•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 market conditions. The Company~~ believes that the automobile insurance industry market ~~is hardening with carriers generally raising rates, although this also depends on individual state profitability and the carriers’ growth appetite.~~

conditions during the first half of 2021 were soft. The market in most states has hardened during the second half of 2021 as insurance carriers began to increase rates reflecting high loss severity and increasing loss frequency as the country emerged from the COVID-19 pandemic. In California, market conditions remain soft due to the difficulty in obtaining regulatory approval for rate increases.

Technology

Since March of 2020, the Company has been leveraging its information technology capabilities to enable most of its employees to work from home and anywhere in the U.S. using mobile and collaborative technologies. In 2021, the Company focused on improving its digital and customer self-service capabilities. Additionally, the Company enhanced its underwriting capabilities and decisioning using a modern rules engine and several AI-enabled technologies. The Company ~~implemented~~continued its core insurance platform modernization initiative in an effort to complete the migration of its insurance business from its legacy systems to Guidewire’s InsuranceSuite, ~~in 2010, which is~~ a widely adopted ~~industry~~industry-leading software ~~leader. Over~~for property and casualty insurance. In 2022, the ~~past several years, InsuranceSuite~~Company intends to continue to invest in the modernization of its technology platforms. The Company also expects to complete the migration of its California private passenger automobile underwriting and umbrella insurance to its consolidated insurance core system.

Note on COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization (the "WHO"), and the outbreak has ~~been deployed~~become increasingly widespread in ~~most of~~ the ~~states and lines of business~~United States, including in the markets in which the Company operates. ~~Throughout 2017, there~~The pandemic has had a notable impact on general economic conditions, including, but not limited to, the temporary closures of many businesses, “shelter in place” and other governmental orders, and reduced consumer spending. The Company is following guidelines established by the Centers for Disease Control, the WHO and orders issued by the state and local governments in which the Company operates. The Company has taken a number of precautionary steps to safeguard its customers, business and employees from COVID-19, including activating its Business Continuity Plan. Most of the Company's employees have been ~~numerous enhancements~~working remotely, with only certain operationally critical employees working on site at various locations. The Company is monitoring and assessing the impact of the COVID-19 pandemic daily, including recommendations and orders issued by federal, state and local governments. In November 2021, the Company extended its "work-from-home" policy indefinitely under the new "Mercury's My Workplace" policy, allowing most of its employees to work from anywhere in the U.S. beginning January 2022.

The Company’s automobile line of insurance business began experiencing a significant decrease in loss frequency in March of 2020, and it remained lower than historical levels through the first half of 2021, although it began to increase as more drivers returned to the road following the gradual reopening of businesses in California and other states. After bottoming out in the second quarter of 2020, loss frequency has been increasing and is near pre-pandemic levels for some coverages and exceeds pre-pandemic levels for the comprehensive coverage due to a rise in vehicle thefts and property crimes. The severity of accidents, for both bodily injury and the cost to repair vehicles, has increased following the outbreak of the COVID-19 pandemic primarily due to a higher percentage of high-speed serious accidents on less congested roads and freeways. The cost to repair vehicles may remain high due to supply chain and labor force issues exacerbated by the high overall inflation rate. The COVID-19 pandemic also created more uncertainty, and the total effect on losses occurring during the COVID-19 era will not be known for several years. The Company expects more late reported claims and a prolonged settlement period, particularly for bodily injury claims. Many courts have been closed, and claimants may have been reluctant to seek medical treatments due to the pandemic. The recent increases in loss frequency combined with sustained high loss severity have negatively impacted the Company's ~~information technology systems~~results of operations, when compared to ~~make them easier~~other quarters following the first quarter of 2020, and ~~more intuitive~~the Company has submitted private passenger automobile rate filings in many states requesting rate increases.

Many businesses have been required by state and local governments to cease or substantially reduce operations, and have suffered severe financial losses as a result. Many of these businesses have submitted claims to their insurers under the business interruption coverage of their commercial property policies, resulting in coverage disputes in many states. While the Company does insure a modest number of businesses with this business interruption coverage, these pandemic-related losses are not covered under the Company's policy terms and conditions. The Company’s business interruption, or “business income” coverage, requires a “direct physical loss” to the property that results in suspension of operations, such as a fire or water loss. The coverage is not triggered under the present circumstances. Most of the Company’s policies also contain an exclusion for ~~agents, customers, shoppers,~~losses caused directly or indirectly by “virus or bacteria.” This exclusion was adopted by many insurers after the SARS outbreak of 2003-2004, upon recognition that such a pandemic could result in losses far exceeding the capacity of individual insurers and ~~internal users.~~ the private insurance market as a whole. The Company does not believe it has any material exposure to business interruption claims.

Due to disruptions in the equity and fixed maturity securities markets following the outbreak of the COVID-19 pandemic, the Company's investment portfolio, along with the overall securities in the financial markets, substantially declined in value in the first quarter of 2020; however, its investment portfolio recovered in value during the subsequent quarters as the overall securities markets improved. In March 2020, the Federal Open Market Committee (“FOMC”) unveiled a set of aggressive measures to cushion the economic impact of the global COVID-19 crisis, including, among others, cutting the federal funds rate by 100 basis points to a range of 0.00% to 0.25% and establishing a series of emergency credit facilities in an effort to support the flow of credit in the economy, easing liquidity pressure and calming market turmoil. While volatility in the financial markets remains elevated, overall market liquidity concerns have eased following the actions taken by the FOMC. The Company believes that it will continue to have sufficient liquidity to support its business operations during the COVID-19 crisis and beyond without the forced sale of investments, based on its existing cash and short-term investments, future cash flows from operations, and $75 million of undrawn credit in its revolving credit facility.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, a substantial tax-and-spending package intended to provide economic stimulus to address the financial impact of the COVID-19 pandemic. The CARES Act includes, among other items, cash payments to individuals as well as emergency grants and forgivable loans to small businesses, if they meet certain criteria. On March 11, 2021, the President of the United States signed the American Rescue Plan Act of 2021, a $1.9 trillion COVID-19 relief bill, to provide additional relief to address the continued impact of COVID-19 on the economy, public health, state and local governments, individuals, and businesses. To the extent the Company's existing or potential policyholders and business partners are aided by such relief programs, the negative impact of the pandemic on its results of operations may be mitigated.

The Company will continue to ~~invest~~monitor the impact of the COVID-19 pandemic, and the effects of the CARES Act, the American Rescue Plan Act of 2021 and any additional legislative relief. The extent of the impact of the pandemic on the Company's business and financial results will depend largely on future developments, including the duration of the pandemic, its impact on capital and financial markets and the related impact on consumer confidence and spending, the success of broad vaccine rollouts in ~~improving user experiences with its information technology systems.~~ the U.S. and around the world, and the impact of actions taken in response to new variants of COVID-19, most of which are highly uncertain and cannot be predicted. As the impact of the COVID-19 pandemic continues to evolve, additional impacts may arise.

B. Regulatory and Legal Matters

The process for implementing rate changes varies by state. For more detailed information related to insurance rate approval, see "Item 1. Business—Regulation."

During ~~2017,~~2021, the Company implemented rate changes in ~~eleven~~11 states. In California, the following rate ~~increases were implemented or~~increase was approved by the California DOI for lines of insurance business that exceeded 5% of the Company's total net premiums earned in ~~2017:~~2021:


▪	In January 2018, the California DOI approved a 5.0% rate increase on MIC's private passenger automobile line of insurance business, which represented approximately 51% of the total Company's net premiums earned in 2017. The Company expects to implement this rate increase in March 2018.


▪	In March 2017, the California DOI approved a 6.9% rate increase on CAIC's private passenger automobile line of insurance business, which represented approximately 14% of the Company's total net premiums earned in 2017. This rate increase became effective in May 2017.


▪	In April 2017, the California DOI approved a 6.9% rate increase on the California homeowners line of insurance business, which represented approximately 12% of the Company's total net premiums earned in 2017. This rate increase became effective in August 2017.

▪In March ~~2006,~~2021, the California DOI ~~issued~~approved a 6.99% rate increase on the California homeowners line of insurance business, which represented approximately 15% of the Company's total net premiums earned in 2021. The Company implemented this rate increase in June 2021.

The Company primarily sells its California private passenger automobile insurance business through two of its insurance subsidiaries, MIC and CAIC. MIC accepts only “Good Drivers” (as defined in the California Insurance Code) and provides lower rates, but its policy has narrower coverages than the CAIC policy. At the request of the California DOI, the Company intends to broaden the coverages in MIC, making the coverages the same as in CAIC. Once the coverages are standardized across these two insurance subsidiaries, the Company will automatically move qualified Good Drivers from CAIC to MIC. Good Drivers accounted for approximately 87% of the Company's California voluntary private passenger automobile policies-in-force at December 31, 2021, while higher risk categories accounted for approximately 13%. The implementation of the transfer of qualified Good Drivers from CAIC to MIC began in January 2022 and is expected to reduce the Company's annual California private passenger automobile insurance premiums earned by approximately $25 million over a 24-month period beginning in the first quarter of 2022. The increase in losses resulting from broadening the coverages in MIC is not estimable, but is not expected to be material.

