinois; Atlanta, Georgia;~~Oklahoma City, Oklahoma; and Austin and San Antonio, Texas.

The Company ~~has approximately 4,600 employees. On January 22, 2013, the Company implemented a plan to consolidate~~consolidated its non-California office based claims and underwriting operations into hubs located in ~~St. Petersburg,~~Clearwater, Florida; Bridgewater, New Jersey; and Austin, ~~Texas. The Company expects that~~Texas, which resulted in a net workforce reduction of approximately 135 employees and a $10 million pre-tax expense in the ~~consolidation will be completed before the end of the second~~first quarter of 2013.

~~Website Access to~~Available Information

The ~~internet address for the~~ Company’s website address is www.mercuryinsurance.com. The ~~internet~~Company's website address ~~provided in this Annual Report on Form 10-K~~ is not intended to function as a hyperlink and the information contained on the Company’s website is not, and should not be considered part of, ~~this report~~ and is not incorporated by reference ininto, this ~~document.~~Annual Report on Form 10-K. The Company makes available on its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and amendments to such periodic reports and proxy statements (the ~~“SEC Reports”~~"SEC Reports") filed with or furnished to the Securities and Exchange Commission ~~(“SEC”~~(the "SEC") pursuant to ~~federal securities laws,~~Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after each SEC Report is filed with or furnished to the SEC. In addition, copies of the SEC Reports are available, without charge, upon written request to the Company’s Chief Financial Officer, Mercury General Corporation, 4484 Wilshire Boulevard, Los Angeles, California 90010. The Company's SEC Reports may be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains the SEC Reports that the Company has filed or furnished electronically with the SEC.

Organization

Mercury General, an insurance holding company, is the parent of Mercury Casualty Company, ~~(“MCC”),~~ a California automobile insurer founded in 1961 by George Joseph, the Company’s Chairman of the Board of Directors. ~~Including MCC,~~

Mercury General ~~has 21 subsidiaries. The Company’s operations are conducted~~conducts its business through the following subsidiaries:



Insurance Companies	~~Date~~ Formed or Acquired	A.M. Best ~~Ratings~~Rating	Primary States
Mercury Casualty Company ~~(“MCC”~~("MCC")⁽¹⁾	~~January~~ 1961	A+	CA, AZ, NV, NY, VA
Mercury Insurance Company ~~(“MIC”~~("MIC")⁽¹⁾	~~November~~ 1972	A+	CA
California Automobile Insurance Company ~~(“CAIC”~~("CAIC")⁽¹⁾	~~June~~ 1975	A+	CA
California General Underwriters Insurance Company, Inc. ~~(“CGU”~~("CGU")⁽¹⁾	~~April~~ 1985	Non-rated	CA
Mercury Insurance Company of Illinois ~~(“MIC IL”)~~	~~August~~ 1989	A+	IL, PA
Mercury Insurance Company of Georgia ~~(“MIC GA”)~~	~~March~~ 1989	A+	GA
Mercury Indemnity Company of Georgia ~~(“MID GA”)~~	~~November~~ 1991	A+	GA
Mercury National Insurance Company ~~(“MNIC”)~~	~~December~~ 1991	A+	IL, MI
American Mercury Insurance Company ~~(“AMI”)~~	~~December~~ 1996	A-	OK, GA, TX, VA
American Mercury Lloyds Insurance Company ~~(“AML”~~("AML")	~~December~~ 1996	A-	TX
Mercury County Mutual Insurance Company ~~(“MCM”)~~	~~September~~ 2000	A-	TX
Mercury Insurance Company of Florida ~~(“MIC FL”)~~	~~August~~ 2001	A+	FL, PA
Mercury Indemnity Company of America ~~(“MIDAM”)~~	~~August~~ 2001	A+	FL, NJ FL
Workmen’s Auto Insurance Company ("WAIC")⁽²⁾	2015	Non-rated	CA

~~Table of Contents~~



Non-Insurance Companies	~~Date~~ Formed or Acquired	Purpose
Mercury Select Management Company, Inc. ~~(“MSMC”)~~	~~August~~ 1997	AML’s attorney-in-fact
~~American Mercury MGA, Inc. (“AMMGA”)~~	~~August 1997~~	~~Inactive general agent, dissolved in 2012.~~
~~Concord Insurance Services, Inc. (“Concord”)~~	~~October 1999~~	~~Inactive insurance agent since 2006~~
Mercury Insurance Services LLC ~~(“MIS LLC”)~~	~~November~~ 2000	Management services to subsidiaries
~~Mercury Group, Inc. (“MGI”)~~AIS Management LLC	~~July 2001~~	~~Inactive insurance agent, dissolved in 2012.~~
~~AIS Management LLC (“AISM”)~~	~~January~~ 2009	Parent company of AIS and PoliSeek
Auto Insurance Specialists LLC ~~(“AIS”~~("AIS")	~~January~~ 2009	Insurance agent
PoliSeek AIS Insurance Solutions, Inc. ~~(“PoliSeek”~~("PoliSeek")	~~January~~ 2009	Insurance agent
Animas Funding LLC ("AFL")	2013	Special purpose investment vehicle
Fannette Funding LLC ("FFL")	2014	Special purpose investment vehicle

_____________


(1)	The term ~~“California Companies”~~"California Companies" refers to MCC, MIC, CAIC, and CGU.


(2)	WAIC was acquired on January 2, 2015. For more detailed information, see Note 20. Acquisition, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."

Production and Servicing of Business

The Company sells its policies through approximately ~~7,700~~9,700 independent agents, its 100% owned insurance agents, AIS and Poliseek, and directly through internet sales portals. All of ~~which, over 1,300 are located~~the independent agents collectively accounted for more than 87% of the Company's direct premiums written in ~~each~~2015, and no independent agent accounted for more than 1% of ~~California and Florida. The remaining~~the Company’s direct premiums written during the last three years. Approximately 1,900 of the independent agents are located in ~~Arizona, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas~~California and ~~Virginia. Over half of the Company’s agents~~approximately 1,500 are located in ~~California have represented the Company for more than ten years.~~Florida. The independent agents are independent contractors selected and contracted by the Company and generally also represent competing insurance companies. NoAIS and Poliseek represented the Company as independent ~~agent accounted~~agents prior to their acquisition in 2009, and continue to act as independent agents selling policies for ~~more than 2%~~a number of other insurance companies. Policies sold directly through the ~~Company’s direct premiums written during~~ ~~2012~~, ~~2011~~,internet sales portals are assigned to and ~~2010~~.serviced by the Company's agents.

The Company believes that it compensates its agents above the industry average. ~~During~~ ~~2012, total~~Net commissions incurred in 2015 were approximately 16% of net premiums written.

The Company’s advertising budget is allocated among television, radio, newspaper, internet, and direct mailing media with the intent to provide the best coverage available within targeted media markets. While the majority of these advertising costs are borne by the Company, a portion of these costs are reimbursed by the Company’s independent agents based upon the number of account leads generated by the advertising. The Company believes that its advertising program is important to generate leads, create brand awareness, and to remain competitive in the current insurance climate. ~~During~~ ~~2012~~,In 2015, the Company launched a national

advertising campaign resulting in net advertising expenditures ~~were $19.4 million.~~of $44 million for the year. In 2016, the Company expects to spend up to $42 million on advertising.

Underwriting

The Company sets its own automobile insurance premium rates, subject to rating regulations issued by the Department of Insurance or similar governmental agency of each state in which it is licensed to operate ~~(“DOI”~~("DOI"). Each state has different rate approval requirements. See ~~“Regulation—~~"Regulation—Department of Insurance Oversight.”"

The Company offers standard, non-standard, and preferred private passenger automobile ~~insurance. In addition, the~~insurance in 13 states. The Company also offers homeowners insurance in 12 states, commercial automobile insurance in 10 states, and mechanical breakdown insurance in most states; and homeowners insurance in Arizona, California, Georgia, Illinois, New Jersey, New York, Oklahoma, Texas, and Virginia. The Company completed its exit of the Florida homeowners market in 2012.states.

In California, ~~“good~~"good drivers,”" as defined by the California Insurance Code, accounted for approximately 82% of all California voluntary private passenger automobile policies-in-force at December 31, ~~2012~~,2015, while higher risk categories accounted for approximately 18%. The private passenger automobile renewal rate in California (the rate of acceptance of offers to renew) averages approximately ~~96%~~95%.

Claims

The Company conducts the majority of claims processing without the assistance of outside adjusters. The claims staff administers all claims and manages all legal and adjustment aspects of claims processing.

Losses and Loss Adjustment Expense Reserves ("Loss Reserves") and Reserve Development

The Company maintains ~~losses and~~ loss ~~adjustment expense~~ reserves for both reported and unreported claims. ~~Losses and loss adjustment expense~~Loss reserves for reported claims are estimated based upon a case-by-case evaluation of the type of claim involved and the expected development of such claims. ~~Losses and loss adjustment expense~~Loss reserves for unreported claims are determined on the

~~Table of Contents~~

basis of historical information by line of ~~insurance.~~insurance business. Inflation is reflected in the reserving process through analysis of cost trends and review of historical reserve settlement.

The Company’s ultimate liability may be greater or less than management estimates of reported ~~losses and~~ loss ~~adjustment expense~~ reserves. ~~Reserves are analyzed quarterly by the Company’s actuarial consultants using current information on reported claims and a variety of statistical techniques.~~ The Company does not discount to a present value that portion of ~~losses and~~ loss ~~adjustment expense~~ reserves expected to be paid in future periods. ~~Federal tax law, however, requires~~However, the Company is required to discount ~~losses and~~ loss ~~adjustment expense~~ reserves for federal income tax purposes.

The following table provides a reconciliation of beginning and ending estimated reserve balances for the years indicated:

RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES



	Year Ended December 31,
	2015			2014			2013
	(Amounts in thousands)
Gross reserves at January 1	$	1,091,797		$	1,038,984		$	1,036,123
Less reinsurance recoverable	(14,484		)	(13,927		)	(12,155		)
Net reserves at January 1	1,077,313			1,025,057			1,023,968
Acquisition of WAIC reserves	18,676			—			—
Incurred losses and loss adjustment expenses related to:
Current year	2,132,837			1,989,315			1,959,730
Prior years	12,658			(3,193		)	2,960
Total incurred losses and loss adjustment expenses	2,145,495			1,986,122			1,962,690
Loss and loss adjustment expense payments related to:
Current year	1,455,245			1,347,967			1,354,074
Prior years	654,097			585,899			607,527
Total payments	2,109,342			1,933,866			1,961,601
Net reserves at December 31	1,132,142			1,077,313			1,025,057
Reinsurance recoverable	14,546			14,484			13,927
Gross reserves at December 31	$	1,146,688		$	1,091,797		$	1,038,984

The increase in the provision for insured events of prior years in 2015 of approximately $12.7 million primarily resulted from the California homeowners and automobile lines of business outside of California, which was partially offset by favorable development in the California automobile line of business.

The decrease in the provision for insured events of prior years in 2014 of approximately $3.2 million primarily resulted from lower than expected loss severity on California personal automobile lines of insurance business partially offset by adverse development in other states.

The increase in the provision for insured events of prior years in 2013 of approximately $3.0 million primarily resulted from Florida claims that were re-opened from prior years due to a state supreme court ruling that was adverse to the insurance industry.

The Company experienced estimated pre-tax catastrophe losses and loss adjustment expenses from severe weather events of $19 million, $11 million, and $17 million in 2015, 2014, and 2013, respectively. The losses in 2015 were primarily the result of severe storms outside of California, and rainstorm and wildfire losses in California. The losses in 2014 were primarily related to winter freeze events on the East Coast and severe rainstorms in California. The losses in 2013 were primarily due to tornadoes in Oklahoma and severe storms in the Midwest and the Southeast regions during the second quarter.

The following table presents the development of ~~losses and~~ loss ~~adjustment expense~~ reserves for the period ~~2002~~2005 through ~~2012.~~2015. The top section of the table shows the reserves at the balance sheet date, net of reinsurance recoverable, for each of the indicated years. This amount represents the estimated net losses and loss adjustment expenses for claims arising from the current and all prior years that are unpaid at the balance sheet date, including an estimate for ~~losses~~loss reserves that had been incurred but not reported ~~(“IBNR”~~("IBNR") to the Company. The second section shows the cumulative amounts paid as of successive years with respect to that reserve liability. The third section shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. Estimates change as more information ~~becomes known~~develops about the frequency and severity of claims for individual years. The bottom line shows favorable (unfavorable) development that exists when the original reserve estimates are greater (less) than the re-estimated reserves at December 31, ~~2012~~2015.

In evaluating the cumulative development information in the table, it should be noted that each amount includes the effects of all changes in development amounts for prior periods. This table does not present accident or policy year development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future favorable or unfavorable development based on this table.

~~Table of Contents~~


	December 31,																																	December 31,
	2002			2003			2004			2005			2006			2007			2008			2009			2010			2011			2012			2005			2006			2007			2008			2009			2010			2011			2012			2013			2014			2015
	(Amounts in thousands)																																	(Amounts in thousands)
Gross Reserves for Losses and Loss Adjustment Expenses-end of year⁽¹⁾	$	679,271		$	797,927		$	900,744		$	1,022,603		$	1,088,822		$1,103,915			$	1,133,508		$	1,053,334		$	1,034,205		$	985,279		$	1,036,123		$	1,022,603		$	1,088,822		$	1,103,915		$	1,133,508		$	1,053,334		$	1,034,205		$	985,279		$	1,036,123		$	1,038,984		$	1,091,797		$	1,146,688
Reinsurance recoverable	(14,382		)	(11,771		)	(14,137		)	(16,969		)	(6,429		)	(4,457		)	(5,729		)	(7,748		)	(6,805		)	(7,921		)	(12,155		)	(16,969		)	(6,429		)	(4,457		)	(5,729		)	(7,748		)	(6,805		)	(7,921		)	(12,155		)	(13,927		)	(14,485		)	(14,546		)
Net Reserves for Losses and Loss Adjustment Expenses-end of year⁽¹⁾	$	664,889		$	786,156		$	886,607		$	1,005,634		$	1,082,393		$	1,099,458		$	1,127,779		$	1,045,586		$	1,027,400		$	977,358		$	1,023,968		$	1,005,634		$	1,082,393		$	1,099,458		$	1,127,779		$	1,045,586		$	1,027,400		$	977,358		$	1,023,968		$	1,025,057		$	1,077,312		$	1,132,142
Paid (cumulative) as of:	Paid (cumulative) as of:																																	Paid (cumulative) as of:
One year later	$	432,126		$	461,649		$	525,125		$	632,905		$	674,345		$	715,846		$	617,622		$	603,256		$	614,059		$	600,090					$	632,905		$	674,345		$	715,846		$	617,622		$	603,256		$	614,059		$	600,090		$	607,527		$	585,899		$	654,097
Two years later	591,054			628,280			748,255			891,928			975,086			1,009,141			913,518			889,806			896,363									891,928			975,086			1,009,141			913,518			889,806			896,363			873,679			862,244			866,703
Three years later	637,555			714,763			851,590			1,027,781			1,123,179			1,168,246			1,059,627			1,023,137												1,027,781			1,123,179			1,168,246			1,059,627			1,023,137			1,027,006			1,004,373			1,002,371
Four years later	655,169			740,534			893,436			1,077,834			1,187,990			1,229,939			1,118,230															1,077,834			1,187,990			1,229,939			1,118,230			1,075,174			1,080,265			1,064,280
Five years later	664,051			750,927			906,466			1,101,693			1,211,343			1,252,687																		1,101,693			1,211,343			1,252,687			1,138,546			1,094,797			1,104,507
Six years later	667,277			754,710			915,086			1,111,109			1,219,719																					1,111,109			1,219,719			1,262,286			1,146,899			1,106,840
Seven years later	668,443			760,300			918,008			1,114,241																								1,114,241			1,224,026			1,265,882			1,151,551
Eight years later	671,474			762,385			918,488																											1,115,824			1,225,644			1,268,784
Nine years later	672,041			762,602																														1,116,622			1,227,546
Ten years later	672,268																																	1,117,085
Net reserves re-estimated as of:	Net reserves re-estimated as of:																																	Net reserves re-estimated as of:
One year later	668,954			728,213			840,090			1,026,923			1,101,917			1,188,100			1,069,744			1,032,528			1,045,894			1,019,690						1,026,923			1,101,917			1,188,100			1,069,744			1,032,528			1,045,894			1,019,690			1,026,928			1,021,864			1,089,970
Two years later	660,705			717,289			869,344			1,047,067			1,173,753			1,219,369			1,102,934			1,076,480			1,073,052									1,047,067			1,173,753			1,219,369			1,102,934			1,076,480			1,073,052			1,056,453			1,057,693			1,063,667
Three years later	662,918			745,744			894,063			1,091,131			1,202,441			1,246,365			1,136,278			1,085,591												1,091,131			1,202,441			1,246,365			1,136,278			1,085,591			1,094,494			1,083,686			1,081,434
Four years later	666,825			750,859			910,171			1,104,988			1,217,328			1,263,294			1,141,714															1,104,988			1,217,328			1,263,294			1,141,714			1,095,907			1,113,672			1,095,715
Five years later	668,318			755,970			914,547			1,112,779			1,225,051			1,263,560																		1,112,779			1,225,051			1,263,560			1,147,149			1,109,707			1,119,235
Six years later	669,499			757,534			918,756			1,115,637			1,225,131																					1,115,637			1,225,131			1,265,186			1,153,005			1,113,980
Seven years later	670,225			762,242			919,397			1,115,916																								1,115,916			1,225,519			1,268,716			1,156,227
Eight years later	672,387			763,016			919,027																											1,116,494			1,227,541			1,271,719
Nine years later	672,517			762,948																														1,117,404			1,229,470
Ten years later	672,541																																	1,117,880
Net cumulative development favorable (unfavorable)	$	(7,652	)	$	23,208		$	(32,420	)	$	(110,282	)	$	(142,738	)	$	(164,102	)	$	(13,935	)	$	(40,005	)	$	(45,652	)	$	(42,332	)				$	(112,246	)	$	(147,077	)	$	(172,261	)	$	(28,448	)	$	(68,394	)	$	(91,835	)	$	(118,357	)	$	(57,466	)	$	(38,610	)	$	(12,658	)
Gross re-estimated liability-latest	$	698,943		$	792,354		$	946,910		$	1,148,445		$	1,245,629		$	1,280,644		$	1,152,166		$	1,100,112		$	1,086,625		$	1,031,505					$	1,150,358		$	1,249,928		$	1,288,761		$	1,166,712		$	1,128,455		$	1,132,431		$	1,106,641		$	1,094,459		$	1,076,027		$	1,102,801
Re-estimated recoverable-latest	(26,402		)	(29,406		)	(27,883		)	(32,529		)	(20,498		)	(17,084		)	(10,452		)	(14,521		)	(13,573		)	(11,815		)
Re-estimated reinsurance recoverable-latest																																		(32,478		)	(20,458		)	(17,042		)	(10,485		)	(14,475		)	(13,196		)	(10,926		)	(13,025		)	(12,360		)	(12,831		)
Net re-estimated liability-latest	$	672,541		$	762,948		$	919,027		$	1,115,916		$	1,225,131		$	1,263,560		$	1,141,714		$	1,085,591		$	1,073,052		$	1,019,690					$	1,117,880		$	1,229,470		$	1,271,719		$	1,156,227		$	1,113,980		$	1,119,235		$	1,095,715		$	1,081,434		$	1,063,667		$	1,089,970
Gross cumulative development favorable (unfavorable)	$	(19,672	)	$	5,573		$	(46,166	)	$	(125,842	)	$	(156,807	)	$	(176,729	)	$	(18,658	)	$	(46,778	)	$	(52,420	)	$	(46,226	)				$	(127,755	)	$	(161,106	)	$	(184,846	)	$	(33,204	)	$	(75,121	)	$	(98,226	)	$	(121,362	)	$	(58,336	)	$	(37,043	)	$	(11,004	)


(1)	Under statutory accounting principles ~~(“SAP”~~("SAP"), reserves are stated net of reinsurance recoverable whereas under U.S. generally accepted accounting principles ~~(“GAAP”~~("GAAP"), reserves are stated gross of reinsurance recoverable.

The Company experienced unfavorable development of approximately ~~$42~~$13 million on the ~~2011~~2014 and prior accident ~~years'~~years’ loss ~~and loss adjustment expense~~ reserves due primarily ~~to an increase~~from the California homeowners and automobile lines of business outside of California, which was partially offset by favorable development in the ~~estimated loss severity for accident years 2010~~California personal automobile line of business. See "Critical Accounting Policies and 2011 California BI losses. In addition, the Company experienced unfavorable development on the run-off of California commercial taxi business and Florida homeowners business, both of which the Company ceased writingEstimates-Reserves" in ~~2011. See “Critical Accounting Estimates-Reserves” in “Item~~"Item 7. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations.”"

For the years 2008 through 2010, the Company experienced unfavorable development of approximately $14 million to $46 million on prior accident years’ losses and loss adjustment expense reserves. The unfavorable development was primarily due to increases in the estimated loss severity for accident years 2008 through 2010 California BI losses, increases in PIP reserves in Florida resulting from court decisions that were adverse to the insurance industry, and development on 2007 and prior accident years New Jersey BI reserves that settled for more than anticipated. These were partially offset by reductions in estimates for loss adjustment expenses, particularly for the 2010 accident year, related to the transfer of a higher proportion of litigated claims to house counsel and a reduction in the estimate for Florida sinkhole claims for accident year 2010, resulting from many of those claims being denied due to the absence of sinkhole activity or structural damage to the houses.

~~Table of Contents~~

For the years 2005 through ~~2007,~~2013, the ~~Company experienced unfavorable development of approximately $110 million~~cumulative reserves developed worse than what was originally expected. The primary causes relate to ~~$164 million~~increasing bodily injury severity trends beyond expectations, higher than expected losses on prior accident years’ losses and loss adjustment expense reserves. The unfavorable development from these years related primarily to increases in loss severity estimates and loss adjustment expense estimates for the California BI coverage as well as increases in the provision for losses in New Jersey and Florida.

~~For 2004, the unfavorable development related to an increase in the Company’s prior accident years’ loss estimates for~~ personal ~~automobile insurance in Florida and New Jersey. In addition, an increase in estimates for loss severity for the 2004 accident year reserves for California and New Jersey~~ automobile lines of insurance business ~~contributed~~in the Northeastern states where the Company relied on industry data for reserving purposes because it had limited historical data, an unfavorable court decision that was adverse to the ~~deficiencies.~~insurance industry for Florida PIP losses, and unfavorable development on the Florida homeowners line of insurance business due to a surge in claims related to sinkholes.

For 2003, the favorable development largely related to lower inflation than originally expected on the BI coverage reserves for the California automobile line of insurance. In addition, the Company experienced a reduction in expenditures to outside legal counsel for the defense of personal automobile claims in California. This led to a reduction in the ultimate expense amount expected to be paid out and therefore favorable development in the reserves at December 31, 2003, partially offset by unfavorable development in the Florida automobile lines of business.

For 2002, the unfavorable development related to increases in the ultimate liability for BI, physical damage, and collision claims over what was originally estimated. The increases in these losses related to increased severity over what was originally recorded and were the result of inflationary trends in health care, auto parts, and body shop labor costs.

Statutory Accounting Principles

The Company’s results are reported in accordance with GAAP, which differ in some respects from amounts reported under SAP prescribed by insurance regulatory authorities. Some of the significant differences under GAAP are described below:

Policy acquisition costs such as commissions, premium taxes, and other costs that vary with and are primarily related to the successful acquisition of new and renewal insurance contracts, are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, ~~rather than~~whereas under SAP, these costs are expensed as ~~incurred, as required by SAP.~~incurred.

Certain assets are included in the consolidated balance sheets, whereas under SAP, such assets are designated as ~~“nonadmitted~~"nonadmitted assets,”" and charged directly against statutory surplus. These assets consist primarily of premium receivables that are outstanding for more than 90 days, deferred tax assets that do not meet statutory requirements for recognition, furniture, equipment, leasehold improvements, capitalized software, and prepaid expenses.

Amounts related to ceded reinsurance are shown gross as prepaid reinsurance premiums and reinsurance recoverables, ~~rather than~~whereas under SAP, these amounts are netted against unearned premium reserves and losses and loss adjustment expenses ~~reserves, respectively, as required by SAP.~~reserves.

Fixed-maturity securities are reported at fair value, ~~rather than~~whereas under SAP, these securities are reported at amortized cost, or the lower of amortized cost, or fair value, depending on the specific type of ~~security as required by SAP.~~security.

Equity securities are marked to market through the consolidated statements of operations, whereas under SAP, these securities are marked to market through unrealized gains and losses in surplus.

Goodwill is reported as the excess of cost of an acquired entity over the fair value of the underlying assets and assessed periodically for impairment. Intangible assets are amortized over their useful lives. Under SAP, goodwill is reported as the excess of cost of an acquired entity over the statutory book value and amortized over 10 years. Its carrying value is limited to 10% of adjusted surplus. ~~Intangible~~Under SAP, intangible assets are not recognized.

The differing treatment of income and expense items results in a corresponding difference in federal income tax expense. Changes in deferred income taxes are reflected as an item of income tax benefit or expense, ~~rather than~~whereas under SAP, changes in deferred income taxes are recorded directly to statutory surplus as regards ~~policyholders, as required by SAP.~~policyholders. Admittance testing under SAP may result in a charge to unassigned surplus for non-admitted portions of deferred tax assets. Under GAAP, a valuation allowance may be recorded against the deferred tax assets and reflected as an expense.

Certain assessments paid to regulatory agencies that are recoverable from policyholders in future periods are expensed, ~~rather than~~whereas under SAP, these assessments are recorded as ~~receivables under SAP.~~receivables.

Operating Ratios (SAP basis)

Loss and Expense Ratios

Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. Under SAP, losses and loss adjustment expenses are stated as a percentage of premiums earned because losses occur over the life of a policy, while underwriting expenses are stated as a percentage of premiums written rather than premiums earned because most underwriting expenses are incurred when policies are written and are not spread over the policy period. The statutory

~~Table of Contents~~

underwriting profit margin is the extent to which the combined loss and expense ratios are less than 100%.

The following table presents, on a statutory basis, the Insurance Companies’ loss, ~~ratio,~~ expense ~~ratio,~~and combined ~~ratio,~~ratios, and the private passenger automobile industry combined ~~ratio, on a statutory basis, are shown in~~ratio. Although the ~~following table. The~~ Insurance Companies’ ratios include lines of insurance business other than private passenger ~~automobile. Since these other lines represent only 19.4%~~automobile that accounted for 22.1% of direct premiums written in 2015, the Company believes its ratios can be compared to the industry ~~ratios included in the following table.~~ratios.


	Year Ended December 31,											Year Ended December 31,
	2012			2011		2010		2009		2008		2015		2014			2013		2012		2011
Loss Ratio	76.1	%		71.2	%	71.0	%	67.8	%	73.3	%	72.6	%	71.0	%		72.7	%	76.1	%	71.2	%
Expense Ratio	26.7	%		27.4	%	29.1	%	28.6	%	28.5	%	26.7	%	27.7	%		27.2	%	26.7	%	27.4	%
Combined Ratio	102.8	%		98.6	%	100.1	%	96.4	%	101.8	%	99.3	%	98.8	%	⁽²⁾	99.9	%	102.8	%	98.6	%
Industry combined ratio (all writers)⁽¹⁾	99.6	%	⁽²⁾	101.6	%	100.4	%	100.8	%	99.8	%	N/A		101.9	%		103.4	%	101.3	%	101.6	%
Industry combined ratio (excluding direct writers)⁽¹⁾	N/A			101.1	%	101.1	%	100.5	%	100.8	%	N/A		99.8	%		100.7	%	102.6	%	101.1	%


(1)	Source: A.M. Best, Aggregates & Averages ~~(2009~~(2011 through ~~2012)~~2014), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).


(2)	~~Source: A.M. Best, “Best’s Special Report U.S. Property/Casualty-Review & Preview, February 4, 2013.”~~ Combined ratio for 2014 does not sum due to rounding.

Premiums to Surplus Ratio

The following table presents ~~for the periods indicated,~~ the Insurance Companies’ statutory ratios of net premiums written to policyholders’ surplus. Guidelines established by the National Association of Insurance Commissioners (the ~~“NAIC”~~"NAIC") indicate that this ratio should be no greater than 3 to 1.


	Year Ended December 31,										Year Ended December 31,
	2012		2011		2010		2009		2008		2015		2014		2013		2012		2011
	(Amounts in thousands, except ratios)										(Amounts in thousands, except ratios)
Net premiums written	$	2,651,731	$	2,575,383	$	2,555,481	$	2,589,972	$	2,750,226	$	2,999,392	$	2,840,922	$	2,728,999	$	2,651,731	$	2,575,383
Policyholders’ surplus	$	1,440,973	$	1,497,609	$	1,322,270	$	1,517,864	$	1,371,095	$	1,451,950	$	1,438,281	$	1,528,682	$	1,440,973	$	1,497,609
Ratio	1.8 to 1		1.7 to 1		1.9 to 1		1.7 to 1		2.0 to 1		2.1 to 1		2.0 to 1		1.8 to 1		1.8 to 1		1.7 to 1

Investments

The Company’s investments are directed by the Chief Investment Officer under the supervision of the Board of Directors. The Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total return framework. The investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a well diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve a return on capital and profitable growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and defaults. The Company believes that this strategy maintains the optimal investment performance necessary to sustain investment income over time. The Company’s portfolio management approach utilizes a market risk and asset allocation strategy as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for monitoring credit exposure and diversification requirements. Within the ranges set by the asset allocation strategy, tactical investment decisions are made in consideration of prevailing market conditions.

Tax considerations, including the impact of the alternative minimum tax ~~(“AMT”~~("AMT"), are important in portfolio management. Changes in loss experience, growth rates, and profitability produce significant changes in the Company’s exposure to AMT liability, requiring appropriate shifts in the investment asset mix between taxable bonds, tax-exempt bonds, and equities in order to maximize after-tax ~~yield~~. yield. The Company closely monitors the timing and recognition of capital gains and losses and the generation of ordinary income to maximize the realization of any deferred tax assets arising from capital ~~losses.~~losses or AMT credit carryforwards, respectively. The Company had no capital loss carryforward at December 31, ~~2012~~2015.

~~Table of Contents~~

Investment Portfolio

The following table presents the composition of the Company’s total investment portfolio:


	December 31,												December 31,
	2012				2011				2010				2015				2014				2013
	Cost⁽¹⁾		Fair Value		Cost⁽¹⁾		Fair Value		Cost⁽¹⁾		Fair Value		Cost⁽¹⁾		Fair Value		Cost⁽¹⁾		Fair Value		Cost⁽¹⁾		Fair Value
					(Amounts in thousands)												(Amounts in thousands)
Taxable bonds	$	253,175	$	265,671	$	166,295	$	180,257	$	200,468	$	223,017	$	426,905	$	414,396	$	350,343	$	350,705	$	329,521	$	331,506
Tax-exempt state and municipal bonds	2,017,728		2,142,683		2,179,325		2,265,332		2,417,188		2,429,263		2,377,370		2,465,607		2,153,151		2,267,695		2,193,521		2,229,147
Total fixed maturities	2,270,903		2,408,354		2,345,620		2,445,589		2,617,656		2,652,280		2,804,275		2,880,003		2,503,494		2,618,400		2,523,042		2,560,653
Equity securities	475,959		477,088		388,417		380,388		336,757		359,606		313,528		315,362		387,851		412,880		223,933		281,883
Short-term investments	294,607		294,653		236,433		236,444		143,378		143,371		185,353		185,277		373,180		372,542		315,886		315,776
Total investments	$	3,041,469	$	3,180,095	$	2,970,470	$	3,062,421	$	3,097,791	$	3,155,257	$	3,303,156	$	3,380,642	$	3,264,525	$	3,403,822	$	3,062,861	$	3,158,312

__________


(1)	Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost.

The Company applies the fair value option to all fixed maturity and equity securities and short-term investments at the time the eligible item is first recognized. For more detailed discussion on the Company's investment portfolio, including credit ratings, see ~~“Liquidity~~"Liquidity and Capital Resources—Invested ~~Assets”~~Assets" in ~~“Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations" and Note 23. Investments, of the Notes to Consolidated Financial ~~Statements.~~Statements in "Item 8. Financial Statements and Supplementary Data."

At ~~December 31, 2012~~, ~~67.4%~~ ~~of the Company’s total investment portfolio at fair value and~~ ~~89.0%~~ of its total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. For more detailed information including credit ratings, see “Liquidity and Capital Resources—Portfolio Composition” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

~~The nominal average maturity of the overall bond portfolio was~~ ~~12.2~~ ~~years (11.0~~ ~~years including all short-term instruments) at~~ ~~December 31, 2012~~, and is heavily weighted in investment grade tax-exempt municipal bonds. Fixed maturity investments purchased by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline. The call-adjusted average maturity of the overall bond portfolio was ~~3.7~~ ~~years (3.3~~ years including all short-term instruments) related to holdings which are heavily weighted with high coupon issues that are expected to be called prior to maturity. The modified duration of the overall bond portfolio reflecting anticipated early calls was ~~3.1~~ ~~years (2.8~~ ~~years including all short-term instruments) at~~ ~~December 31, 2012, including collateralized mortgage obligations with a modified duration of~~ ~~3.2~~ years and short-term bonds that carry no duration. Modified duration measures the length of time it takes, on average, to receive the present value of all the cash flows produced by a bond, including reinvestment of interest. As it measures four factors (maturity, coupon rate, yield, and call terms) which determine sensitivity to changes in interest rates, modified duration is considered a better indicator of price volatility than simple maturity alone. The longer the duration, the more sensitive the asset is to market interest rate fluctuations.

Equity holdings consist of non-redeemable preferred stocks, common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend received deduction, and a partnership interest in a private credit fund. At year end, ~~91.7%~~ ~~of short-term investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis. The Company does not have any direct equity investment in subprime lenders.~~

~~Table of Contents~~

Investment Results

The following table presents the investment results of the Company for the most recent five years:


	Year Ended December 31,															Year Ended December 31,
	2012			2011			2010			2009			2008			2015			2014			2013			2012			2011
				(Amounts in thousands)															(Dollars in thousands)
Average invested assets at cost⁽¹⁾	$	3,011,143		$	3,004,588		$	3,121,366		$	3,196,944		$	3,452,803
Average invested assets at cost^{(1) (3)}																$	3,293,948		$	3,204,592		$	3,028,198		$	3,011,143		$	3,004,588
Net investment income⁽²⁾
Before income taxes	$	131,896		$	140,947		$	143,814		$	144,949		$	151,280		$	126,299		$	125,723		$	124,538		$	131,896		$	140,947
After income taxes	$	115,359		$	124,708		$	128,888		$	130,070		$	133,721		$	110,382		$	111,456		$	109,506		$	115,359		$	124,708
Average annual yield on investments⁽²⁾
Before income taxes	4.4		%	4.7		%	4.6		%	4.5		%	4.4		%	3.8		%	3.9		%	4.1		%	4.4		%	4.7		%
After income taxes	3.8		%	4.2		%	4.1		%	4.1		%	3.9		%	3.4		%	3.5		%	3.6		%	3.8		%	4.2		%
Net realized investment gains (losses) after income taxes⁽³⁾	$	43,147		$	37,958		$	37,108		$	225,189		$	(357,838	)	$	(54,474	)	$	52,770		$	(7,424	)	$	43,147		$	37,958

__________


(1)	Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average invested assets at cost isare based on the monthly amortized cost of the invested assets for each respective period.

(2)

For 2015, net investment income before income taxes increased slightly due to higher average invested asset balances. Net investment income and average annual ~~yield~~yields on investments after income taxes decreased slightly primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during ~~the current~~ low interest rate ~~environment.~~environments, and a higher effective tax rate on investment income due to a greater proportion of taxable investments in 2015 compared to 2014.


~~(2)~~(3)	~~Effective January 1, 2008, the Company adopted the~~At December 31, 2015, fixed maturity securities with call features totaled $2.9 billion and $2.8 billion at fair value ~~option with changes in fair value reflected in net realized investment gains or losses in the consolidated statements of operations.~~and amortized cost, respectively.

Competitive Conditions

The Company operates in the highly competitive property and casualty insurance industry subject to competition on pricing, claims handling, consumer recognition, coverage offered and ~~other~~ product features, customer service, and geographic coverage. Some

of the Company’s competitors are larger and well-capitalized national companies ~~which~~that have broad distribution networks of employed or captive agents.

Reputation for customer service and price are the principal means by which the Company competes with other ~~automobile~~ insurers. In addition, the marketing efforts of independent agents can provide a competitive advantage. Based on the most recent regularly published statistical compilations of premiums written in ~~2012~~,2015, the Company was the ~~fifth~~fourth largest writer of private passenger automobile insurance in California and the ~~thirteenth~~fifteenth largest in the United States.

The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions. The Company has historically seen ~~significant~~ premium growth during hard ~~markets.~~market conditions. The Company believes that the market ~~may be~~is hardening aswith carriers generally raising rates, although this also depends on individual state profitability and the carriers’ growth ~~has begun to improve throughout 2012.~~appetite.

Reinsurance

The Company ~~has reinsurance through the Florida Hurricane~~is party to a Catastrophe ~~Trust Fund (“FHCF”~~Reinsurance Treaty ("Treaty") that is effective through June 30, 2016. The Treaty provides for $100 million coverage ~~equal to approximately 90 percent of $19 million in excess of $8 million~~on a per occurrence ~~based on the latest information provided by FHCF. As of December 31, 2012, the~~basis after covered catastrophe losses exceed a $100 million Company ~~no longer has any Florida homeowners policies-in-force and will not be renewing FHCF~~retention limit, excludes coverage in ~~2013.~~Florida, and limits certain coverages to 37% of catastrophe losses resulting from earthquakes and fire following earthquakes. The annual premium is $4.1 million.

The Company has reinsurance for PIP claims in Michigan through the Michigan Catastrophic Claims Association, a private non-profit unincorporated association created by the Michigan ~~Legislature in 1978.~~Legislature. The reinsurance covers losses in excess of ~~$500,000~~$545,000 per person and has no maximum limit. Michigan law provides for unlimited lifetime coverage for medical costs caused by automobile accidents.

For California homeowners policies, the Company has reduced its catastrophe exposure from earthquakes by placing earthquake risks directly with the California Earthquake Authority ~~(“CEA”~~("CEA"). However, the Company continues to have catastrophe exposure to fires following an earthquake. For more detailed discussion, see ~~“Regulation—~~"Regulation—Insurance ~~Assessments.”~~Assessments" below.

~~Table of Contents~~

The Company carries a commercial umbrella reinsurance treaty and seeks facultative arrangements for large property risks. In addition, the Company has other reinsurance in force that is not material to the consolidated financial statements. If any reinsurers are unable to perform their obligations under a reinsurance treaty, the Company will be required, as primary insurer, to discharge all obligations to its policyholders in their entirety.

Regulation

The Insurance Companies are subject to significant regulation and supervision by insurance departments of the jurisdictions in which they are domiciled or licensed to operate business.

Department of Insurance Oversight

The powers of the DOI in each state primarily include the prior approval of insurance rates and rating factors and the establishment of capital and surplus requirements, solvency standards, restrictions on dividend payments and transactions with affiliates. DOI regulations and supervision are designed principally to benefit policyholders rather than shareholders.

California Proposition 103 requires that property and casualty insurance rates be approved by the California DOI prior to their use and that no rate be approved which is excessive, inadequate, unfairly discriminatory, or otherwise in violation of the provisions of the initiative. The proposition specifies four statutory factors required to be applied in ~~“decreasing~~"decreasing order of ~~importance”~~importance" in determining rates for private passenger automobile insurance: (1) the insured’s driving safety record, (2) the number of miles the insured drives annually, (3) the number of years of driving experience of the insured and (4) whatever optional factors are determined by the California DOI to have a substantial relationship to risk of loss and are adopted by regulation. The statute further provides that insurers are required to give at least a 20% discount to ~~“good~~"good drivers,”" as defined, from rates that would otherwise be charged to such drivers and that no insurer may refuse to insure a ~~“good~~"good driver.”" The Company’s rate plan operates under these rating factor regulations.

On October 26, 2012, the Company implemented the California DOI approved rate increase of approximately 4% on California private passenger automobile policies. The rate increase has not had a significant impact on the number of new and renewal policies written. In October 2012, the Company filed for a 6.9% rate increase in CAIC's private passenger automobile line of business, and plans to file for a rate increase in MIC's private passenger automobile line of business. The Company must obtain approval from the California DOI before implementing these new rates.

In May 2009, the Company filed for a 3.9% rate increase for its California homeowners line of business. In May 2011, the matter was referred to an administrative law judge for review. After extensive evidentiary hearings, the administrative law judge delivered a proposed decision on the matter to the California Insurance Commissioner in September 2012 that recommended a rate reduction of approximately 5.5%. On October 29, 2012, the Company received notice from the California Insurance Commissioner rejecting the administrative law judge's proposed decision and referred the matter back to the administrative law judge to gather more evidence. However, the California Insurance Commissioner recently issued a ruling to disregard his order to gather more evidence. The Company expects a final ruling from the California Insurance Commissioner on this matter in the near future. The Company does not agree with the proposed rate decrease and believes that recent homeowners loss trends support an increase. Consequently, the Company recently filed for a rate increase of 6.9%.

Insurance rates in California, Georgia, New York, New Jersey, Pennsylvania, and Nevada require prior approval from the state DOI, while insurance rates in Illinois, Texas, Virginia, Arizona, and Michigan must only be filed with the respective DOI before they are implemented. Oklahoma and Florida have a modified version of prior approval laws. In all states, the insurance code provides that rates must not be excessive, inadequate, or unfairly discriminatory.

The DOI in each state in which the Company operates is responsible for conducting periodic financial and market conduct examinations of the Insurance Companies in their states. Market conduct examinations typically review compliance with insurance statutes and regulations with respect to rating, underwriting, claims handling, billing, and other practices. ~~The following table presents a summary of~~For more detailed information on the Company’s current financial and market conduct ~~examinations:~~

~~During the course of~~examinations, see "Liquidity and at the conclusion of these examinations, the examining DOI generally reports findings to the Company, and none of the findings reported to date is expected to be material to the Company’s financial position.

~~Table of Contents~~

~~For a discussion of current regulatory matters~~Capital Resources—Regulatory Capital Requirements" in ~~California, see “Regulatory and Legal Matters” in “Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”"

For a discussion of current regulatory matters in California, see "Regulatory and Legal Matters" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 17. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."

The operations of the Company are dependent on the laws of the states in which it does business and changes in those laws can materially affect the revenue and expenses of the Company. The Company retains its own legislative advocates in California. The Company made direct financial contributions of ~~$237,400~~approximately $21,000 and ~~$32,150~~$167,000 to officeholders and candidates in ~~2012~~2015 and ~~2011~~2014, respectively. The Company believes in supporting the political process and intends to continue to make such contributions in amounts which it determines to be appropriate.

~~Risk-Based Capital~~

The Insurance Companies must comply with minimum capital requirements under applicable state laws and ~~regulations, and must have adequate reserves for claims.~~regulations. The ~~minimum statutory capital requirements differ by state and are generally based on balances established by statute, a percentage of annualized premiums, a percentage of annualized loss,~~ or risk-based capital ~~(“RBC”~~("RBC") ~~requirements.~~ ~~The RBC~~ formula is used by insurance regulators to monitor capital and surplus levels. It was designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance business having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. AtThe Company periodically monitors the RBC level of each of the Insurance Companies. As of December 31, ~~2012,~~2015, 2014, and 2013, each of the Insurance Companies ~~had sufficient capital to exceed~~exceeded the ~~highest level of~~ minimum required ~~capital.~~RBC levels. For more detailed information, see "Liquidity and Capital Resources—Regulatory Capital Requirements" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."

Own Risk and Solvency Assessment

Beginning in 2015, insurance companies were required to file an Own Risk and Solvency Assessment ("ORSA") with the insurance regulators in their domiciliary states. The ORSA is required to cover, among many items, a company’s risk management policies, the material risks to which the company is exposed, how the company measures, monitors, manages and mitigates material risks, and how much economic and regulatory capital is needed to continue to operate in a strong and healthy manner. The ORSA is intended to be used by state insurance regulators to evaluate the risk exposure and quality of the risk management processes within insurance companies to assist in conducting risk-focused financial examinations and for determining the overall financial condition of insurance companies. The Company filed its ORSA Summary Report with the California DOI in November 2015. Compliance with the ORSA requirements did not have a material impact on the Company's consolidated financial statements.

Insurance Assessments

The California Insurance Guarantee Association ~~(“CIGA”~~("CIGA") was created to pay claims on behalf of insolvent property and casualty insurers. Each year, these claims are estimated by CIGA and the Company is assessed for its pro-rata share based on prior year California premiums written in the particular line. These assessments are currently limited to 2%2.0% of premiums written in the preceding year and are recouped through a mandated surcharge to policyholders in the year after the assessment. There were no CIGA assessments in ~~2012.~~

During 2012, the Company paid approximately $2 million in assessments to the New Jersey Unsatisfied Claim and Judgment Fund and the New Jersey Property-Liability Insurance Guaranty Association for assessments relating to its personal automobile line of insurance. As permitted by state law, the New Jersey assessments paid during 2012 are recoupable through a surcharge to policyholders. The Company recouped a portion of these assessments in 2012 and expects to continue to recoup them in the future. It is likely that there will be additional assessments in 2013.2015.

The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowner policy directly with the CEA. The Company receives a small fee for placing business with the CEA, which is recorded as other revenue in the consolidated statements of operations. Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made after CEA capital has been expended and are based upon each company’s participation percentage multiplied by the amount of the total assessment. Based upon the most recent information provided by the CEA, the Company’s maximum total exposure to CEA assessments at April 1, ~~2012,~~2015, the most recent date at which information was available, was ~~$52.2~~$64.3 million. There was no assessment made in ~~2012.~~2015.

The Insurance Companies in other states are also subject to the provisions of similar insurance guaranty associations. There were no material ~~assessment~~assessments or payments during ~~2012~~2015 in other states.

Holding Company Act

The California Companies are subject to California DOI regulation pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the ~~“Holding~~"Holding Company ~~Act”~~Act"). The California DOI may examine the affairs of each of the California Companies at any time. The Holding Company Act requires disclosure of any material transactions among affiliates within a Holding Company System. Some transactions and dividends defined to be of an ~~“extraordinary”~~"extraordinary" type may not be made if the California DOI disapproves the transaction within 30 days after notice. Such transactions include, but are not limited to, extraordinary dividends; management agreements, service contracts, and cost-sharing arrangements; all guarantees that are not quantifiable; derivative transactions or series of derivative transactions; certain reinsurance transactions or modifications thereof in which the reinsurance premium or a change in the insurer’s liabilities equals or exceeds ~~5 percent~~5% of the policyholders’ surplus as of the preceding December 31; sales, purchases, exchanges, loans, and extensions of credit; and investments, in the net aggregate, involving more than the lesser of 3% of the respective California Companies’ admitted assets or 25% of statutory surplus as regards policyholders as of the preceding December 31. An extraordinary dividend is a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company’s statutory policyholders’ surplus as of the preceding December 31 or the insurance company’s statutory net income for the preceding calendar year.

~~Table of Contents~~

AnCalifornia-domiciled insurance ~~company is~~companies are also required to notify the California DOI of any dividend after declaration, but prior to payment. There are similar limitations imposed by other states on the Insurance Companies’ ability to pay dividends. As of December 31, ~~2012~~2015, the Insurance Companies are permitted to pay in ~~2013,~~2016, without obtaining DOI approval for extraordinary dividends, ~~$154.6~~$163.7 million in dividends to Mercury General, of which ~~$133.9~~$136.4 million ~~is payable from~~may be paid by the California Companies.

The Holding Company Act also provides that the acquisition or change of ~~“control”~~"control" of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the California DOI. In general, a presumption of ~~“control”~~"control" arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person that controls a California insurance company, such as Mercury General. A person seeking to acquire ~~“control,”~~"control," directly or indirectly, of the Company must generally file with the California DOI an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.

Each of the Insurance Companies is subject to holding company regulations in the state in which it is domiciled. These provisions are substantially similar to those of the Holding Company Act.

Assigned Risks

Automobile liability insurers in California are required to sell BI liability, property damage liability, medical expense, and uninsured motorist coverage to a proportionate number (based on the insurer’s share of the California automobile casualty insurance market) of those drivers applying for placement as ~~“assigned~~"assigned risks.”" Drivers seek placement as assigned risks because their driving records or other relevant characteristics, as defined by Proposition 103, make them difficult to insure in the voluntary market. In ~~2012,~~2015, assigned risks represented less than 0.1% of total automobile direct premiums written and less than 0.1% of total automobile direct premium earned. The Company attributes the low level of assignments to the competitive voluntary market. Many of the other states in which the Company conducts business offer programs similar to that of California. These programs are not a significant contributor to the business written in those states.

Executive Officers of the Company

The following table presents certain information concerning the executive officers of the Company as of February ~~1, 2013~~2, 2016:



Name	Age	Position
George Joseph	9194	Chairman of the Board
Gabriel Tirador	4851	President and Chief Executive Officer
Allan Lubitz	5457	Senior Vice President and Chief Information Officer
~~Joanna Y. Moore~~Theodore R. Stalick	5752	Senior Vice President and Chief ~~Claims~~Financial Officer
~~John Sutton~~	65	~~Senior Vice President—Customer Service~~
Christopher Graves	4750	Vice President and Chief Investment Officer
Robert Houlihan	5659	Vice President and Chief Product Officer
Kenneth G. Kitzmiller	6669	Vice President and Chief Underwriting Officer
Brandt N. Minnich	4649	Vice President—Marketing
~~Theodore~~Randall R. ~~Stalick~~Petro	4952	Vice ~~President and~~ President—Chief ~~Financial~~Claims Officer
Heidi C. Sullivan	47	Vice President—Human Capital
Charles Toney	5154	Vice President and Chief Actuary
Judy A. Walters	6669	Vice President—Corporate Affairs and Secretary

Mr. Joseph, Chairman of the Board of Directors, has served in this capacity since 1961. He held the position of Chief Executive Officer of the Company for 45 years from 1961 through ~~December~~ 2006. Mr. Joseph has more than 50 years’ experience in the property and casualty insurance business.

Mr. Tirador, President and Chief Executive Officer, served as the Company’s assistant controller from 1994 to 1996. In 1997 and 1998, he served as the Vice President and Controller of the Automobile Club of Southern California. He rejoined the Company in 1998 as Vice President and Chief Financial Officer. He was appointed President and Chief Operating Officer in

~~Table of Contents~~

October 2001 and Chief Executive Officer in ~~January~~ 2007. Mr. Tirador has over 20 years experience in the property and casualty insurance industry and is an inactive Certified Public Accountant.

Mr. Lubitz, Senior Vice President and Chief Information Officer, joined the Company in ~~January~~ 2008. Prior to joining the Company, he served as Senior Vice President and Chief Information Officer of H&R Block/Option One Mortgage from 2003 to 2007. He held executive roles including Chief Information Officer of Ditech Mortgage and President of ANR Consulting Group from 2000 to 2003. Prior to 2000, he held several positions at TRW, Experian, and First American Corporation, most recently as a Senior Vice President and Chief Information Officer.

~~Ms. Moore,~~Mr. Stalick, Senior Vice President and Chief ~~Claims~~Financial Officer, joined the Company as Corporate Controller in ~~the claims department~~1997. He was appointed Chief Accounting Officer in ~~1981. She was named Vice President of Claims in 1991~~October 2000 and Vice President and Chief ~~Claims~~Financial Officer in ~~1995. She~~2001. In July 2013, he was ~~promoted to~~named Senior Vice President and Chief ~~Claims Officer on January 1, 2007.~~

Financial Officer. Mr. Sutton, Senior Vice President—Customer Service, joined the Company as Assistant to the Chief Executive Officer in July 2000. He was named Vice President in September 2007 and Senior Vice President in January 2008. Prior to joining the Company, he served as President and Chief Executive Officer of the Covenant Group from 1994 to 2000. Prior to 1994, he held various executive positions at Hanover Insurance Company.Stalick is an inactive Certified Public Accountant.

Mr. Graves, Vice President and Chief Investment Officer, has been employed by the Company in the investment department since 1986. Mr. Graves was appointed Chief Investment Officer in 1998, and named Vice President in ~~April~~ 2001.

Mr. Houlihan, Vice President and Chief Product Officer, joined the Company in his current position in ~~December~~ 2007. Prior to joining the Company, he served as National Product Manager at Bristol West Insurance Group from 2005 to 2007 and Product Manager at Progressive Insurance Company from 1999 to 2005.

Mr. Kitzmiller, Vice President and Chief Underwriting Officer, has been employed by the Company in the underwriting department since 1972. Mr. Kitzmiller was appointed Vice President in 1991, and named Chief Underwriting Officer in ~~January~~ 2010.

Mr. Minnich, Vice President—Marketing, joined the Company as an underwriter in 1989. In 2007, he joined Superior Access Insurance Services as Director of Agency ~~Operations and~~Operations. In 2008 he rejoined the Company as an Assistant Product Manager, and in ~~2008. In~~ 2009, he was named Senior Director of Marketing, a role he held until appointed to his current position later in 2009. Mr. Minnich has over 2025 years experience in the property and casualty insurance industry and is a Chartered Property and Casualty Underwriter.

Mr. ~~Stalick,~~Petro, Vice President and Chief ~~Financial~~Claims Officer, has been employed by the Company in the Claims Department since 1987. Mr. Petro was appointed Vice President in March 2014, and named Chief Claims Officer in March 2015.

Ms. Sullivan, Vice President—Human Capital, joined the Company in 2012. Prior to joining the Company, she served as ~~Corporate Controller in 1997. In October 2000, he was named Chief Accounting Officer, a role he~~Senior Vice President, Human Capital for Arcadian Health Plan from 2008 to 2012. Prior to 2008, she held ~~until appointed to his current position in October 2001. Mr. Stalick is an inactive Certified Public Accountant.~~various leadership positions at Kaiser Permanente, Progressive Insurance, and Score Educational Centers.

Mr. Toney, Vice President and Chief Actuary, joined the Company in 1984 as a programmer/analyst. In 1994, he earned his Fellowship in the Casualty Actuarial Society and was appointed to his current position. In 2011, he became a board member of the Personal Insurance Federation of California. Mr. Toney is Mr. Joseph’s nephew.

Ms. Walters, Vice President—Corporate Affairs and Secretary, has been employed by the Company since 1967, and has served as its Secretary since 1982. Ms. Walters was named Vice President—Corporate Affairs in 1998.


Item 1A.	Risk Factors

The Company’s business involves various risks and uncertainties in addition to the normal risks of business, some of which are discussed in this section. It should be noted that the Company’s business and that of other insurers may be adversely affected by a downturn in general economic conditions and other forces beyond the Company’s control. In addition, other risks and uncertainties not presently known or that the Company currently believes to be immaterial may also adversely affect the Company’s business. ~~If any~~Any such risks or uncertainties, or any of the following risks or uncertainties, that develop into actual events ~~there~~ could beresult in a ~~materially~~material and adverse effect on the Company’s business, financial condition, results of operations, or liquidity.

The information discussed below should be considered carefully with the other information contained in this Annual Report on Form 10-K and the other documents and materials filed by the Company with the SEC, as well as news releases and other information publicly disseminated by the Company from time to time. The following risk factors are in no particular order.

~~Table of Contents~~

Risks Related to the Company’s Business

The Company remains highly dependent upon California ~~and several other key states~~ to produce revenues and operating profits.

For the year ended December 31, ~~2012~~2015, the Company generated ~~77.2%~~81.0% of its direct automobile insurance premiums written in ~~California, 8.0% in Florida, 3.3% in New Jersey, and 3.2% in Texas.~~California. The Company’s financial results are subject to prevailing regulatory, legal, economic, demographic, competitive, and other conditions in ~~these~~the states in which the Company operates and changes in any of these conditions could negatively impact the Company’s results of operations.

Mercury General is a holding company that relies on regulated subsidiaries for cash operating profits to satisfy its obligations.

As a holding company, Mercury General maintains no operations that generate revenue sufficient to pay operating expenses, shareholders’ dividends, or principal or interest on its indebtedness. Consequently, Mercury General relies on the ability of the Insurance Companies, particularly the California Companies, to pay dividends for Mercury General to meet its obligations. The ability of the Insurance Companies to pay dividends is regulated by state insurance laws, which limit the amount of, and in certain circumstances may prohibit the payment of, cash dividends. Generally, these insurance regulations permit the payment of dividends only out of earned surplus in any year which, together with other dividends or distributions made within the preceding 12 months, do not exceed the greater of 10% of statutory surplus as of the end of the preceding year or the net income for the preceding year, with larger dividends payable only after receipt of prior regulatory approval. The inability of the Insurance Companies to pay dividends in an amount sufficient to enable the Company to meet its cash requirements at the holding company level could have a material adverse effect on the Company’s results of operations, financial condition, and its ability to pay dividends to its shareholders.

The ~~Company’s insurance subsidiaries~~Insurance Companies are subject to minimum capital and surplus requirements, and any failure to meet these requirements could subject the ~~Company’s insurance subsidiaries~~Insurance Companies to regulatory action.

The ~~Company’s insurance subsidiaries~~Insurance Companies are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital Model Act adopted by the NAIC, require the ~~Company’s insurance subsidiaries~~Insurance Companies to report their results of RBC calculations to state departments of insurance and the NAIC. If any of the ~~Company’s insurance subsidiaries~~Insurance Companies fails to meet these standards and requirements, the DOI regulating such subsidiary may require specified actions by the subsidiary.

The Company’s success depends on its ability to accurately underwrite risks and to charge adequate premiums to policyholders.

The Company’s financial condition, results of operations, and liquidity depend on its ability to underwrite and set premiums accurately for the risks it assumes. Premium rate adequacy is necessary to generate sufficient premium to offset losses, loss adjustment expenses, and underwriting expenses and to earn a profit. In order to price its products accurately, the Company must collect and properly analyze a substantial volume of data; develop, test, and apply appropriate rating formulae; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. The Company’s ability to undertake these efforts successfully, and as a result, price accurately, is subject to a number of risks and uncertainties, including but not limited to:

availability of sufficient reliable data;

incorrect or incomplete analysis of available data;

uncertainties inherent in estimates and assumptions, generally;

selection and application of appropriate rating formulae or other pricing methodologies;

successful innovation of new pricing strategies;

recognition of changes in trends and in the projected severity and frequency of losses;

the Company’s ability to forecast renewals of existing policies accurately;

unanticipated court decisions, legislation or regulatory action;

ongoing changes in the Company’s claim settlement practices;

changes in operating expenses;

changing driving patterns;

~~Table of Contents~~

extra-contractual liability arising from bad faith claims;

weather catastrophes, including those which may be related to climate change;

~~losses from sinkhole claims;~~

unexpected medical inflation; and

unanticipated inflation in ~~auto~~automobile repair costs, ~~auto~~automobile parts prices, and used car prices.

Such risks may result in the Company’s pricing being based on outdated, inadequate or inaccurate data, or inappropriate analyses, assumptions or methodologies, and may cause the Company to estimate incorrectly future changes in the frequency or severity of claims. As a result, the Company could underprice risks, which would negatively affect the Company’s margins, or it could overprice risks, which could reduce the Company’s volume and competitiveness. In either event, the Company’s financial condition, results of operations, and liquidity could be materially and adversely affected.

~~The effects of emerging claim and coverage issues on the Company’s business are uncertain and may have an adverse effect on the Company’s business.~~

As industry practices and legal, judicial, social, and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect the Company’s business by either extending coverage beyond its underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after the Company has issued insurance policies that are affected by the changes. As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued.

The Company’s insurance rates are subject to ~~prior~~ approval by the departments of insurance in most of the states in which the Company operates, and to political influences.

In ~~most~~six of the states in which it operates, including California, the Company must obtain the ~~DOI's~~DOI’s prior approval of insurance rates charged to its customers, including any increases in those rates. If the Company is unable to receive approval of the rate changes it requests, or if such approval is delayed, the Company’s ability to operate its business in a profitable manner may be limited and its financial condition, results of operations, and liquidity may be adversely affected. Additionally, in California, the law allows for consumer groups to intervene in rate filings, which frequently causes delays in the timeliness of rate approvals and implementation of rate changes and can impact the ~~level of~~ rate that is ultimately approved.

From time to time, the ~~auto~~automobile insurance industry comes under pressure from state regulators, legislators, and special interest groups to reduce, freeze, or set rates at levels that do not correspond with underlying costs, in the opinion of the Company’s management. The homeowners insurance business faces similar pressure, particularly as regulators in catastrophe-prone states seek an acceptable methodology to price for catastrophe exposure. In addition, various insurance underwriting and pricing criteria regularly come under attack by regulators, legislators, and special interest groups. The result could be legislation, regulations, or new interpretations of existing regulations that ~~would~~ adversely affect the Company’s business, financial condition, and results of operations.

The effects of emerging claim and coverage issues on the Company’s business are uncertain and may have an adverse effect on the Company’s business.

coverage beyond its underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after the Company has issued insurance policies that are affected by the changes. As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued.

Loss of, or significant restriction on, the use of credit scoring in the pricing and underwriting of personal lines products could reduce the Company’s future profitability.

The Company uses credit scoring as a factor in pricing and underwriting decisions where allowed by state law. Some consumer groups and regulators have questioned whether the use of credit scoring unfairly discriminates against some groups of people and are ~~calling~~seeking to prohibit or restrict the use of credit scoring in underwriting and pricing. Laws or regulations that significantly curtail or regulate the use of credit scoring, if enacted in a large number of states in which the Company operates, could negatively impact the Company’s future results of operations.

If the Company cannot maintain its A.M. Best ratings, it may not be able to maintain premium volume in its insurance operations sufficient to attain the Company’s financial performance goals.

The Company’s ability to retain its existing business or to attract new business in its ~~insurance operations~~Insurance Companies is affected by its rating by A.M. Best Company. A.M. Best Company currently rates all of the ~~Company’s insurance subsidiaries~~Insurance Companies with sufficient operating history to be rated as either A+ (Superior) or A- (Excellent). If the Company is unable to maintain its A.M. Best ratings, the Company may not be able to grow its premium volume sufficiently to attain its financial performance goals, and ~~if A.M. Best were to downgrade the Company’s ratings,~~ the result may adversely affect the Company’s business, financial condition, and results of operations.

~~Table~~ Two of ~~Contents~~the smaller Insurance Companies, CGU and WAIC, are not rated by A.M. Best Company.

The Company may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

The Company’s future capital requirements, including to fund future growth opportunities, depend on many factors, including its ability to underwrite new business successfully, its ability to establish premium rates and reserves at levels sufficient to cover losses, the success of its ~~current~~ expansion plans, ~~and~~ the performance of its investment ~~portfolio.~~portfolio and the Company’s ability to obtain financing. The Company may ~~need~~seek to ~~raise additional funds~~obtain financing through equity or debt ~~financing,~~issuances, or sales of all or a portion of its investment portfolio or ~~curtail~~other assets. The Company’s ability to obtain financing also depends on economic conditions affecting financial markets and financial strength and claims-paying ability ratings, which are assigned based upon an evaluation of the Company’s ability to meet its ~~growth~~financial obligations. The Company’s current financial strength rating with Fitch is A+. If the Company were to seek financing through the capital markets in the future, it may need to apply for Standard and ~~reduce its assets.~~Poor’s and Moody’s ratings and there can be no assurance that the Company would obtain favorable ratings from either agency. Any equity or debt financing, if available at all, may not be available on terms that are favorable to the Company. In the case of equity financing, the Company’s shareholders could experience dilution. In addition, such securities may have rights, preferences, and privileges that are senior to those of the Company’s current shareholders. If the Company cannot obtain adequate capital on favorable terms or at all, its business, financial condition, and results of operations could be adversely affected.

~~Funding for the Company’s future growth may depend upon obtaining new financing, which may be difficult to obtain given prevalent economic conditions.~~

To accommodate the Company’s expected future growth, the Company may require funding in addition to cash provided from current operations. The Company’s ability to obtain financing may be constrained by current economic conditions affecting global financial markets. Specifically, with the recent trends affecting the banking industry, many lenders and institutional investors have ceased funding even the most credit-worthy borrowers. In addition, financial strength and claims-paying ability ratings have become an increasingly important factor in the Company’s ability to access capital markets. Rating agencies assign ratings based upon an evaluation of an insurance company’s ability to meet its financial obligations. The Company’s current financial strength rating with Fitch is A+. If the Company were to seek financing through the capital markets in the future, it may need to apply for Standard and Poor’s and Moody’s ratings. The ratings could limit the Company’s access to the capital markets or adversely affect pricing of new debt sought in the capital markets. If the Company is unable to obtain necessary financing, it may be unable to take advantage of opportunities with potential business partners or new products or to otherwise expand its business as planned.

Changes in market interest rates, or defaults on securities and tax considerations may have an adverse effect on the Company’s investment portfolio, which may adversely affect the Company’s financial results.

The Company’s financial results are affected, in part, by the performance of its investment portfolio. The Company’s investment portfolio contains interest rate sensitive-investments, such as municipal and corporate bonds. Increases in market interest rates may have an adverse impact on the value of the investment portfolio by decreasing the value of fixed income securities. Declining market interest rates could have an adverse impact on the Company’s investment income as it invests positive cash flows from operations and as it reinvests proceeds from maturing and called investments in new investments that could yield lower rates than the Company’s investments have historically generated. Defaults in the Company’s investment portfolio may produce operating losses and negatively impact the Company’s results of operations.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions, and other factors beyond the Company’s control. Market interest rates have been at historic lows for the last several years. Many observers, including the Company, believe that market interest rates will rise as the economy improves. Although the Company takes measures to manage the risks of investing in a changing interest rate environment, it may not be able to mitigate interest rate sensitivity effectively. The Company’s mitigation efforts include maintaining a high quality portfolio and managing the duration of the portfolio to reduce the effect of interest rate changes. Despite its mitigation efforts, a significant change in interest rates could have a material adverse effect on the Company’s financial condition and results of operations. In addition, changes in loss experience, growth rates and profitability of the Company's investment portfolio significantly impact the Company’s exposure to AMT liability. The Company seeks to manage its AMT liability and maximize after-tax yield through the appropriate investment asset mix between taxable bonds, tax-exempt bonds, and equities. Although the

Company monitors the timing and recognition of capital gains and losses and the generation of ordinary income in an effort to maximize the realization of deferred tax assets arising from capital losses or AMT credit carryforwards, no guaranty can be provided that such monitoring or the Company's tax strategies will be effective.

If interest rates rise, the Company’s debt service costs will increase.

Interest expense on the Company’s notes payable is directly tied to short-term LIBOR rates, which tend to move in conjunction with the short-term bank borrowing rates (the "Fed Funds Rate") established by the Federal Reserve Bank. In December 2015, the Federal Reserve Bank increased the Fed Funds Rate by 0.25% for the first time since 2006 and many economists expect additional rate increases in 2016. The interest expense on the Company's notes payable will increase if short-term LIBOR rates experience increases. Higher interest expense could have an adverse impact on the Company's financial condition, results of operations and liquidity.

The Company’s valuation of financial instruments may include methodologies, ~~estimations,~~estimates, and assumptions that are subject to differing interpretations and could result in changes to valuations that may materially adversely affect the Company’s financial condition or results of operations.

The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data are not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets at fair value are categorized based on the level of judgment associated with the input used to measure their fair value and the level of market price observability.

During periods of market disruption, including periods of significantly changing interest rates, rapidly widening credit spreads, inactivity or illiquidity, it may be difficult to value certain of the Company’s securities if trading becomes less frequent and/or market data become less observable. There may be certain asset classes in historically active markets with significant observable data that become illiquid due to changes in the financial environment. In such cases, the valuations associated with

~~Table of Contents~~

such securities may rely more on management judgment and include inputs and assumptions that are less observable or require greater estimation as well as valuation methods, which are more sophisticated or require greater estimation. The valuations generated by such methods may be different from the value at which the investments ultimately may be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within the Company’s consolidated financial statements, and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on the Company’s financial condition or results of operations.

Changes in the financial strength ratings of financial guaranty insurers issuing policies on bonds held in the Company’s investment portfolio may have an adverse effect on the Company’s investment results.

In an effort to enhance the bond rating applicable to certain bond issues, some bond issuers purchase municipal bond insurance policies from private insurers. The insurance generally guarantees the payment of principal and interest on a bond issue if the issuer defaults. By purchasing the insurance, the financial strength ratings applicable to the bonds are based on the credit worthiness of the insurer as well as the underlying credit of the bond issuer. Several financial guaranty insurers that have issued insurance policies covering bonds held by the Company have experienced financial strength rating downgrades due to risk exposures on insurance policies that guarantee mortgage debt and related structured products. These financial guaranty insurers are subject to DOI oversight. As the financial strength ratings of these insurers are reduced, the ratings of the insured bond issues correspondingly decrease. Although the Company has determined that the financial strength rating of the underlying bond issues in its investment portfolio are within the Company’s investment policy without the enhancement provided by the insurance policies, any further downgrades in the financial strength ratings of these insurance companies or any defaults on the insurance policies written by these insurance companies may reduce the fair value of the underlying bond issues and the Company’s investment portfolio or may reduce the investment results generated by the Company’s investment portfolio, which could have a material adverse effect on the Company’s financial condition, results of operations, and liquidity.

Deterioration of the municipal bond market in general or of specific municipal bonds held by the Company may result in a material adverse effect on the Company’s financial condition, results of operations, and liquidity.

At December 31, ~~2012~~, ~~67.4%~~2015, 72.9% of the Company’s total investment portfolio at fair value and ~~89.0%~~85.6% of its total fixed maturity investments at fair value were invested in tax-exempt municipal bonds. With such a large percentage of the Company’s investment portfolio invested in municipal bonds, the performance of the Company’s investment portfolio, including the cash flows generated by the investment portfolio is significantly dependent on the performance of municipal bonds. If the value of municipal bond markets in general or any of the Company’s municipal bond holdings deteriorate, the performance of the Company’s investment portfolio, financial condition, results of operations, and liquidity may be materially and adversely affected.

Adoption of proposed changes in the tax exemption available for municipal bond interest will have an adverse effect on the value of the Company's municipal bond portfolio and the investment income generated by the Company.

Proposals have been made for the elimination or modification of the tax-exempt status or tax rates applicable to municipal bonds as part of significant tax reform being considered, some of which would enact such changes retroactively. Because many states adopt changes in the Internal Revenue Code as a part of the state taxation system, such changes to the federal income and/or capital gains laws may result in changes to state tax laws, resulting in a loss of or reduction in the exemption of municipal bond interest for state income tax purposes as well. Any changes in tax rates or the tax-exempt status applicable to municipal bonds actually adopted could significantly affect the demand for and supply of liquidity and marketability of such municipal bond obligations. Such changes would likely result in a decrease in the value of the Company's municipal bond portfolio and limit the ability of the Company to acquire and dispose of municipal obligations at desirable yield and price levels. Such changes may also materially reduce the after-tax income earned by the Company's investment securities.

If the Company’s loss reserves are inadequate, its business and financial position could be harmed.

The process of establishing property and liability loss reserves is inherently uncertain due to a number of factors, including underwriting quality, the frequency and amount of covered losses, variations in claims settlement practices, the costs and uncertainty of litigation, and expanding theories of liability. While the Company believes that its actuarial techniques and databases are sufficient to estimate loss reserves, the Company’s approach may prove to be inadequate. If any of these contingencies, many of which are beyond the Company’s control, results in loss reserves that are not sufficient to cover its actual losses, the Company’s financial condition, results of operations, and liquidity may be materially and adversely affected.

There is uncertainty involved in the availability of reinsurance and the collectability of reinsurance recoverable.

The Company reinsures a portion of its potential losses on the policies it issues to mitigate the volatility of the losses on its financial condition and results of operations. The availability and cost of reinsurance is subject to market conditions, which are outside of the Company’s control. From time to time, market conditions have limited, and in some cases, prevented insurers from

~~Table of Contents~~

obtaining the types and amounts of reinsurance that they consider adequate for their business needs. As a result, the Company may not be able to successfully purchase reinsurance and transfer a portion of the Company’s risk through reinsurance arrangements. In addition, as is customary, the Company initially pays all claims and seeks to recover the reinsured losses from its reinsurers. Although the Company reports as assets the amount of claims paid which the Company expects to recover from reinsurers, no assurance can be given that the Company will be able to collect from its reinsurers. If the amounts actually recoverable under the Company’s reinsurance treaties are ultimately determined to be less than the amount it has reported as recoverable, the Company may incur a loss during the period in which that determination is made.

The failure of any of the loss limitation methods employed by the Company could have a material adverse effect on its financial condition or results of operations.

Various provisions of the Company’s policies, such as limitations or exclusions from coverage which are intended to limit the Company’s risks, may not be enforceable in the manner the Company intends. In addition, the Company’s policies contain conditions requiring the prompt reporting of claims and the Company’s right to decline coverage in the event of a violation of that condition. While the Company’s insurance product exclusions and limitations reduce the Company’s loss exposure and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would adversely affect the Company’s loss experience, which could have a material adverse effect on its financial condition or results of operations.

The Company’s business is vulnerable to significant catastrophic property loss, which could have an adverse effect on its financial condition and results of operations.

The Company faces a significant risk of loss in the ordinary course of its business for property damage resulting from natural disasters, man-made catastrophes and other catastrophic events, particularly hurricanes, earthquakes, hail storms, explosions, tropical storms, fires, sinkholes, war, acts of terrorism, severe ~~winter~~ weather and other natural and man-made disasters. Such events typically increase the frequency and severity of automobile and other property claims. Because catastrophic loss events are by their nature unpredictable, historical results of operations may not be indicative of future results of operations, and the occurrence of claims from catastrophic events may result in substantial volatility in the Company’s financial condition and results of operations from period to period. Although the Company attempts to manage its exposure to such events, the occurrence of one or more major catastrophes in any given period could have a material and adverse impact on the Company’s financial condition and results of operations and could result in substantial outflows of cash as losses are paid.

The Company depends on independent agents who may discontinue sales of its policies at any time.

The Company sells its insurance policies primarily through approximately ~~7,700~~9,700 independent agents. The Company must compete with other insurance carriers for these agents’ business. Some competitors offer a larger variety of products, lower prices for insurance coverage, higher commissions, or more attractive non-cash incentives. To maintain its relationship with these independent agents, the Company must pay competitive commissions, be able to respond to their needs quickly and adequately, and create a consistently high level of customer satisfaction. If these independent agents find it preferable to do business with the Company’s competitors, it would be difficult to renew the Company’s existing business or attract new business. State regulations may also limit the manner in which the Company’s producers are compensated or incentivized. Such developments could negatively impact the Company’s relationship with these parties and ultimately reduce revenues.

The Company’s expansion plans may adversely affect its future profitability.

The Company intends to continue to expand its operations in several of the states in which the Company has operations and into states in which it has not yet begun operations. The intended expansion will necessitate increased expenditures. The Company expects to fund these expenditures out of cash ~~flow~~flows from operations. The expansion may not occur, or if it does occur,

may not be successful in providing increased revenues or profitability. If the Company’s cash ~~flow~~flows from operations is insufficient to cover the increased costs of the expansion, or if the expansion does not provide the benefits anticipated, the Company’s financial condition, results of operations, and ability to grow its business may be harmed.

Any inability of the Company to realize its deferred tax assets, if and when they arise, may have a material adverse effect on the Company’s financial condition and results of operations.

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability and capital gain generation. Although management believes that it is more likely than not that the deferred tax assets will be realized, some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable income of an appropriate character and in a sufficient amount to utilize these tax benefits in the future.

~~Table of Contents~~

If Any determination that the Company ~~determines that it~~ would not be able to realize all or a portion of its deferred tax assets in the future ~~the Company~~ would ~~reduce the deferred tax asset through~~result in a charge to earnings in the period in which the determination is made. This charge could have a material adverse effect on the Company’s results of operations and financial condition. In addition, the assumptions used to make this determination are subject to change from period-to-period based on changes in tax laws or variances between the Company’s projected operating performance and actual results. As a result, significant management judgment is required in assessing the possible need for a deferred tax asset valuation allowance. For these reasons and because changes in these assumptions and estimates can materially affect the Company’s results of operations and financial condition, management has included the assessment of a deferred tax asset valuation allowance as a critical accounting estimate.

The carrying value of the Company’s goodwill and other intangible assets could be subject to an impairment write-down.

At December 31, ~~2012~~,2015, the Company’s consolidated balance ~~sheet~~sheets reflected approximately $43 million of goodwill and ~~$48~~$32 million of other intangible assets. The Company evaluates whether events or circumstances have occurred that suggest that the fair values of its intangible assets are below their respective carrying values. The determination that the fair value of the Company’s intangible assets is less than its carrying value may result in an impairment write-down. ~~The~~An impairment write-down would be reflected as expense and could have a material adverse effect on the Company’s results of operations during the period in which it recognizes the expense. In the future, the Company may incur impairment charges related to ~~the~~ goodwill and other intangible assets already recorded or arising out of future acquisitions.

The Company relies on its information technology systems to manage many aspects of its business, and any failure of these systems to function properly or any interruption in their operation could result in a material adverse effect on the Company’s business, financial condition, and results of operations.

The Company depends on the accuracy, reliability, and proper functioning of its information technology systems. The Company relies on these information technology systems to effectively manage many aspects of its business, including underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, and to maintain its policyholder data. The Company is developing and deploying new information technology systems that are designed to manage many of these functions across all of the states in which it operates and all of the lines of insurance it offers. See ~~“Overview—Technology”~~"Overview—A. General—Technology" in ~~“Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”" The failure of hardware or software that supports the Company’s information technology systems, the loss of data contained in the systems, or any delay or failure in the full deployment of the Company’s new information technology systems could disrupt its business and could result in decreased premiums, increased overhead costs, and inaccurate reporting, all of which could have a material adverse effect on the Company’s business, financial condition, and results of operations.

In addition, despite system redundancy, the implementation of security measures, and the existence of a disaster recovery plan for the Company’s information technology systems, these systems are vulnerable to damage or interruption from:

earthquake, fire, flood and other natural disasters;

terrorist attacks and attacks by computer viruses or hackers;

power loss;

unauthorized access; and

computer systems, ~~Internet,~~internet, telecommunications or data network failure.

It is possible that a system failure, accident, or security breach could result in a material disruption to the Company’s business. In addition, substantial costs may be incurred to remedy the damages caused by these disruptions. Following implementation of ~~its new~~ information technology systems, the Company may from time to time install new or upgraded business

management systems. To the extent that a critical system fails or is not properly implemented and the failure cannot be corrected in a timely manner, the Company may experience disruptions to the business that could have a material adverse effect on the Company’s results of operations.

Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of internal or policyholder systems and data could result in damages to the ~~Company's~~Company’s reputation and/or subject usit to expenses, fines or lawsuits.

The Company collects and retains large volumes of internal and policyholder data, including personally identifiable information, for business purposes including underwriting, claims and billing purposes, and relies upon the various information technology systems that enter, process, summarize and report such data. The Company also maintains personally identifiable information about its employees. The confidentiality and protection of ~~our~~the Company’s policyholder, employee and Company data are critical

~~Table of Contents~~

to the ~~Company's~~Company’s business. The ~~Company's~~Company’s policyholders and employees have a high expectation that it will adequately protect their personal information. The regulatory environment, as well as the requirements imposed by the payment card industry and insurance regulators, governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable information security and privacy regulations may increase the ~~Company's~~Company’s operating costs ~~and/or~~and adversely impact its ability to market products and services to its policyholders. Furthermore, a penetrated or compromised information technology system or the intentional, unauthorized, inadvertent or negligent release or disclosure of data could result in theft, loss, fraudulent or unlawful use of policyholder, employee or Company data which could harm the ~~Company's~~Company’s reputation or result in remedial and other expenses, fines or lawsuits.

Changes in accounting standards issued by the Financial Accounting Standards Board ~~(“FASB”~~(" the FASB") or other standard-setting bodies may adversely affect the Company’s consolidated financial statements.

The Company’s consolidated financial statements are subject to the application of GAAP, which is periodically revised and/or expanded. Accordingly, the Company is required to adopt new or revised accounting standards from time to time issued by recognized authoritative bodies, including the FASB. It is possible that future changes the Company is required to adopt could change the current accounting treatment that the Company applies to its consolidated financial statements and that such changes could have a material adverse effect on the Company’s financial condition and ~~results of operations.~~

The Company may be required to adopt International Financial Reporting Standards (“IFRS”). The ultimate adoption of such standards could negatively impact its financial condition or results of operations.

Although not yet required, the Company could be required to adopt IFRS, which differs from GAAP, for the Company’s accounting and reporting standards. The ultimate implementation and adoption of new standards could materially impact the Company’s financial condition or results of operations.

The Company’s disclosure controls and procedures may not prevent or detect acts of fraud.

The Company’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, the Company cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and the Company cannot assure that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on the Company’s stock price.

~~Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the related rules and regulations promulgated by the SEC require the~~The Company is required to include in its Annual Report on Form 10-K a report by its management regarding the effectiveness of the Company’s internal control over financial ~~reporting. The report~~reporting, which includes, among other things, an assessment of the effectiveness of the Company’s internal control over financial reporting as of the end of its fiscal year, including a statement as to whether or not the Company’s internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in the Company’s internal control over financial reporting identified by management. Areas of the Company’s internal control over financial reporting may require improvement from time to time. If management is unable to assert that the Company’s internal control over financial reporting is effective now or in any future period, or if the Company’s independent auditors are unable to express an opinion on the effectiveness of those internal controls, investors may lose confidence in the accuracy and completeness of the Company’s financial reports, which could have an adverse effect on the Company’s stock price.

The ability of the Company to attract, develop and retain talented employees, managers and executives, and to maintain appropriate staffing levels, is critical to the Company’s success.

The Company is constantly hiring and training new employees and seeking to retain current employees. An inability to attract, retain and motivate the necessary employees for the operation and expansion of the Company’s business could hinder its ability to conduct its business activities successfully, develop new products and attract customers.

~~Table of Contents~~

The Company’s success also depends upon the continued contributions of its executive officers, both individually and as a group. The Company’s future performance will be substantially dependent on its ability to retain and motivate its management team. The loss of the services of any of the Company’s executive officers could prevent the Company from successfully implementing its business strategy, which could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Challenging economic conditions may negatively affect the Company’s business and operating results.

Challenging economic conditions could adversely affect the Company in the form of consumer behavior and pressure on its investment portfolio. Consumer behavior could include policy cancellations, modifications, or non-renewals, which may reduce cash flows from operations and investments, may harm the Company’s financial position, and may reduce the Insurance Companies’ statutory surplus. Challenging economic conditions also may impair the ability of the Company’s customers to pay premiums as they ~~fall~~become due, and as a result, the Company’s bad debt reserves and write-offs could increase. It is also possible that claims fraud may increase. The ~~recent sovereign debt crisis in Europe is leading to weaker global economic growth, heightened financial vulnerabilities and some negative rating actions. The~~ Company’s investment portfolios could be adversely affected as a result of ~~deteriorating~~ financial and business conditions affecting the issuers of the securities in the Company’s investment portfolio. In addition, declines in the Company’s profitability could result in a charge to earnings for the impairment of goodwill, which would not affect the Company’s cash ~~flow~~flows but could decrease its earnings, and could adversely affect its stock ~~price could be adversely affected.~~

Many businesses are experiencing a slow recovery from the severe economic recession, and economic uncertainty is expected to continue due in large part to continuing political disagreements in Washington that may cause businesses and consumers to hold back spending. The Company is unable to predict the duration and severity of the current global economic conditions and their impact on the United States, and in California, where the majority of the Company’s business is produced. If economic conditions do not show significant improvement, there could be an adverse impact on the Company’s financial condition, results of operations, and liquidity.price.

The Company may be adversely affected if economic conditions result in either inflation or deflation. In an inflationary environment, established reserves may become inadequate and increase the Company’s loss ratio, and market interest rates may rise and reduce the value of the Company’s fixed maturity portfolio, while increasing interest expense on its LIBOR based debt. The DOIs may not approve premium rate increases in time for the Company to adequately mitigate inflated loss costs. In a deflationary environment, some fixed maturity issuers may have difficulty meeting their debt service obligations and thereby reduce the value of the Company’s fixed maturity portfolio; equity investments may decrease in value; and policyholders may experience difficulties paying their premiums to the Company, which could adversely affect premium revenue.

~~The Company’s business is vulnerable to significant losses related to sinkhole claims, which could have an adverse effect on its results of operations.~~

In 2011, the Company began its withdrawal from the Florida homeowners market due to the high incidence of sinkhole claims. While the Company has closed many sinkhole claims, and believes it has adequately reserved for the remaining open claims, it remains possible for legal or legislative action to require opening closed claims that could impair profitability. The Company completed its withdrawal from the Florida homeowners market in September 2012.

Risks Related to the Company’s Industry

The private passenger automobile insurance industry is highly competitive, and the Company may not be able to compete effectively against larger or better-capitalized companies.

The Company competes with many property and casualty insurance companies selling private passenger automobile insurance in the states in which the Company operates. Many of these competitors are better capitalized than the Company, ~~and~~ have higher A.M. Best ~~ratings.~~ratings, and have a larger market share in the states in which the Company operates. The superior capitalization of the competitors may enable them to offer lower rates, to withstand larger losses, and to more effectively take advantage of new marketing opportunities. The Company’s competition may also become increasingly better capitalized in the future as the traditional barriers between insurance companies and banks and other financial institutions erode and as the property and casualty industry continues to consolidate. The Company’s ability to compete against these larger, better-capitalized competitors depends on its ability to deliver superior service and its strong relationships with independent agents.

The Company may undertake strategic marketing and operating initiatives to improve its competitive position and drive growth. If the Company is unable to successfully implement new strategic initiatives or if the Company’s marketing campaigns do not attract new customers, the Company’s competitive position may be harmed, which could adversely affect the Company’s business and results of operations. Additionally, in the event of a failure of any competitor, the Company and other insurance

~~Table of Contents~~

companies would likely be required by state law to absorb the losses of the failed insurer and would be faced with an unexpected surge in new business from the failed insurer’s former policyholders.

The Company may be adversely affected by changes in the private passenger automobile insurance industry.

~~80.6%~~77.9% of the Company’s direct written premiums for the year ended December 31, ~~2012~~2015 were generated from private passenger automobile insurance policies. Adverse developments in the market for personal automobile insurance or the personal automobile insurance industry in general, whether related to changes in competition, pricing or regulations, could cause the Company’s results of operations to suffer. The property-casualty insurance industry is also exposed to the risks of severe weather conditions, such as rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, wild fires, sinkholes, earthquakes and, to

a lesser degree, explosions, terrorist attacks, and riots. The automobile insurance business is also affected by cost trends that impact profitability. Factors which negatively affect cost trends include inflation in automobile repair costs, automobile parts costs, new and used car ~~prices,~~valuations, medical costs, and ~~medical care.~~changes in non-economic costs due to changes in the legal and regulatory environments. In addition, the advent of driverless cars and usage-based insurance could materially alter the way that automobile insurance is marketed, priced, and underwritten.

The Company cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on its business.

Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, droughts, other storms and fires) in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that may be chief contributors to global climate change. The Company cannot predict the impact that changing climate conditions, if any, will have on its business or its customers. It is also possible that the legal, regulatory and social responses to climate change could have a negative effect on the Company’s results of operations or financial condition.

Changes in federal or state tax laws could adversely affect the Company’s business, financial condition, results of operations, and liquidity.

The Company’s financial condition, results of operations, and liquidity are dependent in part on tax policy implemented at the federal and/or state level. For example, a significant portion of the Company’s investment portfolio consists of municipal securities that receive beneficial tax treatment under applicable federal tax law. The Company’s results are also subject to federal and state tax rules applicable to dividends received from its subsidiaries and its equity holdings. Additionally, changes in tax laws could have an adverse effect on deferred tax assets and liabilities included in the Company’s consolidated balance sheets and results of operations. The Company cannot predict whether any tax legislation will be enacted or whether any such changes to existing federal or state tax law would have a material adverse effect on the Company's financial condition and results of operations.

The insurance industry is subject to extensive regulation, which may affect the Company’s ability to execute its business plan and grow its business.

The Company is subject to ~~comprehensive~~extensive regulation and supervision by government agencies in each of the states in which its ~~insurance subsidiaries~~Insurance Companies are domiciled, sell insurance products, issue policies, or ~~handle~~manage claims. Some states impose restrictions or require prior regulatory approval of specific corporate actions, which may adversely affect the Company’s ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow its business profitably. These regulations provide safeguards for policyholders and are not intended to protect the interests of shareholders. The Company’s ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner is, and will continue to be, critical to its success. Some of these regulations include:

Required Licensing. The Company operates under licenses issued by the DOI in the states in which the Company sells insurance. If a regulatory authority denies or delays granting a new license, the Company’s ability to enter that market quickly or offer new insurance products in that market may be substantially impaired. In addition, if the DOI in any state in which the Company currently operates suspends, non-renews, or revokes an existing license, the Company would not be able to offer affected products in ~~the~~that state.