In July 2019, the governor of California signed a bill that created a $21 billion fund (the "California Wildfire Fund") to help then bankrupt Pacific Gas and Electric Company ("PG&E") and the state's other investor-owned utility companies cover liabilities arising from future wildfires caused by their equipment. The bill requires investor-owned utility companies to fund half of the California Wildfire Fund. The other half is to be funded by surcharges paid by ratepayers across the state. On July 1, 2020, PG&E made an ~~Amended Notice~~announcement that it emerged out of ~~Non-Compliance~~ bankruptcy and made an initial deposit of approximately $5 billion

to ~~a Notice of Non-Compliance originally issued in February 2004 (as amended, “2004 NNC”) alleging~~the California Wildfire Fund. It is expected that the Company ~~charged rates in violation~~and other insurers will be reimbursed for some portion of the ~~California Insurance Code, willfully permitted~~claims paid for its ~~agents~~policyholders if it is determined that a wildfire is caused by equipment failure. The announcement also confirmed that PG&E funded the Subrogation Trust Fund with $11 billion, which was set up to ~~charge broker~~reimburse insurance companies and other entities that paid claims by individuals and businesses related to wildfires that occurred in the recent past years prior to July 1, 2020. The Company received approximately $23 million, net of fees, in ~~violation of California law,~~2020 from the Subrogation Trust Fund. However, this subrogation recovery was for losses and ~~willfully misrepresented the actual price insurance consumers could expect~~loss adjustment expenses previously ceded to pay for insurance by the amount of a fee charged by the consumer's insurance broker. The California DOI sought to impose a fine for each policy on which the Company allegedly permitted an agent to charge a broker fee, 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 bifurcated the 2004 NNC between (a) the California DOI’s order to show cause (the “OSC”), in which the California DOI asserts the false advertising allegations and accusation, and (b) the California DOI’s notice of noncompliance (the “NNC”), in which the California DOI asserts the unlawful rate allegations. In February 2012, the administrative law judge (“ALJ”) submitted a proposed decision dismissing the NNC, but the Commissioner rejected the ALJ’s proposed decision. The Company challenged the rejection in Los Angeles Superior Court in April 2012, and the Commissioner responded with a demurrer. Following a hearing, the Superior Court sustained the Commissioner’s demurrer, based on the Company’s ~~failure to exhaust its administrative remedies,~~reinsurers, and therefore the Company appealed. The Court of Appeal affirmed the Superior Court's ruling that the Company was required to exhaust its administrative remedies, but expressly preserved for later appeal the legal basis for the ALJ’s dismissal: violation of the Company’s due process rights. 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, the proposed decision was not submitted until December 8, 2014. On January 7, 2015, the Commissioner adopted the ALJ’s proposed decision, which became the Commissioner’s adopted order (the "Order"). The decision and Order found that from the period July 1, 1996, through 2006, the Company’s "brokers" were actually operating as "de facto agents" and that the charging of "broker fees" by these producers constituted the charging of "premium" in excess of the Company's approved rates, and assessed a civil penalty in the amount of $27.6 million against the Company. 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 Courtrecovery did not ~~order a stay,~~reduce losses and ~~the $27.6 million assessed penalty was paid in March 2015.~~loss adjustment expenses net of reinsurance. The ~~Company filed an amended Writ on September 11, 2015, adding an explicit request for a refund of the penalty, with interest.~~

On August 12, 2016, the Superior Court issued its ruling on the Writ, for the most part granting the relief sought by the Company. The Superior Court found that the Commissioner and the California DOI did commit due process violations, but declined to dismiss the case on those grounds. The Superior Court also agreed with the Company that the broker fees at issue were not premium, and that the penalties imposed by the Commissioner were improper, and therefore vacated the Order imposing the penalty. The Superior Court entered final judgment on November 17, 2016, issuing a writ requiring the Commissioner to refund the entire penalty amount within 120 days, plus prejudgment interest at the statutory rate of 7%. On January 12, 2017, the California DOI filed a notice of appeal of the Superior Court's judgment entered on November 17, 2016. While the appeal is still pending, the California DOI returned the entire penalty amount plus accrued interest, a total of $30.9 million,benefit to the Company recognized in ~~June 2017 in order~~2020, net of reinsurance and before taxes, was approximately $3 million, representing a reduction to ~~avoid accruing further interest. Because the matter has been appealed,~~reinstatement premiums previously recognized. In addition, the Company ~~has not yet~~received approximately $0.8 million, net of fees, in 2021 from the Subrogation Trust Fund. The benefit to the Company recognized in 2021 before taxes was the ~~$30.9~~full $0.8 million, as a gain in the consolidated statements of operations; instead, the Company recorded the $30.9 million plus interest earned, a total of approximately $31.1 million at December 31, 2017, in other liabilities in the consolidated balance sheets. The Company had filed a motionthis recovery was not related to ~~dismiss the false advertising portion of the case based on the Superior Court's findings, but the ALJ denied that motion after the appeal was filed. The ALJ did, however, grant~~losses and loss adjustment expenses previously ceded to the Company's alternative request to stay further proceedings pending the final determination of the appeal. The Company has accrued a liability for the estimated cost to continue to defend itself in the 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 false advertising OSC will be material to its financial position.reinsurers.

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 Accounting ~~Policies and~~ Estimates" below and Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."

The Company establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is 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 additional regulatory and legal matters, see Note ~~17.~~18. Commitments and ~~Contingencies—Litigation~~Contingencies of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate.

C. Critical Accounting ~~Policies and~~ Estimates

Loss and Loss Adjustment Expense 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 environments, results of litigation, medical costs, the cost of repair materials, and labor rates, among other factors, can impact 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. There is inherent uncertainty with estimates and this is particularly true with loss reserve estimates. This uncertainty comes from many factors which may include changes in claims reporting and settlement patterns, changes in the regulatory and legal 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 independent actuarial consultants to review the Company’s loss reserves and to provide the annual actuarial opinions required under state statutory accounting requirements. The Company analyzes loss reserves quarterly primarily using the incurred loss, paid loss, average severity coupled with the claim count development methods, and the generalized linear model ("GLM") described below. 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 generally analyzes 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 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 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.

~~__________~~

⁽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 balances presented on the consolidated balance sheets as of December 31, 2017 because the debt amounts above include interest, calculated at the stated 4.4% coupon rate, and exclude the discount and issuance costs of the debt.


⁽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 2023.~~

⁽³⁾

~~Loss and loss adjustment expense reserves represents an estimate of amounts necessary to settle all outstanding claims, including IBNR as of~~ ~~December 31, 2017~~. 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. The Company believes that cash flows from operations and existing cash and investments are sufficient to meet these obligations despite the uncertainty in payment patterns. For more detailed information on the Company's liquidity and cash flows, see "Liquidity and Capital Resources—B. Cash Flows" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."


⁽⁴⁾	~~The table excludes liabilities of $10.1 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~~

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 amount of funds that may be invested within an asset class. Duration limits on the fixed maturity securities 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 results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of December 31, ~~2017~~,2021, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with the average rating at December 31, ~~2016.~~2020.

The following table presents municipal securities by state in descending order of holdings at fair value at December 31, ~~2017~~:2021:

States

Fair Value

Average Rating

(Amounts in thousands)

Texas

344,981

AA-

Florida

283,489

A+

New York

262,680

AA-

California

240,124

AA-

Illinois

188,159

Other states

1,523,788

A+

Total

2,843,221

States Fair Value Average Rating
(Amounts in thousands)
Texas $ 379,481
AA-
California 205,159
A+
Florida 192,205
A+
Illinois 183,376
A-
Washington 120,049
AA-
Other states 1,476,262
A+
Total $ 2,556,532

At December 31, ~~2017,~~2021, the municipal securities portfolio was broadly diversified among the states and the largest holdings were in populous states such as Texas and ~~California.~~Florida. These holdings were further diversified primarily among cities, counties, schools, public works, hospitals, and state general obligations. The Company seeks to minimize overall credit risk and ensure diversification by limiting exposure to any particular issuer.

Taxable fixed maturity securities represented ~~12.4%~~40.5% of the Company’s fixed maturity portfolio at December 31, ~~2017. 3.7%~~2021. 0.8% of the Company’s taxable fixed maturity securities were comprised of U.S. government bonds, which were rated AAA at December 31, ~~2017. 11.1%~~2021. 0.3% of the Company’s taxable fixed maturity securities, representing ~~1.4%~~0.1% of its total fixed maturity portfolio, were rated below investment grade at December 31, ~~2017.~~2021. Below investment grade issues are considered "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, ~~2017~~,2021, the Company’s primary objective for common equity investments was current income. The fair

value of the equity investments consisted of ~~$429.4~~$797.0 million in common stocks, ~~$34.9~~$65.5 million in non-redeemable preferred stocks,

and ~~$73.0~~$108.4 million in private equity funds. Common stocks are typically valued for future economic prospects as perceived by the market.