Transactions Between Insurance Companies and Their Affiliates. Transactions between the Insurance Companies and their affiliates (including the Company) generally must be disclosed to state regulators, and prior approval of the applicable regulator is required before any material or extraordinary transaction may be consummated. State regulators may refuse to approve or delay approval of some transactions, which may adversely affect the Company’s ability to innovate or operate efficiently.

Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which the Company conducts business require insurance companies to file insurance rate schedules and insurance policy forms for review and approval. If, as permitted in some states, the Company begins using new rates before they are approved, it may be required to issue refunds or credits to the Company’s policyholders if the new rates are ultimately deemed excessive or unfair and disapproved by the applicable state regulator. In other states, prior approval of rate changes is required and there may be long delays in the approval process or the rates may not be approved. Accordingly, the Company’s ability to respond to market developments or increased costs in that state can be adversely affected.

Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company operates have laws and regulations that limit its ability to exit a market. For example, these states may limit a private passenger ~~auto~~automobile insurer’s

ability to cancel and non-renew policies or they may prohibit the Company from withdrawing one or more lines of insurance business from the state unless prior approval is received from the state ~~insurance department.~~DOI. In some states, these regulations extend to significant reductions in the amount of insurance written, not ~~just~~only to a complete withdrawal. Laws and regulations that limit the

~~Table of Contents~~

Company’s ability to cancel and non-renew policies in some states or locations and that subject withdrawal plans to prior approval requirements may restrict the Company’s ability to exit unprofitable markets, which may harm its business and results of operations.

Other Regulations. The Company must also comply with regulations involving, among other matters:

the use of non-public consumer information and related privacy issues;

the use of credit history in underwriting and rating;

limitations on the ability to charge policy fees;

limitations on types and amounts of investments;

the payment of dividends;

the acquisition or disposition of an insurance company or of any company controlling an insurance company;

involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental charges;

reporting with respect to financial condition;

periodic financial and market conduct examinations performed by state insurance department examiners; and

the other regulations discussed in this Annual Report on Form 10-K.

The failure to comply with these laws and regulations may also result in regulatory actions, fines and penalties, and in extreme cases, revocation of the Company’s ability to do business in that jurisdiction. In addition, the Company may face individual and class action lawsuits by insured and other parties for alleged violations of certain of these laws or regulations.

In addition, from time to time, the Company may support or oppose legislation or other amendments to insurance regulations in California or other states in which it operates. Consequently, the Company may receive negative publicity related to its support or opposition of legislative or regulatory changes that may have a material adverse effect on the Company’s financial condition, results of operations, and liquidity.

Regulation may become more ~~extensive~~restrictive in the future, which may adversely affect the Company’s business, financial condition, and results of operations.

No assurance can be given that states will not make existing insurance-related laws and regulations more restrictive in the future or enact new restrictive laws. New or more restrictive regulation in any state in which the Company conducts business could make it more expensive for it to continue to conduct business in these states, restrict the premiums the Company is able to charge or otherwise change the way the Company does business. In such events, the Company may seek to reduce its writings in or to withdraw entirely from these states. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Company cannot predict whether and to what extent new laws and regulations that would affect its business will be adopted, the timing of any such adoption and what effects, if any, they may have on the Company’s business, financial condition, and results of operations.

Assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds, and other mandatory pooling arrangements may reduce the Company’s profitability.

Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insured parties as the result of impaired or insolvent insurance companies. Many states also have laws that established second-injury funds to provide compensation to injured employees for aggravation of a prior condition or injury which are funded by either assessments based on paid losses or premium surcharge mechanisms. In addition, as a condition to the ability to conduct business in various states, the ~~insurance subsidiaries~~Insurance Companies must participate in mandatory property and casualty ~~shared market~~shared-market mechanisms or pooling arrangements, which provide various types of insurance coverage to individuals or other entities that otherwise are unable to purchase that coverage from private insurers. The effect of these assessments and mandatory shared-market mechanisms or changes in them could reduce the Company’s profitability in any given period or limit its ability to grow its business.

~~Table of Contents~~

The insurance industry faces litigation risks, ~~related to litigation,~~ which, if resolved unfavorably, could result in substantial penalties and/or monetary damages, including punitive damages. In addition, insurance companies incur material expenses ~~in the defense of~~ defending

litigation and their results of operations or financial condition could be adversely affected if they fail to accurately project litigation expenses.

Insurance companies are subject to a variety of legal actions including breach of contract claims, tort claims, fraud and misrepresentation claims, employee benefit claims, and wage and hour ~~claims, breach of contract actions, tort claims, and fraud and misrepresentation~~ claims. In addition, insurance companies incur and likely will continue to incur potential liability for claims related to the insurance industry in general and to the Company’s business in particular, such as ~~claims by policyholders alleging~~those related to allegations for failure to pay ~~for,~~claims, termination or non-renewal of coverage, interpretation of policy language, policy sales practices, ~~claims related to~~ reinsurance matters, and other similar matters. Such actions can also include allegations of fraud, misrepresentation, and unfair or improper business practices and can include claims for punitive damages.

Court decisions and legislative activity may increase exposures for any of the types of claims insurance companies face. There is a risk that insurance companies could incur substantial legal fees and expenses ~~including discovery expenses,~~ in any of the actions companies defend in excess of amounts budgeted for defense.

The Company and ~~its insurance subsidiaries~~the Insurance Companies are named as defendants in a number of lawsuits. ~~These lawsuits~~Those that management believes could have a material effect on the Company's consolidated financial statements are described more fully ~~at “Overview—~~in "Overview—B. Regulatory and Legal ~~Matters”~~Matters" in ~~“Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations" and Note 1616. Commitments and Contingencies, of the Notes to Consolidated Financial ~~Statements.~~Statements in "Item 8. Financial Statements and Supplementary Data." Litigation, by its very nature, is unpredictable and the outcome of these cases is uncertain. The precise nature of the relief that may be sought or granted in any lawsuit is uncertain and may negatively impact the manner in which the Company conducts its business and results of operations, which could materially increase the Company’s legal expenses. In addition, potential litigation involving new claim, coverage, and business practice issues could adversely affect the Company’s business by changing the way policies are priced, extending coverage beyond its underwriting intent, or increasing the size of claims.

Risks Related to the Company’s Stock

The Company is controlled by a small number of shareholders who will be able to exert significant influence over matters requiring shareholder approval, including change of control transactions.

George Joseph and Gloria Joseph collectively own more than 50% of the Company’s common stock. Accordingly, George Joseph and Gloria Joseph have the ability to exert significant influence on the actions the Company may take in the future, including change of control transactions. This concentration of ownership may conflict with the interests of the Company’s other shareholders and lenders.

Future sales of common stock may affect the market price of the Company’s common stock and the future exercise of options and warrants will result in dilution toin the investment of the Company’s shareholders.

The Company may raise capital in the future through the issuance and sale of shares of its common stock. The Company cannot predict what effect, if any, such future sales will have on the market price of its common stock. Sales of substantial amounts of its common stock in the public market could adversely affect the market price of the Company’s outstanding common stock, and may make it more difficult for shareholders to sell common stock at a time and price that the shareholder deems appropriate. In addition, the Company has issued options to purchase shares of its common stock. In the event that any options to purchase common stock are exercised, shareholders will suffer dilution in their investment.

Applicable insurance laws may make it difficult to effect a change of control of the Company or the sale of any of its ~~insurance subsidiaries.~~Insurance Companies.

Before a person can acquire control of a U.S. insurance company or any holding company of a U.S. insurance company, prior written approval must be obtained from the DOI of the state where the insurer is domiciled. Prior to granting approval of an application to acquire control of the insurer or holding company, the state DOI will consider a number of factors relating to the acquirer and the transaction. These laws and regulations may discourage potential acquisition proposals and may delay, deter or prevent a change of control of the Company or the sale by the Company of any of its ~~insurance subsidiaries,~~Insurance Companies, including transactions that some or all of the Company’s shareholders might consider to be desirable.

Although the Company has consistently paid cash dividends in the past, it may not be able to pay cash dividends in the future.

The Company has consistently paid cash dividends ~~on a consistent basis~~ since the public offering of its common stock in November 1985. However, future cash dividends will depend upon a variety of factors, including the Company’s profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by the Board of Directors. The Company’s ability to pay dividends may also be limited by the ability of the Insurance Companies to make distributions to the Company, which may be restricted by

~~Table of Contents~~

~~be restricted by~~ financial, regulatory or tax constraints, and by the terms of the Company’s debt instruments. In addition, there can be no assurance that the Company will continue to pay dividends even if the necessary financial and regulatory conditions are met and if sufficient cash is available for distribution.


Item 1B.	Unresolved Staff Comments

None.


Item 2.	Properties

The Company owns the following buildings which are mostly occupied by the Company’s employees. Space not occupied by the Company ismay be leased to independent third party tenants. ~~For future expansion, the Company owns 4.2 acre and 5.9 acre parcels of land in Brea and Rancho Cucamonga, California, respectively.~~



Location	Purpose	Size in square feet	Percent occupied by the Company at December 31, 2015
Brea, CA	Home office and I.T. facilities (2 buildings)	236,000	100	%
Folsom, CA	Administrative and Data Center	88,000	100	%
Los Angeles, CA	Executive offices	41,000	95	%
Rancho Cucamonga, CA	Administrative	127,000	100	%
Clearwater, FL	Administrative	157,000	62	%
Oklahoma City, OK	Administrative	100,000	25	%

The Company leases ~~all of its other~~additional office space for operations. Office location is not crucial to the Company’s operations, and the Company anticipates no difficulty in extending these leases or obtaining comparable office space. For future expansion, the Company owns 6.3-acre and 5.9-acre parcels of land in Brea and Rancho Cucamonga, California, respectively.

The Company’s properties are well maintained, adequately meet its needs, and are being utilized for their intended purposes.

Location Purpose
Size in
square feet

Percent occupied by
the Company at
December 31, 2012
Brea, CA Home office and I.T. facilities (2 buildings) 236,000
100 %
Folsom, CA Administrative and Data Center 88,000
100 %
Los Angeles, CA Executive offices 41,000
95 %
Rancho Cucamonga, CA Administrative 127,000
100 %
St. Petersburg, FL Administrative 157,000
74 %
Oklahoma, OK Administrative 100,000
77 %


Item 3.	Legal Proceedings

The Company is, from time to time, named as a defendant in various lawsuits or regulatory actions incidental to its insurance business. The majority of lawsuits brought against the Company relate to insurance claims that arise in the normal course of business and are reserved for through the reserving process. For a discussion of the Company’s reserving methods, see ~~“Critical~~"Overview-C. Critical Accounting ~~Estimates”~~Policies and Estimates" in ~~“Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations" and Note 11. Summary of Significant Accounting Policies, of the Notes to Consolidated Financial ~~Statements.~~Statements in "Item 8. Financial Statements and Supplementary Data."

The Company also establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies ~~for which the Company is able to estimate its potential exposure and~~ when the Company believes a loss is ~~probable.~~probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company’s pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition, results of operations, or cash flows.

In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see ~~“Overview—~~"Overview—B. Regulatory and Legal ~~Matters”~~Matters" in ~~“Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations" and Note 1617. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data," which is incorporated herein by reference.

There are no environmental proceedings arising under federal, state, or local laws or regulations to be discussed.


Item 4.	Mine Safety Disclosure

Not applicable.

~~Table of Contents~~

PART II


Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company's common shares are listed on the New York Stock Exchange (Symbol: MCY). The following table presents the high and low sales ~~price~~prices per share (as reported on the New York Stock ~~Exchange (symbol: MCY) since January 2011.~~Exchange) during the last two years.


2012	High		Low
2015					High		Low
1st Quarter	$	46.76	$	42.65	$	60.31	$	52.28
2nd Quarter	$	46.04	$	41.00	$	59.25	$	53.87
3rd Quarter	$	42.32	$	36.01	$	57.19	$	48.78
4th Quarter	$	43.21	$	38.21	$	54.18	$	45.12


2011	High		Low
2014					High		Low
1st Quarter	$	43.94	$	37.29	$	49.72	$	41.70
2nd Quarter	$	41.92	$	38.06	$	49.08	$	44.14
3rd Quarter	$	40.43	$	33.81	$	52.58	$	46.00
4th Quarter	$	46.61	$	37.01	$	59.68	$	48.25

The closing price of the Company’s common stock on February ~~1, 2013~~2, 2016 was ~~$40.34.~~$45.49.

Holders

As of February ~~1, 2013~~2, 2016, there were approximately ~~143~~122 holders of record of the Company’s common stock.

Dividends

Since the public offering of its common stock in November 1985, the Company has paid regular quarterly dividends on its common stock. During ~~2012~~2015 and ~~2011~~,2014, the Company paid dividends on its common stock of ~~$2.4425~~$2.4725 and ~~$2.41~~$2.4625 per share, respectively. On February ~~1, 2013,~~5, 2016, the Board of Directors declared a ~~$0.6125~~$0.62 quarterly dividend payable on March ~~28, 2013~~31, 2016 to shareholders of record on March ~~14, 2013.~~17, 2016.

For financial statement purposes, the Company records dividends on the declaration date. The Company ~~expects~~intends to continue paying quarterly dividends; however, the continued payment and amount of cash dividends will depend upon the Company’s operating results, overall financial condition, capital requirements, and general business conditions.

Holding Company Act

~~The California Companies are subject~~Pursuant to ~~California DOI regulation pursuant to the provisions of~~ the Holding Company ~~Act. The Holding Company~~ Act, ~~requires disclosure of any material transactions among affiliates within a Holding Company System. Certain transactions and dividends defined to be of an “extraordinary” type may not occur if~~ the California DOI disapproves the transaction within 30 days after notice. An extraordinary dividend is a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company’s statutory policyholders’ surplus as of the preceding December 31 or the insurance company’s statutory net income for the preceding calendar year.

~~The~~ Insurance Companies are required to notify ~~the California DOI~~their respectiveDOIs of any dividend after declaration, but prior to payment. There are similar limitations imposed by other states on the Insurance Companies’ ability to pay dividends. As ofDecember 31, ~~2012~~, 2015, the Insurance Companies are permitted to pay in ~~2013,~~2016, without obtaining DOI approval for extraordinary dividends, ~~$154.6~~$163.7 million in dividends to Mercury General, of which ~~$133.9~~$136.4 million ~~is payable from~~may be paid by the California Companies.

For a discussion of certain restrictions on the payment of dividends to Mercury General by some of its insurance subsidiaries, see Note 1112. Dividends, of the Notes to Consolidated Financial ~~Statements.~~Statements in "Item 8. Financial Statements and Supplementary Data."

Performance Graph

The following graph compares the cumulative total shareholder returns on the Company’s Common Stock (Symbol: MCY) with the cumulative total returns on the Standard and Poor’s 500 Composite Stock Price Index (“("S&P 500 ~~Index”~~Index") and the Company’s

~~Table of Contents~~

industry peer group over the last five years. The graph assumes that $100 was invested on December 31, ~~2007~~2010 in each of the Company’s Common Stock, the S&P 500 Index and the industry peer group and the reinvestment of all dividends.

Comparative Five-Year Cumulative Total Returns

Stock Price Plus Reinvested Dividends


	2007		2008		2009		2010		2011		2012		2010		2011		2012		2013		2014		2015
Mercury General	$	100.00	$	96.96	$	88.89	$	102.98	$	115.95	$	106.87	$	100.00	$	112.60	$	103.77	$	137.55	$	164.94	$	142.16
Industry Peer Group	100.00		71.95		75.77		91.18		90.50		107.04		100.00		99.73		118.38		157.16		190.33		184.81
S&P 500 Index	100.00		62.99		79.65		91.64		93.57		108.55		100.00		102.11		118.45		156.82		178.28		180.75

The industry peer group consists of Ace Limited, Alleghany Corporation, Allstate Corporation, American Financial Group, Arch Capital Group Ltd, Berkley (W.R.), Berkshire Hathaway 'B', Chubb Corporation, Cincinnati Financial Corporation, CNA Financial Corporation, Erie Indemnity Company, Hanover Insurance Group, HCC Insurance Holdings, Markel Corporation, Old Republic International, ~~PMI Group, Inc.,~~ Progressive Corporation, RLI Corporation, Selective Insurance Group, Travelers Companies, Inc., ~~W.R. Berkley Corporation~~ and XL ~~Capital, Ltd.~~Group, plc.

Recent Sales of Unregistered Securities

None.

Share Repurchases

The Company has had a stock repurchase program since 1998. The Company’s Board of Directors authorized a $200 million stock repurchase on July ~~27, 2012,~~31, 2015, and the authorization will expire in July ~~2013.~~2016. The Company may repurchase shares of its common stock under the program in open market transactions at the discretion of management. The Company ~~will~~may use its own funds, borrowings against a bank credit facility, and dividends received from the Insurance Companies to fund the share repurchases. ~~Since the inception of the program, the Company has purchased and retired 1,266,100 shares of common stock at an average price of $31.36.~~ No stock has been purchased since 2000.

~~Table of Contents~~


Item 6.	Selected Financial Data

The following selected financial and operating data are derived from the Company’s audited consolidated financial statements. The selected financial and operating data should be read in conjunction with ~~“Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations" and ~~the consolidated financial statements~~"Item 8. Financial Statements and ~~notes thereto contained elsewhere in this Annual Report on Form 10-K.~~Supplementary Data."


	Year Ended December 31,											Year Ended December 31,
	2012		2011		2010		2009		2008			2015			2014		2013			2012		2011
			(Amounts in thousands, except per share data)												(Amounts in thousands, except per share data)
Income Data:
Net premiums earned	$	2,574,920	$	2,566,057	$	2,566,685	$	2,625,133	$	2,808,839		$	2,957,897		$	2,796,195	$	2,698,187		$	2,574,920	$	2,566,057
Net investment income	131,896		140,947		143,814		144,949		151,280			126,299			125,723		124,538			131,896		140,947
Net realized investment gains (losses)	66,380		58,397		57,089		346,444		(550,520		)
Net realized investment (losses) gains												(83,807		)	81,184		(11,422		)	66,380		58,397
Other	10,174		11,884		8,297		4,967		4,597			8,911			8,671		9,738			10,174		11,884
Total revenues	2,783,370		2,777,285		2,775,885		3,121,493		2,414,196			3,009,300			3,011,773		2,821,041			2,783,370		2,777,285
Losses and loss adjustment expenses	1,961,448		1,829,205		1,825,766		1,782,233		2,060,409			2,145,495			1,986,122		1,962,690			1,961,448		1,829,205
Policy acquisition costs	477,788		481,721		505,565		543,307		624,854			539,231			526,208		505,517			477,788		481,721
Other operating expenses	207,281		215,711		255,358		217,683		174,828			250,839			249,381		219,478			207,281		215,711
Interest	1,543		5,549		6,806		6,729		4,966			3,168			2,637		1,260			1,543		5,549
Total expenses	2,648,060		2,532,186		2,593,495		2,549,952		2,865,057			2,938,733			2,764,348		2,688,945			2,648,060		2,532,186
Income (loss) before income taxes	135,310		245,099		182,390		571,541		(450,861		)
Income tax expense (benefit)	18,399		53,935		30,192		168,469		(208,742		)
Net income (loss)	$	116,911	$	191,164	$	152,198	$	403,072	$	(242,119	)
Income before income taxes												70,567			247,425		132,096			135,310		245,099
Income tax (benefit) expense												(3,912		)	69,476		19,953			18,399		53,935
Net income												$	74,479		$	177,949	$	112,143		$	116,911	$	191,164
Per Share Data:
Basic earnings per share	$	2.13	$	3.49	$	2.78	$	7.36	$	(4.42	)	$	1.35		$	3.23	$	2.04		$	2.13	$	3.49
Diluted earnings per share	$	2.13	$	3.49	$	2.78	$	7.32	$	(4.42	)	$	1.35		$	3.23	$	2.04		$	2.13	$	3.49
Dividends paid	$	2.4425	$	2.41	$	2.37	$	2.33	$	2.32
Dividends paid per share												$	2.4725		$	2.4625	$	2.4525		$	2.4425	$	2.4100


	December 31,										December 31,
	2012		2011		2010		2009		2008		2015		2014		2013		2012		2011
			(Amounts in thousands, except per share data)										(Amounts in thousands, except per share data)
Balance Sheet Data:
Total investments	$	3,180,095	$	3,062,421	$	3,155,257	$	3,146,857	$	2,933,820	$	3,380,642	$	3,403,822	$	3,158,312	$	3,180,095	$	3,062,421
Total assets	4,189,686		4,070,006		4,203,364		4,232,633		3,950,195		4,628,645		4,600,289		4,315,181		4,189,686		4,070,006
Losses and loss adjustment expenses	1,036,123		985,279		1,034,205		1,053,334		1,133,508		1,146,688		1,091,797		1,038,984		1,036,123		985,279
Unearned premiums	920,429		843,427		833,379		844,540		879,651		1,049,314		999,798		953,527		920,429		843,427
Notes payable	140,000		140,000		267,210		271,397		158,625		290,000		290,000		190,000		140,000		140,000
Shareholders’ equity	1,842,497		1,857,483		1,794,815		1,770,946		1,494,051		1,820,885		1,875,446		1,822,486		1,842,497		1,857,483
Book value per share	33.55		33.86		32.75		32.33		27.28		33.01		34.02		33.15		33.55		33.86

~~Table of Contents~~


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statements

Certain statements in this Annual Report on Form 10-K or in other materials the Company has filed or will file with the SEC (as well as information included in oral statements or other written statements made or to be made by the Company) contain or may contain ~~“forward-looking statements”~~"forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may address, among other things, the Company’s strategy for growth, business development, regulatory approvals, market position, expenditures, financial results, and reserves. Forward-looking statements are not guarantees of performance and are subject to important factors and events that could cause the Company’s actual business, prospects, and results of operations to differ materially from the historical information contained in this Annual Report on Form 10-K and from those that may be expressed or implied by the forward-looking statements contained in this Annual Report on Form 10-K and in other reports or public statements made by the Company.

Factors that could cause or contribute to such differences include, among others: the competition currently existing in the automobile insurance markets in California and the other states in which the Company operates; the cyclical and generally competitive nature of the property and casualty insurance industry and general uncertainties regarding loss reserves or other estimates; the accuracy and adequacy of the Company’s pricing methodologies; the Company’s success in managing its ~~business in states outside of California;~~non-California business; the impact of potential third party ~~“bad-faith”~~"bad-faith" legislation, changes in laws, regulations or new interpretations of existing laws and regulations, tax position challenges by the California Franchise Tax Board ~~(“FTB”~~("FTB"), and decisions of courts, regulators and governmental bodies, particularly in California; the Company’s ability to obtain and the timing of required regulatory approvals of premium rate changes for insurance policies issued in states where the Company operates; the Company’s reliance on independent agents to market and distribute its insurance policies; the investment yields the Company is able to obtain ~~with~~on its investments and the market risks associated with the Company’s investment portfolio; the effect government policies may have on market interest rates; uncertainties related to assumptions and projections generally, inflation and changes in economic conditions; changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions, trends in litigation, and health care and ~~auto~~automobile repair costs; adverse weather conditions or natural disasters, including those which may be related to climate change, in the markets served by the Company; the stability of the Company’s information technology systems and the ability of the Company to execute on its information technology initiatives; the Company’s ability to realize ~~current~~ deferred tax assets or to hold certain securities with current loss positions to recovery or maturity; and other risks and uncertainties, including but not limited to those discussed in Part I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K or that are otherwise described or updated from time to time in the Company’s SEC filings, all of which are difficult to predict and many of which are beyond the Company’s control. GAAP prescribes when a ~~Company~~company may reserve for particular risks including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain periods.

From time to time, forward-looking statements are also included in the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K, in press releases, in presentations, on its web site, and in other materials released to the public. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or, in the case of any document the Company incorporates by reference, any other report filed with the SEC or any other public statement made by the Company, the date of the document, report or statement. Investors should also understand that it is not possible to predict or identify all factors and should not consider the risks set forth above to be a complete statement of all potential risks and uncertainties. If the expectations or assumptions underlying the Company’s forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those predicted in any forward-looking statements. The factors identified above are believed to be some, but not all, of the important factors that could cause actual events and results to be significantly different from those that may be expressed or implied in any forward-looking statements.

OVERVIEW

A. General

The operating results of property and casualty insurance companies are subject to significant quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and severity of losses, the effect of weather and natural disasters on losses, general economic conditions, the general regulatory environment in states in which an insurer operates, state regulation of insurance including premium rates, changes in fair value of investments, and other factors such as changes in tax laws. The property and casualty insurance industry has been highly cyclical, with periods of high premium rates and shortages

of underwriting capacity followed by periods of severe price competition and excess capacity. These cycles can have a ~~large~~significant impact on the Company’s ability to grow and retain business.

~~Table of Contents~~

The Company is headquartered in Los Angeles, California and operates primarily as a personal automobile insurer selling policies through a network of independent agents, 100% owned insurance agents and direct channels, in thirteen ~~states.~~states: Arizona, California, Florida, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas, and Virginia. The Company also offers homeowners, commercial automobile, ~~and~~commercial property, mechanical breakdown, fire, and umbrella insurance. Private passenger automobile lines of insurance business accounted for ~~80.6%~~77.9% of the ~~$2.7~~$3.0 billion of the Company’s direct premiums written in ~~2012. 78.0%~~2015 and 83% of the private passenger automobile premiums were written in California. ~~The Company also operates in Arizona, Florida, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas, and Virginia.~~

The Company expects to continue its growth by expanding into new states in the future to achieve greater geographic diversification. There are challenges and risks involved in entering each new state, including establishing adequate rates without any operating history in the state, working with a new regulatory regime, hiring and training competent personnel, building adequate systems, and finding qualified agents to represent the Company. The Company does not expect to enter into any new states during 2013.

This section discusses some of the relevant factors that management considers in evaluating the Company’s performance, prospects, and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety of management’s discussion and analysis, the Company’s consolidated financial statements and notes thereto, and all other items contained within this Annual Report on Form 10-K.

~~2012~~2015 Financial Performance Summary

The Company’s net income for the year ended December 31, ~~2012~~2015 decreased to ~~$116.9~~$74.5 million,, or ~~$2.13~~$1.35 per diluted share, from ~~$191.2~~$177.9 million, or ~~$3.49~~$3.23 per diluted share, for the same period in ~~2011. Approximately~~ ~~$132~~2014. Included in net income is $126.3 million in of pre-tax investment income that was generated during ~~2012~~2015 on a portfolio of ~~approximately~~ ~~$3.2~~$3.4 billion at fair value at December 31, ~~2012~~,2015, compared to ~~$141~~$125.7 million of pre-tax investment income that was generated during ~~2011~~2014 on a portfolio of ~~approximately~~ ~~$3.1~~$3.4 billion at fair value at December 31, ~~2011~~.2014. Included in net income are net realized investment losses of $83.8 million and gains of ~~$66.4~~$81.2 million in 2015 and ~~$58.4 million~~ in ~~2012~~ ~~and~~ ~~2011~~,2014, respectively. ~~Net realized investment gains include gains of~~ ~~$45.5 million~~ ~~and~~ ~~$31.3 million~~ in ~~2012~~ ~~and~~ ~~2011, respectively, due to changes in the fair value of total investments pursuant to application of the fair value accounting option.~~

During ~~2012~~,2015, the Company continued its marketing efforts to enhance name recognition and lead generation. The Company believes that its marketing efforts, combined with its ability to maintain relatively low prices and a strong reputation, make the Company ~~very~~ competitive in California and in other states.

The Company believes its thorough underwriting process gives it an advantage over competitors. The ~~Company views its~~Company’s agent relationships and underwriting ~~process as one of~~and claims processes are its ~~primary~~most important competitive ~~advantages because it allows the Company to charge lower rates yet realize better margins than many competitors.~~advantages.

The Company’s operating results and growth have allowed it to consistently generate positive cash flow from operations, which was approximately ~~$148~~$190 million and ~~$159~~$247 million in ~~2012~~2015 and ~~2011~~,2014, respectively. Cash flow from operations has been used to pay shareholder dividends and help support growth.

Economic and Industry Wide Factors

Regulatory Uncertainty—The insurance industry is subject to strict state regulation and oversight and is governed by the laws of each state in which each insurance company operates. State regulators generally have substantial power and authority over insurance companies including, in some states, approving rate changes and rating factors, and establishing minimum capital and surplus requirements. In many states, insurance commissioners may emphasize different agendas or interpret existing regulations differently than previous commissioners. There is no certainty that current or future regulations and the interpretation of those regulations by insurance commissioners and the courts will not have an adverse impact on the Company.

Cost Uncertainty—Because insurance companies pay claims after premiums are collected, the ultimate cost of an insurance policy is not known until well after the policy revenues are earned. Consequently, significant assumptions are made when establishing insurance rates and loss reserves. While insurance companies use sophisticated models and experienced actuaries to assist in setting rates and establishing loss reserves, there can be no assurance that current rates or current reserve estimates will be adequate. Furthermore, there can be no assurance that insurance regulators will approve rate increases when the Company’s actuarial ~~analysis shows~~analyses indicate that they are needed.

Economic Conditions—Many businesses are still experiencing ~~a slow recovery from~~ the ~~severe economic recession,~~effects of uncertain conditions in the global economy and ~~economic uncertainty is expected to continue in 2013 due in large part to continuing political disagreements in Washington that may cause businesses~~capital markets, reduced consumer spending and ~~consumers to hold back spending.~~confidence, and continued volatility, which could adversely impact the Company’s financial condition, results of operations, and liquidity. Further, the ~~sovereign debt crisis~~volatility and disruptions in ~~Europe continues to lead to weaker~~ global ~~economic growth, heightened~~capital markets could adversely affect the Company’s investment portfolio. Although the disruption in the global financial ~~vulnerabilities and some negative~~

~~Table of Contents~~

~~rating actions.~~markets has moderated, not all global financial markets are functioning normally. The Company is unable to predict the ~~duration and severity~~impact of current and future global economic conditions ~~and their impact~~ on the United States, and California, where the majority of the Company’s business is produced. ~~If economic conditions do not show improvement, there could be an adverse impact on the Company’s financial condition, results of operations, and liquidity.~~

Inflation—The largest cost component for automobile insurers is losses, which include medical, ~~costs,~~ replacement automobile parts, and labor costs. There can be significant variation in the overall increases in medical cost inflation, and it is often a year or more after the respective fiscal period ends before sufficient claims have closed for the inflation rate to be known with a reasonable degree of certainty. Therefore, it can be difficult to establish reserves and set premium rates, particularly when actual inflation rates may be higher or lower than anticipated.

Loss Frequency—Another component of overall loss costs is loss frequency, which is the number of claims per risk insured. ~~There has been a long-term trend~~Loss frequency trends are affected by many factors such as fuel prices, the economy, the prevalence of ~~declining loss~~distracted driving and collision avoidance technology in vehicles. Loss frequency generally increased in the personal automobile insurance industry. However, in recent years, the trend has shown increasing loss frequency, and the Company may not be able to accurately predict the trend of loss frequency in the future.2015.

Underwriting Cycle and Competition—The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions. The Company has historically seen significant premium growth during hard ~~markets.~~market conditions. The Company believes that the market ~~may be~~is hardening aswith carriers generally raising rates, although this also depends on individual state profitability and the carriers’ growth ~~has begun to improve throughout~~ ~~2012~~.appetite.

Technology

Agency systems

A new agent incentive management system was introduced in 2014 and enhanced in 2015 to better manage agency information, to continue to improve the agent experience and to provide for more flexible ways to compensate agents.

Operational systems

In ~~2012,~~2015, the Company continued to enhance its internet agency portal, Mercury First. Mercury First is a single entry point for agents providing a broad suite of capabilities. One of its most powerful tools is a point of sale (POS) system that allows agents to easily obtain and compare quotes and write new business. Mercury First is designed as an easy-to-use agency portal that provides a customized work queue for each agency user showing new business leads, underwriting requests and other pertinent customer informationinvest in real time. Agents can also assist customers with processing payments, reporting claims or updating their records. The system enables quick access to documents and forms and empowers the agents with several self-service capabilities.

The NextGen system is designed to be a multi-state, multi-line system. NextGen serves as the primary platform for all underwriting, billing, claims, and commission functions supporting the private passenger auto line in seven states (Virginia, New York, Florida, California, Georgia, Illinois, and Texas).

~~During 2010, the Company launched~~ Guidewire, a ~~commercially available~~commercial software solution that was launched in 2010 to replace legacy platforms, by adding new capabilities and ~~implemented it for the Nevada homeowners line. In 2011, the Company expanded the Guidewire implementation~~enhanced features, including paperless workflow, to ~~Texas, Georgia, Illinois, Pennsylvania,~~meet evolving business needs and Oklahoma for the homeowners line of business and for the Texas commercial auto line of business. In 2012, the Company continued to expand the Guidewire implementation to California, Oklahoma, Georgia, and Arizona for the commercial auto line and to Michigan and Nevada for theregulatory changes. For private passenger automobile ~~line. The Company plans~~insurance, the Guidewire policy, billings and claims modules had been implemented in all states outside of California. California private passenger automobile claims processing was converted to ~~expand~~the Guidewire ~~to other states~~claims module in 2015 and ~~lines of business during 2013.~~

~~In 2012, as part of its continuing commitment to service excellence,~~ the Company ~~enhanced~~expects to implement the ~~web capability for customers in California~~policy and ~~Georgia to bind and pay for new policies online. These policies are serviced by~~billings modules within the ~~Company’s agents. The Company plans to expand this capability to other states in the future.~~next two years.

B. Regulatory and Legal Matters

The process for implementing rate changes varies by state, with California, Georgia, New York, New Jersey, Pennsylvania, and Nevada requiring prior approval from the respective DOI before a rate change may be implemented. Illinois, Texas, Virginia, Arizona, and Michigan only require that rates be filed with the DOI. Oklahoma and Florida have a modified version of prior approval laws. In all states, the insurance code provides that rates must not be excessive, inadequate, or unfairly discriminatory.state. For ~~the Company’s two largest lines of business, private passenger automobile and homeowners, the Company filed rate increases in thirteen states during~~ ~~2012~~.

~~The California DOI uses rating factor regulations requiring automobile~~more detailed information related to insurance rates to be determined in decreasing order of importance by (1) driving safety record, (2) miles driven per year, (3) years of driving experience, and (4) other factors as determined by the California DOI to have a substantial relationship to the risk of loss and adopted by regulation.approval, see "Item 1. Business—Regulation."

~~On October 26, 2012,~~During 2015, the Company implemented rate changes in thirteen states. In California, the ~~California DOI approved~~following rate increase of approximately 4% on California private passenger automobile policies. The rate increase has not had a significant impact on the number of new and renewal policies written. In October 2012, the Company filed for a 6.9% rate increase in CAIC's private passenger automobile
increases were implemented:

~~Table of Contents~~


▪	In May, a 6.4% rate increase on its preferred private passenger automobile line of insurance business, which represented approximately 50% of the total Company net premiums earned.


▪	In August, a 6.9% rate increase on its standard private passenger automobile line of insurance business, which represented approximately 15% of the total Company net premiums earned.

line of business, and plans to file for a rate increase in MIC's private passenger automobile line of business. The Company must obtain approval from the California DOI before implementing these new rates.

In January 2013, the California DOI approved auto body repair regulation to strengthen consumer protection. This regulation builds on existing protection by requiring insurers to settle automobile insurance claims using repair standards described by the regulation and not by the insurers' own standards. The new ruling will become effective in March 2013. The full extent of the impact is currently unknown.

In April 2010, the California DOI ("CDI") issued a Notice of Non-Compliance (“("2010 ~~NNC”~~NNC") to ~~Mercury Insurance Company (“MIC”), Mercury Casualty Company (“MCC”),~~MIC, MCC, and ~~California Automobile Insurance Company (“CAIC”)~~CAIC based on a Report of Examination of the Rating and Underwriting Practices of these companies issued by the ~~California DOI~~CDI in February 2010. The 2010 NNC ~~includes~~included allegations of 35 instances of noncompliance with applicable California insurance law and ~~seeks~~sought to require that each of MIC, MCC, and CAIC change its rating and underwriting practices to rectify the alleged noncompliance and ~~may also~~reserved the right to seek monetary penalties. In April 2010, the Company submitted a Statement of Compliance and Notice of Defense to the ~~2010 NNC,~~CDI, in which it denied the allegations contained in the 2010 NNC and provided specific defenses to each allegation. The Company also requested a hearing in the event that the Statement of Compliance and Notice of Defense ~~does~~did not establish to the satisfaction of the ~~California DOI~~CDI that the alleged noncompliance ~~does~~did not exist, and the matters described in the 2010 NNC ~~are~~were not ~~otherwise~~ able to be resolved informally with the ~~California DOI. However, no assurance can be given that efforts~~CDI. While continuing to ~~resolve~~dispute the CDI's allegations, the Company implemented various changes requested by the CDI and engaged in settlement discussions in the interest of avoiding further litigation. On March 2, 2015, MIC, MCC and CAIC entered into an agreement with the CDI, pursuant to which all allegations in the 2010 NNC ~~informally will be successful.~~were settled for $1 million, which was subsequently paid, and the case was resolved.

of authority for a period of one year. In January 2012, the administrative law judge (the "ALJ") bifurcated the 2004 NNC between (a) the ~~California DOI’s~~CDI’s order to show cause (the "OSC"), in which the ~~California DOI~~CDI asserts the false advertising allegations and accusation, and (b) the ~~California DOI’s~~CDI’s notice of noncompliance, in which the ~~California DOI~~CDI asserts the unlawful rate allegations. In February 2012, the ~~administrative law judge~~ALJ submitted a proposed decision dismissing the ~~California DOI’s 2004 NNC. In March 2012,~~NNC, based on conduct by the ~~California Insurance~~CDI and the Commissioner in violation of the Company's due process rights. Specifically, the ALJ found that the CDI's attorneys and the Commissioner engaged in improper ex parte communication, and commenced a rule making in order to supersede unfavorable evidentiary rulings by the ALJ. The Commissioner rejected the ~~administrative law judge’s~~ALJ's proposed decision. The Company challenged the rejection in Los Angeles Superior Court in April 2012, ~~and~~but the ~~California Insurance Commissioner filed a demurrer to~~challenge was unsuccessful. The Court did not rule on the ~~Company's petition. Following a hearing,~~merits of the ~~trial court sustained the California Insurance Commissioner’s demurrer without leave to amend because it found~~ALJ's due process concerns, but merely held that the Company ~~must first~~was required to exhaust its administrative ~~remedies.~~remedies before seeking relief in the Superior Court. The case was referred back to the ALJ, and the due process issues raised by the ALJ's dismissal were preserved for later appeal. Following an evidentiary hearing in April 2013, post-hearing briefs and an unsuccessful mediation, the ALJ closed the evidentiary record on April 30, 2014. Although a proposed decision was to be submitted to the Commissioner on or before June 30, 2014, after which the Commissioner would have 100 days to accept, reject or modify the proposed decision, or required further evidence, the proposed decision was submitted on December 8, 2014. On January 7, 2015, the Commissioner adopted the ALJ's proposed decision, which became the Commissioner's adopted Order. The Company ~~has appealed the trial court’s~~received notice of this Order on January 10, 2015. The decision and ~~on January 3, 2013, filed a petition to stay~~Order found that from the administrative proceeding pending a determination of its appeal. The Court of Appeal did not stay the adminstrative proceeding but has allowed the appeal to continue. The Company has filed its opening appellate brief, and the court grantedperiod July 1, 1996 through 2006, the Company's ~~request for an expedited appeal. On January 15, 2013,~~"brokers" were actually operating as "de facto agents" and that the ~~administrative law judge heard various pending motions that had originally been filed~~charging of "broker fees" by these producers constituted the ~~Company~~charging of "premium" in ~~June 2011.~~excess of the Company’s approved rates. The ~~administrative law judge has not yet ruled on~~Order assessed a civil penalty in the ~~motions.~~

amount of $27.6 million against the Company. The Company denies the allegations and/or findings in the ~~2004 and 2010 NNC matters,~~Order, and believes that no monetary penalties are ~~warranted,~~warranted. On February 9, 2015, the Company filed a Writ of Administrative Mandamus and Complaint for Declaratory Relief (the "Writ") in the Orange County Superior Court seeking, among other things, to require the Commissioner to vacate the Order, to stay the Order while the Superior Court action is pending, and to judicially declare as invalid the Commissioner’s interpretation of certain provisions of the California Insurance Code. Subsequent to the filing of the Writ, a consumer group petitioned and was granted the right to intervene in the Superior Court action. The court did not order a stay, and the $27.6 million assessed penalty was accrued in 2014 and paid in March 2015. The Company filed an amended Writ on September 11, 2015, adding an explicit request for a refund of the penalty, with interest. The court initially scheduled the matter for hearing on March 14, 2016, with the opening brief due October 19, 2015. The Company filed its opening brief, but the Commissioner then requested an extension of time to file an opposing brief and for the hearing on the Writ. The extension was granted, and the hearing is now scheduled for June 13, 2016. The Company intends to vigorously defend itself against the allegations, ~~vigorously.~~ and seeks reversal of the $27.6 million assessed fine, unless a reasonable settlement can be reached.

The Company has ~~been subject~~also accrued a liability for the estimated cost to ~~fines and penalties by the California DOI~~continue to defend itself in the past due to alleged violations of the California Insurance Code. The largest and most recent of these was settled in 2008 for $300,000. However, prior settlement amounts are not necessarily indicative of the potential results in the current notice of non-compliance matters.false advertising OSC. Based upon its understanding of the facts and the California Insurance Code, the Company does not expect that the ultimate resolution of the ~~2004 and 2010 NNC matters~~false advertising OSC will be material to the ~~Company’s~~its financial ~~position, results of operations, or cash flow. The Company has accrued a liability for the estimated cost to defend itself in the notice of non-compliance matters.~~position.

~~Table of Contents~~

The Company is, from time to time, named as a defendant in various lawsuits or regulatory actions incidental to its insurance business. The majority of lawsuits brought against the Company relate to insurance claims that arise in the normal course of business and are reserved for through the reserving process. For a discussion of the Company’s reserving methods, see ~~“Critical~~"Critical Accounting ~~Estimates”~~Policies and Estimates" below and Note 11. Summary of Significant Accounting Policies, of the Notes to Consolidated Financial ~~Statements.~~Statements in "Item 8. Financial Statements and Supplementary Data."

The Company also establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies ~~for which the Company is able to estimate its potential exposure and~~ when the Company believes a loss is ~~probable.~~probable and is able to estimate its potential exposure. For material loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company’s pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition, results of operations, or cash flows.

In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see Note 1617. Commitments and Contingencies—Litigation, of the Notes to Consolidated Financial ~~Statements—Commitments~~Statements in "Item 8. Financial Statements and ~~Contingencies—Litigation.~~Supplementary Data."

C. Critical Accounting Policies and Estimates

~~Reserves~~Losses and loss adjustment expenses reserves ("loss reserves")

Preparation of the Company’s consolidated financial statements requires management’s judgment and estimates. The most significant is the estimate of loss reserves. Estimating loss reserves is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the loss reserve that is required. A key assumption in estimating loss reserves is the degree to which the historical data used to analyze reserves will be predictive of ultimate claim costs on incurred claims. Changes in the regulatory and legal ~~environment,~~environments, results of litigation, medical costs, the cost of repair materials, and labor rates, among other factors, can impact ~~ultimate claim costs.~~this assumption. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of a claim, the more variable the ultimate settlement amount could be. Accordingly, short-tail liability claims, such as property damage claims, tend to be more reasonably predictable than long-tail liability claims.

The Company calculates a loss reserve point estimate rather than a ~~range of loss reserve estimate.~~range. There is inherent uncertainty with estimates and this is particularly true with ~~estimates for~~ loss ~~reserves.~~reserve estimates. This uncertainty comes from many factors which may include changes in claims reporting and settlement patterns, changes in the regulatory orand legal ~~environment,~~environments, uncertainty over inflation rates, and uncertainty for unknown items. The Company does not make specific provisions for these uncertainties, rather it considers them in establishing its loss reserve by looking at historical patterns and trends and projecting these out to current loss reserves. The underlying factors and assumptions that serve as the basis for preparing the loss reserve estimate include paid and incurred loss development factors, expected average costs per claim, inflation trends, expected loss ratios, industry data, and other relevant information.

The Company also engages an independent actuarial ~~consultant~~consultants to review the Company’s loss reserves and to provide the annual actuarial opinions required under state statutory accounting requirements. The Company ~~does not rely on the actuarial consultant for GAAP reporting or periodic report disclosure purposes. The Company~~ analyzes loss reserves quarterly primarily using the incurred loss, paid loss, claim count development, and average severity methods described below. ~~The Company also uses the paid loss development method to analyze loss adjustment expense reserves as part of its reserve analysis.~~ When deciding among methods to use, the Company evaluates the credibility of each method based on the maturity of the data available and the claims settlement practices for each particular line of insurance business or coverage within a line of insurance business. The Company may also evaluate qualitative factors such as known changes in laws or legal rulings that could affect claims handling or other external environmental factors or internal factors that could affect the settlement of claims. When establishing the loss reserve, the Company will generally analyze the results from all of the methods used rather than relying on a single method. While these methods are designed to determine the ultimate losses on claims under the Company’s policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes. The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.

The incurred loss development method analyzes historical incurred case loss (case reserves plus paid losses) development to estimate ultimate losses. The Company applies development factors against current case incurred losses by accident period to calculate ultimate expected losses. The Company believes that the incurred loss development method provides a reasonable basis for evaluating ultimate losses, particularly in the Company’s larger, more established lines of insurance business which have a long operating history.

The average severity method analyzes historical loss payments and/or incurred losses divided by closed claims and/or total claims to calculate an estimated average cost per claim. From this, the expected ultimate average cost per claim can be estimated. The average severity method coupled with the claim count development method provide meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing loss reserves. The claim count development method analyzes historical claim count development to estimate future incurred claim count

~~Table of Contents~~

development for current claims. The Company applies these development factors against current claim counts by accident period to calculate ultimate expected claim counts.

The paid loss development method analyzes historical payment patterns to estimate the amount of losses yet to be paid. The Company uses this method for losses and loss adjustment expenses.

The Company analyzes catastrophe losses separately from non-catastrophe losses. For catastrophe losses, the Company determines claim counts based on claims reported and development expectations from previous catastrophes and applies an average expected loss per claim based on loss reserves established by adjusters and average losses on previous similar catastrophes.

There are many factors that can cause variability between the ultimate expected loss and the actual developed loss. While there are certainly other factors, the Company believes that the following three items tend to create the most variability between expected losses and actual losses.

(1) Inflation

For the Company’s California automobile lines of insurance business, total reserves are comprised of the following:

BI reserves—approximately 60% of total reserves

Material damage ~~(MD)~~("MD") reserves, including collision and comprehensive property damage—approximately 20% of total reserves

Loss adjustment expenses reserves—approximately 20% of total reserves.

Loss development on MD reserves is generally insignificant because MD claims are generally settled in a shorter period than BI claims. The majority of the loss adjustment ~~expense~~expenses reserves are estimated costs to defend BI claims, which tend to require longer periods of time to settle as compared to MD claims.

BI loss reserves are generally the most difficult to estimate because they take longer to close than other coverages. BI coverage in the Company’s policies includes injuries sustained by any person other than the insured, except in the case of uninsured or underinsured motorist BI coverage, which covers damages to the insured for BI caused by uninsured or underinsured motorists. BI payments are primarily for medical costs and general damages.

The following table presents the typical closure patterns of BI claims in the Company's California personal automobile insurance coverage:


	% of Total		% of Total
	Claims Closed	Dollars Paid	Claims Closed	Dollars Paid
BI claims closed in the accident year reported	40%	12%	44%	15%
BI claims closed one year after the accident year reported	80%	52%	81%	56%
BI claims closed two years after the accident year reported	95%	82%	94%	81%
BI claims closed three years after the accident year reported	99%	95%	98%	93%

BI claims closed in the accident year reported are generally the smaller and less complex claims that settle for approximately ~~$2,500~~$3,000 to ~~$3,000,~~$3,500, on average, whereas the total average settlement, once all claims are closed in a particular accident year, is approximately ~~$8,500~~$10,000 to ~~$10,000.~~$11,000. The Company creates incurred and paid loss triangles to estimate ultimate losses utilizing historical payment and reserving patterns and evaluates the results of this analysis against its frequency and severity analysis to establish BI loss reserves. The Company adjusts development factors to account for inflation trends it sees in loss severity. As a larger proportion of claims from an accident year are settled, there becomes a higher degree of certainty for the loss reserves established for that accident year. Consequently, there is a decreasing likelihood of loss reserve development on any particular accident year, as those periods age. At December 31, ~~2012~~2015, ~~the Company believes that~~ the accident years that are most likely to develop are the ~~2010~~2013 through ~~2012~~2015 accident years; however, it is possible that older accident years could develop as well.

In general, the Company expects that historical claims trends will continue with costs tending to increase, which is generally consistent with historical data, and therefore the Company believes that it is reasonable to expect inflation to continue. ~~The Company is experiencing inflation at a rate that is higher than in recent years.~~ Many potential factors can affect the BI inflation rate, including changes ~~in:~~in claims handling process, changes in statutes and regulations, the number of litigated files, increased use of medical procedures such as MRIs and epidural injections, general economic factors, timeliness of claims adjudication, vehicle safety, weather patterns, and gasoline prices, among other factors; however, the magnitude of the impact of such ~~impact~~factors on the inflation rate is unknown.

~~Table of Contents~~

It is a common practice in the insurance industry for companies to provide small settlement offers at the inception of a claim to BI claimants who have minor injuries. These claims are settled quickly, reducing the likelihood that BI claimants require larger settlements later on. It also results in some claimants receiving payments that would not have received any payments if an extended adjudication of the claim had occurred. When a large percentage of the total claims are small dollar value claims resulting from this practice, it has the effect of lowering the total average cost for all claims (severity) but increasing the total number of claims (frequency). Mercury has historically used this approach to handle its BI claims.

Beginning late in 2008 and continuing through the end of 2009, the Company changed its claims handling procedures and discontinued the practice of providing small settlement offers to BI claimants at the inception of the claim. This had the effect of increasing loss severity and decreasing loss frequency for the 2009 accident year. The prior practice was reinstated in 2010, which resulted in decreased loss severity and increased loss frequency in 2010 compared to 2009. The Company has continued this practice with even greater emphasis on settling small claims quickly.

The Company believes that it is reasonably possible that the California automobile BI severity could vary from recorded amounts by as much as 10%, 5%, and 3% for ~~2012~~2015, ~~2011~~2014, and ~~2010~~2013, respectively. ~~For example, at~~At December 31, ~~2012~~2015, the loss severity for the amounts recorded at December 31, ~~2011~~ ~~increased~~2014 changed by ~~7.0%~~(2.7)%, ~~2.5%~~1.7%, and ~~0.3%~~1.3% for the ~~2011, 2010,~~2014, 2013, and ~~2009~~2012 accident years, respectively. Comparatively, at December 31, 2014, the loss severity for the amounts recorded at December 31, 2013 changed by (3.1)%, (1.3)%, and 0.4% for the 2013, 2012, and 2011 accident years, respectively.

The following table presents the effects of the California automobile BI loss reserves on the ~~2012~~2015, ~~2011~~2014, and ~~2010~~2013 accident ~~year California BI loss reserves~~years based on possible variations in the severity recorded; however, the variation could be more or less than these amounts.

California Automobile Bodily Injury Inflation Reserve Sensitivity Analysis

Accident
Year
Number of Claims Expected
Actual
Recorded
Severity at
12/31/12

Implied
Inflation Rate
Recorded ⁽¹⁾

(A) Pro-forma
severity if actual
severity is lower by
10% for 2012,
5% for 2011, and
3% for 2010

(B) Pro-forma
severity if actual
severity is higher by
10% for 2012,
5% for 2011, and
3% for 2010

Favorable loss
development if
actual severity is
less than recorded
(Column A)

Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
2012 28,671
$ 9,992
10.5 % $ 8,993
$ 10,991
$ 28,642,000
$ (28,642,000 )
2011 27,092
$ 9,045
2.3 % $ 8,593
$ 9,497
$ 12,246,000
$ (12,246,000 )
2010 27,052
$ 8,845
(1.2 )% $ 8,580
$ 9,110
$ 7,169,000
$ (7,169,000 )
2009 25,521
$ 8,956
—
—
—
—
—
Total Loss Development—Favorable (Unfavorable) $ 48,057,000
$ (48,057,000 )



Accident Year	Number of Claims Expected	Actual Recorded Severity at 12/31/15		Implied Inflation Rate Recorded (1)		(A) Pro-forma severity if actual severity is lower by 10% for 2015, 5% for 2014, and 3% for 2013		(B) Pro-forma severity if actual severity is higher by 10% for 2015, 5% for 2014, and 3% for 2013		Favorable loss development if actual severity is less than recorded (Column A)		Unfavorable loss development if actual severity is more than recorded (Column B)
2015	29,529	$	10,691	5.1	%	$	9,622	$	11,760	$	31,567,000	$	(31,567,000	)
2014	30,264	$	10,172	-0.8	%	$	9,663	$	10,681	$	15,404,000	$	(15,404,000	)
2013	29,474	$	10,259	5.0	%	$	9,951	$	10,567	$	9,078,000	$	(9,078,000	)
2012	28,018	$	9,772	—		—		—		—		—
Total Loss Development— Favorable (Unfavorable)										$	56,049,000	$	(56,049,000	)

(1)

Implied inflation rate is calculated by dividing the difference between current and prior year actual recorded severity by the prior year actual recorded severity. The change in the implied inflation rate in 2010 and 2009 is skewed by the change in claims handling process noted above. The 10.5% inflation rate estimated for 2012 reflects the consideration of recent trends experienced on 2012 accident year claims that closed in 2012. While these claims represent just 12% of the ultimate dollars expected to be paid, they serve as an early indicator of inflation. The higher inflation may result from an increase in medical procedures and an increased prevalence of large losses.

(2) Claim Count Development

The Company generally estimates ultimate claim counts for an accident period based on development of claim counts in prior accident periods. ~~Since 2006, for~~For California automobile BI claims, the Company has experienced that approximately 2%3% to 8%5% additional claims will be reported in the year subsequent to an accident year. However, such late reported claims could be more or less than the Company’s expectations. Typically, almost every claim is reported within one year following the end of an accident year and at that point the Company has a high degree of certainty as to what the ultimate claim count will be.

There are many other potential factors that can affect the number of claims reported after aan accident period ~~end.~~ends. These factors include changes in weather patterns, a change in the number of litigated files, the number of automobiles insured, and whether the last day of the ~~year~~accident period falls on a weekday or a weekend. However, the Company is unable to determine which, if any, of the factors actually impact the number of claims reported and, if so, by what magnitude.

At December 31, ~~2012~~,2015, there were ~~26,757~~28,255 BI claims reported for the ~~2012~~2015 accident year and the Company estimates that these are expected to ultimately grow by approximately 7%4.5%. The Company believes that while actual development in recent years has ranged between approximately ~~2% and 8%~~3% to 5%, it is reasonable to expect that the range could be as great as between 0% and 10%. Actual development may be more or less than the expected range.

The following table presents the ~~effect~~effects on loss development ~~based on~~of different claim count within the broader possible range at December 31, ~~2012~~2015:

~~Table of Contents~~

California Automobile Bodily Injury Claim Count Reserve Sensitivity Analysis


2012 Accident Year	Claims Reported	Amount Recorded at 12/31/12 at 7% Claim Count Development		Total Expected Amount If Claim Count Development is 0%		Total Expected Amount If Claim Count Development is 10%
2015 Accident Year									Claims Reported	Amount Recorded at 12/31/15 at 4.5% Claim Count Development		Total Expected Amount If Claim Count Development is 0%		Total Expected Amount If Claim Count Development is 10%
Claim count	26,757	28,671		26,757		29,432			28,255	29,529		28,255		31,081
Approximate average cost per claim	Not meaningful	$	9,992	$	9,992	$	9,992		Not meaningful	$	10,691	$	10,691	$	10,691
Total dollars	Not meaningful	$	286,480,000	$	267,356,000	$	294,085,000		Not meaningful	$	315,695,000	$	302,074,000	$	332,287,000
Total Loss Development—Favorable (Unfavorable)	Total Loss Development—Favorable (Unfavorable)			$	19,124,000	$	(7,605,000	)	Total Loss Development—Favorable (Unfavorable)			$	13,621,000	$	(16,592,000	)

(3) Unexpected ~~Large~~ Losses From Older Accident Periods

Unexpected ~~large~~ losses are generally not provided for in the current loss reserve because they are not known or expected and tend to be unquantifiable. Once known, the Company establishes a provision for the losses, but it is not possible to provide any meaningful sensitivity analysis as to the potential size of any unexpected losses. These losses can be caused by many factors, including unexpected legal interpretations of coverage, ineffective claims handling, ~~regulation~~regulations extending claims reporting periods, assumption of unexpected or unknown risks, adverse court decisions as well as many unknown factors.

Unexpected ~~large~~ losses are fairly infrequent but can have a large impact on the Company’s losses. To mitigate this risk, the Company has established claims handling and review procedures. However, it is still possible that these procedures will not prove entirely effective, and the Company may have material unexpected ~~large~~ losses in future periods. It is also possible that the Company has not identified and established a sufficient loss reserve for all material unexpected ~~large~~ losses occurring in the older accident years, even though a comprehensive claims file review was undertaken. The Company may experience additional development on these loss reserves.

Discussion of losses and loss reserves and prior period loss development at December 31, ~~2012~~2015

At December 31, ~~2012~~2015 and ~~2011~~2014, the Company recorded its point estimate of approximately ~~$1,036 million~~$1.15 billion and $~~985 million~~ ,$1.09 billion, respectively, in losses and loss adjustment expense liabilities, which include approximately ~~$409~~$440.7 million and ~~$344~~$440.8 million, respectively, of ~~IBNR loss reserves.~~IBNR. IBNR includes estimates, based upon past experience, of ultimate developed costs, which may differ from case estimates, unreported claims that occurred on or prior to December 31, ~~2012~~2015 and 2014, and estimated future payments for reopened claims. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date; however, since the provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.

~~During~~ ~~2012~~, the Company experienced severe losses due to Hurricane Sandy which made landfall in New Jersey on October 29, 2012 and caused significant damage to large portions of the Northeastern United States. The Company's total losses from Hurricane Sandy are estimated to be approximately $28 million. The Company also recognized catastrophe losses due to wind and hail storms in the Midwest region totaling $10 million.

The Company evaluates its loss reserves quarterly. When management determines that the estimated ultimate claim cost requires a decrease for previously reported accident years, favorable development occurs and a reduction in losses and loss adjustment expenses is reported in the current period. If the estimated ultimate claim cost requires an increase for previously reported accident years, unfavorable development occurs and an increase in losses and loss adjustment expenses is reported in the current period. For ~~2012~~2015, the Company reported unfavorable development of approximately ~~$42~~$13 million on the ~~2011~~2014 and prior accident years’ losses and loss adjustment expense reserves, which at December 31, ~~2011~~2014 totaled approximately $~~985 million~~.$1.09 billion. The unfavorable development in 2015 was primarily from the California homeowners and automobile lines of insurance business outside of California, which was partially offset by favorable development in the California personal automobile line of insurance business.~~2012~~ ~~is largely~~

During 2015, the Company recorded catastrophe losses of approximately $19 million which were primarily the result of ~~re-estimates~~severe storms outside of California, BIand rainstorm and wildfire losses ~~that have experienced both higher average severities and more late reported claims (claim count development) than originally estimated at~~ ~~December 31, 2011~~.

~~Premiums~~

~~The Company’s insurance premiums are recognized as income ratably over the term of the policies and~~ in proportion to the amount of insurance protection provided. Unearned premiums are carried as a liability on the balance sheet and are computed on a monthly pro-rata basis. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized acquisition costs, and maintenance costs partially offset by investment income to related unearned premiums. To the extent that any of the Company’s lines of business become unprofitable, a premium deficiency reserve may be required.California.

~~Table of Contents~~

Investments

The Company’s fixed maturity and equity investments are classified as ~~“trading”~~"trading" and carried at fair value as required when applying the fair value option, with changes in fair value reflected in net realized investment gains or losses in the consolidated statements of operations. The majority of equity holdings, including non-redeemable ~~fund~~ preferred stocks, isare actively traded on national exchanges or trading markets, and isare valued at the last transaction price on the balance sheet dates.

Fair Value of Financial Instruments

~~The financial~~Financial instruments recorded in the consolidated balance sheets include investments, receivables, ~~interest rate swap agreements,~~total return swaps, accounts payable, ~~equity contracts,~~options sold, and secured and unsecured notes payable. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Due to their short-term maturity, the carrying values of receivables and accounts payable approximate their fair market values. All investments are carried on the consolidated balance sheets at fair value, as ~~disclosed~~described in Note 12. Fair Value of Financial Instruments, of the Notes to Consolidated Financial ~~Statements.~~Statements in Item 8. "Financial Statements and Supplementary Data."

The Company’s financial instruments include securities issued by the U.S. government and its agencies, securities issued by states and municipal governments and agencies, certain corporate and other debt securities, equity securities, and exchange traded funds. ~~Approximately~~ ~~98%~~99.7% of the fair value of ~~the~~ financial instruments held at December 31, ~~2012~~2015 is based on observable market prices, observable market parameters, or is derived from such prices or parameters. The availability of observable market prices and pricing parameters can vary by financial instrument. Observable market prices and pricing parameters of a financial instrument, or a related financial instrument, are used to derive a price without requiring significant judgment.

The Company may hold or acquire financial instruments that lack observable market prices or market parameters ~~currently or in future periods~~ because they are less actively ~~traded.~~traded currently or in future periods. The fair value of such instruments is determined using techniques appropriate for each particular financial instrument. These techniques may involve some degree of judgment. The price transparency of the particular financial instrument will determine the degree of judgment involved in determining the fair value of the Company’s financial instruments. Price transparency is affected by a wide variety of factors, including ~~for example,~~ the type of financial instrument, whether

it is a new financial instrument and not yet established in the marketplace, and the characteristics particular to the transaction. Financial instruments for which actively quoted prices or pricing parameters are available or for which fair value is derived from actively quoted prices or pricing parameters will generally have a higher degree of price transparency. By contrast, financial instruments that are thinly traded or not quoted will generally have diminished price transparency. Even in normally active markets, the price transparency for actively quoted financial instruments may be reduced ~~from time to time~~ during periods of market dislocation. Alternatively, in thinly quoted markets, the participation of market makers willing to purchase and sell a financial instrument provides a source of transparency for products that otherwise are ~~otherwise~~ not actively quoted. For a further discussion, see Note 34. Fair Value Measurement, of the Notes to Consolidated Financial ~~Statements.~~Statements in Item 8. "Financial Statements and Supplementary Data."

Income Taxes

At December 31, ~~2012~~,2015, the Company’s deferred income taxes were in a net ~~liability~~asset position ~~materially~~mainly due to deferred tax ~~liabilities~~assets generated by unearned premiums, alternative minimum tax credit carryforwards, expense accruals and loss reserve discounting. These deferred tax assets were substantially offset by deferred tax liabilities resulting from deferred acquisition costs and unrealized gains on securities held. These deferred tax liabilities were substantially offset by deferred tax assets resulting from unearned premiums, expense accruals, loss reserve discounting, and AMT and other tax credit carryforwards. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. Management’s recoverability assessment of ~~its~~the Company’s deferred tax assets which are ordinary in character takes into consideration the Company’s strong history of generating ordinary taxable income and a reasonable expectation that it will continue to generate ordinary taxable income in the future. Further, the Company has the capacity to recoup its ordinary deferred tax assets through tax loss carryback claims for taxes paid in prior years. Finally, the Company has various deferred tax liabilities ~~which~~that represent sources of future ordinary taxable income.

Management’s recoverability assessment with regard to its capital deferred tax assets is based on estimates of anticipated capital gains, ~~and~~ tax-planning strategies available to generate future taxable capital gains, ~~both~~and the Company's capacity to absorb capital losses carried back to prior years, each of which would contribute to the realization of deferred tax benefits. The Company has significant unrealized gains in its investment portfolio that could be realized through asset dispositions, at management’s discretion. In addition, the Company expects to hold certain ~~quantities of~~ debt securities, which are currently in loss positions, to recovery or maturity. Management believes unrealized losses related to these debt securities, which represent a portion of the unrealized loss positions at ~~period end,~~period-end, are fully realizable at maturity. Management believes its long-term time horizon for holding these securities allows it to avoid any forced sales prior to maturity. ~~The Company also has unrealized gains in its investment portfolio which could be realized through asset dispositions, at management’s discretion.~~ Further, the Company has the capability to generate additional realized capital gains by entering into a sale-leaseback ~~transaction~~transactions using one or more of its appreciated real estate holdings.

~~Table of Contents~~

Finally, the Company has the capacity to recoup capital deferred tax assets through tax capital loss carryback claims for taxes paid within permitted carryback periods.

The Company has the capability to implement tax planning strategies as it has a steady history of generating positive cash flow from operations ~~as well as the reasonable expectation~~and believes that its cash flow needs can be met in future periods without the forced sale of its investments. This capability assists management in controlling the timing and amount of realized losses ~~it generates~~generated during future periods. By prudent utilization of some or all of these strategies, management has the intent and believes that it has the ability ~~and intent~~ to generate capital gains and minimize tax losses in a manner sufficient to avoid losing the benefits of its deferred tax assets. Management will continue to assess the need for a valuation allowance on a quarterly basis. Although realization is not assured, management believes it is more likely than not that the Company’s deferred tax assets will be realized.

The Company’s effective income tax rate can be affected by several factors. These generally include ~~tax exempt~~tax-exempt investment income, ~~non-deductible~~other nondeductible expenses, and periodically, non-routine tax items such as adjustments to unrecognized tax benefits related to tax uncertainties. The effective tax rate was (5.5)% for ~~2012~~ ~~was~~ ~~13.6%~~,2015, compared to ~~22.0%~~28.1% for ~~2011~~.2014. The decrease in the effective tax rate is mainly due to a $176.9 million decrease in ~~taxable~~total pre-tax income ~~relative~~for 2015 compared to ~~tax exempt~~the total pre-tax income for 2014, while tax-exempt investment ~~income.~~income, a component of total pre-tax income, remained relatively consistent. The decrease in pre-tax income was primarily due to a shift from net realized investment gains of $81.2 million in 2014 to net realized investment losses of $83.8 million in 2015. The Company’s effective tax rate for the year ended December 31, ~~2012~~2015 was lower than the statutory tax rate primarily as a result of ~~tax exempt~~tax-exempt investment income earned.

~~Goodwill and Other Intangible Assets~~

Goodwill and other intangible assets arise from business acquisitions and consist of the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed and identifiable intangible assets acquired. The Company annually evaluates goodwill and other intangible assets for impairment. The Company also reviews its goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed the implied fair value. As of ~~December 31, 2012, the fair value of the Company’s reporting units exceeded their carrying value.~~

Contingent Liabilities

The Company has known, and may have unknown, potential liabilities which include claims, assessments, lawsuits, or regulatory fines and penalties relating to the Company’s business. The Company continually evaluates these potential liabilities and accrues for them and/or discloses them in the notes to the consolidated financial statements where required. The Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition, results of operations, or cash flows. See ~~also “Regulatory~~"Regulatory and

Legal ~~Matters”~~Matters" above and Note 1617. Commitments and Contingencies, of the Notes to Consolidated Financial ~~Statements.~~Statements in "Item 8. Financial Statements and Supplementary Data."

~~For~~Premiums

The Company’s insurance premiums are recognized as income ratably over the term of the policies and in proportion to the amount of insurance protection provided. Unearned premiums are carried as a ~~discussion~~liability on the consolidated balance sheets and are computed monthly on a pro-rata basis. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of ~~recently issued accounting standards, see Note 1~~expected claim costs, unamortized acquisition costs, and maintenance costs partially offset by investment income to related unearned premiums. To the extent that any of ~~Notes to Consolidated Financial Statements.~~the Company’s lines of insurance business become unprofitable, a premium deficiency reserve may be required.

RESULTS OF OPERATIONS

Year Ended December 31, ~~2012~~2015 Compared to Year Ended December 31, ~~2011~~2014

Revenues

Net premiums ~~earned~~written and net premiums ~~written~~earned in ~~2012~~2015 increased ~~0.3%~~5.6% and ~~3.0%~~5.8%, respectively, from ~~2011~~2014. ~~Net premiums written by the Company's California operations and non-California operations increased by $73.3 million and $3.1 million, respectively, from 2011.~~ The increase in net premiums written iswas primarily due to ~~an increase~~higher average premiums per policy arising from rate increases in the California private passenger automobile line of insurance business and growth in the number of ~~policies-in-force~~homeowner policies written in California and slightly higher average premiums per policy. The increase in average premiums per policy partially reflects a modest shift for the California personal automobile line from six-month policies to twelve-month policies. Premiums on twelve-month policies are typically twice that of six-month policies. For ~~2012~~, fewer than 5% of California personal automobile policies were written on a twelve-month basis and more than 95% were written on a six-month basis, whereas in 2011, fewer than 1% of the California personal automobile policies were written on a twelve-month basis and over 99% were written on a six-month basis. In addition, the Company increased private passenger automobile ~~insurance rates in twelve states outside California and grew its homeowners business~~policies written in several states outside of California ~~during 2012.~~.

Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any applicable reinsurance. Net premiums written is a statutory measure designed to determine production levels. Net premiums earned, the most directly comparable GAAP measure, represents the portion of net premiums written that is recognized as revenue in the financial statements for the period presented and earned on a pro-rata basis over the term of the policies.

The following is a reconciliation of total net premiums written to net premiums earned:

~~Table of Contents~~


							Year Ended December 31,
	2012			2011			2015			2014
	(Amounts in thousands)						(Amounts in thousands)
Net premiums written	$	2,651,731		$	2,575,383		$	2,999,392		$	2,840,922
Change in net unearned premium	(76,811		)	(9,326		)	(41,495		)	(44,727		)
Net premiums earned	$	2,574,920		$	2,566,057		$	2,957,897		$	2,796,195

Expenses

Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. The following table presents the ~~Company’s~~Insurance Companies' consolidated loss, expense, and combined ratios determined in accordance with GAAP:


					Year Ended December 31,
	2012		2011		2015		2014
Loss ratio	76.2	%	71.3	%	72.5	%	71.0	%
Expense ratio	26.6	%	27.2	%	26.7	%	27.7	%
Combined ratio	102.8	%	98.5	%
Combined ratio ⁽¹⁾					99.2	%	98.8	%

__________

(1) Combined ratio for 2014 does not sum due to rounding.

Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The Company’s loss ratio was affected by unfavorable development of approximately ~~$42~~$13 million and ~~$18~~favorable development of approximately $3 million on prior accident years’ losses and loss adjustment expense reserves for the years ended December 31, ~~2012~~2015 and ~~2011~~,2014, respectively. The unfavorable development in ~~2012~~ ~~is largely~~2015 was primarily from the ~~result~~California homeowners and automobile lines of ~~re-estimates~~business outside of California, ~~BI losses~~ which ~~have experienced both higher average severities and more late reported claims (claim count development) than originally estimated at~~ ~~December 31, 2011~~.was partially offset by favorable development in the California personal automobile line of business. The ~~2012~~favorable development in 2014 was primarily from California personal automobile lines of insurance business partially offset by adverse development in other states. The 2015 loss ratio was also negatively impacted by a total of ~~$39~~$19 million of catastrophe

losses mostly due to severe storms outside of California, and rainstorm and wildfire losses in California. The 2014 loss ratio was also negatively impacted by a total of $11 million of catastrophe losses mostly due to ~~Hurricane Sandy and wind and hail storms~~winter freeze events in the ~~Midwest region during~~ ~~2012. In addition,~~East Coast and homeowners losses in California from severe rainstorms. Excluding the ~~2012~~effect of estimated prior periods’ loss development and catastrophe losses, the loss ratio was ~~negatively impacted by rising~~71.5% and 70.7% for the years ended December 31, 2015 and 2014, respectively. The increase in the adjusted loss ratio was primarily due to higher loss frequency and ~~increasing severity on the California private passenger automobile line of business. The~~ ~~2011~~ ~~loss ratio was negatively impacted by a total of $18 million of catastrophe losses due to California winter storms, Hurricane Irene, and Georgia tornadoes during~~ ~~2011~~.severity.

Expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses by net premiums earned. ~~The improvement~~Excluding the $27.6 million penalty assessed by the California DOI and accrued by the Company in 2014, the expense ratio would have been 26.8% in 2014 comparable to the expense ratio in ~~2012~~ ~~was mainly due to ongoing cost reduction efforts~~2015. The 2015 expense ratio also included higher advertising expenses and lower ~~profitability related expenses.~~average commissions paid to agents.

Combined ratio is equal to loss ratio plus expense ratio and is the key measure of underwriting performance traditionally used in the property and casualty insurance industry. A combined ratio under 100% generally reflects profitable underwriting results; and a combined ratio over 100% generally reflects unprofitable underwriting results.

Income tax ~~expenses were~~ ~~$18.4~~(benefit) expense was $(3.9) million and ~~$53.9~~$69.5 million for the years ended December 31, ~~2012~~2015 and ~~2011~~,2014, respectively.The $73.4 million decrease in income tax expense ~~resulted from decreased taxable~~to an income tax benefit was primarily due to a $176.9 million reduction in ~~2012.~~total pre-tax income, while tax-exempt investment income, a component of total pre-tax income, remained relatively consistent compared to the same period in 2014. The decrease in pre-tax income was primarily due to a change in net realized investment gains of $81.2 million in 2014 to net realized investment losses of $83.8 million in 2015.

Investments

The following table presents the investment results of the Company:


							Year Ended December 31,
	2012			2011			2015			2014
	(Amounts in thousands)						(Amounts in thousands)
Average invested assets at cost⁽¹⁾	$	3,011,143		$	3,004,588		$	3,293,948		$	3,204,592
Net investment income⁽²⁾
Before income taxes	$	131,896		$	140,947		$	126,299		$	125,723
After income taxes	$	115,359		$	124,708		$	110,382		$	111,456
Average annual yield on investments⁽²⁾
Before income taxes	4.4		%	4.7		%	3.8		%	3.9		%
After income taxes	3.8		%	4.2		%	3.4		%	3.5		%
Net realized investment gains	$	66,380		$	58,397
Net realized investment (losses) gains							$	(83,807	)	$	81,184

__________


(1)	Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average invested assets at cost isare based on the monthly amortized cost of the invested assets for each respective period.

~~Table of Contents~~

(2)

Net investment income before income taxes increased slightly due to higher average invested asset balances. Net investment income and average annual ~~yield~~yields on investments after income taxes decreased slightly primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during ~~the current~~ low interest rate ~~environment.~~environments, and a higher effective tax rate on investment income due to a greater proportion of taxable investments in 2015 compared to 2014.

The following tables present the components of net realized investment (losses) gains included in net income:



	Year Ended December 31, 2015
	(Losses) Gains Recognized in Income
	Sales			Changes in fair value			Total
	(Amounts in thousands)
Net realized investment (losses) gains:
Fixed maturity securities ⁽¹⁾⁽²⁾	$	136		$	(39,304	)	$	(39,168	)
Equity securities ⁽¹⁾⁽³⁾	(17,459		)	(22,988		)	(40,447		)
Short-term investments ⁽¹⁾	(1,396		)	561			(835		)
Total return swaps	1,062			(7,500		)	(6,438		)
Options sold	3,021			60			3,081
Total	$	(14,636	)	$	(69,171	)	$	(83,807	)



	Year Ended December 31, 2014
	Gains (Losses) Recognized in Income
	Sales			Changes in fair value			Total
	(Amounts in thousands)
Net realized investment gains (losses):
Fixed maturity securities ⁽¹⁾⁽²⁾	$	(2,719	)	$	77,208		$	74,489
Equity securities ⁽¹⁾	41,637			(32,922		)	8,715
Short-term investments ⁽¹⁾	(1,943		)	(527		)	(2,470		)
Total return swap	2,706			(5,675		)	(2,969		)
Options sold	3,394			25			3,419
Total	$	43,075		$	38,109		$	81,184

__________


(1)	The changes in fair value of the investment portfolio result from the application of the fair value option.


(2)	The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio. The fair values in 2015 were adversely affected by the increase in market interest rates in 2015. The fair value increases in 2014 were primarily caused by the overall improvement in the municipal bond market.

(3)

In 2015, the decreases in the fair value of equity securities were primarily due to a decline in the value of the Company's holdings in industrial stocks. Prior to the fourth quarter of 2014, the Company realized gains by selling equity securities. During the fourth quarter of 2014, decreases in the fair value of equity securities were primarily due to a decline in the value of the Company's holdings in energy stocks.

~~Included in net income are net realized investment gains of~~ ~~$66.4 million~~ ~~and~~ ~~$58.4 million~~ in ~~2012~~ ~~and~~ ~~2011, respectively.Net realized investment gains include gains of~~ ~~$45.5 million~~ ~~and~~ ~~$31.3 million~~ in ~~2012~~ ~~and~~ ~~2011, respectively, due to changes in the fair value of total investments pursuant to application of the fair value accounting option. The net gains during~~ ~~2012~~ ~~arise from$36.3 million~~ ~~and~~ ~~$9.2 million~~ increases in the market value of the Company’s fixed maturity and equity securities, respectively. The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio, which was positively affected by the overall municipal market improvement for 2012. The primary cause of the increase in the value of the Company’s equity securities was the overall improvement in the equity markets for 2012. The net gains during 2011 arise from a $62.1 million increase in the market value of the Company’s fixed maturity securities offset by a $30.9 million decline in the market value of the Company’s equity securities.

Net Income

~~Net income was~~ ~~$116.9 million~~ or ~~$2.13~~ ~~per diluted share and $191.2 million or $3.49 per diluted share in~~ ~~2012~~ ~~and~~ ~~2011, respectively. Diluted per share results were based on a weighted average of~~ ~~54.9 million~~ ~~and~~ ~~54.8 million~~ ~~shares in~~ ~~2012~~ ~~and~~ ~~2011, respectively. Basic per share results were~~ ~~$2.13~~ ~~and $3.49 in~~ ~~2012~~ ~~and~~ ~~2011, respectively. Included in net income per share were net realized investment gains, net of income taxes, of $0.79~~ ~~and $0.69 per share (basic and diluted) in~~ ~~2012~~ ~~and~~ ~~2011, respectively.~~



	Year Ended December 31,
	2015			2014
	(Amounts in thousands, except per share data)
Net income	$	74,479		$	177,949
Basic average shares outstanding	55,157			55,008
Diluted average shares outstanding	55,209			55,020
Basic Per Share Data:
Net Income	$	1.35		$	3.23
Net realized investment (losses) gains, net of tax	$	(0.99	)	$	0.95
Diluted Per Share Data:
Net Income	$	1.35		$	3.23
Net realized investment (losses) gains, net of tax	$	(0.99	)	$	0.95

Year Ended December 31, ~~2011~~2014 Compared to Year Ended December 31, ~~2010~~2013

Revenues

Net premiums written and net premiums earned in ~~2011 were essentially the same as 2010 while~~2014 increased 4.1% and 3.6%, respectively, from 2013. The increase in net premiums written in 2011 increased by approximately $20 million from 2010. Net premiums written by the Company’s California operations were approximately $2 billion in 2011, a 0.4% decrease from 2010. Net premiums written by the Company’s non-California operations were approximately $632 million in 2011, a 4.5% increase from 2010. Growth outside of California resulted from expanded and improved product offerings andwas primarily due to higher average premiums per ~~policy.~~policy arising from rate increases in the California private passenger automobile and homeowners lines of insurance business.

The following is a reconciliation of total net premiums written to net premiums earned:


						Year Ended December 31,
	2011			2010		2014			2013
	(Amounts in thousands)					(Amounts in thousands)
Net premiums written	$	2,575,383		$	2,555,481	$	2,840,922		$	2,728,999
Change in net unearned premium	(9,326		)	11,204		(44,727		)	(30,812		)
Net premiums earned	$	2,566,057		$	2,566,685	$	2,796,195		$	2,698,187

Expenses

The following table presents the Company’s consolidated loss, expense, and combined ratios determined in accordance with GAAP:


					Year Ended December 31,
	2011		2010		2014		2013
Loss ratio	71.3	%	71.1	%	71.0	%	72.7	%
Expense ratio	27.2	%	29.6	%	27.7	%	26.9	%
Combined ratio	98.5	%	100.7	%
Combined ratio ⁽¹⁾					98.8	%	99.6	%


(1)	Combined ratio for 2014 does not sum due to rounding.

The ~~loss ratio for 2011 was generally consistent with the 2010 loss ratio. The~~Company’s loss ratio was affected by favorable development of approximately $3 million and unfavorable development of approximately ~~$18 million and favorable development of approximately $13~~$3 million on prior accident years’ losses and loss adjustment expense reserves for the years ended December 31, ~~2011~~2014 and ~~2010,~~2013, respectively. The favorable development in 2014 was primarily from California personal automobile lines of insurance business partially offset by adverse development in other states. The unfavorable development in ~~2011 is largely~~2013 was primarily from the ~~result~~Florida private passenger automobile line of ~~re-estimates of California BI losses which have experienced higher average severities than originally estimated at December 31, 2010.~~insurance business. The ~~2011~~2014 loss ratio was also negatively impacted by a total of ~~$18~~$11 million of catastrophe losses mostly due to winter freeze events in the East Coast and homeowners losses in California ~~winter storms, Hurricane Irene, and Georgia tornadoes during 2011.~~from severe rainstorms. The ~~2010~~2013 loss ratio was also negatively impacted by a total of $17 million of catastrophe losses mostly due to tornadoes in Oklahoma and severe ~~rainstorms~~storms in the Midwest and Southeast regions during 2013. Excluding the effect of estimated prior periods’ loss development and catastrophe losses, the loss ratio was 70.7% and 72.0% for the years ended December 31, 2014 and 2013, respectively. The Company attributes the improved accident year loss ratio to the impact of rate increases which exceeded underlying loss cost trends in 2014.

The increase in the 2014 expense ratio was affected by the $27.6 million penalty assessed by the California ~~and homeowner’s losses in Florida~~DOI as a result of ~~sinkhole claims during 2010.~~

~~The~~the California Insurance Commissioner's adoption of a decision by the ALJ in the 2004 NNC. Excluding the effect of the California DOI penalty assessment, the expense ratio was 26.8% for 2010 was impacted by contributions made in support of a California legislative initiative totaling $12.1 million and would have been 29.1% without those financial contributions. The 2011 expense ratio decreased as a result of decreased agent contingent commissions, consulting, advertising, and information technology expenditures.the year ended December 31, 2014.

~~Table of Contents~~

Income tax ~~expenses were $53.9~~expense was $69.5 million and ~~$30.2~~$20.0 million for the years ended December 31, ~~2011~~2014 and ~~2010,~~2013, respectively. The increase in income tax expense ~~resulted from increased taxable income~~was mainly due to the increase in ~~2011.~~underwriting and investment gains.

Investments

The following table presents the investment results of the Company:


							Year Ended December 31,
	2011			2010			2014			2013
	(Amounts in thousands)						(Amounts in thousands)
Average invested assets at cost⁽¹⁾	$	3,004,588		$	3,121,366		$	3,204,592		$	3,028,198
Net investment income:
Net investment income⁽²⁾
Before income taxes	$	140,947		$	143,814		$	125,723		$	124,538
After income taxes	$	124,708		$	128,888		$	111,456		$	109,506
Average annual yield on investments:
Average annual yield on investments ⁽²⁾
Before income taxes	4.7		%	4.6		%	3.9		%	4.1		%
After income taxes	4.2		%	4.1		%	3.5		%	3.6		%
Net realized investment gains	$	58,397		$	57,089
Net realized investment gains (losses)							$	81,184		$	(11,422	)

__________


(1)	Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average invested assets at cost isare based on the monthly amortized cost of the invested assets for each respective period.


(2)	Net investment income increased due to higher average invested asset balances; and average annual yield decreased slightly primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments.

~~Included in net income are~~The following tables present the components of net realized investment gains ~~of $58.4 million and $57.1 million~~(losses) included in 2011 and 2010, respectively. Net realized investment gains include gains of $31.3 million and $46.6 million in 2011 and 2010, respectively, due to changes in the fair value of total investments pursuant to the application of the fair value accounting option. The net ~~gains during 2011 arise from a $62.1 million increase in the market value of the Company’s fixed maturity securities offset by a $30.9 million~~income:



	Year Ended December 31, 2014
	Gains (Losses) Recognized in Income
	Sales			Changes in fair value			Total
	(Amounts in thousands)
Net realized investment gains (losses):
Fixed maturity securities ⁽¹⁾⁽²⁾	$	(2,719	)	$	77,208		$	74,489
Equity securities ⁽¹⁾⁽³⁾	41,637			(32,922		)	8,715
Short-term investments ⁽¹⁾	(1,943		)	(527		)	(2,470		)
Total return swap	2,706			(5,675		)	(2,969		)
Options sold	3,394			25			3,419
Total	$	43,075		$	38,109		$	81,184



	Year Ended December 31, 2013
	Gains (Losses) Recognized in Income
	Sales			Changes in fair value			Total
	(Amounts in thousands)
Net realized investment gains (losses):
Fixed maturity securities ⁽¹⁾⁽²⁾	$	5,478		$	(100,703	)	$	(95,225	)
Equity securities ⁽¹⁾⁽⁴⁾	24,088			56,822			80,910
Short-term investments ⁽¹⁾	(903		)	(156		)	(1,059		)
Total return swap	527			1,649			2,176
Options sold	1,835			(59		)	1,776
Total	$	31,025		$	(42,447	)	$	(11,422	)

__________


(1)	The changes in fair value of the investment portfolio result from the application of the fair value option.

(2)

The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio. The fair value increases in 2014 were primarily caused by the overall improvement in the municipal bond market, and the fair value decreases in 2013 were primarily caused by the overall decline in the ~~market value of the Company’s equity securities. The Company’s~~ municipal bond holdings represent the majority of its fixed maturity portfolio, which was positively affected by the overall municipal market improvement for 2011. The primary cause of the losses on the Company’s equity securities was the overall decline in the equity markets occurring primarily in the third quarter of 2011. The net gains during 2010 arise from $1.0 million and $45.7 million increases in the market value of the Company’s fixed maturity and equity securities, respectively. The primary cause of the gains on the Company's equity securities for 2010 was the overall improvement in the equity market.


(3)	Prior to the fourth quarter of 2014, the Company realized gains by selling equity securities. During the fourth quarter of 2014, decreases in the fair value of equity securities were primarily due to a decline in the value of the Company's holdings in energy stocks.


(4)	For 2013, the increases in fair value were primarily caused by the overall improvement in the equity markets.

Net Income

Net income was $191.2 million or $3.49 per diluted share and $152.2 million or $2.78 per diluted share in 2011 and 2010, respectively. Diluted per share results were based on a weighted average of 54.8 million shares in 2011 and 2010. Basic per share results were $3.49 and $2.78 in 2011 and 2010, respectively. Included in net income per share were net realized investment gains, net of income taxes, of $0.69 and $0.68 per share (basic and diluted) in 2011 and 2010, respectively.



	Year Ended December 31,
	2014		2013
	(Amounts in thousands, except per share data)
Net income	$	177,949	$	112,143
Basic average shares outstanding	55,008		54,947
Diluted average shares outstanding	55,020		54,964
Basic Per Share Data:
Net Income	$	3.23	$	2.04
Net realized investment gains (losses), net of tax	$	0.95	$	(0.14	)
Diluted Per Share Data:
Net Income	$	3.23	$	2.04
Net realized investment gains (losses), net of tax	$	0.95	$	(0.14	)

LIQUIDITY AND CAPITAL RESOURCES

A. General

The Company is largely dependent upon dividends received from its insurance subsidiaries to pay debt service costs and to make distributions to its shareholders. Under current insurance law, the Insurance Companies are entitled to pay ordinary dividends of approximately ~~$155~~$164 million in ~~2013~~2016 to Mercury General. The Insurance Companies paid Mercury General ordinary dividends of ~~approximately $145~~$133 million during ~~2012.~~2015. As of December 31, ~~2012~~,2015, Mercury General had approximately ~~$85~~$149 million in investments and cash that could be utilized to satisfy its direct holding company obligations.

The principal sources of funds for the Insurance Companies are premiums, sales and maturity of invested assets, and dividend and interest income from invested assets. The principal uses of funds for the Insurance Companies are the payment of claims and related expenses, operating expenses, dividends to Mercury General, payment of debt, and the purchase of investments.

B. Cash Flows

The Company has generated positive cash flow from operations ~~for over twenty consecutive years. Because~~since the public offering of ~~the Company’s long track record of positive operating cash flows, it~~its common stock in November 1985, and does not attempt to match the duration and timing of asset maturities with those of liabilities. Rather, the Company manages its portfolio with a view towards maximizing total return with an emphasis on

~~Table of Contents~~

after-tax income. With combined cash and short-term investments of ~~$452.8~~$449.5 million at December 31, ~~2012~~,2015 as well as $100 million of credit available on a $250 million revolving credit facility, the Company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments. Investment maturities are also available to meet the ~~Company's~~Company’s liquidity needs. However, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that the Company’s sources of funds will be sufficient to meet its liquidity needs or that the Company will not be required to raise additional funds to meet those needs or for future business expansion, through the sale of equity or debt securities or from credit facilities with lending institutions.