Common stocks represented ~~11.5%~~15.5% of total investments at fair ~~value.~~value at December 31, 2021. 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.

Based on hypothetical reductions in the overall value of the stock market, the following table illustrates estimated reductions in the overall value of the Company’s common stock portfolio at December 31, ~~2017~~2021 and ~~2016:~~2020:


	December 31,
	2021		2020
	(Amounts in thousands, except Average Beta)
Average Beta	1.14		1.11
Hypothetical reduction of 25% in the overall value of the stock market	$	227,152	$	191,970
Hypothetical reduction of 50% in the overall value of the stock market	$	454,304	$	383,939

December 31,
2017 2016
(Amounts in thousands, except Average Beta)
Average Beta 0.88
0.83
Hypothetical reduction of 25% in the overall value of the stock market $ 99,828
$ 70,410
Hypothetical reduction of 50% in the overall value of the stock market $ 199,656
$ 140,820

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 a substantial amount of 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 widening credit spreads and credit exposure to collateralized securities.

The fixed maturity portfolio at December 31, ~~2017,~~2021, which represented ~~77.4%~~78.4% of total investments at December 31, ~~2017~~2021, 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 to receive the present value of all the cash flows produced by such assets, including reinvestment of interest. The longer the duration, the more sensitive the asset is to market interest rate fluctuations.

The Company has historically invested in fixed maturity securities with a goal of maximizing after-tax yields and holding assets to the maturity or call date. Since assets with longer maturities tend to produce higher current yields, the Company’s historical investment philosophy resulted in a portfolio with a moderate duration. Fixed maturity securities purchased by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline. The modified duration of the overall fixed maturity securities portfolio reflecting anticipated early calls was ~~4.0~~3.4 years at December 31, ~~2017, compared to 3.7 years and 3.2 years at December 31, 2016 and 2015, respectively.~~2021.

If interest rates were to rise by 100 and 200 basis points, the Company estimates that the fair value of its fixed maturity securities portfolio at December 31, ~~2017~~2021 would decrease by ~~$127.4~~$142.3 million ~~or $254.8~~and $284.5 million, respectively. Conversely, if interest rates were to decrease, the fair value of the Company’s fixed maturity securities portfolio would rise, and it may cause a higher number of the Company’s fixed maturity securities to be called away. The proceeds from the called fixed maturity securities would likely be reinvested at lower yields, which would result in lower overall investment income for the Company.


~~Item 8.~~	~~Financial Statements and Supplementary Data~~

Item 8.Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~The~~To the Shareholders and Board of Directors ~~and Shareholders~~

Mercury General Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Mercury General Corporation and subsidiaries (the ~~“Company”)~~Company) as of December 31, ~~2017~~2021 and ~~2016,~~2020, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the ~~three‑year~~three-year period ended December 31, ~~2017,~~2021, and the related notes and financial statement schedules I, II, and IV (collectively, the ~~“consolidated~~consolidated financial ~~statements”)~~statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2017~~2021 and ~~2016,~~2020, and the results of its operations and its cash flows for each of the years in the ~~three‑year~~three-year period ended December 31, ~~2017,~~2021, 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) ~~(“PCAOB”)~~(PCAOB), the Company’s internal control over financial reporting as of December 31, ~~2017,~~2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February ~~8, 2018~~15, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Loss and loss adjustment expense reserves

As discussed in Notes 1 and 12 to the consolidated financial statements, the Company estimates loss and loss adjustment expense reserves (loss reserves) to cover incurred losses and loss adjustment expenses. Specifically, loss reserves are established based on the Company’s assessment of claims pending and the development of prior years’ loss liabilities. As of December 31, 2021, the loss and loss adjustment expense reserves balance was $2.23 billion, which included catastrophe losses.

We identified the evaluation of loss reserves, excluding catastrophe losses, as a critical audit matter. Subjective auditor judgment was required to assess the Company’s selected methods and assumptions, such as paid and incurred loss development factors, used to estimate loss reserves. Specialized actuarial skills and knowledge were needed to evaluate the Company’s actuarial methodologies and the estimate of future claims payment and reporting patterns based on observed historical patterns.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s reserving process. This included controls related to the selection of methods and assumptions used in the estimate of loss reserves. We also

involved actuarial professionals with specialized skills and knowledge, who assisted in:

• assessing the Company’s methodology for estimating loss reserves by comparing it to generally accepted actuarial methods

• evaluating the Company’s estimates for certain lines of business by performing independent analyses of loss reserves using the Company’s underlying historical claims data

• evaluating the Company’s estimates for the remaining lines of business in comparison to internal experience and related industry trends

• developing a range of reserves based on actuarial methodologies and comparing to the Company’s total recorded loss reserves

• evaluating the year-over-year movements of the Company’s recorded loss reserves within the developed range of reserves.

/s/ KPMG LLP

We have served as the Company’s auditor since 1963.

Los Angeles, California

February ~~8, 2018~~15, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~The~~To the Shareholders and Board of Directors ~~and Shareholders~~

Mercury General Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited the Mercury General Corporation and~~subsidiaries’~~ subsidiaries' (the ~~“Company”)~~Company) internal control over financial reporting as of December 31, ~~2017,~~2021, based on criteria established inInternal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2017,~~2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ~~(“PCAOB”)~~(PCAOB), the consolidated balance sheets of the Company as of December 31, ~~2017~~2021 and ~~2016,~~2020, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2017,~~2021, and the related notes and financial statement schedules I, II, and IV (collectively, the ~~“consolidated~~consolidated financial ~~statements”~~statements), and our report dated February ~~8, 2018~~15, 2022 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’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.~~of Independent Registered Public Accounting Firm. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

/s/ KPMG LLP

Los Angeles, California

February ~~8, 2018~~15, 2022

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)


	December 31,
	2021		2020
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $3,909,780; $3,388,418)	$	4,031,523	$	3,549,810
Equity securities (cost $754,536; $695,150)	970,939		803,851
Short-term investments (cost $141,206; $376,547)	140,127		375,609
Total investments	5,142,589		4,729,270
Cash	335,557		348,479
Receivables:
Premiums	621,740		599,070
Allowance for credit losses on premiums receivable	(6,000)		(10,000)
Premiums receivable, net of allowance for credit losses	615,740		589,070
Accrued investment income	43,299		42,985
Other	7,600		10,730
Total receivables	666,639		642,785
Reinsurance recoverables	45,000		48,579
Allowance for credit losses on reinsurance recoverables	—		(91)
Reinsurance recoverables, net of allowance for credit losses	45,000		48,488
Deferred policy acquisition costs	258,259		246,994
Fixed assets, net	191,332		178,923
Operating lease right-of-use assets	31,967		40,554
Current income taxes	20,108		—
Goodwill	42,796		42,796
Other intangible assets, net	10,255		11,322
Other assets	27,970		38,635
Total assets	$	6,772,472	$	6,328,246
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and loss adjustment expense reserves	$	2,226,430	$	1,991,304
Unearned premiums	1,519,799		1,405,873
Notes payable	372,931		372,532
Accounts payable and accrued expenses	169,125		194,421
Operating lease liabilities	34,577		43,825
Current income taxes	—		10,426
Deferred income taxes	53,569		41,132
Other liabilities	255,760		236,136
Total liabilities	4,632,191		4,295,649
Commitments and contingencies	0		0
Shareholders’ equity:
Common stock without par value or stated value:
Authorized 70,000 shares; issued and outstanding 55,371; 55,358	98,943		98,970
Retained earnings	2,041,338		1,933,627
Total shareholders’ equity	2,140,281		2,032,597
Total liabilities and shareholders’ equity	$	6,772,472	$	6,328,246

See accompanying Notes to Consolidated Financial Statements.