Net cash provided by operating activities in ~~2012~~2015 was ~~$148.1~~$190.2 million,, a decrease of ~~$10.5~~$56.2 million compared to ~~2011~~.2014. The decrease was primarily due to the ~~increased payment of income taxes~~increase in paid losses, loss adjustment expenses, and ~~losses~~operating expenses, which included the $27.6 million penalty assessed by the California DOI as discussed in "Regulatory and ~~lower investment income as a result of the lower interest rate environment,~~Legal Matters" above, partially offset by ~~increased~~an increase in premiums collected. The Company utilized the cash provided by operating activities primarily for the payment of dividends to its shareholders. ~~Funds derived from the sale, redemption or maturity of fixed maturity investments of $668.7 million were primarily reinvested by the Company in high grade fixed maturity securities.~~

The following table presents the estimated fair value of fixed maturity securities at December 31, ~~2012~~2015 by contractual maturity in the next five years.


	Fixed Maturity Securities		Fixed Maturity Securities
	(Amounts in thousands)		(Amounts in thousands)
Due in one year or less	$	79,344	$	108,775
Due after one year through two years	99,603		106,822
Due after two years through three years	68,617		124,542
Due after three years through four years	76,072		70,706
Due after four years through five years	88,350		92,170
	$	411,986	$	503,015

See ~~“D. Debt”~~"D. Debt" below for cash flow related to outstanding ~~debts.~~debt.

C. Invested Assets

Portfolio Composition

An important component of the Company’s financial results is the return on its investment portfolio. The Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total return framework. The investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a ~~well diversified,~~well-diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve return on capital and profitable growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and defaults. The Company continues to believe that this strategy ~~maintains~~enables the optimal investment performance necessary to sustain investment income over time. The Company’s portfolio management approach utilizes a market risk and consistent asset allocation strategy as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for determining overall below investment grade exposure and diversification requirements. Within the ranges set by the asset allocation strategy, tactical investment decisions are made in consideration of prevailing market conditions.

4244

~~Table of Contents~~

The following table presents the composition of the total investment portfolio of the Company at December 31, ~~2012~~2015:


	Cost⁽¹⁾		Fair Value		Cost⁽¹⁾		Fair Value
	(Amounts in thousands)				(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies	$	13,999	$	14,204	$	22,542	$	22,507
Municipal securities	2,040,537		2,165,095		2,417,046		2,505,039
Mortgage-backed securities	27,786		30,703		49,639		49,839
Corporate securities	151,019		155,551		255,606		243,372
Collateralized debt obligations	37,562		42,801
Collateralized loan obligations					50,710		50,548
Other asset-backed securities					8,732		8,698
	2,270,903		2,408,354		2,804,275		2,880,003
Equity securities:
Common stock:
Public utilities	82,474		85,106
Banks, trusts and insurance companies	19,701		22,166
Energy and other	352,889		346,809
Common stock					275,479		280,263
Non-redeemable preferred stock	10,895		11,701		25,161		24,668
Partnership interest in a private credit fund	10,000		11,306
Private equity funds					12,888		10,431
	475,959		477,088		313,528		315,362
Short-term investments	294,607		294,653		185,353		185,277
Total investments	$	3,041,469	$	3,180,095	$	3,303,156	$	3,380,642

__________


(1)	Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at cost.

At December 31, ~~2012~~2015, ~~67.4%~~72.9% of the Company’s total investment portfolio at fair value and ~~89.0%~~85.6% of its total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. Equity holdings consist of non-redeemable preferred stocks, dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend received deduction, and ~~a partnership interest in a~~ private ~~credit fund.~~equity funds. At December 31, ~~2012~~2015, ~~91.7%~~56.9% of short-term investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis. The Company does not have any direct investment in ~~subprime~~sub-prime lenders.

~~During~~ ~~2012, the Company recognized $66.4 million~~ ~~in net realized investment gains, which included gains of $47.7 million and $16.7 million related to fixed maturity and equity securities, respectively. Included in the gains were~~ ~~$36.3 million~~ ~~and~~ ~~$9.2 million~~ ~~in gains due to changes in the fair value of the Company’s fixed maturity and equity security portfolio, respectively, as a result of applying the fair value option.~~

During 2011, the Company recognized $58.4 million in net realized investment gains, which included gains of $54.1 million related to fixed maturity securities and losses of $4.9 million related to equity securities. Included in the gains and losses were $62.1 million in gains due to changes in the fair value of the Company’s fixed maturity portfolio and $30.9 million in losses due to changes in the fair value of the Company's equity security portfolio, as a result of applying the fair value option.

Fixed Maturity Securities and Short-Term Investments

Fixed maturity securities include debt securities, which may have fixed or variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of the Company’s asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs, tax planning considerations, or other economic factors. Short-term investments include money market accounts, options, and short-term bonds that are highly rated short duration securities and redeemable within one year.

A primary exposure for the fixed maturity securities is interest rate risk. The longer the duration, the more sensitive the asset is to market interest rate fluctuations. As assets with longer maturity dates tend to produce higher current yields, the Company’s historical investment philosophy has resulted in a portfolio with a moderate duration. The nominal average maturities of the overall bond portfolio were ~~12.2~~12.6 years and ~~11.8~~12.6 years (~~11.0~~(12.2 years and ~~10.8~~11.4 years when including ~~all~~ short-term instruments) at December 31, ~~2012~~2015 and ~~2011~~2014, respectively. The portfolio is heavily weighted in investment grade tax-exempt municipal bonds. Fixed maturity investments purchased by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline. The call-adjusted average maturities of the overall bond portfolio were ~~3.7~~3.4 years and ~~4.5~~3.4 years (~~3.3~~(3.3 years

~~Table of Contents~~

and ~~4.1~~3.1 years when including ~~all~~ short-term instruments) at December 31, ~~2012~~2015 and ~~2011~~,2014, respectively, related to holdings which are heavily weighted with high coupon issues that are expected to be called prior to maturity. The modified durations of the overall bond portfolio reflecting anticipated early calls were ~~3.1~~3.2 years and ~~3.7~~2.8 years, (~~2.8~~(3.1 years and ~~3.3~~2.6 years when including ~~all~~ short-term instruments) at December 31, 2015 and 2014, respectively, including collateralized mortgage obligations with a modified duration of ~~3.2~~1.9 years and ~~2.4~~1.8 years at December 31, ~~2012~~2015 and ~~2011~~2014, respectively, and short-term bonds that carry no duration. Modified duration measures the length of time it takes, on average, to receive the present value of all the cash flows produced by a bond, including reinvestment of interest. As it measures four factors (maturity, coupon rate, yield, and call terms) which determine sensitivity to changes in interest rates, modified duration is considered a better indicator of price volatility than simple maturity alone.

Another exposure related to the fixed maturity securities is credit risk, which is managed by maintaining a weighted-average portfolio credit quality rating of ~~AA-~~A+, at fair valueat December 31, 2015, consistent with the average rating at December 31, ~~2011~~2014. The Company’s municipal bond holdings of which 98.4% were tax exempt, represented 85.6% of its fixed maturity portfolio at December 31, 2015, at fair value, and are broadly diversified geographically..

To calculate the weighted-average credit quality ratings as disclosed throughout this Annual Report on Form 10-K, individual securities were weighted based on fair value and a credit quality numeric score that was assigned to each security’s average of ratings assigned by nationally recognized securities rating ~~grade. Tax-exempt bond holdings are broadly diversified geographically.~~ organizations.

Taxable holdings consist principally of investment grade issues. At December 31, ~~2012~~2015, fixed maturity holdings rated below investment grade and non-rated bonds totaled ~~$41.4~~$37.5 million and ~~$47.4~~$6.2 million, respectively, at fair value, and represented ~~1.7%~~1.3% and ~~2.0%~~0.2%, respectively, of total fixed maturity securities. At December 31, ~~2011~~2014, fixed maturity holdings rated below investment grade and non-rated ~~fixed maturity holdings~~bonds totaled ~~$95.8~~$37.2 million and ~~$17.2~~$10.8 million, respectively, at fair value, and represented ~~3.9%~~1.4% and ~~0.7%~~0.4%, respectively, of total fixed maturity securities.

Credit ratings for the Company's fixed maturity portfolio were stable in 2015, with 91.2% of fixed maturity securities at fair value experiencing no change in their overall rating. 2.7% and 6.1% of fixed maturity securities at fair value experienced upgrades and downgrades, respectively, in 2015. The downgrades were slight and still within the investment grade portfolio in 2015.

The following table presents the credit quality ratings of the Company’s fixed maturity portfolio ~~by security type at~~ ~~December 31, 2012~~at fair value. The Company’s estimated credit quality ratings are based on the average of ratings assigned by nationally recognized securities rating organizations. Credit ratings for the Company’s fixed maturity portfolio were stable as compared to the prior year, with 81.2% of fixed maturity securities at fair value experiencing no change in their overall rating. 14.2% of fixed maturity securities at fair value experienced upgrades, partially offset by 4.5% in credit downgrades. The majority of the downgrades were slight and still within the investment grade portfolio, except for $8.8 million at fair value that were downgraded to below investment grade during ~~2012~~.

~~Table of Contents~~


	December 31, 2012																		December 31, 2015
	AAA			AA⁽¹⁾			A⁽¹⁾			BBB⁽¹⁾			Non-Rated/Other			Total
By Security Type																			AAA			AA⁽¹⁾			A⁽¹⁾			BBB⁽¹⁾			Non-Rated/Other			Total
	(Amounts in thousands)																		(Dollars in thousands)
U.S. government bonds and agencies:
Treasuries	$	10,789		$	0		$	0		$	0		$	0		$	10,789		$	14,300		$	—		$	—		$	—		$	—		$	14,300
Government Agency	3,415			0			0			0			0			3,415
Government agency																			8,207			—			—			—			—			8,207
Total	14,204			0			0			0			0			14,204			22,507			—			—			—			—			22,507
	100.0		%													100.0		%	100.0		%													100.0		%
Municipal securities:
Insured	18,515			482,731			500,012			85,796			17,250			1,104,304			4,270			350,964			425,750			13,490			5,136			799,610
Uninsured	261,973			316,100			331,123			141,702			9,893			1,060,791			269,973			667,782			582,463			181,507			3,704			1,705,429
Total	280,488			798,831			831,135			227,498			27,143			2,165,095			274,243			1,018,746			1,008,213			194,997			8,840			2,505,039
	13.0		%	36.9		%	38.4		%	10.5		%	1.2		%	100.0		%	10.9		%	40.7		%	40.2		%	7.7		%	0.5		%	100.0		%
Mortgage-backed securities:
Commercial	0			0			4,271			0			0			4,271			7,278			8,440			7,961			13,652			—			37,331
Agencies	11,025			0			0			0			0			11,025			4,204			—			—			—			—			4,204
Non-agencies:
Prime	214			1,942			1,482			571			2,969			7,178			—			31			698			—			2,175			2,904
Alt-A	0			1,329			299			0			6,601			8,229			—			—			1,197			—			4,203			5,400
Total	11,239			3,271			6,052			571			9,570			30,703			11,482			8,471			9,856			13,652			6,378			49,839
	36.6		%	10.7		%	19.7		%	1.8		%	31.2		%	100.0		%	23.0		%	17.0		%	19.8		%	27.4		%	12.8		%	100.0		%
Corporate securities:
Basic materials																			—			—			—			6,190			2,950			9,140
Communications	0			0			5,285			6,563			0			11,848			—			—			344			678			—			1,022
Consumer—cyclical	0			0			8,964			0			81			9,045			—			—			3,074			5,731			4,185			12,990
Consumer—non-cyclical	0			0			0			9,883			0			9,883			—			334			0			6,994			4,061			11,389
Energy	0			0			0			27,655			6,068			33,723			—			0			438			46,164			7,738			54,340
Financial	0			26,010			23,298			11,698			7,841			68,847			5,059			3,635			60,628			52,455			4,130			125,907
Industrial	0			0			0			7,404			0			7,404			—			—			—			4,569			2,647			7,216
Technology	0			0			0			6,329			0			6,329			—			—			—			6,475			2,821			9,296
Basic materials	0			0			0			5,701			0			5,701
Utilities	0			0			0			2,771			0			2,771			—			—			1,968			10,104			—			12,072
Total	0			26,010			37,547			78,004			13,990			155,551			5,059			3,969			66,452			139,360			28,532			243,372
	0.0		%	16.7		%	24.1		%	50.2		%	9.0		%	100.0		%	2.1		%	1.6		%	27.3		%	57.3		%	11.7		%	100.0		%
Collateralized debt obligations:
Collateralized loan obligations:
Corporate	4,702			0			0			0			38,099			42,801			—			2,974			47,574			—			—			50,548
Total	4,702			0			0			0			38,099			42,801			—			2,974			47,574			—			—			50,548
	11.0		%										89.0		%	100.0		%				5.9		%	94.1		%							100.0		%
Other asset-backed securities																			—			3,967			4,731			—			—			8,698
																						45.6		%	54.4		%							100.0		%
Total	$	310,633		$	828,112		$	874,734		$	306,073		$	88,802		$	2,408,354		$	313,291		$	1,038,127		$	1,136,826		$	348,009		$	43,750		$	2,880,003
	12.9		%	34.4		%	36.3		%	12.7		%	3.7		%	100.0		%	10.9		%	36.0		%	39.5		%	12.1		%	1.5		%	100.0		%

__________


(1)	Intermediate ratings are ~~offered~~included at each level (e.g., AA includes AA+, AA and AA-).

U.S. government bonds and agencies

The Company had ~~$25.2~~$26.7 million, ~~1.0%~~or 0.9% of its fixed maturity portfolio, at fair value, in U.S. government bonds and agencies and mortgage-backed securities (Agencies). at December 31, 2015. In August 2011, Standard and Poor’s downgraded the U.S. government’s long-term sovereign credit rating from AAA to AA+. This downgrade has triggered significant volatility in prices for a variety of investments. While Moody’s andApril 2015, Fitch affirmed ~~their~~its AAA ~~ratings, they placed~~rating for U.S. government-issued debt, although a ~~negative outlook~~significant increase in ~~November 2011~~government deficits and ~~warned of~~debt could lead to a potential downgrade if no long-term deficit agreement was reached over the next two years. The negative outlook reflects these rating agencies’ declining confidence that timely fiscal measures will be forthcoming to place U.S. public finances on a sustainable path and secure the AAA ratings.downgrade. Standard and Poor’s affirmed the U.S. Treasury’s short-term credit rating of AAA indicating that the short-term capacity of the U.S. to meet its financial commitment on its outstanding obligations is strong. The Company understands

~~Table of Contents~~

that market participants continue to use rates of return on U.S. government debt as a risk-free ~~rate. In addition, since the downgrade, market participants~~rate and have continued to invest in U.S. Treasury ~~securities and the current yields on U.S. Treasury securities are lower than before the downgrade.~~securities.

~~(1)~~ Municipal Securities

The Company had ~~$2.2~~$2.5 billion at fair value ($~~2.0~~2.4 billion at amortized cost) in municipal bonds at December 31, ~~2012~~2015, of which ~~$1.1 billion~~$799.6 million were insured by bond insurers. For insured municipal bonds that have underlying ratings, the average underlying rating was A+AA- at December 31, ~~2012~~2015.

At December 31, ~~2012~~2015, the ~~bond insurers providing credit enhancement were Assured Guaranty Corporation and National Public Finance Guarantee Corporation, which covered approximately 18% of the insured municipal securities. The~~ average rating of the Company’s ~~insured~~ municipal bonds insured by ~~these~~ bond insurers was A+, with an underlying rating of A-. ~~9.1%~~Most of the insured bonds’ ratings were investment grade and reflected the credit of underlying issuers. 9.0% of the remaining insured bonds are non-rated or below investment grade, and the Company does not believe that ~~these~~bond insurers provide credit enhancement to the municipal bonds that they insure.

The Company considers the strength of the underlying credit as a buffer against potential market value declines which may result from future rating downgrades of the bond insurers. In addition, the Company has a long-term time horizon for its municipal bond holdings which generally allows it to recover the full principal amounts upon maturity and avoid forced sales prior to maturity of bonds that have declined in market value due to the bond insurers’ rating downgrades. Based on the uncertainty surrounding the financial condition of these insurers, it is possible that there will be additional downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair value of municipal bonds.

~~(2)~~ Mortgage-Backed Securities

~~The~~At December 31, 2015 and 2014, respectively, the mortgage-backed securities portfolio isof $49.8 million and $47.7 million at fair value ($49.6 million and $45.5 million at amortized cost) was categorized as loans to ~~“prime”~~"prime" borrowers except for ~~$8.2~~$5.4 million and ~~$9.8~~$6.2. million ($~~7.3~~5.3 million and ~~$8.3~~$5.5 million at amortized cost) of Alt-A ~~mortgages at~~ ~~December 31, 2012~~ ~~and~~ ~~2011, respectively.~~mortgages. Alt-A mortgage backed securities are at fixed or variable rates and include certain securities that are collateralized by residential mortgage loans issued to borrowers with ~~stronger~~ credit profiles stronger than those of sub-prime borrowers, but do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation. The Company had holdings of ~~$4.3~~$37.3 million and $32.5 million ($~~4.2~~37.6 million and $32.3 million at amortized cost) ~~and $0~~ in commercial mortgage-backed securities at December 31, ~~2012~~2015 and ~~2011~~2014, respectively.

The weighted-average rating of the Company’s Alt-A mortgage-backed securities at December 31, 2015 was ~~B+ and~~B, consistent with the weighted-average rating at December 31, 2014. The weighted-average rating of the entire mortgage backed securities portfolio was A- ~~as of~~at December 31, ~~2012~~2015, compared to BBB+ at December 31, 2014 .

~~(3)~~ Corporate Securities

Included in fixed maturity securities are ~~$155.6~~$243.3 million and ~~$75.1~~$256.9 million of ~~fixed rate~~ corporate securities, which had durations of ~~1.8~~2.8 and ~~3.6~~2.3 years, at December 31, ~~2012~~2015 and ~~2011~~,2014, respectively. The weighted-average rating was ~~BBB+~~BBB as of December 31, ~~2012~~2015 and ~~2011~~2014.

~~(4)~~ Collateralized ~~Debt~~Loan Obligations

Included in fixed maturities securities are collateralized ~~debt~~loan obligations of ~~$42.8~~$50.5 million and ~~$47.5~~$22.2 million, which ~~represent 1.3%~~represented 1.5% and ~~1.6%~~0.7% of the total investment portfolio, and had durations of ~~0.5~~5.7 years and ~~1.1~~5.4 years at December 31, ~~2012~~2015 and ~~2011~~,2014, respectively.

Equity Securities

Equity holdings of $315.4 million consist of non-redeemable preferred stocks, common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend received deduction, and ~~a partnership interest in a~~ private ~~credit fund.~~equity funds. The net ~~gains~~losses in ~~2012~~2015 due to changes in fair value of the Company’s equity portfolio were ~~$9.2 million~~.$23.0 million. The primary cause of the ~~gains on~~decrease in the ~~Company’s~~value of the Company's equity securities was the overall ~~increase~~decline in the ~~equity markets.~~utilities and industrial sectors in 2015.

The Company’s common stock allocation is intended to enhance the return of and provide diversification for the total portfolio. At December 31, ~~2012~~2015, ~~15.0%~~9.3% of the total investment portfolio at fair value was held in equity securities, compared to ~~12.4%~~12.1% at December 31, ~~2011~~2014.

The following table presents the equity security portfolio by industry sector ~~for~~ ~~2012~~at December 31, 2015 and ~~2011~~2014:

~~Table of Contents~~

December 31,
2012 2011
Cost Fair Value Cost Fair Value
(Amounts in thousands)
Equity securities:
Basic materials $ 37,407
$ 32,862
$ 32,719
$ 27,139
Communications 8,970
10,428
7,692
7,347
Consumer—cyclical 8,337
7,658
12,985
11,986
Consumer—non-cyclical 9,498
10,162
4,310
4,197
Energy 242,961
246,209
227,183
233,225
Financial 27,553
30,075
26,156
23,887
Funds 10,264
11,579
11,190
10,621
Industrial 32,697
29,188
34,622
28,728
Technology 10,567
8,635
8,548
6,875
Utilities 87,705
90,292
23,012
26,383
$ 475,959
$ 477,088
$ 388,417
$ 380,388

~~Short-Term Investments~~

At ~~December 31, 2012, short-term investments include money market accounts, options, and short-term bonds which are highly rated short duration securities and redeemable within one year.~~



	December 31,
	2015				2014
	Cost		Fair Value		Cost		Fair Value
			(Amounts in thousands)
Equity securities:
Basic materials	$	17,094	$	16,027	$	18,707	$	20,079
Communications	22,226		21,759		6,255		7,103
Consumer—cyclical	34,707		38,378		29,919		32,368
Consumer—non-cyclical	31,694		32,480		9,502		8,931
Energy	38,560		34,895		126,052		135,316
Financial	40,730		41,974		40,439		42,660
Funds	19,017		16,676		10,000		11,719
Industrial	17,261		17,110		24,327		19,693
Technology	19,105		18,397		17,214		18,688
Utilities	73,134		77,666		105,436		116,323
	$	313,528	$	315,362	$	387,851	$	412,880

D. Debt

~~Effective August 4, 2011, the Company extended the maturity date~~Notes payable consists of the ~~$120 million Bank of America credit facility from January 1, 2012 to January 2, 2015 with interest payable at a floating rate of LIBOR rate plus 40 basis points.~~following:



				December 31,
	Lender	Interest Rate	Expiration	2015		2014
				(Amounts in thousands)

Secured credit facility	Bank of America	LIBOR plus 40 basis points	December 3, 2017 ⁽²⁾	$	120,000	$	120,000
Secured loan	Union Bank	LIBOR plus 40 basis points	December 3, 2017 ⁽³⁾	20,000		20,000
Unsecured credit facility	Bank of America and Union Bank	(1)	December 3, 2019⁽⁴⁾	150,000		150,000
Total				$	290,000	$	290,000

__________

(1)

On July 2, 2013, the Company entered into an unsecured $200 million five-year revolving credit facility. The interest rate on borrowings under the credit facility is based on the Company’s debt to total capital ratio and ranges from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is above 25%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 15% to 22.5 basis points when the ratio is above 25%. Debt to capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. In 2015, the interest rate was LIBOR plus 112.5 basis points on the $150 million of borrowings and 12.5 basis points on the undrawn portion of the credit facility. The interest rate was approximately 1.53% at December 31, 2015.


(2)	Effective December 3, 2014, the Company extended the maturity date from July 31, 2016 to December 3, 2017.


(3)	Effective December 12, 2014, the Company extended the maturity date from January 2, 2015 to December 3, 2017.


(4)	Effective December 3, 2014, the Company extended the maturity date from June 30, 2018 to December 3, 2019, and expanded the borrowing capacity from $200 million to $250 million.

~~On October 4, 2011, the Company refinanced its Bank of America $18 million LIBOR plus 50 basis points~~The bank loan ~~that was scheduled to mature on March 1, 2013 with a Union Bank $20 million LIBOR plus 40 basis points loan that matures on January 2, 2015.~~

~~Both the $120 million~~and credit ~~facility and the $20 million bank loan~~facilities contain financial covenants pertaining to minimum statutory surplus, debt to capital ratio, and ~~risk based capital~~RBC ratio. The Company was in compliance with all of its loan covenants at December 31, ~~2012.~~2015.

For a further discussion, see Note 7. Notes ~~6 and 7~~Payable, of the Notes to Consolidated Financial ~~Statements.~~Statements in "Item 8. Financial Statements and Supplementary Data."

E. Capital Expenditures

In ~~2012~~2015, the Company made capital expenditures, including capitalized software, of approximately ~~$15~~$20.1 million primarily related to Information Technology.

F. Regulatory Capital ~~Requirement~~Requirements

The Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations, and must have adequate reserves for claims. The minimum statutory capital requirements differ by state and are generally based on balances established by statute, a percentage of annualized premiums, a percentage of annualized loss, ~~or RBC requirements.~~regulations. The RBC ~~requirements are based on guidelines established~~formula is used by ~~the NAIC.~~ ~~The RBC formula~~insurance regulators to monitor capital and surplus levels. It was designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance business having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. AtThe Company periodically monitors the RBC level of each of the Insurance Companies. As of December 31, ~~2012,~~2015, 2014, and 2013, each of the Insurance Companies ~~had sufficient capital to exceed~~exceeded the ~~highest level of~~ minimum required ~~capital.~~RBC levels, as determined by the NAIC and adopted by the state insurance regulators. None of the Insurance Companies’ RBC ratios was less than 375% of the authorized control level RBC as of December 31, 2015, 2014, and 2013. Generally, an RBC ratio of 200% or less would require some form of regulatory or company action.

Among other considerations, industry and regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to statutory policyholders’ surplus should not exceed 3.0 to 1. Based on the combined surplus of all the Insurance Companies of ~~$1.4~~$1.45 billion at December 31, ~~2012~~,2015, and net premiums written of $~~2.7~~$3.0 billion,, the ratio of premiums written to surplus was ~~1.8~~2.1 to 1.

The following table presents a summary of current examinations:



State	Exam Type	Period Under Review	Status
GA	Financial	2011 to 2013	Received draft report and submitted response to the DOI.
CA	Market Conduct	2013 to 2014	Received draft report and submitted response to the DOI.
CA	Rating and Underwriting	2014	Fieldwork began in July 2014.
VA	Market Conduct	2014 to 2015	Exam to begin on or after April 2016.

During the course of and at the conclusion of these examinations, the examining DOI generally reports findings to the Company, and none of the findings reported to date is expected to be material to the Company’s financial position.

~~Table of Contents~~

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, ~~2012~~2015, the Company had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.

CONTRACTUAL OBLIGATIONS

The Company’s significant contractual obligations at December 31, ~~2012~~2015 are summarized as follows:


Contractual Obligations(4)	Total		2013		2014		2015		2016		2017		Thereafter				Payments due by Period
															Total		2016		2017		2018		2019		2020		Thereafter
					(Amounts in thousands)														(Amounts in thousands)
Debt (including interest)⁽¹⁾	$	141,904	$	1,014	$	890	$	140,000	$	0	$	0	$	0	$	299,892	$	2,955	$	142,885	$	2,114	$	151,938	$	—	$	—
Lease obligations⁽²⁾	41,724		14,224		10,069		6,985		5,658		3,843		945		31,990		14,765		11,008		4,684		1,006		463		64
Losses and loss adjustment expenses⁽³⁾	1,036,123		595,847		252,302		117,971		44,699		25,304		0		1,146,688		640,034		285,189		141,124		56,847		23,494		—
Total Contractual Obligations	$	1,219,751	$	611,085	$	263,261	$	264,956	$	50,357	$	29,147	$	945	$	1,478,570	$	657,754	$	439,082	$	147,922	$	209,791	$	23,957	$	64

__________

(1)

The Company’s debt contains various terms, conditions and covenants which, if violated by the Company, would result in a default and could result in the acceleration of the Company’s payment obligations. Amounts differ from the ~~balance~~balances presented on the consolidated balance sheets as of December 31, ~~2012~~2015 because the debt amounts above include ~~interest.~~interest, calculated by using the average one-month LIBOR rate in 2015 plus the bank margin in effect.


(2)	The Company is obligated under various non-cancellable lease agreements providing for office space, automobiles, and office equipment that expire at various dates through the year ~~2019~~. 2021.

(3)

Reserve for losses and loss adjustment expenses is an estimate of amounts necessary to settle all outstanding claims, including IBNR as of December 31, ~~2012~~2015. The Company has estimated the timing of these payments based on its historical experience and expectation of future payment patterns. However, the timing of these payments may vary significantly from the amounts shown above. The ultimate cost of losses may vary materially from recorded amounts which are the Company’s best estimates.


(4)	The table excludes liabilities of ~~$3.5~~$10.9 million related to uncertainty in tax settlements as the Company is unable to reasonably estimate the timing and amount of related future payments.


Item 7A.	Quantitative and Qualitative Disclosures about Market Risks

The Company is subject to various market risk exposures primarily due to its investing and borrowing activities. Primary market risk exposures are changes in interest rates, equity prices, and credit risk. Adverse changes to these rates and prices may occur due to changes in the liquidity of a market, or to changes in market perceptions of creditworthiness and risk tolerance. The following disclosure reflects estimates of future performance and economic conditions. Actual results may differ.

Overview

The Company’s investment policies define the overall framework for managing market and investment risks, including accountability and controls over risk management activities, and specify the investment limits and strategies that are appropriate given the liquidity, surplus, product profile, and regulatory requirements of the Company's subsidiaries. Executive oversight of investment activities is conducted primarily through the Company’s investment committee. The Company’s investment committee focuses on strategies to enhance after-tax yields, mitigate market risks, and optimize capital to improve profitability and returns.

The Company manages exposures to market risk through the use of asset allocation, duration, and credit ratings. Asset allocation limits place restrictions on the total funds that may be invested within an asset class. Duration limits on the fixed maturities portfolio place restrictions on the amount of interest rate risk that may be taken. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by investment policies.

Credit risk

Credit risk ~~is due to~~results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturities portfolio. As of December 31, ~~2012~~2015, the estimated weighted-average credit quality rating of the fixed maturities portfolio was ~~AA-~~A+, at fair value, consistent with the average rating at December 31, ~~2011~~. Historically, the ten-year default rate per Moody’s for AA rated municipal bonds has been less than 1%. The Company’s municipal bond holdings, which represent 89.9% of its fixed maturity portfolio at ~~December 31, 2012, at fair value, are broadly diversified geographically.~~2014.

~~Table of Contents~~

~~99.0% of municipal bond holdings are tax-exempt.~~ The following table presents municipal bond holdings by state in descending order of holdings at fair value at December 31, ~~2012~~2015:

States

Fair Value

Average Rating

Fair Value

Average Rating

(Amounts in thousands)

Texas

339,023

457,968

California

285,554

A+

324,529

AA-

Florida

183,081

A+

201,146

A+

Illinois

140,574

A+

153,727

A+

Indiana

104,924

AA-

111,550

A+

Other states

1,111,939

A+

1,256,119

A+

Total

2,165,095

2,505,039

The portfolio is broadly diversified among the states and the largest holdings are in populous states such as Texas and California. These holdings are further diversified primarily among cities, counties, schools, public works, hospitals, and state general obligations. The Company ~~has no holdings in the three California municipalities that recently declared bankruptcy: Stockton, Mammoth Lakes, and San Bernardino.The Company~~ seeks to minimize overall credit risk and ensure diversification by limiting exposure to any particular issuer.

Taxable fixed maturity securities represented ~~11.0%~~14.4% of the Company’s fixed maturity ~~portfolio. 9.5%~~portfolio at December 31, 2015. 6.4% of the Company’s taxable fixed maturity securities were comprised of U.S. government bonds and agencies and mortgage-backed securities ~~(agencies)~~(Agencies), which were rated AAA at December 31, ~~2012. 8.5%~~2015. 7.4% of the Company’s taxable fixed maturity securities, representing ~~0.9%~~1.1% of ~~the~~its total fixed maturity portfolio, were rated below investment grade. Below investment grade issues are considered ~~“watch list”~~"watch list" items by the Company, and their status is evaluated within the context of the Company’s overall portfolio and its investment policy on an aggregate risk management basis, as well as their ability to recover their investment on an individual issue basis.

Equity price risk

Equity price risk is the risk that the Company will incur losses due to adverse changes in the equity markets.

At December 31, ~~2012~~2015, the Company’s primary objective for common equity investments was current income. The fair value of the equity investments ~~consists~~consisted of ~~$454.1~~$280.3 million in common stocks, ~~$11.7~~$24.7 million in non-redeemable preferred stocks,

and ~~$11.3~~$10.4 million in ~~a partnership interest in a~~ private ~~credit fund.~~equity funds. Common stock equity assets are typically valued for future economic prospects as perceived by the market. ~~The Company invests more of its portfolio in the energy and utility sector than what is represented in the S&P 500 Index.~~

Common stocks represented ~~14.3%~~8.3% of total investments at fair value. Beta is a measure of a security’s systematic (non-diversifiable) risk, which is measured as the percentage change in an individual security’s return for a 1% change in the return of the market. ~~The average Beta for the Company’s common stock holdings was 1.06 at~~ ~~December 31, 2012~~.

Based on a hypothetical ~~25% or 50% reduction~~reductions in the overall value of the stock market, the ~~Company estimates that~~following table illustrates estimated reductions in the ~~fair~~overall value of the Company’s common stock portfolio ~~would decrease by $120.3 million or $240.6 million, respectively.~~at December 31, 2015 and 2014:



	December 31,
	2015		2014
	(Amounts in thousands, except Average Beta)
Average Beta	0.89		0.98
Hypothetical reduction in the overall value of the stock market of 25%	$	62,359	$	91,287
Hypothetical reduction in the overall value of the stock market of 50%	$	124,717	$	182,573

Interest rate risk

Interest rate risk is the risk that the Company will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of interest bearing assets and liabilities. The Company faces interest rate risk, as it invests substantial funds in interest sensitive assets and issues interest sensitive liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key benchmarks, as well as changes in interest rates resulting from ~~the~~ widening credit spreads and credit exposure to collateralized securities.

The value of the fixed maturity portfolio at December 31, 2015, which represented ~~75.7%~~85.2% of total ~~investment~~investments at fair value, is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases and vice versa. A common measure of the interest sensitivity of fixed maturity assets is modified duration, a calculation that utilizes maturity, coupon rate, yield and call terms to calculate an average age of the expected cash ~~flows.~~flows generated by such assets. The longer the duration, the more sensitive the asset is to market interest rate fluctuations.

The Company has historically invested in fixed maturity investments with a goal of maximizing after-tax yields and holding assets to the maturity or call date. Since assets with longer ~~maturity dates~~maturities tend to produce higher current yields, the Company’s

~~Table of Contents~~

historical investment philosophy resulted in a portfolio with a moderate duration. Bond investments made by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline. The ~~decrease in municipal bond credit spreads in 2012 caused overall interest rates to decrease, which resulted in a decrease in the~~modified duration of the ~~Company’s portfolio. Consequently, the modified duration of the~~overall bond portfolio reflecting anticipated early calls was ~~3.1~~3.2 years at December 31, ~~2012~~2015 compared to ~~3.7~~2.8 years and ~~4.7~~3.9 years at December 31, ~~2011~~2014 and ~~2010~~2013, respectively.

Given a hypothetical ~~parallel~~ increase of 100 or 200 basis points in interest rates, the Company estimates that the fair value of its bond portfolio at December 31, ~~2012~~2015 would decrease by ~~$75.4~~$94.7 million or ~~$150.8~~$189.4 million, respectively. Conversely, if interest rates were to decrease, the fair value of the ~~Company's~~Company’s bond portfolio would rise, and it may cause a higher number of the ~~Company's~~Company’s bonds to be called away. The proceeds from the called bonds would likely be reinvested at lower yields which would result in lower overall investment income for the Company.

5053

~~Table of Contents~~


Item 8.	Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



	Page
Reports of Independent Registered Public Accounting Firm	5255

Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, ~~2012~~2015 and ~~2011~~2014	5457
Consolidated Statements of Operations ~~and Consolidated Statements of Comprehensive Income~~ for ~~Each of~~ the Years ~~in the Three-Year Period~~ Ended December 31, ~~2012~~2015, 2014, and 2013	5558
Consolidated Statements of Shareholders’ Equity for ~~Each of~~ the Years ~~in the Three-Year Period~~ Ended December 31, ~~2012~~2015, 2014, and 2013	5659
Consolidated Statements of Cash Flows for ~~Each of~~ the Years ~~in the Three-Year Period~~ Ended December 31, ~~2012~~2015, 2014, and 2013	5760
Notes to Consolidated Financial Statements	5861

5154

~~Table of Contents~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Mercury General Corporation:

We have audited the accompanying consolidated balance sheets of Mercury General Corporation and subsidiaries (the Company) as of December 31, ~~2012~~2015 and ~~2011~~2014, and the related consolidated statements of operations, ~~comprehensive income,~~ shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2012~~.2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury General Corporation and subsidiaries as of December 31, ~~2012~~2015 and ~~2011~~2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, ~~2012~~2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mercury General Corporation’s internal control over financial reporting as of December 31, ~~2012~~2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February ~~11, 2013~~9, 2016 expressed an unqualified opinion on the effectiveness of the ~~Company��s~~Company’s internal control over financial reporting.

/s/ KPMG LLP

Los Angeles, California

February ~~11, 2013~~9, 2016

5255

~~Table of Contents~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Mercury General Corporation:

We have audited Mercury General Corporation’s ~~(the Company)~~ internal control over financial reporting as of December 31, ~~2012~~2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mercury General Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Mercury General Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2012~~2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway ~~Commission.~~Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, ~~2012~~2015 and ~~2011~~2014, and the related consolidated statements of operations, ~~comprehensive income,~~ shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2012~~2015, and our report dated February ~~11, 2013~~9, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Los Angeles, California

February ~~11, 2013~~
9, 2016

5356

~~Table of Contents~~

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)


	December 31,				December 31,
	2012		2011		2015		2014
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $2,270,903; $2,345,620)	$	2,408,354	$	2,445,589
Equity securities (cost $475,959; $388,417)	477,088		380,388
Short-term investments (cost $294,607; $236,433)	294,653		236,444
Fixed maturity securities (amortized cost $2,804,275; $2,503,494)					$	2,880,003	$	2,618,400
Equity securities (cost $313,528; $387,851)					315,362		412,880
Short-term investments (cost $185,353; $373,180)					185,277		372,542
Total investments	3,180,095		3,062,421		3,380,642		3,403,822
Cash	158,183		211,393		264,221		289,907
Receivables:
Premiums	345,387		288,799		436,621		390,009
Accrued investment income	31,109		32,541		42,747		38,737
Other	17,756		11,320		21,925		21,202
Total receivables	394,252		332,660		501,293		449,948
Deferred policy acquisition costs	185,910		171,430		201,762		197,202
Fixed assets, net	161,940		177,760		157,131		158,976
Current income taxes	7,058		0		9,041		503
Deferred income taxes	0		6,511		23,231		—
Goodwill	42,796		42,850		42,796		42,796
Other intangible assets, net	47,589		53,749		31,702		35,623
Other assets	11,863		11,232		16,826		21,512
Total assets	$	4,189,686	$	4,070,006	$	4,628,645	$	4,600,289
LIABILITIES AND SHAREHOLDERS’ EQUITY
Losses and loss adjustment expenses	$	1,036,123	$	985,279	$	1,146,688	$	1,091,797
Unearned premiums	920,429		843,427		1,049,314		999,798
Notes payable	140,000		140,000		290,000		290,000
Accounts payable and accrued expenses	96,220		94,743		122,571		130,887
Current income taxes	0		67
Deferred income taxes	445		0		—		5,333
Other liabilities	153,972		149,007		199,187		207,028
Total liabilities	2,347,189		2,212,523		2,807,760		2,724,843
Commitments and contingencies
Shareholders’ equity:
Common stock without par value or stated value:
Authorized 70,000 shares; issued and outstanding 54,922; 54,856	79,380		76,634
Authorized 70,000 shares; issued and outstanding 55,164; 55,121					90,985		88,705
Additional paid-in capital	0		538		8,870		3,804
Retained earnings	1,763,117		1,780,311		1,721,030		1,782,937
Total shareholders’ equity	1,842,497		1,857,483		1,820,885		1,875,446
Total liabilities and shareholders’ equity	$	4,189,686	$	4,070,006	$	4,628,645	$	4,600,289

See accompanying notes to consolidated financial statements.

5457

~~Table of Contents~~

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Year Ended December 31,						Year Ended December 31,
	2012		2011		2010		2015			2014		2013
Revenues:
Net premiums earned	$	2,574,920	$	2,566,057	$	2,566,685	$	2,957,897		$	2,796,195	$	2,698,187
Net investment income	131,896		140,947		143,814		126,299			125,723		124,538
Net realized investment gains	66,380		58,397		57,089
Net realized investment (losses) gains							(83,807		)	81,184		(11,422		)
Other	10,174		11,884		8,297		8,911			8,671		9,738
Total revenues	2,783,370		2,777,285		2,775,885		3,009,300			3,011,773		2,821,041
Expenses:
Losses and loss adjustment expenses	1,961,448		1,829,205		1,825,766		2,145,495			1,986,122		1,962,690
Policy acquisition costs	477,788		481,721		505,565		539,231			526,208		505,517
Other operating expenses	207,281		215,711		255,358		250,839			249,381		219,478
Interest	1,543		5,549		6,806		3,168			2,637		1,260
Total expenses	2,648,060		2,532,186		2,593,495		2,938,733			2,764,348		2,688,945
Income before income taxes	135,310		245,099		182,390		70,567			247,425		132,096
Income tax expense	18,399		53,935		30,192
Income tax (benefit) expense							(3,912		)	69,476		19,953
Net income	$	116,911	$	191,164	$	152,198	$	74,479		$	177,949	$	112,143
Net income per share:
Basic	$	2.13	$	3.49	$	2.78	$	1.35		$	3.23	$	2.04
Diluted	$	2.13	$	3.49	$	2.78	$	1.35		$	3.23	$	2.04

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(in thousands)~~

Year Ended December 31,
2012 2011 2010
Net income $ 116,911
$ 191,164
$ 152,198
Other comprehensive income (loss), before tax:
Gains (losses) on hedging instrument 0
1,139
(220 )
Other comprehensive income (loss), before tax 0
1,139
(220 )
Income tax expense (benefit) related to gains (losses) on hedging instrument 0
399
(77 )
Other comprehensive income (loss), net of tax: 0
740
(143 )
Comprehensive income $ 116,911
$ 191,904
$ 152,055

See accompanying notes to consolidated financial statements.

5558

~~Table of Contents~~

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)


	Year Ended December 31,									Year Ended December 31,
	2012			2011			2010			2015			2014			2013
Common stock, beginning of year	$	76,634		$	74,188		$	72,589		$	88,705		$	81,591		$	79,380
Proceeds of stock options exercised	2,492			1,951			816			2,111			6,824			1,884
Share-based compensation expense	168			439			651			142			142			125
Tax benefit on sales of incentive stock options	86			56			132			27			148			202
Common stock, end of year	79,380			76,634			74,188			90,985			88,705			81,591
Additional paid in capital, beginning of year	538			78			0			3,804			411			—
Share-based compensation expense	(538		)	460			161			5,066			3,970			849
Exercise of stock options	0			0			(83		)	—			(577		)	(438		)
Additional paid in capital, end of year	0			538			78			8,870			3,804			411
Accumulated other comprehensive loss, beginning of year	0			(740		)	(597		)
Other comprehensive income (loss), net of tax	0			740			(143		)
Accumulated other comprehensive loss, end of year	0			0			(740		)
Retained earnings, beginning of year	1,780,311			1,721,289			1,698,954			1,782,937			1,740,484			1,763,117
Net income	116,911			191,164			152,198			74,479			177,949			112,143
Dividends paid to shareholders	(134,105		)	(132,142		)	(129,863		)	(136,386		)	(135,496		)	(134,776		)
Retained earnings, end of year	1,763,117			1,780,311			1,721,289			1,721,030			1,782,937			1,740,484
Total shareholders’ equity	$	1,842,497		$	1,857,483		$	1,794,815		$	1,820,885		$	1,875,446		$	1,822,486

See accompanying notes to consolidated financial statements.

5659

~~Table of Contents~~

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,									Year Ended December 31,
	2012			2011			2010			2015			2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	116,911		$	191,164		$	152,198		$	74,479		$	177,949		$	112,143
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	36,974			40,657			40,735			26,478			28,054			30,587
Net realized investment gains	(66,380		)	(58,397		)	(57,089		)
Net realized investment losses (gains)										83,807			(81,184		)	11,422
Bond amortization, net	6,757			4,615			1,062			21,360			18,918			12,529
Excess tax benefit from exercise of stock options	(86		)	(56		)	(132		)	(27		)	(148		)	(202		)
Increase in premiums receivable	(56,588		)	(7,819		)	(4,192		)	(41,512		)	(23,934		)	(20,688		)
Changes in current and deferred income taxes	(83		)	45,431			11,399			(35,287		)	8,343			3,451
(Increase) decrease in deferred policy acquisition costs	(14,480		)	(851		)	5,287
Increase (decrease) in unpaid losses and loss adjustment expenses	50,844			(48,926		)	(19,129		)
Increase (decrease) in unearned premiums	77,002			10,048			(11,161		)
Increase (decrease) in accounts payable and accrued expenses	1,197			(9,985		)	(9,054		)
Increase in deferred policy acquisition costs										(4,560		)	(2,736		)	(8,556		)
Increase in unpaid losses and loss adjustment expenses										36,214			52,813			2,861
Increase in unearned premiums										42,552			46,271			33,098
(Decrease) increase in accounts payable and accrued expenses										(35,086		)	31,019			30,367
Share-based compensation	(370		)	899			812			5,208			4,112			974
Increase (decrease) in other payables	2,545			(4,142		)	(23,186		)	18,114			(10,988		)	12,135
Other, net	(6,181		)	(4,113		)	4,231			(1,496		)	(1,954		)	(10,317		)
Net cash provided by operating activities	148,062			158,525			91,781			190,244			246,535			209,804
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases	(590,562		)	(379,963		)	(432,869		)	(965,701		)	(542,494		)	(831,796		)
Sales	139,860			217,535			204,543			260,946			209,680			228,116
Calls or maturities	528,886			418,616			285,454			386,644			330,637			343,628
Equity securities available for sale in nature:
Purchases	(358,216		)	(351,198		)	(272,519		)	(748,217		)	(868,383		)	(596,883		)
Sales	277,272			325,562			240,764			805,417			745,058			872,997
Calls	923			0			4,826			2,851			1,044			—
Changes in securities payable and receivable	1,919			(9,137		)	10,763			(1,387		)	9,294			1,702
Net (increase) decrease in short-term investments	(58,949		)	(93,737		)	12,815
Net decrease (increase) in short-term investments and purchased options										187,492			(56,530		)	(20,005		)
Purchase of fixed assets	(15,177		)	(18,079		)	(28,886		)	(20,112		)	(26,037		)	(18,671		)
Sale of fixed assets	2,044			2,990			1,341			141			224			820
Business acquisition, net of cash acquired										7,771			—			—
Other, net	2,255			12,026			6,868			2,473			3,472			1,741
Net cash (used in) provided by investing activities	(69,745		)	124,615			33,100
Net cash used in investing activities										(81,682		)	(194,035		)	(18,351		)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders	(134,105		)	(132,142		)	(129,863		)	(136,386		)	(135,496		)	(134,776		)
Excess tax benefit from exercise of stock options	86			56			132			27			148			202
Payment to retire senior notes	0			(125,000		)	0
Payoff bank loan	0			(18,000		)	0
Proceeds from stock options exercised	2,492			1,951			733			2,111			6,247			1,446
Proceeds from bank loan	0			20,000			0			—			100,000			50,000
Net cash used in financing activities	(131,527		)	(253,135		)	(128,998		)	(134,248		)	(29,101		)	(83,128		)
Net (decrease) increase in cash	(53,210		)	30,005			(4,117		)	(25,686		)	23,399			108,325
Cash:
Beginning of year	211,393			181,388			185,505			289,907			266,508			158,183
End of year	$	158,183		$	211,393		$	181,388		$	264,221		$	289,907		$	266,508
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	1,690		$	6,193		$	6,607		$	2,989		$	2,543		$	998
Income taxes paid	$	18,481		$	8,503		$	18,792		$	31,390		$	61,139		$	16,503

See accompanying notes to consolidated financial statements.

5760

~~Table of Contents~~

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

NOTES ~~STATEMENTS~~ TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

General

Mercury General Corporation ("Mercury General") and its subsidiaries (referred to herein collectively as the ~~“Company”~~"Company") are primarily engaged ~~primarily~~ in writing personal automobile insurance through 1314 Insurance Companies in ~~a number of~~13 states, principally California. The Company also writes homeowners, commercial automobile, ~~and~~commercial property, mechanical breakdown, fire, and umbrella insurance. The private passenger automobile ~~lines~~line of insurance ~~exceeded~~ ~~80%~~business was more than 77% of the Company’s direct premiums written in ~~2012~~2015, ~~2011~~2014, and ~~2010~~2013, ~~with~~of which approximately ~~78%~~83%, ~~77%~~83%, and ~~77%~~81% of the private passenger automobile premiums were written in California during ~~2012~~2015, ~~2011~~2014, and ~~2010~~2013, respectively. Premiums written represents the premiums charged on policies issued during a fiscal period, which is a statutory measure designed to determine production levels.

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Mercury General Corporation and its ~~100% owned subsidiaries. The subsidiaries are as follows:~~subsidiaries:



Insurance Companies

Mercury Casualty Company ("MCC")		Mercury National Insurance Company
Mercury Insurance Company ("MIC")		American Mercury Insurance Company
California Automobile Insurance Company ("CAIC")		American Mercury Lloyds Insurance Company⁽¹⁾
California General Underwriters Insurance Company, Inc.		Mercury County Mutual Insurance Company⁽²⁾
Mercury Insurance Company of Illinois		Mercury Insurance Company of Florida
Mercury Insurance Company of Georgia		Mercury Indemnity Company of America
Mercury Indemnity Company of Georgia		Workmen's Auto Insurance Company ("WAIC")⁽⁵⁾

Non-Insurance Companies

Mercury Select Management Company, Inc.		~~Mercury Group, Inc.~~⁽³⁾
~~American Mercury MGA, Inc.~~⁽³⁾		AIS Management ~~LLC~~
~~Concord Insurance Services, Inc.~~		~~Auto Insurance Specialists~~ LLC
Mercury Insurance Services LLC		Auto Insurance Specialists LLC
Animas Funding LLC ("AFL")⁽³⁾		PoliSeek AIS Insurance Solutions, Inc.
Fannette Funding LLC ("FFL")⁽⁴⁾

__________


(1)	American Mercury Lloyds Insurance Company is not owned but is controlled by the Company through its attorney-in-fact, Mercury Select Management Company, Inc.


(2)	Mercury County Mutual Insurance Company is not owned but is controlled by the Company through a management contract.


(3)	~~Inactive companies dissolved~~Special purpose investment vehicle formed in ~~December 2012.~~2013.


(4)	Special purpose investment vehicle formed in 2014.


(5)	California domiciled insurance company acquired in 2015. See Note 20. Acquisition.

The consolidated financial statements have been prepared in conformity with ~~GAAP,~~U.S. generally accepted accounting principles ("GAAP"), which differ in some respects from those filed in reports to insurance regulatory authorities. All intercompany transactions and balances have been eliminated.

Certain reclassifications have been made in the 2014 consolidated financial statements to conform to the classifications in 2015.

The Company did not have other comprehensive income (loss) in 2015, 2014 and 2013.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates require the Company

to apply complex assumptions and judgments, and often the Company must make estimates about effects of matters that are inherently uncertain and will likely change in subsequent periods. The most significant assumptions in the preparation of these consolidated financial statements relate to reserves for losses and loss adjustment expenses. Actual results could differ from those estimates.

Investments

~~Table of Contents~~

~~Investments~~

The Company applies the fair value option to all fixed ~~maturities~~maturity and equity securities and short-term investments at the time an eligible ~~item~~items is first recognized. The primary reasons for electing the fair value option were simplification and cost benefit considerations as well as the expansion of ~~investments sold is determined~~the use of fair value measurement by the Company consistent with the long-term measurement objectives of the Financial Accounting Standards Board (the "FASB") for accounting for financial instruments. See Note 2. Fair Value of Financial Instruments for additional information on ~~a first-in and first-out method and realized gains and losses are included in net realized investment gains.~~ the fair value option.

Gains and losses due to changes in fair value for items measured at fair value pursuant to application of the fair value option are included in net realized investment (losses) gains in the ~~Company’s~~Company's consolidated statements of operations, while interest and dividend income on ~~the~~ investment holdings are recognized on an accrual basis on each measurement date and are included in net investment income in the ~~Company’s~~Company's consolidated statements of operations. The primary reasons for electing the fair value option were simplification and cost-benefit considerations as well as fair value measurement use consistent with the long-term measurement objectives of the FASB for accounting for financial instruments. See Note 2 for additional information regarding the fair value option.

Fixed maturity securities include debt securities, which may have fixed or variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of the Company’s asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs, tax planning considerations, or other economic factors. Premiums and discounts on fixed maturities are amortized using first call date and are adjusted for anticipated prepayments. Premiums and discounts on mortgage-backed securities are adjusted for anticipated prepayment using the retrospective method, with the exception of some beneficial interests in securitized financial assets, which are accounted for using the prospective method.

Equity securities consist of non-redeemable preferred stocks, common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend received deduction, and ~~a partnership~~an interest in a private ~~credit fund.~~equity funds.

Short-term investments include money market accounts, options, and short-term bonds ~~which~~that are highly rated short duration securities and redeemable within one year.

The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Liabilities for covered call options of ~~$0.2 million~~ ~~and~~ ~~$0.7 million~~ ~~were included in other liabilities at~~ ~~December 31, 2012~~ ~~and~~ ~~2011, respectively.~~

~~Fair Value of Financial Instruments~~

The financial instruments recorded in the consolidated balance sheets include investments, receivables, interest rate swap agreements, accounts payable, equity contracts, and secured notes payable. As discussed above, all investments are carried at fair value on the consolidated balance sheets, including ~~$42.8 million~~ ~~and~~ ~~$11.3 million~~ of fixed maturities and equity securities, respectively, which are valued based on broker quotes for underlying debt and credit instruments and an estimated benchmark spread for similar assets in active markets. The fair value of the Company’s ~~$120 million~~ ~~and~~ ~~$20 million~~ secured notes, classified as Level 2 in the fair value hierarchy described in Note 3, is estimated based on assumptions and inputs, such as reset rates and the market value for underlying collateral, for similarly termed notes that are observable in the market. See Note 3 for methods and assumptions used in estimating fair values of interest rate swap agreements and equity contracts. Due to their short-term maturity, the carrying values of receivables and accounts payable approximate their fair market values. The following table presents estimated fair values of financial instruments at ~~December 31, 2012~~ ~~and~~ ~~2011~~.

December 31,
2012 2011
(Amounts in thousands)
Assets
Investments $ 3,180,095
$ 3,062,421
Liabilities
Interest rate swap agreements $ 103
$ 670
Equity contracts $ 175
$ 655
Secured notes $ 140,000
$ 140,000

~~Table of Contents~~

Securities on Deposit

~~The Company has securities deposited by the Insurance Companies with various DOIs as~~As required by statute, the Company’s insurance subsidiaries have securities deposited with the Departments of Insurance or similar governmental agencies in the states in which they are licensed to operate with fair values ~~of approximately~~ ~~$16~~totaling $21 million and ~~$18~~$18 million at December 31, ~~2012~~2015 and ~~2011~~,2014, respectively.

Deferred Policy Acquisition Costs

In October 2010, the FASB issued a new standard to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The new standard defines acquisition costs as those related directly to the successful acquisition of new or renewal insurance contracts. Effective January 1, 2012, the Company adopted the new standard using the prospective method. Deferred policy acquisition costs consist of commissions paid to outside agents, premium taxes, salaries, and certain other underwriting costs that are incremental or directly related to the successful acquisition of new and renewal insurance contracts and are amortized over the life of the related policy in proportion to premiums earned. Deferred policy acquisition costs are limited to the amount that will remain after deducting from unearned premiums and anticipated investment income, the estimated losses and loss adjustment expenses, and the servicing costs that will be incurred as premiums are earned. ~~Under the new standard, the~~The Company’s deferred policy acquisition costs are further limited by excluding those costs not directly related to the successful acquisition of insurance contracts. ~~The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.~~Deferred policy acquisition cost amortization was ~~$477.8~~$539.2 million,, ~~$481.7~~ $526.2 million,, and ~~$505.6~~$505.5 million during the years ended December 31, ~~2012~~, ~~2011~~,2015, 2014, and ~~2010~~,2013, respectively. The Company does not defer advertising ~~expenses~~expenditures but expenses them as incurred. The Company recorded net advertising ~~expenses~~expense of approximately ~~$19~~$44 million,, ~~$21~~ $23 million,, and ~~$30~~$20 million during the years ended December 31, ~~2012~~, ~~2011~~,2015, 2014, and ~~2010~~,2013, respectively.

Fixed Assets

Fixed assets are stated at historical cost less accumulated depreciation and amortization. The useful life for buildings is 30 to 40 years. Furniture, equipment, and purchased software are depreciated on a combination of straight-line and accelerated methods over 3 to 7 years. The Company has capitalized certain consulting costs, payroll, and payroll-related costs for employees related to computer software developed for internal use, which are amortized on a straight-line method over the estimated useful life of the software, generally not exceeding 57 years. In accordance with applicable accounting standards, capitalization ceases no later than the point at which a computer software project is substantially complete and ready for its intended use. Leasehold improvements are amortized over the shorter of the useful life of the assets or the life of the associated lease.

The Company periodically assesses long-lived assets or asset groups including building and equipment, for recoverability when events or changes in circumstances indicate that their carrying ~~amount~~amounts may not be recoverable. If the Company identifies an indicator of impairment, the Company assesses recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. ~~The Company recorded~~ There were no impairment charges during ~~the three years ended~~ ~~December 31, 2012~~.2015, 2014, and 2013.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets arise as a result of business acquisitions and consist of the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed and identifiable intangible assets acquired. Identifiable intangible assets consist of the value of customer relationships, trade names, software and technology, and favorable leases, which are all subject to amortization, and an insurance license which is not subject to amortization.

The Company ~~annually~~ evaluates goodwill and other intangible assets for ~~impairment. The Company also reviews its goodwill and other intangible assets for~~ impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed ~~its~~their implied fair ~~value.~~values. The ~~Company adopted the new standard issued in September 2011 which does not require the two-step goodwill impairment test if the~~ Company qualitatively determines ~~that,~~whether, more likely than not, the fair value exceeds the carrying amount of a reporting unit. There are numerous assumptions and estimates underlying the qualitative assessments including future earnings, long-term strategies, and the Company’s annual planning and forecasting process. If these planned initiatives do not accomplish the targeted objectives, the assumptions and estimates underlying the qualitative assessments could be adversely affected and have a material effect upon the Company’s financial condition and results of operations. In addition, the Company evaluates other intangible assets using methods similar to those used for goodwill described above. As of December 31, ~~2012~~2015 and ~~2011~~2014, goodwill and other intangible impairment assessments indicated that there was no impairment.

Premium Revenue Recognition

Premium revenue is recognized on a pro-rata basis over the ~~term~~terms of the policies in proportion to the amount of insurance protection provided. Premium revenue includes installment and other fees for services which are recognized in the periods in which the services are rendered. Unearned premiums represent the portion of the written premium related to the unexpired policy term. Unearned

~~Table of Contents~~

premiums are predominantly computed monthly on a ~~monthly~~ pro-rata basis and are stated gross of reinsurance deductions, with the reinsurance deduction recorded in other receivables. Net premiums written, a statutory measure designed to determine production levels, were $3.00 billion, $2.84 billion, and $2.73 billion in ~~$2.65 billion~~2015, ~~$2.58 billion~~2014, and ~~$2.56 billion~~ in ~~2012~~, ~~2011, and~~ ~~2010~~2013, respectively.

~~No independent agent accounted for more than~~ 2% ~~of the Company’s direct premiums written during~~ ~~2012~~, ~~2011, and~~ ~~2010~~.

Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses are determined in amounts estimated to cover incurred losses and loss adjustment expenses and established based upon the Company’s assessment of claims pending and the development of prior years’ loss liabilities. These amounts include liabilities based upon individual case estimates for reported losses and loss adjustment expenses and estimates of such amounts that are ~~IBNR.~~incurred but not reported. Changes in the estimated liability are charged or credited to operations as the losses and loss adjustment expenses are ~~reestimated.~~re-estimated. The liability is stated net of anticipated salvage and subrogation recoveries. The amount of reinsurance recoverable is included in other receivables.

Estimating loss reserves is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the loss reserve that is required. A key assumption in estimating loss reserves is the degree to which the historical data used to analyze reserves will be predictive of ultimate claim costs on incurred claims. Changes in the regulatory and legal ~~environment,~~environments, results of litigation, medical costs, the cost of repair materials, and labor rates, among other factors, can impact ~~ultimate claim costs.~~this assumption. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of a claim, the more variable the ultimate settlement amount could be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably predictable than long-tail liability claims, such as those involving the Company’s BIbodily injury (BI) coverages. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date. ~~Since~~However, since the provisions for loss reserves are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.

The Company analyzes loss reserves quarterly primarily using the incurred loss, paid loss, claim count development, and average severity methods described below. ~~The Company also uses the paid loss development method to analyze loss adjustment expense reserves as part of its reserve analysis.~~ When deciding among methods to use, the Company evaluates the credibility of each method based on the maturity of the data available and the claims settlement practices for each particular line of insurance business or coverage within a line of insurance business. The Company may also evaluate qualitative factors such as known changes in laws or legal ruling that could affect claims handling or other external environmental factors or internal factors that could affect the settlement of claims. When establishing the loss reserve, the Company will generally analyze the results from all of the methods

used rather than relying on a single method. While these methods are designed to determine the ultimate losses on claims under the Company’s policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes. The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.

The paid loss development method analyzes historical payment patterns to estimate the amount of losses yet to be paid. The Company uses this method for losses and loss adjustment expenses.

Derivative Financial Instruments

The Company accounts for all derivative instruments, other than those that meet the normal purchases and sales exception, as either an asset or liability, measured at fair value, which is based on information obtained from independent parties. In addition, changes in fair value are recognized in earnings unless specific hedge accounting criteria are met. The Company’s derivative instruments include ~~interest rate swap agreements~~total return swaps and ~~were used to hedge the exposure to:~~

~~Table of Contents~~

~~Changes in fair value of an asset or liability (fair value hedge); and~~

~~Variable cash flows of a forecasted transaction (cash flow hedge).~~options sold. See Note 8.Derivative Financial Instruments.

Derivatives designated as hedges are evaluated based on established criteria to determine the effectiveness of their correlation to and ability to reduce the designated risk of specific securities or transactions. Effectiveness is reassessed on a quarterly basis. Hedges that are deemed to be effective are accounted for as follows:

~~Fair value hedge: changes in fair value of the hedging instrument, as well as the hedged item, are recognized in earnings in the period of change.~~

~~Cash flow hedge~~: changes in fair value of the hedging instrument are reported as a component of accumulated other comprehensive income and subsequently amortized into earnings over the life of the hedged transactions.

~~If a hedge is deemed to become ineffective, it is accounted for as follows:~~

~~Fair value hedge: changes in fair value of the hedging instrument are recognized in earnings in the period of change.~~

~~Cash flow hedge~~: changes in fair value of the hedging instrument are reported in earnings for the current period. If it is determined that a hedging instrument no longer meets the Company’s risk reduction and correlation criteria, or if the hedging instrument expires, any accumulated balance in other comprehensive income is recognized in earnings in the period of determination.

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the ~~period~~periods presented. Diluted earnings per share is based on the weighted average shares of common stock and potential dilutive ~~common stock~~securities outstanding during the ~~period~~periods presented. At December 31, ~~2012~~2015 and ~~2011~~2014, potential dilutive ~~common stocks consist~~securities consisted of outstanding stock ~~options.~~options and restricted stock units ("RSUs") granted from the Company's 2013 Long Term Incentive Plan. See Note ~~15 contains~~16. Earnings Per Share, for the required disclosures relating to the calculation of basic and diluted earnings per share.

~~Segment Reporting~~

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company does not have any operations that require separate disclosure as reportable operating segments for the periods presented.

~~The annual direct premiums written attributable to private passenger automobile, homeowners, commercial automobile, and other lines of insurance were as follows:~~

Year Ended December 31,
2012 2011 2010
(Amounts in thousands)
Private passenger automobile $ 2,140,531
$ 2,105,602
$ 2,115,763
Homeowners 318,295
285,188
261,560
Commercial automobile 74,655
75,642
84,503
Other lines 122,239
113,251
96,999
Total $ 2,655,720
$ 2,579,683
$ 2,558,825

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of the Company’s assets and liabilities, and expected benefits of utilizing net operating loss, capital loss, and tax-credit carryforwards. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in earnings in the period that includes the enactment date.

At December 31, ~~2012~~,2015, the Company’s deferred income taxes were in a net ~~liability~~asset position, which included a combination of ordinary and capital deferred tax benefits. In assessing the ~~realization of~~Company's ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred

~~Table of Contents~~

tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax-planning strategies in making this assessment. The Company believes that through the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in order to maximize the full benefits of its deferred tax assets. Although realization is not assured, management believes that it is more likely than not that the Company’s deferred tax assets will be realized.

Reinsurance

Liabilities for unearned premiums and unpaid losses are stated in the accompanying consolidated financial statements before deductions for ceded reinsurance. The ceded amounts are immaterial and are carried in other receivables. Earned premiums are stated net of deductions for ceded reinsurance.

The Insurance Companies, as primary insurers, are required to pay losses to the extent reinsurers are unable to discharge their obligations under the reinsurance agreements.

Share-Based Compensation

Share-based compensation expense for all share-based payment awards granted or modified is based on the estimated grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is the option vesting term of four or five years for options granted prior to 2008 and four years for options granted subsequent to January 1, 2008, for only those shares expected to vest. The fair value of stock option awards is estimated using the Black-Scholes option pricing model with the grant-date assumptions and weighted-average fair values.

Under its 2005 Incentive Award Plan (the “2005 Plan”), the Compensation Committee of the Company’s Board of Directors granted performance vesting restricted stock units to the Company’s senior management and key employees as follows:

Grant Year
2012 2011 2010
Three-year performance period ending December 31, 2014
2013
2012
Vesting shares, target ⁽¹⁾
89,000
80,000
55,000
Vesting shares, maximum ⁽¹⁾
200,250
120,000
55,000


~~(1)~~	~~2010 grant includes~~ ~~10,000~~ ~~shares of restricted stock.~~

The restricted stock units vest at the end of a three-year performance period beginning with the year of the grant, and then only if, and to the extent that, the Company’s cumulative underwriting income, and with respect to the 2012 grants only, target level of growth in net premiums written during such three-year period achieves the threshold performance levels established by the Compensation Committee of the Company's Board of Directors.

The fair value of each restricted ~~share~~stock unit grant was determined based on the market price on the ~~date of grant.~~grant date. Compensation cost ~~has been~~is recognized based on management’s best estimate ~~that~~of the performance goals that will be achieved. If such goals are not met, no compensation cost ~~would be~~is recognized and any recognized compensation cost would be reversed. For the 2012, 2011, and 2010 grants, the achievement of the performance condition set by the Compensation Committee was no longer considered probable, and previously recognized compensation costs were reversed as of ~~December 31, 2012~~. See Note 1415. Share-Based Compensation for additional disclosures.

Recently Issued Accounting Standards

In ~~June 2011,~~January 2016, the FASB issued Accounting Standards Update ("ASU") 2016-01, "Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in this ASU update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01: (1) requires equity investments (except those accounted for under the equity method or those that result in the consolidation of the investee) to be measured at fair value with changes in the fair value recognized in net income; (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a ~~new standard which revises~~qualitative assessment to identify impairment; (3) requires the ~~manner in which entities present comprehensive income in their~~use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (4) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the notes to the financial statements. These amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ~~new standard removes~~Company does not anticipate that ASU 2016-01 will have a material impact on its consolidated financial statements and related disclosures.

In May 2015, the ~~presentation options and~~FASB issued ASU 2015-09, "Financial Services-Insurance (Topic 944) Disclosures About Short-Duration Contracts." ASU 2015-9 requires insurance entities to ~~report components~~provide additional disclosures related to claims liabilities. The additional disclosure requirements for the annual reports include: (1) the claims development information by accident year, on a net of ~~comprehensive income~~reinsurance basis, for the number of years for which claims incurred remain outstanding but not to exceed the most recent 10 years, and for the most recent reporting period presented, an insurer also needs to disclose the amount of total net outstanding claims for all accident years included in ~~either~~the claims development tables; (2) a ~~continuous statement~~reconciliation of ~~comprehensive income or two separate but consecutive statements.~~claims development information and the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses; and (3) information about the claims frequency and the amount of the incurred-but-not-reported liabilities for each accident year presented. In addition, a description of the methodologies and assumptions used to determine the amounts disclosed and significant changes in methodologies and assumptions are required. The ~~new~~roll forward of the liability for unpaid claims and claims adjustment expenses, currently required only for annual periods, will also be required for interim periods. This standard ~~does not change the items that must~~will be ~~reported in other comprehensive income. The Company adopted the new standard which became~~ effective for annual periods beginning after December 15, 2015, and interim periods within annual reporting periods beginning after December 15, 2016. Although the adoption of this standard will not have a material impact on its consolidated financial statements, the Company will expand the nature and extent of its insurance contracts disclosures.

In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810) Amendments to the Consolidation Analysis" affecting the consolidation evaluation of limited partnerships and similar entities, fees paid to a decision maker or a service provider as a variable interest, and variable interests in a variable interest entity held by related parties of the reporting entities. The amendments are effective for annual and interim ~~period ended March 31, 2012.~~reporting periods beginning after December 15, 2015. The adoption of the new standard ~~did~~will not have a material impact on the ~~Company’s~~Company's consolidated financial statements.

In ~~December 2011,~~May 2014, the FASB issued ~~a new standard which indefinitely defers certain provisions of this standard. One of this standard’s provisions required~~ASU 2014-09, "Revenue Recognition (Topic 606): Revenue from Contracts with Customers." ASU 2014-09 requires entities to ~~present reclassification adjustments out~~apply a five-step model to determine the amount and timing of ~~accumulated~~revenue recognition. The model specifies, among other ~~comprehensive income by component in both~~criteria, that revenue should be recognized when an entity transfers control of goods or services to a customer at the ~~statement in~~amount at which ~~net income is presented and~~ the ~~statement in which other comprehensive income is presented. Accordingly, this requirement is indefinitely deferred and will~~entity expects to be ~~further deliberated by the FASB at a future date.~~

~~Table of Contents~~

entitled. In ~~May 2011,~~August 2015, the FASB issued ~~a new~~an update which defers the effective

date of this standard ~~which develops a single~~to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that annual reporting period. Early adoption is now permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that annual reporting period. The Company is evaluating the impact of this standard on its consolidated financial statements and ~~converged guidance on how~~related disclosures.

2. Fair Value of Financial Instruments

The financial instruments recorded in the consolidated balance sheets include investments, receivables, options sold, total return swaps, accounts payable,and secured and unsecured notes payable. Due to ~~measure~~their short-term maturity, the carrying values of receivables and accounts payable approximate their fair values. All investments are carried at fair value ~~and~~ on ~~required disclosures about~~the consolidated balance sheets.

The following table presents estimated fair values of financial instruments:



	December 31,
	2015		2014
	(Amounts in thousands)
Assets
Investments	$	3,380,642	$	3,403,822
Liabilities
Total return swaps	$	11,525	$	4,025
Options sold	$	260	$	194
Secured notes	$	140,000	$	140,000
Unsecured note	$	150,000	$	150,000

Investments

The Company applies the fair value ~~measurements. While~~option to all fixed maturity and equity securities and short-term investments at the ~~new standard~~time an eligible item is ~~largely consistent with existing~~first recognized. The cost of investments sold is determined on a first-in and first-out method and realized gains and losses are included in net realized investment (losses) gains. See Note 3. Investments for additional information.

Options Sold

The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value ~~measurement principles, it expands existing disclosure requirements~~of the option written. Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Liabilities for covered call options of $0.3 million and $0.2 million were included in other liabilities at December 31, 2015 and 2014, respectively.

Total Return Swaps

The fair values of the total return swaps reflect the estimated amounts that, upon termination of the contracts, would be received for selling an asset or paid to transfer a liability in an orderly transaction at December 31, 2015 and 2014 based on models using inputs, such as interest rate yield curves and credit spreads, observable for substantially the full term of the contract.

Secured notes payable

The fair value ~~measurements and makes other amendments. The Company adopted the new standard which became effective for the interim period ended March 31, 2012. The adoption~~ of the ~~new standard did not have a material impact~~Company's $120 million secured note and $20 million secured note, classified as Level 2 in the fair value hierarchy described in Note 4. Fair Value Measurement, is estimated based on assumptions and inputs, such as the market value of underlying collateral and reset rates, for similarly termed notes that are observable in the market. The fair values of the secured notes approximated their carrying values.

Unsecured note payable

The fair value of the Company's $150.0 million unsecured note, classified as Level 2 in the fair value hierarchy described in Note 4. Fair Value Measurement, is based on the ~~Company’s consolidated financial statements.~~unadjusted quoted price for similar notes in active markets. The fair value of the unsecured note approximated its carrying value.

For additional disclosures regarding methods and assumptions used in estimating fair values, see Note 4. Fair Value Measurement.

2.3. Investments

The following table presents (losses) gains ~~(losses)~~ due to changes in fair value of investments that are measured at fair value pursuant to application of the fair value option:


	Year Ended December 31,								Year Ended December 31,
	2012		2011			2010			2015			2014			2013
	(Amounts in thousands)								(Amounts in thousands)
Fixed maturity securities	$	36,317	$	62,149		$	967		$	(39,304	)	$	77,208		$	(100,703	)
Equity securities	9,158		(30,879		)	45,659			(22,988		)	(32,922		)	56,822
Short-term investments	34		19			(46		)	561			(527		)	(156		)
Total	$	45,509	$	31,289		$	46,580		$	(61,731	)	$	43,759		$	(44,037	)

~~A summary of net realized investment~~The following table presents gross gains ~~is as follows:~~

Year Ended December 31,
2012 2011 2010
(Amounts in thousands)
Net realized gains (losses) from investments and other liabilities:
Fixed maturity securities $ 47,707
$ 54,112
$ 5,909
Equity securities 16,679
(4,854 ) 46,547
Short-term investments (686 ) 139
18
Options 2,680
9,000
4,615
Total $ 66,380
$ 58,397
$ 57,089

~~Gross gains and losses~~(losses) realized on the sales of ~~investments, excluding options, are shown below:~~investments:


	Year Ended December 31,																							Year Ended December 31,
	2012								2011								2010							2015								2014								2013
	(Amounts in thousands)																							(Amounts in thousands)
	Gross Realized Gains		Gross Realized Losses			Net			Gross Realized Gains		Gross Realized Losses			Net			Gross Realized Gains		Gross Realized Losses			Net		Gross Realized Gains		Gross Realized Losses			Net			Gross Realized Gains		Gross Realized Losses			Net			Gross Realized Gains		Gross Realized Losses			Net
Fixed maturity securities	$	11,473	$	(83	)	$	11,390		$	2,675	$	(10,712	)	$	(8,037	)	$	8,754	$	(3,812	)	$	4,942	$	631	$	(495	)	$	136		$	7,015	$	(9,734	)	$	(2,719	)	$	9,320	$	(3,842	)	$	5,478
Equity securities	19,538		(12,017		)	7,521			41,872		(15,847		)	26,025			16,793		(15,905		)	888		41,305		(58,764		)	(17,459		)	59,342		(17,705		)	41,637			82,385		(58,297		)	24,088
Short-term investments	2		(722		)	(720		)	120		0			120			64		0			64		—		(1,396		)	(1,396		)	—		(1,943		)	(1,943		)	—		(903		)	(903		)

Contractual Maturity

At December 31, ~~2012~~2015, fixed maturity holdings rated below investment grade and non-rated comprised ~~2.8%~~1.3% of total investments at fair value. Additionally, the Company owns securities that are credit enhanced by financial guarantors that are subject to uncertainty related to market perception of the guarantors’ ability to perform. Determining the estimated fair value of municipal bonds could become more difficult should markets for these securities become illiquid.

The following table presents the estimated fair values of the Company's fixed maturity securities at December 31, ~~2012~~2015 by contractual ~~maturity are shown below.~~maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

~~Table of Contents~~


	Estimated Fair Value		Estimated Fair Value
	(Amounts in thousands)		(Amounts in thousands)
Fixed maturity securities:
Due in one year or less	$	79,344	$	108,775
Due after one year through five years	332,642		394,240
Due after five years through ten years	529,997		609,243
Due after ten years	1,466,371		1,767,745
Total	$	2,408,354	$	2,880,003

Investment Income

AThe following table presents a summary of net investment ~~income is shown in the following table:~~income:


	Year Ended December 31,									Year Ended December 31,
	2012			2011			2010			2015			2014			2013
	(Amounts in thousands)									(Amounts in thousands)
Fixed maturity securities	$	117,557		$	130,895		$	136,345		$	108,122		$	104,946		$	107,926
Equity securities	15,831			10,869			8,435			14,630			17,313			18,249
Short-term investments	2,073			1,747			1,413			9,033			8,561			2,702
Total investment income	$	135,461		$	143,511		$	146,193		$	131,785		$	130,820		$	128,877
Less: investment expense	(3,565		)	(2,564		)	(2,379		)	(5,486		)	(5,097		)	(4,339		)
Net investment income	$	131,896		$	140,947		$	143,814		$	126,299		$	125,723		$	124,538

3.4. Fair Value ~~Measurements~~Measurement

The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data are not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded at fair value on the consolidated balance sheets ~~at fair value~~ are categorized based on the level of judgment associated with inputs used to measure their fair value and the level of market price observability, as follows:



Level 1	Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.



Level 2	Pricing inputs are other than quoted prices in active markets, which are based on the following:

Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in non-active markets; or

Either directly or indirectly observable inputs as of the reporting date.



Level 3	Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.

In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.

~~Table of Contents~~

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities

The Company’s fair value measurements are based on the market approach, which utilizes market transaction data for the same or similar instruments.

The Company obtained unadjusted fair values on ~~approximately~~ ~~98%~~99.7% of its portfolio from an independent pricing service. For ~~approximately~~ 2%0.3% of its portfolio, classified as Level 3, the Company obtained specific unadjusted broker quotes based on net fund value and, ~~less significantly,~~to a lesser extent, unobservable inputs from at least one knowledgeable outside security broker to determine the fair value as of December 31, ~~2012~~2015. At December 31, 2015 and 2014, $10.4 million and $11.7 million, respectively, of equity securities were valued based on broker quotes for underlying debt and credit instruments and an estimated benchmark spread for similar assets in active markets.

Level 1 Measurements—Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio.

U.S. government bonds and ~~agencies~~agencies/Short-term bonds: Valued using unadjusted quoted market prices for identical assets in active markets.

Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.

Money market instruments: Valued based on unadjusted quoted prices for identical ~~assets.~~assets in active markets.

~~Equity contracts~~Options sold/Purchased options: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on quoted prices for identical instruments in active markets.

Level 2 Measurements—Fair values of financial assets and financial liabilities are obtained from an independent pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the investment portfolio.

Municipal securities: Valued based on models or matrices using inputs such as quoted prices for identical or similar assets in active markets.

Mortgage-backed securities: Comprised of securities that are collateralized by residential and commercial mortgage loans and valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. The Company had holdings of ~~$4.3~~$37.3 million and $32.5 million at December 31, 2015 and $0 at ~~December 31, 2012~~ ~~and~~ ~~2011~~2014, respectively, in commercial mortgage-backed securities.

Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets.

Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets.

~~Interest rate swap agreements~~Total return swaps: Valued based on multi-dimensional models using inputs such as interest rate yield curves, underlying debt/credit instruments and the appropriate benchmark spread for similar assets in active markets, observable for substantially the full term of the contract.

Collateralized loan obligations: Valued based on underlying debt instruments and the appropriate benchmark spread for similar assets in active markets.

Other asset-backed securities: Comprised of securities that are collateralized by non-mortgage assets, such as automobile loans, valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets.

Secured notes payable: Valued based on underlying collateral and reset rates for similarly termed notes that are observable in the market.

Unsecured notes payable: Valued based on the unadjusted quoted price for similar notes in active markets.

Level 3 Measurements—Fair values of financial assets are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed trading level.

Collateralized debt obligations/~~Partnership interest in a private credit fund~~Private equity funds: Valued based on underlying ~~debt and~~ debt/credit instruments and the appropriate benchmark spread for similar assets in active markets; taking into consideration unobservable inputs related to liquidity assumptions.

The Company’s financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment (losses) gains in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis, ~~as of~~ ~~December 31, 2012~~ ~~and~~ ~~2011~~, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair ~~value:~~values:



	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies	$	22,507	$	—	$	—	$	22,507
Municipal securities	—		2,505,040		—		2,505,040
Mortgage-backed securities	—		49,838		—		49,838
Corporate securities	—		243,372		—		243,372
Collateralized loan obligations	—		50,548		—		50,548
Other asset-backed securities	—		8,698		—		8,698
Equity securities:
Common stock	280,263		—		—		280,263
Non-redeemable preferred stock	—		24,668		—		24,668
Private equity funds	—		0		10,431		10,431
Short-term investments:
Short-term bonds	69,991		9,850		—		79,841
Money market instruments	105,436		0		—		105,436
Total assets at fair value	$	478,197	$	2,892,014	$	10,431	$	3,380,642
Liabilities
Notes payable:
Secured Notes	$	—	$	140,000	$	—	$	140,000
Unsecured Notes	—		150,000		—		150,000
Other liabilities:
Total return swaps	—		11,525		—		11,525
Options sold	260		—		—		260
Total liabilities at fair value	$	260	$	301,525	$	—	$	301,785

6670

~~Table of Contents~~

December 31, 2012
Level 1 Level 2 Level 3 Total
(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies $ 14,204
$ 0
$ 0
$ 14,204
Municipal securities 0
2,165,095
0
2,165,095
Mortgage-backed securities 0
30,703
0
30,703
Corporate securities 0
155,551
0
155,551
Collateralized debt obligations 0
0
42,801
42,801
Equity securities:
Common stock:
Public utilities 85,106
0
0
85,106
Banks, trusts and insurance companies 22,166
0
0
22,166
Energy and other 346,809
0
0
346,809
Non-redeemable preferred stock 0
11,701
0
11,701
Partnership interest in a private credit fund 0
0
11,306
11,306
Short-term bonds 0
24,530
0
24,530
Money market instruments 270,123
0
0
270,123
Total assets at fair value $ 738,408
$ 2,387,580
$ 54,107
$ 3,180,095
Liabilities
Equity contracts $ 175
$ 0
$ 0
$ 175
Interest rate swap agreements 0
103
0
103
Total liabilities at fair value $ 175
$ 103
$ 0
$ 278


	December 31, 2011								December 31, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(Amounts in thousands)								(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies	$	14,298	$	0	$	0	$	14,298	$	16,108	$	—	$	—	$	16,108
Municipal securities	0		2,271,275		0		2,271,275		—		2,275,455		—		2,275,455
Mortgage-backed securities	0		37,371		0		37,371		—		47,691		—		47,691
Corporate securities	0		75,142		0		75,142		—		256,930		—		256,930
Collateralized debt obligations	0		0		47,503		47,503		—		22,216		—		22,216
Equity securities:
Common stock:									372,598		—		—		372,598
Public utilities	26,342		0		0		26,342
Banks, trusts and insurance companies	16,027		0		0		16,027
Energy and other	316,592		0		0		316,592
Non-redeemable preferred stock	0		11,419		0		11,419		—		28,563		—		28,563
Partnership interest in a private credit fund	0		0		10,008		10,008
Private equity funds									—		—		11,719		11,719
Short-term investments:
Short-term bonds	0		9,011		0		9,011		69,999		18,362		—		88,361
Money market instruments	227,433		0		0		227,433		284,181		—		—		284,181
Total assets at fair value	$	600,692	$	2,404,218	$	57,511	$	3,062,421	$	742,886	$	2,649,217	$	11,719	$	3,403,822
Liabilities
Equity contracts	$	655	$	0	$	0	$	655
Interest rate swap agreements	0		670		0		670
Notes payable:
Secured Notes									$	—	$	140,000	$	—	$	140,000
Unsecured Notes									—		150,000		—		150,000
Other liabilities:
Total return swaps									—		4,025		—		4,025
Options sold									194		—		—		194
Total liabilities at fair value	$	655	$	670	$	0	$	1,325	$	194	$	294,025	$	—	$	294,219

~~Table of Contents~~

The following table presents a summary of changes in fair value of Level 3 financial assets and financial ~~liabilities held at fair value at December 31:~~liabilities:


														Year Ended December 31,
	2012					2011								2015					2014
	Collateralized Debt Obligations			Partnership Interest in a Private Credit Fund		Municipal Securities			Collateralized Debt Obligations			Partnership Interest in a Private Credit Fund		Collateralized Debt Obligations		Partnership Interest in a Private Credit Fund			Collateralized Debt Obligations			Partnership Interest in a Private Credit Fund
	(Amounts in thousands)													(Amounts in thousands)
Beginning Balance	$	47,503		$	10,008	$	1,624		$	55,692		$	0	$	—	$	11,719		$	4,302		$	12,548
Realized gains (losses) included in earnings	7,975			1,298		39			(9,300		)	8
Purchase	25,000			0		0			0			10,000
Realized losses included in earnings														—		(4,175		)	(755		)	(829		)
Reclassification from other assets														—		2,911			—			—
Sales	(37,677		)	0		(1,663		)	0			0		—		—			(3,547		)	—
Settlements	0			0		0			1,111			0		—		(24		)	—			—
Ending Balance	$	42,801		$	11,306	$	0		$	47,503		$	10,008	$	—	$	10,431		$	—		$	11,719
The amount of total (losses) gains for the period included in earnings attributable to assets still held at December 31	$	(3,017	)	$	1,298	$	0		$	(8,189	)	$	8
The amount of total losses for the period included in earnings attributable to assets still held at December 31														$	—	$	(5,385	)	$	—		$	(829	)

There were no transfers between Levels 1, 2, and 3 of ~~the~~financial assets and financial liabilities that were fair ~~value hierarchy~~valued on a recurring basis in ~~2012~~2015 and ~~2011~~2014.

At December 31, ~~2012~~2015, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.

5. Fixed Assets

~~Fixed assets consist~~The following table presents the components of ~~the following:~~fixed assets:


	December 31,						December 31,
	2012			2011			2015			2014
	(Amounts in thousands)						(Amounts in thousands)
Land	$	26,770		$	26,770		$	26,770		$	26,770
Buildings and improvements	126,726			125,837			132,529			131,174
Furniture and equipment	106,788			113,628			109,802			107,288
Capitalized software	133,477			123,356			178,113			162,065
Leasehold improvements	7,593			7,354			9,109			8,991
	401,354			396,945			456,323			436,288
Less accumulated depreciation and amortization	(239,414		)	(219,185		)	(299,192		)	(277,312		)
Fixed assets, net	$	161,940		$	177,760		$	157,131		$	158,976

Depreciation expense, including amortization of leasehold improvements, was $20.5 million, $22.1 million, and $24.6 million during ~~$30.8 million~~2015, ~~$34.3 million~~2014, and ~~$33.9 million~~ ~~during~~ ~~2012~~, ~~2011, and~~ ~~2010~~2013, respectively.

5.6. Deferred Policy Acquisition Costs

Deferred policy acquisition costs ~~are~~were as follows:


	December 31,									December 31,
	2012			2011			2010			2015			2014			2013
	(Amounts in thousands)									(Amounts in thousands)
Balance, beginning of year	$	171,430		$	170,579		$	175,866		$	197,202		$	194,466		$	185,910
Policy acquisition costs deferred	492,268			482,572			500,278			543,791			528,944			514,073
Amortization	(477,788		)	(481,721		)	(505,565		)	(539,231		)	(526,208		)	(505,517		)
Balance, end of year	$	185,910		$	171,430		$	170,579		$	201,762		$	197,202		$	194,466

~~Table of Contents~~

6.7. Notes Payable

Notes payable consists of ~~two secured notes of $120 million~~ ~~and $20 million~~ ~~at both December 31, 2012 and 2011.~~the following:



				December 31,
	Lender	Interest Rate	Expiration	2015		2014
				(Amounts in thousands)
Secured credit facility	Bank of America	LIBOR plus 40 basis points	December 3, 2017	$	120,000	$	120,000
Secured loan	Union Bank	LIBOR plus 40 basis points	December 3, 2017	20,000		20,000
Unsecured credit facility	Bank of America and Union Bank	(1)	December 3, 2019	150,000		150,000
Total				$	290,000	$	290,000

__________

(1)

On July 2, 2013, the Company entered into an unsecured $200 million five-year revolving credit facility. The interest rate on borrowings under the credit facility is based on the Company's debt to total capital ratio and ranges from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is above 25%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 15% to 22.5 basis points when the ratio is above 25%. Debt to capital ratio is expressed as a percentage of (i) consolidated debt to (ii) consolidated shareholders' equity plus consolidated debt. Effective December 3, 2014, the Company extended the maturity date of the unsecured credit facility from June 30, 2018 to December 3, 2019, and expanded the borrowing capacity from $200 million to $250 million. In 2015 and 2014, the interest rate was LIBOR plus 112.5 basis points on the $150 million of borrowings and 12.5 basis points on the undrawn portion of the credit facility. The interest rate was approximately 1.53% at December 31, 2015.

The $$120 million credit facility is secured by municipal bonds held as collateral. ~~The credit facility calls for the collateral requirement to be greater than the loan amount.~~ The collateral requirement is calculated as the fair market value of the municipal bonds held as collateral multiplied by the advance rates, which vary based on the credit quality and duration of the assets held and range between 75% and 100% of the fair value of each bond. Effective ~~August 4, 2011,~~December 3, 2014, the Company extended the maturity date of the $$120 million credit facility from ~~January 1, 2012~~July 31, 2016 to ~~January 2, 2015~~ ~~with interest payable at a floating rate of LIBOR plus~~ 40 ~~basis points.~~December 3, 2017.