December 31,
2017 2016
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $2,823,230; $2,795,410) $ 2,892,777
$ 2,814,553
Equity securities (cost $474,197; $331,770) 537,240
357,327
Short-term investments (cost $302,693; $375,700) 302,711
375,680
Total investments 3,732,728
3,547,560
Cash 291,413
220,318
Receivables:
Premiums 474,060
459,152
Accrued investment income 39,368
41,205
Other 6,658
11,329
Total receivables 520,086
511,686
Reinsurance recoverables 56,349
13,306
Deferred policy acquisition costs 198,151
200,826
Fixed assets, net 145,223
155,910
Current income taxes 61,257
—
Deferred income taxes —
45,277
Goodwill 42,796
42,796
Other intangible assets, net 20,728
25,625
Other assets 32,592
25,414
Total assets $ 5,101,323
$ 4,788,718
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and loss adjustment expense reserves $ 1,510,613
$ 1,290,248
Unearned premiums 1,101,927
1,074,437
Notes payable 371,335
320,000
Accounts payable and accrued expenses 108,252
112,334
Current income taxes —
9,962
Deferred income taxes 22,932
—
Other liabilities 224,877
229,335
Total liabilities 3,339,936
3,036,316
Commitments and contingencies

Shareholders’ equity:
Common stock without par value or stated value:
Authorized 70,000 shares; issued and outstanding 55,332; 55,289 97,523
95,529
Retained earnings 1,663,864
1,656,873
Total shareholders’ equity 1,761,387
1,752,402
Total liabilities and shareholders’ equity $ 5,101,323
$ 4,788,718

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Year Ended December 31,
	2021		2020		2019
Revenues:
Net premiums earned	$	3,741,948	$	3,555,635	$	3,599,418
Net investment income	129,727		134,858		141,263
Net realized investment gains	111,658		85,731		222,793
Other	10,024		8,287		9,044
Total revenues	3,993,357		3,784,511		3,972,518
Expenses:
Losses and loss adjustment expenses	2,760,155		2,395,343		2,706,024
Policy acquisition costs	633,385		627,788		602,085
Other operating expenses	283,397		285,831		269,305
Interest	17,113		17,048		17,035
Total expenses	3,694,050		3,326,010		3,594,449
Income before income taxes	299,307		458,501		378,069
Income tax expense	51,370		83,894		57,982
Net income	$	247,937	$	374,607	$	320,087
Net income per share:
Basic	$	4.48	$	6.77	$	5.78
Diluted	$	4.48	$	6.77	$	5.78

See accompanying Notes to Consolidated Financial Statements.

Year Ended December 31,
2017 2016 2015
Revenues:
Net premiums earned $ 3,195,437
$ 3,131,773
$ 2,957,897
Net investment income 124,930
121,871
126,299
Net realized investment gains (losses) 83,650
(34,255 ) (83,807 )
Other 11,945
8,294
8,911
Total revenues 3,415,962
3,227,683
3,009,300
Expenses:
Losses and loss adjustment expenses 2,444,884
2,355,138
2,145,495
Policy acquisition costs 555,350
562,545
539,231
Other operating expenses 233,475
235,314
250,839
Interest 15,168
3,962
3,168
Total expenses 3,248,877
3,156,959
2,938,733
Income before income taxes 167,085
70,724
70,567
Income tax expense (benefit) 22,208
(2,320 ) (3,912 )
Net income $ 144,877
$ 73,044
$ 74,479
Net income per share:
Basic $ 2.62
$ 1.32
$ 1.35
Diluted $ 2.62
$ 1.32
$ 1.35

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)


	Year Ended December 31,
	2021		2020		2019
Common stock, beginning of year	$	98,970	$	98,828	$	98,026
Proceeds of stock options exercised	215		—		701
Share-based compensation expense	141		142		123
Withholding tax on stock options exercised	(383)		—		(22)
Common stock, end of year	98,943		98,970		98,828
Retained earnings, beginning of year	1,933,627		1,700,674		1,519,658
Cumulative effect of adopting ASU 2016-13 (Note1)	—		(2,014)		—
Retained earnings, beginning of year, as adjusted	1,933,627		1,698,660		1,519,658
Net income	247,937		374,607		320,087
Dividends paid to shareholders	(140,226)		(139,640)		(139,071)
Retained earnings, end of year	2,041,338		1,933,627		1,700,674
Total shareholders’ equity, end of year	$	2,140,281	$	2,032,597	$	1,799,502

See accompanying Notes to Consolidated Financial Statements.

Year Ended December 31,
2017 2016 2015
Common stock, beginning of year $ 95,529
$ 90,985
$ 88,705
Proceeds of stock options exercised 2,102
1,818
2,111
Payment for vested restricted stock units and related taxes —
1,671
—
—
Reclassification of restricted stock units from equity to liability award (168 ) —
—
Share-based compensation expense 60
142
142
Excess tax benefits related to share-based compensation —
913
27
Common stock, end of year 97,523
95,529
90,985
Additional paid in capital, beginning of year —
8,870
3,804
Share-based compensation expense —
—
5,066
Payment for vested restricted stock units and related taxes —
(5,122 ) —
Reclassification of restricted stock units from equity to liability award —
(3,435 ) —
Exercise of stock options —
(313 ) —
Additional paid in capital, end of year —
—
8,870
Retained earnings, beginning of year 1,656,873
1,721,030
1,782,937
Net income 144,877
73,044
74,479
Dividends paid to shareholders (137,886 ) (137,201 ) (136,386 )
Retained earnings, end of year 1,663,864
1,656,873
1,721,030
Total shareholders’ equity $ 1,761,387
$ 1,752,402
$ 1,820,885

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,
	2021		2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	247,937	$	374,607	$	320,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	79,056		68,463		64,730
Net realized investment gains	(111,658)		(85,731)		(222,793)
(Increase) decrease in premiums receivable	(26,670)		13,946		(49,832)
Decrease in reinsurance recoverables	3,488		30,127		142,314
Changes in current and deferred income taxes	(18,097)		31,236		72,545
Increase in deferred policy acquisition costs	(11,265)		(13,828)		(18,035)
Increase in loss and loss adjustment expense reserves	235,126		70,049		91,843
Increase in unearned premiums	113,926		50,326		119,366
(Decrease) increase in accounts payable and accrued expenses	(26,724)		51,988		26,493
Share-based compensation	141		142		123
Other, net	16,324		14,291		(27,163)
Net cash provided by operating activities	501,584		605,616		519,678
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases	(1,460,641)		(878,213)		(491,795)
Sales	336,201		168,087		136,560
Calls or maturities	518,557		250,878		316,860
Equity securities available for sale in nature:
Purchases	(958,008)		(1,230,785)		(1,174,759)
Sales	943,857		1,174,540		1,088,701
Calls	—		3,880		—
Changes in securities payable and receivable	8,327		873		(2,536)
Decrease (increase) in short-term investments	270,383		118,830		(240,391)
Purchase of fixed assets	(41,442)		(39,953)		(40,088)
Other, net	9,096		20,577		6,247
Net cash used in investing activities	(373,670)		(411,286)		(401,201)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders	(140,226)		(139,640)		(139,071)
Proceeds from stock options exercised	215		—		701
Payments on finance lease obligations	(825)		(609)		—
Net cash used in financing activities	(140,836)		(140,249)		(138,370)
Net (decrease) increase in cash	(12,922)		54,081		(19,893)
Cash:
Beginning of year	348,479		294,398		314,291
End of year	$	335,557	$	348,479	$	294,398
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	16,616	$	16,599	$	16,586
Income taxes paid (refunded), net	$	69,467	$	52,659	$	(14,564)

See accompanying Notes to Consolidated Financial Statements.

Year Ended December 31,
2017 2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 144,877
$ 73,044
$ 74,479
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 55,343
53,258
47,838
Net realized investment (gains) losses (83,650 ) 34,255
83,807
Increase in premiums receivable (14,908 ) (22,531 ) (41,512 )
Change in reinsurance recoverables (43,043 ) 998
(89 )
Gain on sale of fixed assets (3,078 ) —
—
Changes in current and deferred income taxes (3,010 ) (2,130 ) (35,287 )
Decrease (increase) in deferred policy acquisition costs 2,675
936
(4,560 )
Increase in loss and loss adjustment expense reserves 220,365
143,560
36,214
Increase in unearned premiums 27,490
25,124
42,552
Decrease in accounts payable and accrued expenses (4,178 ) (10,586 ) (35,086 )
Share-based compensation 60
142
142
Other, net 42,462
(4,392 ) 21,773
Net cash provided by operating activities 341,405
291,678
190,271
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases (734,397 ) (1,077,638 ) (965,701 )
Sales 100,709
396,766
260,946
Calls or maturities 575,735
647,059
386,644
Equity securities available for sale in nature:
Purchases (831,310 ) (714,113 ) (748,217 )
Sales 679,571
696,138
805,417
Calls 7,100
—
2,851
Changes in securities payable and receivable (44,740 ) 29,958
(1,387 )
Changes in short-term investments and purchased options 73,005
(191,530 ) 187,492
Purchase of fixed assets (19,443 ) (16,979 ) (20,112 )
Sale of fixed assets 6,239
14
141
Business acquisition, net of cash acquired —
—
7,771
Other, net 1,934
3,605
2,473
Net cash used in investing activities (185,597 ) (226,720 ) (81,682 )
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders (137,886 ) (137,201 ) (136,386 )
Employee taxes paid with shares related to share-based compensation —
(3,292 ) —
Proceeds from stock options exercised 2,162
1,632
2,111
Net proceeds from issuance of senior notes 371,011
—
—
Payoff of principal on loan and credit facilities (320,000 ) —
—
Proceeds from bank loan —
30,000
—
Net cash used in financing activities (84,713 ) (108,861 ) (134,275 )
Net increase (decrease) in cash 71,095
(43,903 ) (25,686 )
Cash:
Beginning of year 220,318
264,221
289,907
End of year $ 291,413
$ 220,318
$ 264,221
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 9,863
$ 3,531
$ 2,989
Income taxes paid (refunded), net $ 25,218
$ (183 ) $ 31,390