On ~~October 4, 2011~~,December 12, 2014, the Company ~~refinanced its Bank~~extended the maturity date of ~~America $~~the ~~18 million~~ ~~LIBOR plus 50 basis points loan that was scheduled to mature on~~ ~~March 1, 2013~~ ~~with a Union Bank~~ $20 million ~~LIBOR plus~~ 40 ~~basis points~~bank loan ~~that matures on~~ from January 2, 2015 to December 3, 2017. The ~~. The~~ $20 million bank loan has collateral requirements similar to those of the $$120 million credit facility.

~~Both the $120 million~~The credit ~~facility~~facilities and ~~the $20 million~~ bank loan contain financial covenants pertaining to minimum statutory surplus, debt to capital ratio, and ~~risk based~~risk-based capital ("RBC") ratio. The Company was in compliance with all of its loan covenants at December 31, ~~2012.~~2015.

~~The Company retired all of its~~ ~~$125 million7.25%~~ ~~senior notes on their~~ ~~August 15, 2011~~ ~~maturity date by using a portion of the proceeds from the extraordinary dividend paid by MCC to Mercury General.~~

The aggregated maturities ~~for~~of notes payable are $~~140 million~~ ~~in 2015.~~as follows:



Maturity
	(Amounts in thousands)
2016	$	—
2017	$	140,000
2018	$	—
2019	$	150,000

~~For additional disclosures regarding methods and assumptions used in estimating fair values of interest rate swap agreements associated with the Company’s loans listed above, see Note 7.~~

7.8. Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts (options sold) on various equity securities are intended to manage the price risk associated with forecasted purchases or sales of such securities. ~~Interest rate swaps are intended~~

The Company also enters into derivative contracts to ~~manage the interest rate risk associated with the Company’s debts with fixed or floating rates.~~enhance returns on its investment portfolio.

On February ~~6, 2009~~13, 2014, Fannette Funding LLC ("FFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into ana total return swap agreement with Citibank. Under the total return swap agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest ~~rate swap of its floating LIBOR rate~~ on ~~a $120 million~~ ~~credit facility for a fixed rate of~~ ~~1.93%~~ ~~that matured on~~ ~~January 3, 2012. The purpose~~the outstanding notional amount of the underlying obligations. The total return swap ~~was to offset the variability~~is secured by approximately $30 million of ~~cash flows resulting from the variable interest rate. The swap was not designated~~U.S. Treasuries as ~~a hedge and changes~~collateral, which are included in ~~the fair value were adjusted through~~short-term investments on the consolidated ~~statement~~balance sheets. The Company paid interest equal to LIBOR plus 135 basis points on approximately $95 million of ~~operations in the period~~underlying obligations as of ~~change.~~December 31, 2015. The agreement had an initial term of one year, subject to annual renewal, and was renewed for an additional one-year term expiring February 13, 2017, with interest equal to LIBOR plus 145 basis points.

On ~~March 3, 2008~~August 9, 2013, Animas Funding LLC ("AFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into ana three-year total return swap agreement with Citibank. Under the total return swap agreement, AFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest ~~rate swap of its floating~~equal to LIBOR ~~rate~~plus 120 basis points on the $~~18 million~~ ~~bank loan for a fixed rate of~~ ~~4.25%. The swap was designated as a cash flow hedge and the fair market value~~outstanding notional amount of the ~~interest rate~~underlying obligations, which was approximately $124 million as of December 31, 2015. The total return swap ~~was reported~~is secured by approximately $40 million of U.S. Treasuries as ~~a component of other comprehensive income and amortized into earnings over the term of the hedged transaction. On~~ ~~October 4, 2011, the Company refinanced its Bank of America $18 million~~ ~~LIBOR plus 50 basis points loan that was scheduled to mature~~collateral, which are included in short-term investments on~~March 1, 2013~~ ~~with a Union Bank $20 million~~ ~~LIBOR plus~~ 40 ~~basis points loan that matures on~~ ~~January 2, 2015. The related interest rate swap was deemed to become ineffective and is no longer designated as a hedge. Changes in the fair value are adjusted through~~ the consolidated ~~statement of operations in the period of change. The fair market value of the interest rate swap was approximately~~ ~~$103,000~~ ~~and~~ ~~$670,000~~ ~~as of~~ ~~December 31, 2012~~ ~~and~~ ~~2011, respectively. The swap matures on~~ ~~March 1, 2013~~.balance sheets.

~~Table of Contents~~

Fair value amounts, and (losses) gains ~~and losses~~ on derivative instruments

The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative (losses) gains ~~and losses~~ in the consolidated statements of operations:

Asset Derivatives Liability Derivatives
December 31, 2012 December 31, 2011 December 31, 2012 December 31, 2011
(Amounts in thousands)
Non-hedging derivatives
Interest rate contracts—Other liabilities $ 0
$ 0
$ (103 ) $ (670 )
Equity contracts—Short-term investments (Other liabilities) 0
0
(175 ) (655 )
Total derivatives $ 0
$ 0
$ (278 ) $ (1,325 )



	Asset Derivatives				Liability Derivatives
	December 31, 2015		December 31, 2014		December 31, 2015		December 31, 2014
	(Amounts in thousands)
Total return swaps - Other assets	$	—	$	—	$	—	$	—
Options sold - Other liabilities	—		—		260		194
Total return swaps - Other liabilities	—		—		11,525		4,025
Total derivatives	$	—	$	—	$	11,785	$	4,219

Gain (Loss) Recognized in
Comprehensive Income
Year Ended December 31,
Derivatives Contracts for Cash Flow Hedges 2012 2011 2010
(Amounts in thousands)
Interest rate contracts—Other comprehensive income (loss) $ 0
$ 1,139
$ (220 )

Gain (Loss)
Recognized in Income
Year Ended December 31,
Derivatives Not Designated as Hedging Instruments 2012 2011 2010
(Amounts in thousands)
Interest rate contract—Other revenue (expense) $ 567
$ 1,232
$ (457 )
Equity contracts—Net realized investment gains 2,680
9,000
4,615
Total $ 3,247
$ 10,232
$ 4,158



	(Losses) Gains Recognized in Income
	Year Ended December 31,
	2015			2014			2013
	(Amounts in thousands)
Total return swaps - Net realized investment (losses) gains	$	(6,438	)	$	(2,969	)	$	2,176
Options sold - Net realized investment gains	3,081			3,419			1,776
Interest rate contract - Other revenue	—			—			103
Total	$	(3,357	)	$	450		$	4,055

Most ~~equity contracts~~options sold consist of covered calls. The Company writes covered calls on underlying equity positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under statutory regulations. The Company manages the risk associated with covered calls through strict capital limitations and asset diversification throughout various industries. For additional disclosures regarding equity contracts, see Note 4. Fair Value Measurement.

~~8. Goodwill and~~9. Other Intangible Assets

~~Goodwill~~

~~There was a slight change in the carrying amount of goodwill due to the dissolution of AMMGA for the year ended~~ ~~December 31, 2012. Goodwill is reviewed for impairment on an annual basis and more frequently if potential impairment indicators exist.~~ No ~~impairment indications were identified during any of the periods presented.~~

~~Table of Contents~~

~~Other Intangible Assets~~

The following table presents the components of other intangible ~~assets as of~~ ~~December 31, 2012~~ ~~and~~ ~~2011~~.assets:


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Useful Lives	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Useful Lives
	(Amounts in thousands)							(in years)	(Amounts in thousands)							(in years)
As of December 31, 2012:
As of December 31, 2015:
Customer relationships	$	51,755	$	(19,585	)	$	32,170	11	$	52,430	$	(34,327	)	$	18,103	11
Trade names	15,400		(2,567		)	12,833		24	15,400		(4,491		)	10,909		24
Technology	4,300		(1,720		)	2,580		10	4,300		(3,010		)	1,290		10
Favorable leases	1,725		(1,719		)	6		3
Software	550		(550		)	0		2
Insurance license									1,400		—			1,400		Indefinite
Total intangible assets, net	$	73,730	$	(26,141	)	$	47,589		$	73,530	$	(41,828	)	$	31,702

As of December 31, 2011:
As of December 31, 2014:
Customer relationships	$	51,755	$	(14,676	)	$	37,079	11	$	51,755	$	(29,402	)	$	22,353	11
Trade names	15,400		(1,925		)	13,475		24	15,400		(3,850		)	11,550		24
Technology	4,300		(1,290		)	3,010		10	4,300		(2,580		)	1,720		10
Favorable leases	1,725		(1,540		)	185		3
Software	550		(550		)	0		2
Total intangible assets, net	$	73,730	$	(19,981	)	$	53,749		$	71,455	$	(35,832	)	$	35,623

The Company recognized $1.4 million of other intangible assets for a state insurance license related to the acquisition of Workmen's Auto Insurance Company. See Note 20. Acquisition for the acquisition's cost allocation.

Other intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during any of the periods presented.

~~Intangible~~Other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. ~~Intangible~~Other intangible assets amortization ~~expenses were~~expense was $6.0 million in each of the years ended December 31, ~~$6.2 million~~2015, ~~$6.4 million~~2014, and ~~$6.8 million~~2013 ~~during~~ ~~2012~~, ~~2011, and~~ ~~2010, respectively.~~. None of the intangible assets with definite useful lives are anticipated to have a residual value.

The following table presents the estimated future amortization expense related to other intangible assets as of December 31, ~~2012~~2015:


Year Ending December 31,	Amortization Expense		Amortization Expense
	(Amounts in thousands)		(Amounts in thousands)
2013	$	5,986
2014	5,980
2015	5,980
2016	5,980		$	6,077
2017	5,253		5,349
2018			5,335
2019			4,906
2020			758
Thereafter	18,410		7,877
Total	$	47,589	$	30,302

~~Table of Contents~~

9.10. Income Taxes

Income tax provision

The Company and its subsidiaries file a consolidated federal income tax return. The ~~provision for~~ income tax (benefit) expense ~~consists~~consisted of the following components:


	Year Ended December 31,								Year Ended December 31,
	2012		2011			2010			2015			2014		2013
	(Amounts in thousands)								(Amounts in thousands)
Federal
Current	$	9,340	$	31,390		$	23,699		$	21,942		$	44,469	$	30,266
Deferred	6,238		20,518			9,964			(25,594		)	20,444		(14,970		)
	$	15,578	$	51,908		$	33,663		$	(3,652	)	$	64,913	$	15,296
State
Current	$	2,079	$	2,934		$	(3,225	)	$	943		$	4,421	$	5,234
Deferred	742		(907		)	(246		)	(1,203		)	142		(577		)
	$	2,821	$	2,027		$	(3,471	)	$	(260	)	$	4,563	$	4,657
Total
Current	$	11,419	$	34,324		$	20,474		$	22,885		$	48,890	$	35,500
Deferred	6,980		19,611			9,718			(26,797		)	20,586		(15,547		)
Total	$	18,399	$	53,935		$	30,192		$	(3,912	)	$	69,476	$	19,953

The income tax ~~provision~~(benefit) expense reflected in the consolidated statements of operations is reconciled to the federal income tax (benefit) expense on income before income taxes based on a statutory rate of 35% as shown in the table below:


	Year Ended December 31,									Year Ended December 31,
	2012			2011			2010			2015			2014			2013
	(Amounts in thousands)									(Amounts in thousands)
Computed tax expense at 35%	$	47,359		$	85,785		$	63,837		$	24,699		$	86,598		$	46,234
Tax-exempt interest income	(27,789		)	(31,414		)	(33,966		)	(26,993		)	(27,839		)	(26,381		)
Dividends received deduction	(1,482		)	(1,704		)	(1,463		)	(1,613		)	(2,027		)	(2,239		)
State tax expense (benefit)	1,918			1,299			(3,580		)
State tax expense										(287		)	3,872			4,944
Nondeductible expenses										575			9,900			190
Other, net	(1,607		)	(31		)	5,364			(293		)	(1,028		)	(2,795		)
Income tax expense	$	18,399		$	53,935		$	30,192
Income tax (benefit) expense										$	(3,912	)	$	69,476		$	19,953

Deferred Income Taxes

Deferred ~~income taxes reflect~~tax assets and liabilities are recognized for the ~~net~~estimated future tax ~~effects of temporary~~consequences attributable to differences between the ~~carrying amounts~~financial reporting basis and the respective tax basis of the Company’s assets and liabilities, ~~for financial reporting purposes~~ and ~~the amounts used for income tax purposes. Realization~~expected benefits of utilizing net operating loss, capital loss, and tax-credit carryforwards. The ultimate realization of deferred tax assets is dependent on upon

generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate ~~character prior to their expiration.~~nature, and tax-planing strategies in making this assessment. The Company believes ~~it has the ability and intent,~~that through the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in order to ~~generate income sufficient to avoid losing~~maximize the full benefits of its deferred tax assets. ~~Significant~~

The following table presents the significant components of the Company’s net deferred tax assets and ~~liabilities are as follows:~~liabilities:

~~Table of Contents~~


	December 31,						December 31,
	2012			2011			2015			2014
	(Amounts in thousands)						(Amounts in thousands)
Deferred tax assets:
20% of net unearned premium	$	66,353		$	61,039		$	75,406		$	71,907
Capital loss carryforward	0			7,108
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes	15,019			15,034			9,518			11,100
Write-down of impaired investments	1,723			4,638			857			942
Tax credit carryforward	37,557			20,060			36,349			31,198
Expense accruals	10,910			11,632			11,264			13,395
Other deferred tax assets	4,860			3,568			9,596			7,448
Total gross deferred tax assets	136,422			123,079			142,990			135,990

Deferred tax liabilities:
Deferred acquisition costs	(65,069		)	(60,000		)	(70,617		)	(69,021		)
Tax liability on net unrealized gain on securities carried at fair value	(48,483		)	(31,997		)	(23,095		)	(47,333		)
Tax depreciation in excess of book depreciation	(10,191		)	(15,164		)	(10,742		)	(9,414		)
Undistributed earnings of insurance subsidiaries	(4,499		)	(3,962		)	(4,022		)	(4,486		)
Tax amortization in excess of book amortization	(914		)	(442		)	(2,514		)	(1,982		)
Other deferred tax liabilities	(7,711		)	(5,003		)	(8,769		)	(9,087		)
Total gross deferred tax liabilities	(136,867		)	(116,568		)	(119,759		)	(141,323		)
Net deferred tax (liabilities) assets	$	(445	)	$	6,511

Net deferred tax assets (liabilities)							$	23,231		$	(5,333	)

The Company had an alternative minimum tax credit carryforward balance of $36.3 million and $31.2 million at December 31, 2015 and 2014, respectively, which is not subject to expiration.

Uncertainty in Income Taxes

The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return ~~once a “more-likely-than-not”~~only if, the positions are "more-likely-than-not" sustainable. Once this threshold has been ~~met. For a~~met, the Company’s measurement of its expected tax ~~position that meets the recognition threshold, the largest amount of tax benefit that is greater than~~ ~~50%~~ ~~likely of being realized upon ultimate settlement~~benefits is recognized in ~~the~~its financial statements.

There ~~were~~ no ~~material changes~~was a $0.4 million decrease to the total amount of unrecognized tax benefits related to tax uncertainties during ~~2012~~.2015. The decrease was the result of tax positions taken regarding state tax apportionment issues based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company does not expect any changes in such unrecognized tax benefits to have a significant impact on its consolidated financial statements within the next 12 months.

The Company and its subsidiaries file income tax returns inwith the ~~U.S. federal jurisdiction~~Internal Revenue Service and the taxing authorities of various states. Tax years that remain subject to examination by major taxing jurisdictions are ~~2009~~2012 through ~~2011~~2014 for federal taxes and 2003 through ~~2011~~2014 for California state taxes. ~~Tax year 2010 is currently under examination by the Internal Revenue Service.~~ The Company is currently under examination by the California Franchise Tax Board ~~(“FTB”~~("FTB") for tax years 2003 through ~~2010.~~2013. The FTB ~~has~~ issued Notices of Proposed Assessments to the Company for tax years 2003 through ~~2006.~~2010, which the Company formally protested. The ~~Company has filed protests~~proposed adjustments for tax years 2003 through 2006 were affirmed following an administrative protest process with the FTB examination. The Company is in ~~response to these assessments and presented its case in a hearing before~~settlement discussions with the FTB. ~~No assessments have been received for tax years 2007 through 2010.~~If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with the State Board of Equalization or litigation in superior court. Management believes that the resolution of these examinations and assessments will not have a material impact on the consolidated financial statements.

The following table presents a reconciliation of the beginning and ending balances of unrecognized tax ~~benefits is as follows:~~benefits:


							December 31,
	2012			2011			2015			2014
	(Amounts in thousands)						(Amounts in thousands)
Balance at January 1	$	4,567		$	3,823		$	12,612		$	10,784
Additions based on tax positions related to:
Current year	330			1,011			932			2,277
Prior years	1,539			0			(1,379		)	(258		)
Reductions based on tax positions related to prior years	(308		)	(267		)
Reductions as a result of as lapse of the applicable statute of limitations	(202		)	0
Additions (reductions) as a result of lapse of the applicable statute of limitations							—			(191		)
Balance at December 31	$	5,926		$	4,567		$	12,165		$	12,612

~~Table of Contents~~

As presented above, the balances of unrecognized tax benefits were ~~$5.9~~$12.2 million and ~~$4.6~~$12.6 million at December 31, ~~2012~~2015 and ~~2011~~,2014, respectively. Of these totals, ~~$3.5~~$10.9 million and ~~$3.6~~$11.1 million represent unrecognized tax benefits, net of federal tax benefit and accrued interest expense which, if recognized, would impact the Company’s effective tax rate.

Management does not expect the ~~Company’s~~Company's total amount of unrecognized tax benefits to materially increase within the next twelve ~~months related to its ongoing California state tax apportionment factor issues.~~months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income taxes. During the years ended December 31, ~~2012~~, ~~2011~~,2015, 2014, and ~~2010~~,2013, the Company recognized net interest and penalty expense, ~~or (benefit),~~ excluding refunds, of ~~$111,000~~, ~~$106,000~~,$112,000, $739,000, and ~~($872,000)~~,$1,119,000, respectively. The Company carried an accrued interest and penalty balance of ~~$945,000~~$2,915,000 and ~~$834,000~~$2,803,000 at December 31, ~~2012~~2015 and ~~2011~~,2014, respectively.

~~10.~~11. Losses and Loss Adjustment Expenses

~~Activity~~The following table presents the activity in the reserves for losses and loss adjustment ~~expenses is summarized as follows:~~expenses:


	Year Ended December 31,									Year Ended December 31,
	2012			2011			2010			2015			2014			2013
	(Amounts in thousands)									(Amounts in thousands)
Gross reserves at January 1	$	985,279		$	1,034,205		$	1,053,334		$	1,091,797		$	1,038,984		$	1,036,123
Less reinsurance recoverable	(7,921		)	(6,805		)	(7,748		)	(14,484		)	(13,927		)	(12,155		)
Net reserves at January 1	977,358			1,027,400			1,045,586			1,077,313			1,025,057			1,023,968
Acquisition of WAIC reserves										18,676			—			—
Incurred losses and loss adjustment expenses related to:
Current year	1,919,116			1,810,711			1,838,824			2,132,837			1,989,315			1,959,730
Prior years	42,332			18,494			(13,058		)	12,658			(3,193		)	2,960
Total incurred losses and loss adjustment expenses	1,961,448			1,829,205			1,825,766			2,145,495			1,986,122			1,962,690
Loss and loss adjustment expense payments related to:
Current year	1,314,748			1,265,188			1,240,696			1,455,245			1,347,967			1,354,074
Prior years	600,090			614,059			603,256			654,097			585,899			607,527
Total payments	1,914,838			1,879,247			1,843,952			2,109,342			1,933,866			1,961,601
Net reserves at year-end	1,023,968			977,358			1,027,400
Net reserves at December 31										1,132,142			1,077,313			1,025,057
Reinsurance recoverable	12,155			7,921			6,805			14,546			14,484			13,927
Gross reserves at year-end	$	1,036,123		$	985,279		$	1,034,205
Gross reserves at December 31										$	1,146,688		$	1,091,797		$	1,038,984

The increase in the provision for insured events of prior years in ~~2012~~2015 of approximately ~~$42~~$12.7 million primarily resulted from the ~~re-estimate~~California homeowners and automobile lines of accident years 2010 and 2011 California BI losses which have experienced higher average severities and more late reported claims than were originally estimated at December 31, 2011. Additionally, the Company experienced unfavorable development on the run-offbusiness outside of California, ~~commercial taxi business and Florida homeowners business, both of~~ which ~~the Company ceased writing~~was partially offset by favorable development in ~~2011. 2012 accident year losses were also impacted by higher loss severity and frequency on~~ the California ~~private passenger~~ automobile line of business.

The increase in the provision for insured events of prior years in ~~2011~~2013 of approximately $18$3.0 million primarily resulted from Florida claims that were re-opened from prior years due to a state supreme court ruling that was adverse to the re-estimate of accident years 2008 through 2010 California BI losses which have experienced higher average severities than were originally estimated at December 31, 2010. Partially offsetting this increase was favorable development on loss adjustment expenses reflecting cost savings from the transition of a large portion of litigated cases from outside counsel to in-house counsel.insurance industry.

~~The decrease in the provision for insured events of prior years in 2010 of approximately $13 million~~ primarily resulted from the re-estimate of accident year 2009 California BI losses. In addition, the Company experienced favorable development on New Jersey personal automobile reserves, resulting from more aggressive handling of litigated claims, which includes a high percentage of favorable results in cases brought to trial. The favorable development was partially offset by unfavorable development on Florida reserves, which included approximately $~~3 million~~ ~~of unfavorable development on the homeowners line of business, primarily related to sinkhole claims.~~

The Company experienced estimated pre-tax catastrophe losses and loss adjustment expenses from severe weather events of ~~$39~~$19 million,, ~~$18~~ $11 million,, and ~~$25~~$17 million in ~~2012~~, ~~2011~~,2015, 2014, and ~~2010~~,2013, respectively. The losses in ~~2012~~2015 were primarily the result of severe storms outside of California, and rainstorm and wildfire losses in California. The losses in 2014 were primarily related to winter freeze events on the East Coast and severe rainstorms in California. The losses in 2013 were primarily due to ~~Hurricane Sandy~~tornadoes in Oklahoma and ~~wind and hail~~severe storms in the Midwest ~~region. The losses in 2011 related to California wind storms, Hurricane Irene,~~ and ~~Georgia tornadoes. The losses in 2010 primarily related to California rainstorms.~~the Southeast regions during the second quarter.

~~Table of Contents~~

~~11.~~12. Dividends

The following table presents shareholder dividends ~~paid in total and per share:~~paid:


	Year Ended December 31,						Year Ended December 31,
	2012		2011		2010		2015		2014		2013
	(Amounts in thousands, except per share data)						(Amounts in thousands, except per share data)
Total paid	$	134,105	$	132,142	$	129,863	$	136,386	$	135,496	$	134,776
Per share	$	2.4425	$	2.41	$	2.37
Per share paid							$	2.4725	$	2.4625	$	2.4525

The Insurance Companies are subject to the financial capacity guidelines established by their domiciliary states. The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations. For ~~2013,~~2015, the insurance subsidiaries of the Company are permitted to pay approximately ~~$155~~$164 million in dividends to Mercury General without the prior approval of the DOI of domiciliary states. The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay shareholder dividends. During ~~2012~~, ~~2011~~,2015, 2014, and ~~2010~~,2013, the Insurance Companies paid the ~~Company~~Mercury General ordinary dividends of ~~$145~~$133 million,, $0, $225 million, and ~~$128~~$120 million,~~, respectively, and extraordinary dividends of~~ ~~$0 million~~, ~~$270 million, and~~ $0, respectively.

On February ~~1, 2013,~~5, 2016, the Board of Directors declared a $~~0.6125~~$0.62 quarterly dividend payable on March ~~28, 2013~~31, 2016 to shareholders of record on March ~~14, 2013.~~17, 2016.

~~12.~~13. Statutory Balances and Accounting Practices

The Insurance Companies prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance departments of their domiciliary states. Prescribed statutory accounting practices primarily include those published as statements of ~~SAP~~statutory accounting principles by the ~~NAIC,~~National Association of Insurance Commissioners (the "NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. As of December 31, ~~2012~~2015, there were no material permitted statutory accounting practices utilized by the Insurance Companies.

The following table presents the statutory net income, and statutory capital and surplus of the Insurance Companies, as reported to regulatory authorities:


	Year Ended December 31,						Year Ended December 31,
	2012		2011		2010		2015		2014		2013
	(Amounts in thousands)						(Amounts in thousands)
Statutory net income⁽¹⁾	$	63,365	$	223,447	$	142,981	$	123,984	$	155,654	$	235,251
Statutory capital and surplus	1,440,973		1,497,609		1,322,270		$	1,451,950	$	1,438,281	$	1,528,682

__________


(1)	Statutory net income ~~excludes~~reflects differences from GAAP net income, including changes in the fair value of the investment portfolio as a result of the application of the fair value option.

The ~~statutory~~Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations. The RBC formula is used by insurance regulators to monitor capital and surplus levels. It was designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance business having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. The Company periodically monitors the RBC level of each of the Insurance Companies. As of December 31, 2015, 2014, and 2013, each of the Insurance Companies exceeded the ~~highest~~minimum required RBC levels, as determined by the NAIC and adopted by the state insurance regulators. None of the Insurance Companies’ RBC ratios was less

than 375% of the authorized control level RBC as of ~~minimum~~December 31, 2015, 2014 and 2013 . Generally, an RBC ratio of 200% or less would require some form of regulatory ~~required capital.~~or company action.

~~13.~~14. Profit Sharing Plan and Annual Cash Bonuses

The Company’s employees are eligible to become members of the Profit Sharing Plan (the ~~“Plan”~~"Plan"). The Company, at the option of the Board of Directors, may make annual contributions to the Plan, and the contributions are not to exceed the greater of the Company’s net income for the plan year or its retained earnings at that date. In addition, the annual contributions may not exceed an amount equal to 15% of the compensation paid or accrued during the year to all participants under the Plan. No contributions were made in the past three years.

The Plan includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue Code. The matching contributions, at a rate set by the Board of Directors, totaled $$8.5 million, $8.0 million, and $8.1 million for 2015, ~~7.2 million, $7.2 million, and $7.0 million~~ ~~for~~ ~~2012~~, ~~2011~~2014, and ~~2010~~2013, respectively.

The Plan also includes an employee stock ownership plan that covers substantially all employees. The Board of Directors ~~authorized~~authorizes the Plan to purchase ~~approximately~~ $0, $0~~, and~~ ~~$1.2 million~~ of the Company’s common stock in the open market for

~~Table of Contents~~

allocation to the Plan ~~participants~~participants. No purchases were made during the past three years.

The Company also provides annual cash bonuses to eligible employees based on performance criteria for each recipient and for the Company as a whole. The Company performance goals were based on the Company's premium growth and combined ratio. The Company paid annual cash bonuses of $20.7 million, $19.1 million, and $0.0 million in 2015, ~~2012~~, ~~2011~~2014, and ~~2010~~2013, respectively. ~~The Company recognized compensation expense equal to such amounts.~~

~~14.~~15. Share-Based Compensation

In ~~May 2005,~~February 2015, the Company adopted the 2015 Incentive Award Plan (the "2015 Plan"), replacing the 2005 Equity Incentive Plan (the "2005 Plan") which ~~succeeded a prior plan.~~expired in January 2015. The 2015 Plan was approved at the Company's Annual Meeting of Shareholders in May 2015. A maximum of ~~4,957,250~~4,900,000 shares of common stock under the ~~2005~~2015 Plan are authorized for issuance upon exercise of stock options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. As of December 31, ~~2012~~,2015, only stock options and restricted stock unit awards have been granted under these plans. Beginning January 1, 2008, stock options granted, for which the Company has recognized share-based compensation expense, become exercisable at a rate of 25% per year beginning one year from the date granted, are granted at the ~~market~~closing price of the Company's stock on the date of grant, and expire after 10 years. Prior to January 1, 2008, ~~shares~~stock options granted became exercisable at a rate of 20% per year.



	Year Ended December 31,
	2015		2014		2013
	(Amounts in thousands)
Cash received from stock option exercises	$	2,111	$	6,247	$	1,446
Compensation cost	5,208		4,112		974
Excess tax benefit	27		148		202

~~Cash received from option exercises was~~ ~~$2,492,000~~, ~~$1,951,000, and $733,000~~ ~~during~~ ~~2012~~, ~~2011, and~~ ~~2010, respectively. Total compensation costs were $168,000, $439,000, and $651,000~~ ~~during~~ ~~2012~~, ~~2011, and~~ ~~2010, respectively. The excess tax benefit realized for the tax deduction from option exercises of the share-based payment awards totaled $86,000~~, ~~$56,000, and $132,000~~ ~~during~~ ~~2012~~, ~~2011, and~~ ~~2010, respectively.~~ Stock Option Awards

No stock options were awarded in 2015 and 2014 under the ~~past three years.~~2015 Plan and 2005 Plan, respectively. The fair values of stock options awarded in 2013 under the 2005 Plan were estimated on the dates of grant using a closed-form option valuation model (Black-Scholes). The following table provides the assumptions used in the calculation of grant-date fair values of stock options awarded during 2013 based on the Black-Scholes option pricing model.



	2013
Weighted-average grant-date fair value	$7.11
Expected volatility	33.16% - 33.18%
Weighted-average expected volatility	33.17%
Risk-free interest rate	0.88% - 1.60%
Expected dividend yield	5.40% - 5.76%
Expected term in months	72

Expected volatilities are based on historical volatility of the Company’s stock over the term of the stock options. The Company estimated the expected term of stock options, which represents the period of time that stock options granted are expected to be outstanding, by using historical exercise patterns and post-vesting termination behavior. The risk free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.

AThe following table presents a summary of the stock option activity under the Company’s plans ~~as of~~for the year ended December 31, ~~2012~~2015 ~~and changes during the year then ended is presented below:~~:


	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in 000’s)		Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in 000’s)
Outstanding at January 1, 2012	544,225	$	46.09
Outstanding at January 1, 2015							248,000	$	49.85
Granted	0						—
Exercised	(65,450)	$	38.07				(43,000)	$	49.10
Canceled or expired	(27,750)						(37,000)	$	58.48
Outstanding at December 31, 2012	451,025	$	47.22	4.5	$	724
Exercisable at December 31, 2012	408,775	$	48.59	4.3	$	479
Outstanding at December 31, 2015							168,000	$	48.14	3.8	$	305
Exercisable at December 31, 2015							128,000	$	49.58	2.7	$	183

The aggregate intrinsic ~~value~~values in the table above ~~represents~~represent the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the stock option exercise price, multiplied by the number of in-the-money stock options) that would have been received by the stock option holders had all stock options been exercised on December 31, ~~2012~~.2015. The aggregate intrinsic ~~value~~values of stock options exercised ~~was $392,000, $262,000~~,were $303,000, $1,160,000, and $~~431,000~~$862,000 during ~~2012~~, ~~2011~~,2015, 2014, and ~~2010~~,2013, respectively. The total fair ~~value~~values of stock options vested ~~was $407,000, $467,000~~,were $142,000, $142,000, and $~~498,000~~$146,000 during ~~2012~~, ~~2011~~,2015, 2014, and ~~2010~~,2013, respectively.

The following table presents information regarding stock options outstanding at December 31, ~~2012~~2015:

Options Outstanding Options Exercisable
Range of Exercise Prices
Number of
Options

Weighted-Avg.
Remaining
Contractual Life
(Years)

Weighted-
Avg. Exercise
Price

Number of
Options

Weighted-
Avg. Exercise
Price
$33.61-40.53 131,525 6.1 $ 34.21
89,275 $ 34.36
$47.61-51.51 166,000 4.6 $ 49.64
166,000 $ 49.64
$52.13-58.83 153,500 2.9 $ 55.73
153,500 $ 55.73



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted-Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Number of Options	Weighted- Average Exercise Price
$33.61-$47.61	88,000	6.1	$	43.29	48,000	$	43.09
$50.01-$51.51	38,000	2.0	$	50.72	38,000	$	50.72
$54.93-$57.50	42,000	0.8	$	55.96	42,000	$	55.96

As of December 31, ~~2012, $42,000~~2015, $202,000 of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average ~~period~~remaining contractual life of ~~0.4~~1.4 years.

Restricted Stock Unit Awards

Under the 2015 Plan and 2005 Plan, the Compensation Committee of the Company’s Board of Directors granted ~~performance~~performance-based vesting restricted stock ~~units~~unit awards to the Company’s senior management and key employees. ~~See Note 1 for grants summary. A summary of~~

The following table presents the restricted stock ~~and~~unit grants summary at December 31, 2015:



	Grant Year
	2015	2014	2013
Three-year performance period ending December 31,	2017	2016	2015
Vesting shares, target (net of forfeited)	99,250	85,500	78,500
Vesting shares, maximum (net of forfeited)	186,094	160,313	176,625

The following table presents a summary of restricted stock unit awards activity during the years indicated:



	Year Ended December 31,
	2015			2014			2013
	Shares	Weighted- Average Fair Value per Share		Shares	Weighted- Average Fair Value per Share		Shares	Weighted- Average Fair Value per Share
Outstanding at January 1	167,000	$	41.15	170,500	$	39.64	169,000	$	42.22
Granted	100,250	$	53.80	93,500	$	45.17	84,500	$	36.82
Vested	—			—			—
Forfeited/Canceled	(4,000)	$	43.10	(16,500)	$	43.99	(3,000)	$	36.82
Expired	—	$	—	(80,500)	$	44.01	(80,000)	$	40.22
Outstanding at December 31	263,250	$	45.94	167,000	$	41.15	170,500	$	39.64

The restricted stock units ~~activity as~~vest at the end of a three-year performance period beginning with the year of the grant, and then only if, and to the extent that, the Company’s performance during the performance period achieves the threshold established by the Compensation Committee of the Company’s Board of Directors. For 2013, 2014 and 2015 grants, vesting is based on the Company’s cumulative underwriting income, annual underwriting income, and net earned premium growth. As of December 31, ~~2012~~2015, 1,000, 8,000, and ~~2011~~,6,000 target restricted stock units granted in 2015, 2014 and ~~changes during~~2013, respectively, have been forfeited because the ~~years then ended~~recipients were no longer employed by the Company. Expired shares represent shares that did not meet the vesting requirements.

The fair value of each restricted stock unit grant was determined based on the closing price of the Company's common stock on the grant date. Compensation cost is ~~as follows:~~

~~Table of Contents~~

2012 2011 2010
Shares
Weighted-
Average Fair
Value per Share
Shares
Weighted-
Average Fair
Value per Share
Shares
Weighted-
Average Fair
Value per Share
Outstanding at January 1 135,000 $ 40.70
55,000 $ 41.40
0
$ 0.00
Granted 92,000 44.01
80,000 40.22
55,000
$ 41.40
Vested 0 0 0

Forfeited/Canceled (3,000) 0 0

Expired (55,000) 0 0

Outstanding at December 31 169,000 $ 42.22
135,000 $ 40.70
$ 55,000
$ 41.40
recognized based on management’s best estimate that performance goals will be achieved. If such goals are not met, no compensation cost would be recognized and any previously recognized compensation cost would be reversed.

~~15.~~16. Earnings Per Share

AThe following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share ~~calculation for income from operations is presented below:~~calculations:


																Year Ended December 31,
	2012					2011					2010					2015					2014					2013
	Income (Numerator)		Weighted Shares (Denominator)	Per-Share Amount		Income (Numerator)		Weighted Shares (Denominator)	Per-Share Amount		Income (Numerator)		Weighted Shares (Denominator)	Per-Share Amount		Income (Numerator)		Weighted Shares (Denominator)	Per-Share Amount		Income (Numerator)		Weighted Shares (Denominator)	Per-Share Amount		Income (Numerator)		Weighted Shares (Denominator)	Per-Share Amount
	(Amounts and numbers in thousands, except per-share data)															(Amounts and numbers in thousands, except per-share data)
Basic EPS
Income available to common stockholders	$	116,911	54,899	$	2.13	$	191,164	54,825	$	3.49	$	152,198	54,792	$	2.78	$	74,479	55,157	$	1.35	$	177,949	55,008	$	3.23	$	112,143	54,947	$	2.04
Effect of dilutive securities:
Options	0		23			0		20			0		34			—		15			—		12			—		17
RSUs																—		37			—		—			—		—
Diluted EPS
Income available to common stockholders after assumed conversions	$	116,911	54,922	$	2.13	$	191,164	54,845	$	3.49	$	152,198	54,826	$	2.78	$	74,479	55,209	$	1.35	$	177,949	55,020	$	3.23	$	112,143	54,964	$	2.04

~~Incremental shares of~~ ~~415,000~~, ~~504,000, and~~ ~~448,000~~ ~~for~~ ~~2012~~, ~~2011, and~~ ~~2010, respectively, were excluded from the computation of the diluted earnings per common shares due to their anti-dilutive effect.~~ Potentially dilutive securities representing approximately ~~80,000~~, ~~103,000~~,67,000, 252,000, and ~~93,000~~359,000 shares of common stock for ~~2012~~2015, ~~2011~~2014, and ~~2010~~2013, respectively, were ~~also~~ excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive.

~~16.~~17. Commitments and Contingencies

Operating Leases

The Company is obligated under various non-cancellable lease agreements providing for office space, automobiles, and office equipment that expire at various dates through the year ~~2019~~.2021. For leases that contain predetermined escalations of the minimum rentals, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred rent in other liabilities. This liability amounted to $~~2.2~~$3.6 million and $~~1.6~~$4.4 million at December 31, ~~2012~~2015 and ~~2011~~,2014, respectively. Total rent expense under these lease agreements was $~~17.7~~$16.0 million,~~, $18.2~~ $14.6 million,, and $~~17.1~~$19.3 million for ~~2012~~2015, ~~2011~~2014, and ~~2010~~2013, respectively.

The following table presents future minimum commitments for operating leases as of December 31, ~~2012~~2015:


Year Ending December 31,	Operating Leases		Operating Leases
	(Amounts in thousands)		(Amounts in thousands)
2013	$	14,224
2014	10,069
2015	6,985
2016	5,658		$	14,765
2017	3,843		11,008
2018			4,684
2019			1,006
2020			463
Thereafter	945		64

~~Table of Contents~~

California Earthquake Authority ~~(“CEA”~~("CEA")

The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowners policies directly with the CEA. The Company receives a small fee for placing business with the CEA, which is recorded as other income in the consolidated statements of operations. Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made after CEA capital has been expended and are based upon each company’s participation percentage multiplied by the amount of the total assessment. Based upon the most recent information provided by the CEA, the Company’s maximum total exposure to CEA assessments at April 1, ~~2012,~~2015, the most recent date at which information was available, was approximately $~~52.2 million~~.$64.3 million. There was no assessment made in ~~2012.~~2015.

Regulatory Matters

In March 2006, the ~~California DOI~~CDI issued an Amended Notice of Non-Compliance to a Notice of Non-Compliance originally issued in February 2004 (as amended, ~~“2004 NNC”~~"2004 NNC") alleging that the Company charged rates in violation of the California Insurance Code, willfully permitted its agents to charge broker fees in violation of California law, and willfully misrepresented the actual price insurance consumers could expect to pay for insurance by the amount of a fee charged by the ~~consumer's~~consumer’s insurance broker. The ~~California DOI seeks~~CDI sought to impose a fine for each policy inon which the Company allegedly permitted an agent to charge a broker fee, ~~and~~to impose a penalty for each policy on which the Company allegedly used a misleading advertisement, and to suspend certificates of authority for a period of one year. In January 2012, the administrative law judge (the "ALJ") bifurcated the 2004 NNC between (a) the ~~California DOI’s~~CDI’s order to show cause (the "OSC"), in which the ~~California DOI~~CDI asserts the false advertising allegations and accusation, and (b) the ~~California DOI’s~~CDI’s notice of noncompliance, in which the ~~California DOI~~CDI asserts the unlawful rate allegations. In February 2012, the ~~administrative law judge~~ALJ submitted a proposed decision dismissing the ~~California DOI’s 2004 NNC. In March 2012,~~NNC, based on conduct by the ~~California Insurance~~CDI and the Commissioner in violation of the Company's due process rights. Specifically, the ALJ found that the CDI's attorneys and the Commissioner engaged in improper ex parte

communication, and commenced a rule making in order to supersede unfavorable evidentiary rulings by the ALJ. The Commissioner rejected the ~~administrative law judge’s~~ALJ's proposed decision. The Company challenged the rejection in Los Angeles Superior Court in April 2012, ~~and~~but the ~~California Insurance Commissioner filed a demurrer to~~challenge was unsuccessful. The Court did not rule on the ~~Company's petition. Following a hearing,~~merits of the ~~trial court sustained the California Insurance Commissioner’s demurrer without leave to amend because it found~~ALJ's due process concerns, but merely held that the Company ~~must first~~was required to exhaust its administrative ~~remedies.~~remedies before seeking relief in the Superior Court. The case was referred back to the ALJ, and the due process issues raised by the ALJ's dismissal were preserved for later appeal. Following an evidentiary hearing in April 2013, post-hearing briefs and an unsuccessful mediation, the ALJ closed the evidentiary record on April 30, 2014. Although a proposed decision was to be submitted to the Commissioner on or before June 30, 2014, after which the Commissioner would have 100 days to accept, reject or modify the proposed decision, or required further evidence, the proposed decision was submitted on December 8, 2014. On January 7, 2015, the Commissioner adopted the ALJ's proposed decision, which became the Commissioner's adopted Order. The Company ~~has appealed the trial court’s~~received notice of this Order on January 10, 2015. The decision and ~~on January 3, 2013, filed a petition to stay~~Order found that from the administrative proceeding pending a determination of its appeal. The Court of Appeal did not stay the adminstrative proceeding but has allowed the appeal to continue. The Company has filed its opening appellate brief, and the court grantedperiod July 1, 1996 through 2006, the Company's ~~request for an expedited appeal. On January 15, 2013,~~"brokers" were actually operating as "de facto agents" and that the ~~administrative law judge heard various pending motions that had originally been filed~~charging of "broker fees" by these producers constituted the ~~Company~~charging of "premium" in ~~June 2011.~~excess of the Company’s approved rates. The ~~administrative law judge has not yet ruled on~~Order assessed a civil penalty in the ~~motions.~~

The Company has ~~been subject~~also accrued a liability for the estimated cost to ~~fines and penalties by the California DOI~~continue to defend itself in the ~~past due to alleged violations of the California Insurance Code. The largest and most recent of these was settled in 2008 for $300,000. However, prior settlement amounts are not necessarily indicative of the potential results in the current notice of non-compliance matters.~~false advertising OSC. Based upon its understanding of the facts and the California Insurance Code, the Company does not expect that the ultimate resolution of the ~~2004 and 2010 NNC matters~~false advertising OSC will be material to the ~~Company’s~~its financial position. ~~The Company has accrued a liability for the estimated cost to defend itself in the notice of non-compliance matters.~~

Litigation

~~Table of Contents~~

In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate.

The Company is also involved in proceedings relating to assessments and rulings made by the FTB. See Note 9.10. Income Taxes.

There are no environmental proceedings arising under federal, state, or local laws or regulations to be discussed.

~~17.~~18. Risks and Uncertainties

Many businesses are still experiencing ~~a slow recovery from~~ the ~~severe economic recession,~~effects of uncertain conditions in the global economy and ~~economic uncertainty is expected to continue in 2013 due in large part to continuing political disagreements in Washington that may cause businesses~~capital markets, reduced consumer spending and ~~consumers to hold back spending.~~confidence, and continued volatility, which could adversely impact the Company’s financial condition, results of operations, and liquidity. Further, the ~~sovereign debt crisis~~volatility and disruptions in ~~Europe continues to lead to weaker~~ global ~~economic growth, heightened~~capital markets could adversely affect the Company’s investment portfolio. Although the disruption in the global financial ~~vulnerabilities and some negative rating actions.~~markets has moderated, not all global financial

markets are functioning normally. The Company is unable to predict the ~~duration and severity~~impact of current and future global economic conditions ~~and their impact~~ on the United States, and California, where the majority of the Company’s business is produced. ~~If economic conditions do not show improvement, there could be an adverse impact on the Company’s financial condition, results of operations, and liquidity.~~

The Company applies the fair value option to its investment portfolio. Rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within the Company’s financial statements, and the period-to-period changes in value could vary significantly. Decreases in market value may have a material adverse effect on the Company’s financial condition or results of operations.

The Company is taking steps to align expenses with revenues; however, not all expenses can be effectively reduced and if premium volumes decline, it could lead to higher expense ratios. The impact from the recession would also affect the capital and surplus of the Insurance Companies, which could indirectly impact the ability and capacity to pay shareholder dividends.