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

NOTES 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") are primarily engaged in writing personal automobile insurance through 1413 Insurance Companies in 11 states, principally California. The Company also writes homeowners, commercial automobile, commercial property, mechanical protection, fire, and umbrella insurance. The private passenger automobile line of insurance business was more than ~~76%~~68% of the Company’s direct premiums written in ~~2017~~2021, 2020, and 2019, and approximately 87%, ~~2016~~88%, and ~~2015, of which approximately 85%, 84%, and 83%~~88% of the private passenger automobile premiums were written in California ~~during~~ ~~2017~~, ~~2016~~,in 2021, 2020, and ~~2015~~,2019, 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 subsidiaries:



Insurance Companies

Mercury Casualty Company ("MCC")						Mercury National Insurance Company ("MNIC")(1)
Mercury Insurance Company ("MIC")						American Mercury Insurance Company
California Automobile Insurance Company ("CAIC")						American Mercury Lloyds Insurance Company⁽¹⁾(2)
California General Underwriters Insurance Company, Inc.						Mercury County Mutual Insurance Company⁽²⁾(3)
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~~Orion Indemnity Company ("~~WAIC"~~OIC")⁽⁴⁾

Non-Insurance Companies

Mercury Select Management Company, Inc.						AIS Management LLC
Mercury Insurance Services LLC						Auto Insurance Specialists LLC
Animas Funding LLC ("AFL")⁽³⁾(5)						PoliSeek AIS Insurance Solutions, Inc.
Fannette Funding LLC ("FFL")⁽³⁾(5)						Mercury Plus Insurance Services LLC

__________


⁽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⁾	~~Special purpose investment vehicle.~~


⁽⁴⁾	~~California domiciled insurance company acquired in 2015. See Note 20. Acquisition.~~

(1)MNIC was dissolved in December 2021.

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

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

(4)OIC was formerly known as Workmen’s Auto Insurance Company (“WAIC”). The name change became effective in August 2021.

(5)Special purpose investment vehicle.

The consolidated financial statements have been prepared in conformity with 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 prior period amounts have been reclassified to conform with the current period presentation.

The Company did not have other comprehensive income (loss) in ~~2017, 2016~~2021, 2020 and ~~2015.~~2019.

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 and Other Financial Instruments

Financial instruments recorded in the consolidated balance sheets include investments, note receivable, other receivables, accounts payable, options sold, and notes payable. The Company’s investments 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.

The Company applies the fair value option to all fixed maturity and equity securities and short-term investments at the time an eligible item is first recognized. The primary reasons for electing the fair value option were simplification and cost benefit considerations as well as the expansion of 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. Financial Instruments for additional information on 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 gains ~~(losses)~~ in the Company's consolidated statements of operations, while interest and dividend income on investment holdings are recognized on an accrual basis on each measurement date and are included in net investment income in the Company's consolidated statements of operations. The Company’s fixed maturity and equity securities are classified as “trading” and carried at fair value as required when applying the fair value option. The majority of equity holdings, including non-redeemable preferred stocks, are actively traded on national exchanges or trading markets, and are valued at the last transaction price on the balance sheet date.

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 other receivables and accounts payable approximate their fair values. 97.9% of the fair value of its investments at December 31, 2021 is based on observable market prices, observable pricing 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 pricing parameters because they are less actively 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 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 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 not actively quoted. For a further discussion, see Note 4. Fair Value Measurements.

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%~~50% corporate dividend received deduction, and private equity funds.

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

In the normal course of investing activities, the Company either forms or enters into relationships with variable interest entities ("VIEs"). A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of the VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company's assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in its consolidated financial statements.

~~The~~From time to time, the Company forms special purpose investment vehicles to facilitate its investment activities involving derivative instruments such as total return swaps, or limited partnerships such as private equity funds. These special purpose investment vehicles are consolidated VIEs as the Company has determined it is the primary beneficiary of such VIEs. Creditors have no recourse against the Company in the event of default by these VIEs. The Company had no implied or unfunded commitments to these VIEs at December 31, ~~2017~~2021 and ~~2016.~~2020. The Company's financial or other support provided to these VIEs and its loss exposure are limited to its collateral and original investment.

The Company ~~also~~ invests, directly or indirectly through its consolidated VIEs, in limited partnerships or limited liability companies such as private equity funds. These investments are non-consolidated VIEs as the Company has determined it is not the primary ~~beneficiary.~~beneficiary of such VIEs. The Company's maximum exposure to loss with respect to these VIEs is limited to the total carrying value that is included in equity securities in the Company's consolidated balance sheets. At December 31, ~~2017 and 2016,~~2021, the Company had ~~no outstanding~~a maximum of approximately $32 million in unfunded commitments to these VIEs whereby the Company may be called ~~by the partnerships during the commitment period~~prior to April 30, 2022 to provide additional capital to fund the purchase of ~~new~~ investments and the expenses of a new private equity fund. The Company expects to fund any capital calls on these commitments using the ~~partnerships.~~distributions of principal and interest from a mature private equity fund. At December 31, 2020, the Company had no such unfunded commitments to these VIEs.

Securities on Deposit

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 ("DOI") with fair values totaling ~~$17 million and $19~~approximately $15 million at December 31, ~~2017~~2021 and ~~2016, respectively.~~2020.

Deferred Policy Acquisition Costs

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. 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 Company does not defer advertising expenditures but expenses them as incurred.

The table below presents a summary of deferred policy acquisition cost amortization and net advertising expense:


	Year Ended December 31,							Year Ended December 31,
	2017		2016		2015			2021		2020		2019
	(Amounts in millions)							(Amounts in millions)
Deferred policy acquisition cost amortization	$	555.4	$	562.5	$	539.2	Deferred policy acquisition cost amortization	$	633.4	$	627.8	$	602.1
Net advertising expense	37.4		39.6		44.0		Net advertising expense	50.1		37.7		42.2

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 7 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 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. There were no impairment charges during ~~2017, 2016,~~2021, 2020, and ~~2015.~~2019.

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 evaluates 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 their implied fair values. The Company qualitatively determines 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, ~~2017~~2021 and ~~2016~~,2020, 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 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 premiums are predominantly computed monthly on a pro-rata basis and are stated gross of reinsurance deductions,

with the reinsurance deduction recorded in other ~~receivables.~~assets. 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 insurance business become unprofitable, a premium deficiency reserve may be required. Net premiums written, a statutory measure designed to determine production levels, ~~were $3.22~~was $3.86 billion, ~~$3.16~~$3.61 billion, and ~~$3.00~~$3.73 billion in ~~2017~~, ~~2016~~,2021, 2020, and ~~2015~~,2019, respectively. The Company's net premiums written in 2020 was reduced by approximately $128 million due to premium refunds and credits to its eligible policyholders associated with the "Mercury Giveback" program for reduced driving and business activities following the outbreak of the COVID-19 pandemic.

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 incurred but not reported. Changes in the estimated liability are charged or credited to operations as the losses and loss adjustment expenses are re-estimated. The liability is stated net of anticipated salvage and subrogation recoveries, and gross of reinsurance recoverables on unpaid losses.

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 environments, results of litigation, medical costs, the cost of repair materials, and labor rates, among other factors, can impact 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 bodily 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. 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, average severity coupled with the claim count development methods, and the generalized linear model ("GLM") described below. 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 method analyzes historical payment patterns to estimate the amount of losses yet to be paid.

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

•The GLM determines an average severity for each percentile of claims that have been closed as a percentage of estimated ultimate claims. The average severities are applied to open claims to estimate the amount of losses yet to be paid. The GLM utilizes operational time, determined as a percentile of claims closed rather than a finite calendar period, which neutralizes the effect of changes in the timing of claims handling.

The Company analyzes catastrophe losses separately from non-catastrophe losses. For catastrophe losses, the Company generally 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. For catastrophe losses on individual properties that are expected to be total losses, the Company typically establishes reserves at the policy limits.

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 total return swaps and options sold.~~ See Note 8.9.Derivative Financial Instruments.

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 periods presented. Diluted earnings per share is based on the weighted average shares of common stock and potential dilutive securities outstanding during the periods presented. At December 31, ~~2017, potential~~2021 and 2020, potentially dilutive securities consisted of outstanding stock ~~options, while at December 31, 2016, such securities consisted of outstanding stock options and restricted stock units ("RSUs") granted under the Company's 2014 Long Term Incentive Plan.~~options. See Note ~~16.~~17. Earnings Per Share, for the required disclosures relating to the calculation of basic and diluted earnings per share.