~~Table of Contents~~

~~18.~~19. Quarterly Financial Information (Unaudited)

~~Summarized~~The following table presents summarized quarterly financial data for ~~2012~~2015 and ~~2011~~2014 ~~are as follows:~~:


	Quarter Ended														Quarter Ended
	March 31		June 30				September 30				December 31				March 31			June 30			September 30			December 31
	(Amounts in thousands, except per share data)														(Amounts in thousands, except per share data)
2012
2015
Net premiums earned															$	720,737		$	731,546		$	745,520		$	760,094
Change in fair value of investments pursuant to the fair value option															$	(4,884	)	$	(40,783	)	$	(18,538	)	$	2,474
Income before income taxes															$	29,859		$	4,511		$	12,267		$	23,930
Net income															$	26,165		$	9,639		$	15,270		$	23,405
Basic earnings per share ⁽²⁾															$	0.47		$	0.17		$	0.28		$	0.42
Diluted earnings per share⁽²⁾															$	0.47		$	0.17		$	0.28		$	0.42
Dividends paid per share															$	0.6175		$	0.6175		$	0.6175		$	0.6200

2014
Net premiums earned	$	635,812	$	637,247			$	646,084			$	655,777			$	683,701		$	697,889		$	705,237		$	709,368
Change in fair value of investments pursuant to the fair value option	$	49,343	$	(24,788	)		$	44,783			$	(23,829	)		$	45,699		$	41,412		$	(20,528	)	$	(22,824	)
Income (loss) before income taxes	$	101,994	$	(18,853	)		$	91,330			$	(39,161	)		$	102,030		$	136,436		$	37,120		$	(28,161	)
Net income (loss)	$	73,356	$	(5,264	)		$	66,201			$	(17,382	)		$	72,649		$	94,960		$	31,296		$	(20,956	)
Basic earnings per share	$	1.34	$	(0.10	)		$	1.21			$	(0.32	)		$	1.32		$	1.73		$	0.57		$	(0.38	)
Diluted earnings per share	$	1.34	$	(0.10	)	⁽¹⁾	$	1.21			$	(0.32	)	⁽¹⁾	$	1.32		$	1.73		$	0.57		$	(0.38	)	⁽¹⁾
Dividends paid per share	$	0.61	$	0.61			$	0.61			$	0.6125			$	0.6150		$	0.6150		$	0.6175		$	0.6175
2011
Net premiums earned	$	638,487	$	642,331			$	643,626			$	641,613
Change in fair value of investments pursuant to the fair value option	$	20,904	$	20,597			$	(64,312	)		$	54,100
Income (loss) before income taxes	$	76,911	$	75,613			$	(18,118	)		$	110,693
Net income (loss)	$	58,226	$	57,251			$	(3,782	)		$	79,469
Basic earnings per share	$	1.06	$	1.04			$	(0.07	)		$	1.45
Diluted earnings per share	$	1.06	$	1.04			$	(0.07	)	⁽¹⁾	$	1.45
Dividends paid per share	$	0.60	$	0.60			$	0.60			$	0.61

__________


(1)	The dilutive impact of incremental shares is excluded from net loss position in accordance with GAAP.


(2)	The basic and diluted earnings per share do not sum due to rounding.

Net income during ~~2012~~2015 was primarily affected by ~~slightly~~net realized investment losses, an increase in losses and loss adjustment expenses partially offset by an increase in net premiums earned. Net income during the fourth quarter of 2015 was affected by net realized investment losses of $8.2 million as compared with net loss during the fourth quarter of 2014 which was affected by net realized investment losses of $21.6 million and by the $27.6 million penalty assessed by the California DOI and accrued by the Company in the fourth quarter of 2014.

Net income during 2014 was primarily affected by the $27.6 million penalty assessed by California DOI, higher net premiums earned and ~~lower operating expenses,~~increases in the fair value of the Company’s investment portfolio offset by ~~unfavorable development on loss reserves,~~ catastrophe related ~~losses,~~losses. See Note 17. Commitments and ~~higher loss frequency and severity on the California private passenger automobile line of business. The decrease in operating expenses in~~ ~~2012~~ was primarily due to ongoing cost reduction efforts and lower profitability related expenses. The unfavorable development of loss reserves is largely the result of re-estimates of California BI losses .Contingencies for "2004 NNC" discussion. The primary causes of the net loss during the ~~second~~fourth quarter of ~~2012~~2014 were ~~driven by unfavorable development on loss reserves, catastrophic losses in~~ the ~~Midwest region, and~~$27.6 million penalty described above, the declines in the fair value of the Company’s equity securities due to the overall decline in the equity market, and the severe rainstorms in California.

Net income during 2013 was primarily affected by higher net premiums earned offset by catastrophe related losses, and declines in the fair value of the Company’s investment portfolio due to the overall decline in the municipal bond markets. Net income during 2013 was also affected by the consolidation of claims and underwriting operations located outside of California into hub locations, which resulted in approximately $10 million of pre-tax office closure costs and severance related expense during the first quarter of 2013. The primary causes of the net loss during the ~~fourth~~second quarter of ~~2012 was primarily due to~~2013 were increased losses resulting

from catastrophe losses ~~from Hurricane Sandy, high seasonal frequency~~due to tornadoes in ~~California,~~Oklahoma and severe storms in the Midwest and the Southeast regions, and declines in the fair value of the Company’s municipal and equity securities due to the overall decline in the municipal and equity markets.

~~Net income during~~ ~~2011~~ ~~was mainly affected by lower policy acquisition costs~~20. Acquisition

Pursuant to an October 22, 2014 Stock Purchase Agreement, the Company purchased all the issued and ~~operating expenses, offset by unfavorable~~outstanding shares of Workmen’s Auto Insurance Company ("WAIC"), a California domiciled property and casualty insurance company, on January 2, 2015.

WAIC is a Los Angeles-based non-standard, private passenger automobile insurance company that operates predominantly in California. The Company intends to use the WAIC non-standard automobile product to complement the Company’s preferred and standard product offerings.

The Company paid $8 million in cash for the shares of WAIC, of which $2 million has been withheld in escrow for up to three years as security for any loss development on ~~loss reserves. The lower policy~~claims incurred on or prior to June 30, 2014. Based on the evaluation performed at the acquisition ~~costs are due to the lower premium deficiency reserve~~date and declines in other underwriting costs including agent contingent commissions. The operating expenses in 2011 decreased as a result of decreased consulting, advertising, and information technology expenditures. The unfavorable development of loss reserves is largely the result of re-estimates of California BI losses. The primary causesat December 31, 2015, of the ~~net~~claims reserves for WAIC for losses and loss ~~during~~adjustment expenses incurred on or prior to June 30, 2014, the ~~third quarter of~~ ~~2011~~ ~~were driven by declines~~Company estimates that it will recover the $2 million held in escrow and, therefore, the Company has deducted it from cash consideration to arrive at the fair value of total consideration transferred. In accordance with regulatory approval requirements, the ~~Company’s equity securities due~~Company made a $15 million cash capital contribution to ~~the overall decline in the equity markets.~~WAIC on January 12, 2015.

~~19. Subsequent Events~~21. Segment Information

~~During January 2013,~~The Company is primarily engaged in writing personal automobile insurance and provides related property and casualty insurance products to its customers through 14 subsidiaries in 13 states, principally in California.

The Company has one reportable business segment - the ~~Company announced a net workforce reduction of approximately~~ ~~135~~ ~~employees, representing less than~~ 3%Property and Casualty business segment.

Property and Casualty Lines

The Property and Casualty business segment offers several insurance products to the Company’s individual customers and small business customers. These insurance products are: private passenger automobile which is the Company’s primary business, and related insurance products such as homeowners, commercial automobile and commercial property. These insurance products are primarily sold to the Company’s individual customers and small business customers, which increases retention of the ~~total workforce, resulting from~~Company’s private personal automobile client base. The insurance products comprising the ~~consolidation of its claims~~Property and Casualty business segment are sold through the same distribution channels, mainly through independent and 100% owned insurance agents, and go through a similar underwriting ~~operations located outside of California into hub locations in Florida, New Jersey,~~process.

The Company’s Chief Operating Decision Maker evaluates operating results based on pre-tax underwriting results which is calculated as net premiums earned less (i) incurred losses and ~~Texas. Approximately~~ $8 ~~million to~~ ~~$13~~ ~~million (pre-tax) of office closure~~loss adjustment expenses; and (ii) underwriting expenses (policy acquisition costs and ~~severance~~other operating expenses).

Expenses are allocated based on certain assumptions that are primarily related to premiums and losses. The Company’s net investment income, net realized investment (losses) gains, other income, and interest expense ~~will be recognized during~~are excluded in evaluating pre-tax underwriting profit. The Company does not allocate its assets, including investments, or income taxes in evaluating pre-tax underwriting profit.

The following table presents operating results by reportable segment for the ~~first quarter of 2013.~~years ended:



	December 31, 2015							December 31, 2014								December 31, 2013
	Property & Casualty Lines		Other ⁽¹⁾		Total			Property & Casualty Lines		Other ⁽¹⁾			Total			Property & Casualty Lines		Other ⁽¹⁾			Total
(Amounts in millions)
Net premiums earned	$	2,906.6	$	51.3	$	2,957.9		$	2,737.3	$	58.9		$	2,796.2		$	2,638.4	$	59.8		$	2,698.2
Less:
Incurred expenses	2,117.3		28.2		2,145.5			1,951.4		34.7			1,986.1			1,926.4		36.3			1,962.7
Underwriting expenses	770.0		20.0		790.0			749.7		25.9			775.6			701.0		23.9			724.9
Underwriting gain	19.3		3.1		22.4			36.2		(1.7		)	34.5			11.0		(0.4		)	10.6
Investment income					126.3								125.7								124.5
Net realized investment (losses) gains					(83.8		)						81.1								(11.4		)
Other income					8.9								8.7								9.7
Interest expense					(3.2		)						(2.6		)						(1.3		)
Pre-tax income					$	70.6							$	247.4							$	132.1
Net income					$	74.5							$	177.9							$	112.1

The following table presents the Company’s direct premiums written and net premiums earned by line of insurance business for the years ended:



	December 31, 2015						December 31, 2014						December 31, 2013
	Property & Casualty Lines		Other ⁽¹⁾		Total		Property & Casualty Lines		Other ⁽¹⁾		Total		Property & Casualty Lines		Other ⁽¹⁾		Total
(Amounts in millions)
Private passenger automobile	$	2,345.8	$	—	$	2,345.8	$	2,223.1	$	—	$	2,223.1	$	2,165.6	$	—	$	2,165.6
Homeowners	402.2		—		402.2		374.5		—		374.5		340.0		—		340.0
Commercial automobile	153.5		—		153.5		135.9		—		135.9		104.7		—		104.7
Other	81.6		29.8		111.4		75.4		44.3		119.7		64.4		62.8		127.2
Direct premiums written	$	2,983.1	$	29.8	$	3,012.9	$	2,808.9	$	44.3	2,853.2		$	2,674.7	$	62.8	$	2,737.5

Private passenger automobile	$	2,308.6	$	—	$	2,308.6	$	2,203.0	$	—	$	2,203.0	$	2,163.4	$	—	$	2,163.4
Homeowners	379.7		—		379.7		347.9		—		347.9		328.5		—		328.5
Commercial automobile	144.4		—		144.4		121.8		—		121.8		88.3		—		88.3
Other	73.9		51.3		125.2		64.6		58.9		123.5		58.2		59.8		118.0
Net premiums earned	$	2,906.6	$	51.3	$	2,957.9	$	2,737.3	$	58.9	$	2,796.2	$	2,638.4	$	59.8	$	2,698.2

__________


(1)	"Other" represents net premiums written and earned from an operating segment that does not meet the quantitative thresholds required to be considered a reportable segment. This operating segment offers automobile mechanical breakdown warranties which are sold through auto dealerships and credit unions.

~~Table of Contents~~


Item 9.	Changes in and Disagreements ~~with~~With Accountants on Accounting and Financial Disclosure

None


Item 9A.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2012~~2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated ~~Framework.~~Framework (2013). Based upon its assessment, the Company’s management believes that, as of December 31, ~~2012~~2015, the Company’s internal control over financial reporting is effective based on these criteria.

KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this ~~2012~~2015 Annual Report on Form 10-K, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2012~~2015, which is included herein.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.


Item 9B.	Other Information

None

8187

~~Table of Contents~~

PART III


Item 10.	Directors, Executive Officers, and Corporate Governance


Item 11.	Executive Compensation


Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


Item 13.	Certain Relationships and Related Transactions, and Director Independence


Item 14.	Principal Accounting Fees and Services

Information regarding executive officers of the Company is included in Part I. For other information called for by Items 10, 11, 12, 13 and 14, reference is made to the Company’s definitive proxy statement for its Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after December 31, ~~2012~~2015 and which is incorporated herein by reference.

8288

~~Table of Contents~~

PART IV


Item 15.	Exhibits and Financial Statement Schedules

The following documents are filed as a part of this report:

1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, ~~2012~~2015 are contained herein as listed in the Index to Consolidated Financial Statements on page ~~51.~~54.

2. Financial Statement Schedules:

Report of Independent Registered Public Accounting Firm

Schedule I—Summary of Investments—Other than Investments in Related Parties

Schedule II—Condensed Financial Information of Registrant

Schedule IV—Reinsurance

All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto.

3. Exhibits



~~3.1(1)~~Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with the SEC
3.1	Articles of Incorporation of the Company, as amended to date.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1997, and is incorporated herein by this reference.
~~3.2(2)~~	3.2	Amended and Restated Bylaws of the Company.	This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended September 30, 2007, and is incorporated herein by this reference.
~~3.3(3)~~	3.3	First Amendment to Amended and Restated Bylaws of the Company.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 4, 2008, and is incorporated herein by this reference.
~~3.4(4)~~	3.4	Second Amendment to Amended and Restated Bylaws of the Company.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on February 25, 2009, and is incorporated herein by this reference.
~~4.1(5)~~	4.1	Shareholders’ Agreement dated as of October 7, 1985 among the Company, George Joseph and Gloria Joseph.
~~10.1(1)~~		This document was filed as an exhibit to Registrant’s Registration Statement on Form ~~of Agency Contract.~~S-1, File No. 33-899, and is incorporated herein by this reference.
10.2(6)*	10.1*	Profit Sharing Plan, as Amended and Restated as of March 11, 1994.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by this reference.
10.3(7)*	10.2*	Amendment 1994-I to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference.
10.4(7)*	10.3*	Amendment 1994-II to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference.
10.5(8)*	10.4*	Amendment 1996-I to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1996, and is incorporated herein by this reference.
10.6(8)*	10.5*	Amendment 1997-I to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1996, and is incorporated herein by this reference.
10.7(1)*	10.6*	Amendment 1998-I to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1997, and is incorporated herein by this reference.


10.8(9)*
10.7*	Amendment 1999-I to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1999, and is incorporated herein by this reference.
10.8*	Amendment 1999-II to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1999, and is incorporated herein by this reference.
10.9(10)*	10.9*	Amendment 2001-I to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2001, and is incorporated herein by this reference.
10.10(11)*	10.10*	Amendment 2002-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2002, and is incorporated herein by this reference.
10.11(11)*	10.11*	Amendment 2002-2 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2002, and is incorporated herein by this reference.
10.12(12)*	10.12*	Amendment 2003-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by this reference.
10.13(12)*	10.13*	Amendment 2004-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by this reference.
10.14(13)*	10.14*	Amendment 2006-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is incorporated herein by this reference.
10.15(14)*	10.15*	Amendment 2006-2 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by this reference.
10.16(13)*	10.16*	Amendment 2007-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is incorporated herein by this reference.
10.17(15)*	10.17*	Amendment 2008-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.
10.18(15)*	10.18*	Amendment 2008-2 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.
10.19(16)*	10.19*	Amendment 2009-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2009, and is incorporated herein by this reference.
10.20(16)*	10.20*	Amendment 2009-2 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2009, and is incorporated herein by this reference.
10.21(17)*	10.21*	Amendment 2011-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2011, and is incorporated herein by this reference.
~~10.22(18)~~10.22*	Amendment 2013-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2013, and is incorporated herein by this reference.
10.23*	Amendment 2014-1 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2014, and is incorporated herein by this reference.
10.24*	Amendment 2014-2 to the Mercury General Corporation Profit Sharing Plan.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2014, and is incorporated herein by this reference.
10.25*	Amendment 2015-1 to the Mercury General Corporation Profit Sharing Plan.
10.26*	Amendment 2015-2 to the Mercury General Corporation Profit Sharing Plan.



10.27	Management ~~agreement~~Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Casualty Company, Mercury Insurance Company, California Automobile Insurance Company and California General Insurance Company.

~~Table of Contents~~

This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.

~~10.23(18)~~	10.28	Expense Reimbursement and Services Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and American Mercury Insurance Company.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.
~~10.24(18)~~	10.29	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Insurance Company of Georgia.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.
~~10.25(18)~~	10.30	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Indemnity Company of Georgia.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.
~~10.26(18)~~	10.31	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Insurance Company of Illinois.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.
~~10.27(18)~~	10.32	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Indemnity Company of Illinois.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.
~~10.28(10)~~	10.33	Management Agreement effective January 1, 2002 between Mercury Insurance Services, LLC and Mercury Insurance Company of Florida and Mercury Indemnity Company of Florida.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2001, and is incorporated herein by this reference.
~~10.29(14)~~	10.34	Management Agreement dated January 22, 1997 between Mercury County Mutual Insurance Company and Mercury Insurance Services, LLC.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by this reference.
~~10.30(15)~~	10.35*	Director Compensation Arrangements.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2013, and is incorporated herein by this reference.
10.31(19)*	10.36*	Mercury General Corporation Senior Executive Incentive Bonus Plan.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 10, 2013, and is incorporated herein by this reference.
10.32(20)*	10.37*	Amended and Restated Mercury General Corporation 2005 Equity Incentive Award Plan.	This document was filed as an exhibit to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 1, 2010, and is incorporated herein by this reference.
10.33(21)10.38		Form of Incentive Stock Option Agreement under the Mercury General Corporation 2005 Equity Incentive Award Plan.
10.34(22)*		~~Restricted Stock Agreement (Time Vesting) under~~This document was filed as an exhibit to Registrant’s Form 8-K filed with the ~~Mercury General Corporation~~Securities and Exchange Commission on May 16, 2005, ~~Equity Incentive Award Plan.~~and is incorporated herein by this reference.
10.35(23)10.39		~~Restricted Stock Agreement (Performance Vesting) under the Mercury General Corporation 2005 Equity Incentive Award Plan.~~
10.36(24)*		Form of Restricted Stock Unit Award Agreement under the Mercury General Corporation 2005 Equity Incentive Award Plan.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 5, 2010, and is incorporated herein by this reference.
~~10.37(25)~~	10.40	Credit Agreement, dated as of January 2, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.
~~10.38(15)~~	10.41	Amendment Agreement to Credit Agreement, dated as of January 26, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.
~~10.39(26)~~10.42		Second Amendment Agreement to Credit Agreement, dated as of August 4, 2011, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 5, 2011, and is incorporated herein by this reference.


10.40(27)*
10.43	Third Amendment Agreement to Credit Agreement, dated as of July 31, 2013, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 5, 2013, and is incorporated herein by this reference.
10.44	Fourth Amendment Agreement to Credit Agreement, dated as of December 3, 2014, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2014, and is incorporated herein by this reference.
10.45*	Mercury General Corporation Annual Incentive Plan.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 2, 2011, and is incorporated herein by this reference.
10.46	Credit Agreement, dated as of July 2, 2013, by and among Mercury General Corporation, Bank of America, as Administrative Agent, and the Lenders party thereto.	This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended June 30, 2013, and is incorporated herein by this reference.
10.47	First Amendment Agreement to Credit Agreement, dated as of December 3, 2014, among Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.	This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2014, and is incorporated herein by this reference.
10.48*	Mercury General Corporation 2015 Incentive Award Plan	This document was filed as an exhibit to Registrant’s Form S-8 filed with the Securities and Exchange Commission on February 20, 2015 (File No. 333-202204), and is incorporated herein by this reference.
10.49*	Form of Restricted Stock Unit Agreement under the Mercury General Corporation 2015 Incentive Award Plan	This document was filed as an exhibit to Registrant’s Form S-8 filed with the Securities and Exchange Commission on February 20, 2015 (File No. 333-202204), and is incorporated herein by this reference.
10.50*	Form of Stock Option Agreement under the Mercury General Corporation 2015 Incentive Award Plan	This document was filed as an exhibit to Registrant’s Form S-8 filed with the Securities and Exchange Commission on February 20, 2015 (File No. 333-202204), and is incorporated herein by this reference.
21.1		Subsidiaries of the Company.	This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2014, and is incorporated herein by this reference.
23.1		Consent of Independent Registered Public Accounting Firm.
31.1		Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
32.2		Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
101**		The following financial statements from the Annual Report on Form 10-K for the year ended December 31, 2012, filed on February 11, 2013, formatted in XBRL (Extensible Business Reporting Language) and furnishedctronically herewith: (i) the Consolidated Balance Sheets; (ii) The Consolidated Statements of Operations; (iii) the Consolidated Statements of Stockholers’ Equity; (iv) the Consolidated Statements of Comprehensive Income; and (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements.



~~(1)~~101.INS	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1997, and is incorporated herein by this reference.~~

~~Table of Contents~~

XBRL Instance Document
~~(2)~~101.SCH	~~This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended September 30, 2007, and is incorporated herein by this reference.~~

XBRL Taxonomy Extension Schema Document
~~(3)~~101.CAL	~~This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 4, 2008, and is incorporated herein by this reference.~~

XBRL Taxonomy Extension Calculation Linkbase Document
~~(4)~~101.DEF	~~This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on February 25, 2009, and is incorporated herein by this reference.~~

XBRL Taxonomy Extension Definition Linkbase Document
~~(5)~~101.LAB	~~This document was filed as an exhibit to Registrant’s Registration Statement on Form S-1, File No. 33-899, and is incorporated herein by this reference.~~

XBRL Taxonomy Extension Label Linkbase Document
~~(6)~~101.PRE	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by this reference.~~

XBRL Taxonomy Extension Presentation Linkbase Document
~~(7)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference.~~


~~(8)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1996, and is incorporated herein by this reference.~~


~~(9)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1999, and is incorporated herein by this reference.~~


~~(10)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2001, and is incorporated herein by this reference.~~


~~(11)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2002, and is incorporated herein by this reference.~~


~~(12)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by this reference.~~


~~(13)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is incorporated herein by this reference.~~


~~(14)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by this reference.~~


~~(15)~~	~~This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.~~


~~(16)~~	~~This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 2009, and is incorporated herein by this reference.~~


~~(17)~~	~~This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 2011, and is incorporated herein by this reference.~~


~~(18)~~	~~This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.~~


~~(19)~~	~~This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 19, 2008, and is incorporated herein by this reference.~~


~~(20)~~	~~This document was filed as an exhibit to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 1, 2010, and is incorporated herein by this reference.~~


~~(21)~~	~~This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 16, 2005, and is incorporated herein by this reference.~~


~~(22)~~	~~This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended March 31, 2006, and is incorporated herein by this reference.~~


~~(23)~~	~~This document was filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended March 31, 2010, and is incorporated herein by this reference.~~


~~(24)~~	~~This document was filed as an exhibit to Registrant's Form 8-K filed with the Securities and Exchange Commission on October 5, 2010, and is incorporated herein by this reference.~~


~~(25)~~	~~This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended June 30, 2008, and is incorporated herein by this reference.~~


~~(26)~~	~~This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 5, 2011, and is incorporated herein by this reference.~~


~~(27)~~	~~This document was filed as an exhibit to Registrant's Form 8-K filed with the Securities Exchange Commission on May 2, 2011, and is incorporated herein by this reference.~~


*	Denotes management contract or compensatory plan or arrangement.

Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under Sections 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to the liability of those sections, except as shall be expressly set forth by specific reference in such filings.

8593

~~Table of Contents~~

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.




MERCURY GENERAL CORPORATION

BY	/S/ GABRIEL TIRADOR
	Gabriel Tirador
	President and Chief Executive Officer

February ~~11, 2013~~9, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Signature		Title		Date

/S/S/ GEORGE JOSEPH George Joseph		Chairman of the Board		February ~~11, 2013~~9, 2016

/S~~/ GABRIEL~~ T~~IRADOR~~ S/ GABRIEL TIRADOR Gabriel Tirador		President and Chief Executive Officer and Director (Principal Executive Officer)		February ~~11, 2013~~9, 2016

/S/ THEODORE R. STALICK Theodore R. Stalick		Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)		February ~~11, 2013~~9, 2016

/S~~/ BRUCE~~S/ BRUCE A. BBUNNER ___~~UNNER~~ Bruce A. Bunner	Director		February 9, 2016

/S/ MICHAEL D. CURTIUS Michael D. Curtius	Director		February ~~11, 2013~~9, 2016

/S/ JAMES G. ELLIS James G. Ellis	Director		February 9, 2016

/S/ CHRISTOPHER GRAVES Christopher Graves	Director		February 9, 2016

/S/ RICHARD E. GRAYSON Richard E. Grayson	Director		February 9, 2016

/S/ MARTHA E. MARCONS~~/ MICHAEL~~ ~~D. CURTIUS~~ ~~Michael D. Curtius~~Martha E. Marcon		Director		February ~~11, 2013~~9, 2016

/S~~/ Christopher Graves~~S/ JOHN G. NACKEL ~~Christopher Graves~~John G. Nackel		Director		February ~~11, 2013~~9, 2016

/S/ DONALD P. NEWELL Donald P. Newell	Director		February 9, 2016

/S~~/ RICHARD~~ ~~E. GRAYSON~~ S/ GLENN S. SCHAFER ~~Richard E. Grayson~~Glenn S. Schafer		Director		February ~~11, 2013~~9, 2016

/S~~/ MARTHA~~ ~~E. MARCON~~ S/ DONALD R. SPUEHLER ~~Martha E. Marcon~~Donald R. Spuehler		Director		February ~~11, 2013~~9, 2016

/S~~/ DONALD~~ ~~P. NEWELL~~ ~~Donald P. Newell~~		~~Director~~		~~February 11, 2013~~

/S~~/ DONALD~~ ~~R. SPUEHLER~~ ~~Donald R. Spuehler~~		~~Director~~		~~February 11, 2013~~

8694

~~Table of Contents~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Mercury General Corporation:

Under date of February ~~11, 2013~~9, 2016, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries (the Company) as of December 31, ~~2012~~2015 and ~~2011~~2014, and the related consolidated statements of operations, ~~comprehensive income,~~ shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2012~~2015, as contained in the ~~Annual Report~~2015 annual report on Form ~~10-K for the year~~ ~~2012~~.10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules in the accompanying index. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Los Angeles, California

February ~~11, 2013~~9, 2016

See accompanying Report of Independent Registered Public Accounting Firm

S-1

~~Table of Contents~~

SCHEDULE I

MERCURY GENERAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2012
MERCURY GENERAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2015							MERCURY GENERAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2015

Type of Investment	Cost		Fair Value		Amounts in the Balance Sheet		Cost		Fair Value		Amounts in the Balance Sheet
	(Amounts in thousands)						(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies	$	13,999	$	14,204	$	14,204	$	22,542	$	22,507	$	22,507
Municipal securities	2,040,537		2,165,095		2,165,095		2,417,046		2,505,039		2,505,039
Mortgage-backed securities	27,786		30,703		30,703		49,639		49,839		49,839
Corporate securities	151,019		155,551		155,551		255,606		243,372		243,372
Collateralized debt obligations	37,562		42,801		42,801
Collateralized loan obligations							50,710		50,548		50,548
Other asset-backed securities							8,732		8,698		8,698
Total fixed maturity securities	2,270,903		2,408,354		2,408,354		2,804,275		2,880,003		2,880,003
Equity securities:
Common stock:
Public utilities	82,474		85,106		85,106
Banks, trust and insurance companies	19,701		22,166		22,166
Energy and other	352,889		346,809		346,809
Common stock							275,479		280,263		280,263
Non-redeemable preferred stock	10,895		11,701		11,701		25,161		24,668		24,668
Partnership interest in a private credit fund	10,000		11,306		11,306
Private equity funds							12,888		10,431		10,431
Total equity securities	475,959		477,088		477,088		313,528		315,362		315,362
Short-term investments	294,607		294,653		294,653		185,353		185,277		185,277
Total investments	$	3,041,469	$	3,180,095	$	3,180,095	$	3,303,156	$	3,380,642	$	3,380,642

See accompanying Report of Independent Registered Public Accounting Firm

S-2

~~Table of Contents~~

SCHEDULE I, Continued

MERCURY GENERAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2011
MERCURY GENERAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2014							MERCURY GENERAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2014

Type of Investment	Cost		Fair Value		Amounts in the Balance Sheet		Cost		Fair Value		Amounts in the Balance Sheet
	(Amounts in thousands)						(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies	$	14,097	$	14,298	$	14,298	$	16,028	$	16,108	$	16,108
Municipal securities	2,186,259		2,271,275		2,271,275		2,160,710		2,275,455		2,275,455
Mortgage-backed securities	33,008		37,371		37,371		45,519		47,691		47,691
Corporate securities	73,009		75,142		75,142		258,940		256,930		256,930
Collateralized debt obligations	39,247		47,503		47,503
Collateralized loan obligations							22,297		22,216		22,216
Total fixed maturity securities	2,345,620		2,445,589		2,445,589		2,503,494		2,618,400		2,618,400
Equity securities:
Common stock:
Public utilities	22,969		26,342		26,342
Banks, trust and insurance companies	17,495		16,027		16,027
Energy and other	326,135		316,592		316,592
Common stock							349,839		372,598		372,598
Non-redeemable preferred stock	11,818		11,419		11,419		28,012		28,563		28,563
Partnership interest in a private credit fund	10,000		10,008		10,008
Private equity funds							10,000		11,719		11,719
Total equity securities	388,417		380,388		380,388		387,851		412,880		412,880
Short-term investments	236,433		236,444		236,444		373,180		372,542		372,542
Total investments	$	2,970,470	$	3,062,421	$	3,062,421	$	3,264,525	$	3,403,822	$	3,403,822

See accompanying Report of Independent Registered Public Accounting Firm

S-3

SCHEDULE II

~~Table of Contents~~

SCHEDULE II MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS					MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS

	December 31,				December 31,
	2012		2011		2015		2014
	(Amounts in thousands)				(Amounts in thousands)
ASSETS
Investments, at fair value:
Equity securities (cost $31,178; $24,885)	$	27,127	$	20,282
Short-term investments (cost $47,174; $26,817)	47,174		26,817
Fixed maturity securities (cost $557; $0)					$	571	$	—
Equity securities (cost $131,217; $189,032)					127,572		182,300
Short-term investments (cost $1,144; $9,744)					1,144		9,744
Investment in subsidiaries	1,760,760		1,787,047		1,819,426		1,783,049
Total investments	1,835,061		1,834,146		1,948,713		1,975,093
Cash	10,199		29,219		20,139		52,326
Accrued investment income	4		17		208		158
Amounts receivable from affiliates	200		200		220		1,181
Current income taxes	6,333		22		8,894		239
Deferred income taxes	729		1,654		10,524		6,975
Income tax receivable from affiliates	6,182		12,833		5,917		3,482
Other assets					2,981		1,095
Total assets	$	1,858,708	$	1,878,091	$	1,997,596	$	2,040,549
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	47	$	48
Notes payable					$	150,000	$	150,000
Amounts payable to affiliates	95		0		25		97
Income tax payable to affiliates	16,069		20,288		26,439		14,728
Other liabilities	0		272		247		278
Total liabilities	16,211		20,608		176,711		165,103
Commitments and contingencies
Shareholders’ equity:
Common stock	79,380		76,634		90,985		88,705
Additional paid in capital	0		538
Additional paid-in capital					8,870		3,804
Retained earnings	1,763,117		1,780,311		1,721,030		1,782,937
Total shareholders’ equity	1,842,497		1,857,483		1,820,885		1,875,446
Total liabilities and shareholders’ equity	$	1,858,708	$	1,878,091	$	1,997,596	$	2,040,549

See accompanying notes to condensed financial information.

See accompanying Report of Independent Registered Public Accounting Firm

S-4

~~Table of Contents~~SCHEDULE II, Continued

SCHEDULE II, Continued MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS
MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS										MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS

	Year Ended December 31,									Year Ended December 31,
	2012			2011			2010			2015			2014			2013
	(Amounts in thousands)									(Amounts in thousands)
Revenues:
Net investment income	$	1,114		$	1,411		$	951		$	4,314		$	4,478		$	1,293
Net realized investment gains (losses)	697			(1,866		)	1,420
Net realized investment (losses) gains										(7,026		)	(9,428		)	3,416
Total revenues	1,811			(455		)	2,371			(2,712		)	(4,950		)	4,709
Expenses:
Other operating expenses	1,688			2,267			12,945			7,526			5,971			2,924
Interest	0			1,341			2,180			2,127			1,746			318
Total expenses	1,688			3,608			15,125			9,653			7,717			3,242
Income (loss) before income taxes and equity in net income of subsidiaries	123			(4,063		)	(12,754		)
Income tax expense (benefit)	1,800			(684		)	(3,507		)
(Loss) income before income taxes and equity in net income of subsidiaries										(12,365		)	(12,667		)	1,467
Income tax (benefit) expense										(4,708		)	(100		)	3,310
Loss before equity in net income of subsidiaries	(1,677		)	(3,379		)	(9,247		)	(7,657		)	(12,567		)	(1,843		)
Equity in net income of subsidiaries	118,588			194,543			161,445			82,136			190,516			113,986
Net income	$	116,911		$	191,164		$	152,198		$	74,479		$	177,949		$	112,143

~~STATEMENTS OF COMPREHENSIVE INCOME~~

Year Ended December 31,
2012 2011 2010
(Amounts in thousands)
Net income $ 116,911
$ 191,164
$ 152,198
Other comprehensive income (loss), before tax:
Gains (losses) on hedging instrument 0
1,139
(220 )
Other comprehensive income (loss), before tax 0
1,139
(220 )
Income tax expense (benefit) related to gains (losses) on hedging instrument 0
399
(77 )
Other comprehensive income (loss), net of tax: 0
740
(143 )
Comprehensive income $ 116,911
$ 191,904
$ 152,055

See accompanying notes to condensed financial information.

See accompanying Report of Independent Registered Public Accounting Firm

S-5

~~Table of Contents~~SCHEDULE II, Continued

SCHEDULE II, Continued MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS										MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS

	Year Ended December 31,									Year Ended December 31,
	2012			2011			2010			2015			2014			2013
	(Amounts in thousands)									(Amounts in thousands)
Cash flows from operating activities:
Net cash used in operating activities	$	(5,590	)	$	(312	)	$	(4,441	)
Net cash provided by (used in) operating activities										$	548		$	(3,434	)	$	(843	)
Cash flows from investing activities:
Dividends from subsidiaries	145,000			270,000			128,000
Fixed maturity securities:
Calls or maturities	0			0			265
Equity securities:
Capital contribution to subsidiaries										(90,125		)	(30,125		)	(40,125		)
Distributions received from special purpose entities										8,883			6,756			—
Dividends received from subsidiaries										133,000			225,000			120,000
Purchases of fixed maturity securities available for sale in nature										(571		)	—			—
Equity securities available for sale in nature
Purchases	(14,102		)	(50,056		)	(836		)	(146,236		)	(254,572		)	(25,038		)
Sales	7,308			43,520			2,070			192,005			90,422			25,798
Calls	0			0			895
Net increase in short-term investments	(20,413		)	(21,451		)	(583		)
(Decrease) in payable for securities, net										—			(2,489		)	2,489
Net decrease in short-term investments										8,612			1,346			36,085
Business acquisition										(6,000		)	—			—
Other, net	304			1,047			(110		)	1,945			2,191			895
Net cash provided by investing activities	118,097			243,060			129,701			101,513			38,529			120,104
Cash flows from financing activities:
Dividends paid to shareholders	(134,105		)	(132,142		)	(129,863		)	(136,386		)	(135,496		)	(134,776		)
Excess tax benefit from exercise of stock options	86			56			132			27			148			202
Payment to retire senior notes	0			(125,000		)	0
Proceeds from stock options exercised	2,492			1,951			733			2,111			6,247			1,446
Proceeds from bank loan										—			100,000			50,000
Net cash used in financing activities	(131,527		)	(255,135		)	(128,998		)	(134,248		)	(29,101		)	(83,128		)
Net decrease in cash	(19,020		)	(12,387		)	(3,738		)
Net (decrease) increase in cash										(32,187		)	5,994			36,133
Cash:
Beginning of year	29,219			41,606			45,344			52,326			46,332			10,199
End of year	$	10,199		$	29,219		$	41,606		$	20,139		$	52,326		$	46,332
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	0		$	1,932		$	1,972		$	2,153		$	1,757		$	318
Income taxes paid (received)	$	4,667		$	(1,252	)	$	(8,755	)	$	1,807		$	2,112		$	(827	)

See accompanying notes to condensed financial information.

See accompanying Report of Independent Registered Public Accounting Firm

S-6

~~Table of Contents~~

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO CONDENSED FINANCIAL INFORMATION

The accompanying condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.

Distributions received from Special Purpose Entities

On February 13, 2014, Fannette Funding LLC ("FFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into a total return swap agreement with Citibank. Under the total return swap agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap is secured by approximately $30 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 135 basis points on approximately $95 million of underlying obligations as of December 31, 2015. The agreement had an initial term of one year , subject to annual renewal, and was renewed for an additional one-year term expiring February 13, 2017, with interest equal to LIBOR plus 145 basis points.

On August 9, 2013, Animas Funding LLC ("AFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into a three-year total return swap agreement with Citibank. Under the total return swap agreement, AFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest equal to LIBOR plus 120 basis points on the outstanding notional amount of the underlying obligations, which was approximately $124 million as of December 31, 2015. The total return swap is secured by approximately $40 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets.

Distributions of $8.9 million and $6.8 million were received in 2015 and 2014, respectively, from these special purpose entities.

Dividends received from Subsidiaries

Dividends of $~~145,000,000, $270,000,000~~,$133,000,000, $225,000,000 and $~~128,000,000~~$120,000,000 were received by ~~the Company~~Mercury General from its 100% owned insurance subsidiaries in ~~2012, 2011,~~2015, 2014 and ~~2010,~~2013, respectively, and are recorded as a reduction to investment in subsidiaries.

Capitalization of Insurance Subsidiaries

Mercury General made capital contributions to its insurance subsidiaries of $~~125,000~~$90,125,000, $30,125,000 and $40,125,000 in ~~each~~2015, 2014 and 2013.

Business Acquisition

Pursuant to an October 22, 2014 Stock Purchase Agreement, Mercury General purchased all the issued and outstanding shares of ~~2012, 2011,~~Workmen’s Auto Insurance Company ("WAIC"), a California domiciled property and ~~2010.~~casualty insurance company, on January 2, 2015.

~~Guarantees~~WAIC is a Los Angeles-based non-standard, private passenger automobile insurance company that operates predominantly in California. Mercury General intends to use the WAIC non-standard automobile product to complement its preferred and standard product offerings.

Mercury General paid $8 million in cash for the shares of WAIC, of which $2 million has been withheld in escrow for up to three years as security for any loss development on claims incurred on or prior to June 30, 2014. Based on the evaluation performed at the acquisition date and at December 31, 2015, of the claims reserves for WAIC for losses and loss adjustment expenses incurred on or prior to June 30, 2014, Mercury General estimates that it will recover the $2 million held in escrow, and therefore deducted it from cash consideration to arrive at the fair value of total consideration transferred. In accordance with regulatory approval requirements, Mercury General made a $15 million cash capital contribution to WAIC on January 12, 2015.

See accompanying Report of Independent Registered Public Accounting Firm

S-7

Notes Payable

On July 2, 2013, Mercury General entered into an unsecured $200 million five-year revolving credit facility. Effective December 3, 2014, the Company expanded the borrowing capacity from $200 million to $250 million. Total borrowings were $150 million as of December 31, 2015. The interest rate was approximately1.53% at December 31, 2015.

Commitments and Contingencies

The borrowings by MCC, a subsidiary, under the ~~$120~~$120 million credit facility and ~~$20~~$20 million bank loan are secured by approximately ~~$182~~$180 million of municipal bonds owned by MCC, at fair value, held as collateral. The total borrowings of ~~$140~~$140 million are guaranteed by ~~the Company.~~Mercury General.

Federal Income Taxes

The Company files a consolidated federal income tax return ~~with~~for the following ~~subsidiaries:~~entities:



Mercury Casualty Company		Mercury County Mutual Insurance Company
Mercury Insurance Company		Mercury Insurance Company of Florida
~~Mercury~~California Automobile Insurance Company		Mercury Indemnity Company of America
California ~~Automobile Insurance Company~~		~~Mercury Select Management Company, Inc.~~
~~California~~ General Underwriters Insurance Company, Inc.		~~American~~ Mercury ~~MGA,~~Select Management Company, Inc.
Mercury Insurance Company of Illinois		~~Concord~~Mercury Insurance Services ~~Inc.~~LLC
Mercury Insurance Company of Georgia		~~Mercury Insurance Services~~AIS Management LLC
Mercury Indemnity Company of Georgia		~~Mercury Group, Inc.~~
~~Mercury National Insurance Company~~		~~AIS Management LLC~~
~~American Mercury Insurance Company~~		Auto Insurance Specialists LLC
~~American~~ Mercury ~~Lloyds~~National Insurance Company		PoliSeek AIS Insurance Solutions, Inc.
American Mercury ~~County Mutual~~Insurance Company		Animas Funding LLC
American Mercury Lloyds Insurance Company		Fannette Funding LLC
Workman's Auto Insurance Company

The method of allocation between the companies is subject to an agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses incurred by the insurance subsidiaries to the extent it can be used in the current consolidated return.

~~See accompanying Report of Independent Registered Public Accounting Firm~~

~~S-7~~

~~Table of Contents~~

SCHEDULE IV MERCURY GENERAL CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, Property and Liability Insurance Earned Premiums	SCHEDULE IV MERCURY GENERAL CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, Property and Liability Insurance Earned Premiums									SCHEDULE IV MERCURY GENERAL CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, Property and Liability Insurance Earned Premiums

	2012			2011			2010			2015			2014			2013
	(Amounts in thousands)									(Amounts in thousands)
Direct amounts	$	2,578,715		$	2,569,661		$	2,569,942		$	2,970,424		$	2,806,889		$	2,704,401
Ceded to other companies	(5,066		)	(4,134		)	(4,468		)	(12,964		)	(11,185		)	(7,059		)
Assumed	1,271			530			1,211			437			491			845
Net amounts	$	2,574,920		$	2,566,057		$	2,566,685		$	2,957,897		$	2,796,195		$	2,698,187

See accompanying Report of Independent Registered Public Accounting Firm

S-8



Accident Year	Number of Claims Expected	Actual Recorded Severity at 12/31/12		Implied Inflation Rate Recorded ⁽¹⁾		(A) Pro-forma severity if actual severity is lower by 10% for 2012, 5% for 2011, and 3% for 2010		(B) Pro-forma severity if actual severity is higher by 10% for 2012, 5% for 2011, and 3% for 2010		Favorable loss development if actual severity is less than recorded (Column A)		Unfavorable loss development if actual severity is more than recorded (Column B)
2012	28,671	$	9,992	10.5	%	$	8,993	$	10,991	$	28,642,000	$	(28,642,000	)
2011	27,092	$	9,045	2.3	%	$	8,593	$	9,497	$	12,246,000	$	(12,246,000	)
2010	27,052	$	8,845	(1.2	)%	$	8,580	$	9,110	$	7,169,000	$	(7,169,000	)
2009	25,521	$	8,956	—		—		—		—		—
Total Loss Development—Favorable (Unfavorable)										$	48,057,000	$	(48,057,000	)



	Gain (Loss) Recognized in Comprehensive Income
	Year Ended December 31,
Derivatives Contracts for Cash Flow Hedges	2012		2011		2010
	(Amounts in thousands)
Interest rate contracts—Other comprehensive income (loss)	$	0	$	1,139	$	(220	)



	Gain (Loss) Recognized in Income
	Year Ended December 31,
Derivatives Not Designated as Hedging Instruments	2012		2011		2010
	(Amounts in thousands)
Interest rate contract—Other revenue (expense)	$	567	$	1,232	$	(457	)
Equity contracts—Net realized investment gains	2,680		9,000		4,615
Total	$	3,247	$	10,232	$	4,158

~~Exam Type~~

~~Period Under Review~~

~~Status~~

~~Market Conduct~~

~~January 2009 to December 2011~~

~~DOI terminated exam. No report to be issued.~~