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.

The Company’s deferred income taxes usually include a combination of ordinary and capital deferred tax benefits and expenses. At December 31, ~~2017,~~2021, the Company’s deferred income taxes were in a net liability position ~~which included a combination of ordinary and capital~~mainly due to deferred tax ~~benefits~~liabilities generated by unrealized gains on securities held and ~~expenses.~~deferred acquisition costs. These deferred tax liabilities were substantially offset by deferred tax assets resulting from unearned premiums, loss reserve discounting, and expense accruals. In assessing the 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.~~realized, and to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. The ultimate realization of deferred 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.

Management’s recoverability assessment of 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. The Company also has various deferred tax liabilities 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, tax-planning strategies available to generate future taxable capital gains, 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 debt securities, which are currently in loss positions, to recovery or maturity. Management believes ~~that~~unrealized losses related to these debt securities, which represent a portion of the unrealized loss positions at December 31, 2021, 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. Further, the Company has the capability to generate additional realized capital gains by entering into sale-leaseback transactions using one or more of its appreciated real estate holdings. The Company also 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 ~~use of prudent~~capability to implement tax planning strategies as it has a steady history of generating positive cash flows from operations and believes that its liquidity needs can be met in future periods without the ~~generation~~forced sale of its investments. This capability assists management in controlling the timing and amount of realized losses 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 to generate capital gains and minimize tax losses in a manner sufficient ~~income will be realized in order~~ to ~~maximize~~avoid losing the ~~full~~ 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 ~~that~~ it is more likely than not that the Company’s deferred tax assets will be realized.

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 Note 18. Commitments and Contingencies, for the required disclosures relating to contingent liabilities.

Reinsurance

Liabilities for unearned premiums and unpaid losses are stated in the accompanying consolidated financial statements before deductions for ceded reinsurance. Unpaid losses and unearned premiums that are ceded to reinsurers are carried in reinsurance recoverables and other ~~receivables,~~assets, respectively, in the Company's consolidated balance sheets. ~~Earned~~Reinsurance recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the

underlying contracts. Most of the Company's reinsurance premiums are recognized ratably over the contract period to the extent coverage remains available. Net premiums earned and losses and loss adjustment expenses are stated net of deductions for ceded reinsurance.

The Company is the assuming reinsurer under a Catastrophe Participation Reinsurance Contract ("Contract") effective through December 31, 2022. The Company reimburses up to $25 million in losses for a proportional share of a portfolio of catastrophe losses under the Contract, to the extent the actual loss ratio exceeds the threshold loss ratio of 73.5%.

The Company is party to a Catastrophe Reinsurance Treaty ("Treaty") covering a wide range of perils that is effective through June 30, 2022. The Treaty provides $792 million of coverage on a per occurrence basis after covered catastrophe losses exceed the $40 million Company retention limit. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies, such as homeowners, but does cover losses from fires following an earthquake. The Treaty provides for one full reinstatement of coverage limits with a minor exception at the top coverage layer, and includes some additional minor territorial and coverage limits.

The effect of reinsurance on property and casualty premiums written and earned was as follows:


	Year Ended December 31,
	2021		2020		2019
	(Amounts in thousands)
Premiums Written
Direct	$	3,877,476	$	3,624,965	$	3,742,627
Ceded	(65,521)		(50,630)		(43,785)
Assumed	13,361		8,012		919
Net	$	3,825,316	$	3,582,347	$	3,699,761
Premiums Earned
Direct	$	3,764,626	$	3,574,898	$	3,626,857
Ceded	(65,017)		(56,212)		(56,725)
Assumed	13,301		8,067		910
Net	$	3,712,910	$	3,526,753	$	3,571,042

The Company recognized ceded premiums earned of approximately $65 million, $56 million, and $57 million in 2021, 2020, and 2019, respectively, which are included in net premiums earned in its consolidated statements of operations, and ceded losses and loss adjustment expenses of approximately $(10) million, $(28) million, and $(71) million in 2021, 2020, and 2019, respectively, which are included in losses and loss adjustment expenses in its consolidated statements of operations. The negative ceded losses and loss adjustment expenses in 2021 was primarily the result of favorable development on prior years' catastrophe losses that had previously been ceded to the Company's reinsurers. The negative ceded losses and loss adjustment expenses in 2020 was mainly due to the reimbursements from Pacific Gas and Electric Corporation ("PG&E") Subrogation Trust Fund to the Company for certain claims paid to its policyholders related to wildfires in recent past years, in accordance with PG&E's Plan of Reorganization approved by the United States Bankruptcy Court. These loss recoveries from PG&E were ceded to the Company's reinsurers as the original losses had previously been ceded to its reinsurers under the Treaty. The negative ceded losses and loss adjustment expenses in 2019 primarily resulted from the re-estimation of the catastrophe loss reserves, including estimated subrogation, on the 2018 Camp and Woolsey Fires and the 2017 Southern California wildfires, which had previously been ceded to reinsurers under the Treaty, in conjunction with the sale of the Company's subrogation rights during the first quarter of 2019. The re-estimation primarily benefited the Company's reinsurers. See Note 12. Loss and Loss Adjustment Expense Reserves for additional information.

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~~expenses for all stock options granted or modified isare based on ~~the~~their estimated grant-date fair ~~value.~~values. 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~~years. The Company estimates forfeitures expected to ~~vest.~~occur in determining the amount of compensation cost to be recognized in each period. 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.

The fair value of each restricted stock unit ("RSU") grant ~~was~~is determined based on the market price on the grant date for awards classified as equity and on each reporting date for awards classified as a liability. Compensation cost is recognized based on management’s best estimate of the performance goals that will be ~~achieved.~~achieved at the end of the performance period, taking into account expected forfeitures. If ~~such~~the minimum performance goals are not expected to be met, no compensation cost is recognized and any recognized compensation cost would be reversed. See Note ~~15.~~16. Share-Based Compensation for additional disclosures.

Revenue from Contracts with Customers

~~Recently Issued Accounting Standards~~

The Company's revenue from contracts with customers that are in scope of Topic 606 represents the commission income that the Company's 100% owned insurance agencies, Auto Insurance Specialists LLC ("AIS") and PoliSeek AIS Insurance Solutions, Inc. ("Poliseek"), earned from third-party insurers. The Company's commission income from third-party insurers was approximately $20.2 million, $18.0 million and $16.3 million, with related expenses of approximately $12.8 million, $11.8 million and $10.5 million, for the years ended December 31, 2021, 2020 and 2019, respectively. Due to the immateriality of the Company's commission income and its related expenses to the overall consolidated financial statements, the commission income, net of related expenses, is included in other revenues in the Company's consolidated statements of operations, and in other income of the Property and Casualty business segment in the Company's segment reporting in accordance with Topic 280, Segment Reporting (see Note 19. Segment Information).

~~In May 2017,~~

AIS and PoliSeek are primarily engaged in the ~~FASB issued~~marketing and sales of insurance policies in private passenger automobile, commercial automobile and homeowners lines of business. Their revenues primarily consist of commission income received from property and casualty insurers. The primary performance obligation of AIS and Poliseek in return for the commission income from the insurers is to complete the sale of the policy and deliver the control of the policy to the insurer prior to the policy effective date. The total revenue from the sale of a policy is recognized when the sale is complete and the policy is effective as all the material aspects of the performance obligation are satisfied and the insurer is deemed to obtain control of the insurance policy at that time. The commission income is constrained such that the revenue is recognized only to the extent that the commission income received is not likely to be returned to the insurers due to policy cancellations. Any commission income not received when the sale is complete is recognized as commission income receivable, which is included in other receivables in the Company's consolidated balance sheets. Commission income receivable at December 31, 2021 and 2020 was approximately $1.4 million and $1.2 million, respectively.

A refund liability is recorded for the expected amount of the commission income that has to be returned to the insurers based on estimated policy cancellations. The refund liability is computed for the entire portfolio of contracts as a practical expedient, using the expected value method based on all relevant information, including historical data. The refund liability at December 31, 2021 and 2020 was approximately $0.9 million, which was included in other liabilities in the Company's consolidated balance sheets.

As of December 31, 2021 and 2020, the Company had no contract assets and contract liabilities, and no remaining performance obligations associated with unrecognized revenues.

Capitalized Implementation Costs for Cloud Computing Arrangements

On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") ~~2017-09,~~2018-15, "~~Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting.~~" ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for the Company beginning January 1, 2018. The Company does not anticipate that ASU 2017-09 will have a material impact on its consolidated financial statements and related disclosures.

~~In January 2017, the FASB issued ASU 2017-04, "~~Intangibles - Goodwill and Other ~~(Topic 350)~~- Internal-Use Software (Subtopic 350-40), ~~Simplifying~~Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," on a prospective basis, which provides guidance that requires capitalizing and amortizing certain of the ~~Test for Goodwill Impairment." ASU 2017-04 removes~~implementation costs. The majority of the ~~requirement~~Company's cloud computing arrangements relate to ~~compare~~service contracts with third parties that host the ~~implied fair value of goodwill~~Company's data and computing infrastructure that are used in providing services to and supporting transactions with its ~~carrying amount as part~~existing or potential policyholders and insurance agents.

The balance of ~~Step 2~~capitalized implementation costs for cloud computing arrangements, net of accumulated amortization, was $2.8 million and $4.8 million at December 31, 2021 and 2020, respectively, which is included in other assets in the ~~goodwill impairment test~~Company's consolidated balance sheets. The accumulated amortization was $6.0 million and ~~requires an entity~~$2.1 million at December 31, 2021 and 2020, respectively. The total amortization expense related to ~~recognize an impairment charge~~such capitalized implementation costs was $3.9 million, $1.8 million, $0.3 million for the ~~amount by~~years ended December 31, 2021, 2020, and 2019, respectively, which is included in other operating expenses in the ~~carrying amount~~Company's consolidated statements of ~~a reporting unit exceeds its fair value. An entity still has the option to perform the qualitative assessment~~operations.

Allowance for ~~a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company beginning~~Credit Losses

On January 1, 2020, ~~with early adoption permitted. The Company does not anticipate that ASU 2017-04 will have a material impact on its consolidated financial statements and related disclosures.~~

~~In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.~~" ASU 2016-16 requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 is effective for the Company ~~beginning January 1, 2018. The Company does not anticipate that ASU 2016-16 will have a material impact on its consolidated financial statements and related disclosures.~~

~~In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments (Topic 230).~~" The new guidance is intended to reduce diversity in how certain transactions are classified in the consolidated statement of cash flows. ASU 2016-15 is effective for the Company beginning January 1, 2018. The Company does not anticipate that ASU 2016-15 will have a material impact on its consolidated financial statements and related disclosures.

~~In June 2016, the FASB issued~~adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)."along with certain additional ASUs on Topic 326 using a modified retrospective transition method, and recognized the cumulative-effect adjustment of approximately $2 million to the beginning retained earnings of 2020. The ~~amendments in this ASU replace~~cumulative-effect adjustment primarily resulted from re-estimating credit losses on the outstanding balances of the Company's premiums receivable and reinsurance recoverables at the adoption date. Topic 326 replaced the "incurred loss" methodology for recognizing credit losses with a methodology that reflects expected credit losses ~~and requires consideration of a broader range of information including past events, current conditions and reasonable and supportable forecasts that affect the collectibility of reported amounts of~~for financial assets that are not accounted for at fair value through net income. The Company's investment portfolio, not including accrued investment income, was not affected by Topic 326 as it applies the fair value option to all of its investments.

Premiums Receivable

The majority of the Company's premiums receivable are short-term in nature and are due within a year, consistent with the policy term of its insurance policies sold. Generally, premiums are collected prior to providing risk coverage, minimizing the Company's exposure to credit risk. The Company monitors the credit risk associated with premiums receivable, taking into consideration the fact that credit risk is reduced by the Company's right to offset unearned premiums against premiums receivable. The Company has established an allowance for uncollectible premiums receivable related to credit risk, and the estimated allowance is reviewed quarterly and adjusted as appropriate based on evaluations of balances due from insureds, management’s experience, historical data, current economic conditions, and reasonable and supportable forecasts of future economic conditions that affect the collectibility of the reported amounts. In estimating an allowance for uncollectible premiums receivable, the Company assesses customer balances and write-offs by state, line of business, and the year the premiums were written. The estimated allowance is based on historical write-off percentages adjusted for the effects of current trends and reasonable and supportable forecasts, as well as expected recoveries of amounts written off.

Evaluating the current trends or economic conditions that impact the Company's ability to collect premiums receivable and projecting those into the remaining life of premiums receivable in order to develop a reasonable and supportable forecast of the ultimate collectibility involve significant judgment and assumptions about future economic conditions. The improving economy and declining unemployment rate contributed to the reduction in allowance for credit losses in 2021. The Company monitors the overall credit risk of premiums receivable by regularly reviewing macroeconomic indicators such as ~~loans, certain debt securities, trade receivables, net investment~~trends in ~~leases, off-balance sheet~~unemployment, inflation and interest rates, regulatory developments such as restrictions on cancellation of policies for nonpayment of premiums, and insurance policy specific indicators such as trends in policy cancellations.

The following table presents a summary of changes in allowance for credit ~~exposures~~losses on premiums receivable:


	Year Ended December 31,
	2021		2020		2019


Beginning balance	$	10,000	$	1,445	1,458
Cumulative effect of adopting ASU 2016-13	—		1,855		—
Beginning balance, as adjusted	10,000		3,300		1,458
Provision during the period for expected credit losses	(893)		10,294		6,162
Write-off amounts during the period	(3,693)		(4,406)		(7,000)
Recoveries during the period of amounts previously written off	586		812		825
Ending balance	$	6,000	$	10,000	$	1,445

Reinsurance Recoverables

Reinsurance recoverables are balances due to the Company from its reinsurers for paid and unpaid losses and loss adjustment expenses. A credit exposure exists with respect to these balances to the extent that any reinsurer is unable to meet its obligations. The Company has established an allowance for uncollectible reinsurance ~~receivables. Under~~recoverables related to credit risk, and changes in the ~~current GAAP incurred~~allowance are presented as a component of losses and loss ~~methodology, recognition~~adjustment expenses in the Company's consolidated statements of operations. The Company reviews the allowance quarterly and adjusts it as necessary to reflect changes in estimates of uncollectible balances. The Company evaluates the financial condition of its reinsurers and monitors concentration risk to minimize its exposure to significant losses from individual reinsurers. The Company attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements with reinsurers that have high credit ratings and by obtaining

collateral as necessary. The primary method of obtaining collateral is through letters of credit.

Generally, the Company uses a default analysis to estimate uncollectible reinsurance recoverables. The primary components of the ~~full amount~~default analysis are reinsurance recoverable balances by reinsurer, net of collateral and any liabilities held by the Company subject to a right of offset, and future default factors used to estimate the probability that the reinsurer may be unable to meet its future obligations in full. The determination of the future default factor is based on a historical default factor published by a major rating agency applicable to the particular financial strength rating class. Application of future default factors also requires considerable judgment and assumptions, such as timing of loss payments and duration of the outstanding recoverable balances. Based on its past experiences with major catastrophes, the Company assumed that the majority of the reinsurance recoverable balances on unpaid losses outstanding at December 31, 2021 will be billed and collected or written off over the course of the next 5 years, and that the outstanding reinsurance recoverable balances on paid losses will be collected or written off within a year.

AM Best's Financial Strength Ratings of the Company's reinsurers ranged between B++ and A++ at December 31, 2021. While a ratings downgrade could result in an increase in provision for uncollectible reinsurance recoverables and a charge to earnings in that period, a downgrade in and of itself does not imply that the Company will be unable to collect all of the reinsurance recoverables from the reinsurers in question. To the extent the creditworthiness of the Company's reinsurers were to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the allowance for uncollectible reinsurance recoverables. The Company monitors credit risk by reviewing the credit ratings of its reinsurers, adequacy of letters of credit, ~~losses is generally delayed until the loss is probable~~and broader industry risks such as catastrophes impacting its reinsurers.

The following table presents a summary of ~~occurring. Current GAAP restricts the ability to record~~changes in allowance for credit losses on reinsurance recoverables:


	Year Ended December 31,
	2021		2020		2019


Beginning balance	$	91	$	—	$	—
Cumulative effect of adopting ASU 2016-13	—		159		—
Beginning balance, as adjusted	91		159		—
Provision during the period for expected credit losses	(91)		(68)		—
Write-off amounts during the period	—		—		—
Recoveries during the period of amounts previously written off	—		—		—
Ending balance	$	—	$	91	$	—

Accrued Interest Receivables

The Company made certain accounting policy elections for its accrued interest receivables on the adoption date of Topic 326 as allowed: a) an election to present accrued interest receivable balances separately from the associated financial assets on the balance sheet, and b) an election not to measure an allowance for credit losses on accrued interest receivable amounts and instead write off uncollectible accrued interest amounts in a timely manner by reversing interest income.

As a general policy, the Company writes off the accrued interest receivable balance when it receives a default notice or when the scheduled interest payment is not received, unless management determines that ~~are~~the default is temporary considering all of the relevant information. The Company believes that for the majority of its investment securities, writing off the uncollectible interest receivable balance within a year from the due date is considered timely. In all cases, the Company writes off the accrued interest receivable immediately if management determines that it is not reasonably expected ~~but do not yet meet~~that the ~~probability threshold. ASU 2016-13~~payment will be received. The Company did not have any cumulative-effect adjustment as a result of adopting Topic 326 for its accrued interest receivables. The Company's accrued interest receivable balances are included in accrued investment income receivables in its consolidated balance sheets. There were no accrued interest receivable amounts considered uncollectible or written off for the years ended December 31, 2021, 2020 and 2019.

Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides optional

expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or other interbank offered rates expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company expects to apply the ~~Company beginning~~optional expedients in this ASU to its unsecured credit facility that references LIBOR (see Note 8), when the facility is modified with ~~the first quarter ending March 31, 2020. While the~~a replacement rate before LIBOR is discontinued. The Company ~~is in the process of evaluating the impact of ASU 2016-13, it~~ does not expect ~~this ASU to have a~~any material impact on its consolidated financial statements and related disclosures ~~as most of its financial instruments with potential exposure to material credit losses are accounted for at fair value through net income.~~

~~In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)~~," which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted ASU 2016-09 for the quarter ended March 31, 2017. As a result of the adoption, the Company recognizes excess tax benefits in its provision for income taxes rather than paid-in capital. Additional amendments to accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of January 1, 2017, where the cumulative effect of these changes are required to be recorded. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The Company also elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented, which resulted in an increase to both net cash provided by operating activities and net cash used in financing activities of approximately $913,000 and $27,000 for 2016 and 2015, respectively. The adoption of the presentation requirements for cash flows related to employee taxes paid with shares resulted in an increase to both net cash provided by operating activities and net cash used in financing activities of approximately $3,292,000 and $0 for 2016 and 2015, respectively.

~~In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which supersedes the guidance in Accounting Standards Codification ("ASC") 840, "Leases." ASU 2016-02 requires a lessee to recognize lease assets and lease liabilities~~ resulting from all leases. ASU 2016-02 retains the distinction between a finance lease and an operating lease. Lessor accounting is largely unchanged from ASC 840. ASU 2016-02 will be effective for the Company beginning January 1, 2019. However, in transition, the Company will be required to recognize and measure leases at the beginning of the earliest period presented usingapplying this ASU.

a modified retrospective approach. While the Company is in the process of evaluating the impact of ASU 2016-02, it does not expect this ASU to have a material impact on its consolidated financial statements, except for recognizing lease assets and lease liabilities for its operating leases. The Company's lease obligations under various non-cancellable operating lease agreements amounted to approximately $32,000,000 at December 31, 2017.

~~In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10)~~, ~~Recognition and Measurement of Financial Assets and Financial Liabilities.~~" The amendments in this ASU 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 qualitative assessment to identify impairment; (3) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) 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; and (6) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for the Company beginning January 1, 2018. The Company does not anticipate that ASU 2016-01 will have a material impact on its consolidated financial statements and related disclosures.

~~In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606).~~" ASU 2014-09 requires entities to apply a five-step model to determine the amount and timing of revenue recognition. The model specifies, among other criteria, that revenue should be recognized when an entity transfers control of goods or services to a customer in the amount to which the entity expects to be entitled. In August 2015, the FASB issued ASU 2015-14, "~~Revenue from Contracts with Customers (Topic 606),Deferral of the Effective Date~~," which deferred the effective date of ASU 2014-09 for the Company to January 1, 2018. Subsequently, the FASB has issued additional ASUs on Topic 606 that do not change the core principle of the guidance in ASU 2014-09 but merely clarify certain aspects of it. The additional ASUs is also effective for the Company beginning January 1, 2018. Two methods of transition are permitted upon adoption: full retrospective and modified retrospective. The Company adopted ASU 2014-09 along with the related additional ASUs on Topic 606 on January 1, 2018, using the modified retrospective transition method. The Company did not have any material cumulative-effect adjustment as a result of the adoption, mostly because the accounting for insurance contracts is outside of the scope of ASU 2014-09. In addition, the adoption of ASU 2014-09 and the overall Topic 606 will not have any material impact on our consolidated financial statement line items in the year of adoption. The Company will make the additional required disclosures under Topic 606, starting with the Company's consolidated financial statements that include the initial adoption date.

2.Financial Instruments

Financial instruments recorded in the consolidated balance sheets include investments, note receivable, other receivables, options sold, ~~total return swaps,~~ accounts payable, ~~and secured~~ and unsecured notes payable. Due to their short-term maturity, the carrying values of other receivables and accounts payable approximate their fair values. All investments are carried at fair value in the consolidated balance sheets.

The following table presents the fair values of financial instruments:


	December 31,					December 31,
	2017		2016			2021		2020
	(Amounts in thousands)					(Amounts in thousands)
Assets					Assets
Investments	$	3,732,728	$	3,547,560	Investments	$	5,142,589	$	4,729,270
Note receivable	5,565		—		Note receivable	—		5,725
Total return swaps	—		667
Liabilities					Liabilities
Total return swaps	1,200		765
Options sold	123		20		Options sold	301		—
Secured notes	—		140,000
Unsecured notes	385,583		180,000
Notes payable					Notes payable	413,378		415,253

Estimated Fair Value
(Amounts in thousands)
Fixed maturity securities:
Due in one year or less $ 200,963
Due after one year through five years 532,344
Due after five years through ten years 286,031
Due after ten years 1,873,439
Total $ 2,892,777

Investment Income

The following table presents a summary of net investment income:


	Year Ended December 31,
	2021		2020		2019
	(Amounts in thousands)
Fixed maturity securities	$	100,001	$	100,166	$	102,254
Equity securities	35,064		37,598		32,233
Short-term investments	1,059		2,822		12,381
Total investment income	$	136,124	$	140,586	$	146,868
Less: investment expense	(6,397)		(5,728)		(5,605)
Net investment income	$	129,727	$	134,858	$	141,263

Year Ended December 31,
2017 2016 2015
(Amounts in thousands)
Fixed maturity securities $ 102,790
$ 104,111
$ 108,122
Equity securities 18,554
14,629
14,630
Short-term investments 8,753
8,936
9,033
Total investment income $ 130,097
$ 127,676
$ 131,785
Less: investment expense (5,167 ) (5,805 ) (5,486 )
Net investment income $ 124,930
$ 121,871
$ 126,299

4. Fair Value Measurements

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 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:
			a. Quoted prices for similar assets or liabilities in active markets;
			b. Quoted prices for identical or similar assets or liabilities in non-active markets; or
			c. Either directly or indirectly observable inputs as of the reporting date.

~~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.

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 ~~98.0%~~97.9% of its investment portfolio from an independent pricing ~~service. For private equity funds that were classified as Level 3 and included in equity securities~~service at December 31, 2017 and 2016, the Company obtained specific unadjusted broker quotes based on net fund value and, to a lesser extent, unobservable inputs from at least one knowledgeable outside security broker to determine the fair value. The fair value of such private equity funds was $1.5 million and $9.1 million at December 31, 2017 and 2016, respectively.2021.

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/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 in active markets.

Options sold: 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 ~~$19.3~~$25.2 million and ~~$30.0~~$17.6 million in commercial mortgage-backed securities at December 31, ~~2017~~2021 and ~~2016~~,2020, respectively.

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.

~~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 ("CLOs"): 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.

Note receivable: Valued based on observable inputs, such as benchmark yields, and considering any premium or discount for the differential between the stated interest rate and market interest rates, based on quoted market prices of similar instruments.

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.

Private equity ~~funds~~fund: ~~Private equity funds, excluding a~~The single private equity fund that was not measured at net asset value ("NAV")~~, are~~ was valued based on underlying investments of the fund or assets similar to such investments in active markets, taking into consideration specific unadjusted broker quotes based on net fund value and unobservable inputs from at least ~~one~~1 knowledgeable outside security broker related to liquidity assumptions. This private equity fund was reclassified from Level 3 to private equity funds measured at net asset value at March 31, 2020, due to the use of the NAV practical expedient in measuring the fair value of the fund.

Fair value measurement using NAV practical expedient - The fair ~~value~~values of the Company's investment in private equity ~~fund~~funds measured at net asset value isare determined using NAV as advised by the external fund ~~manager~~managers and the third party ~~administrator.~~administrators. The NAV of the Company's limited partnership or limited liability company interest in ~~this~~such a fund is based on the manager's and the administrator's valuation of the underlying holdings in accordance with the fund's governing documents and GAAP. In accordance with applicable accounting guidance, ~~this investment,~~private equity funds measured at fair value using the NAV practical expedient isare not classified in the fair value hierarchy. The strategy of three of the ~~fund~~four such funds with a fair value of approximately $107.7 million at December 31, 2021 is to provide current income to investors by investing mainly in ~~equity tranches and sub-investment grade rated debt tranches of~~secured loans, CLOs or CLO issuers, ~~in the new and secondary markets,~~ and equity interests in vehicles established to purchase and warehouse ~~loans~~loans; the strategy of the other such fund with a fair value of approximately $0.7 million at December 31, 2021 is to achieve favorable long-term financial returns and measurable positive social and environmental returns by investing in ~~anticipation of a CLO closing or to satisfy regulatory risk retention requirements associated with certain CLOs.~~privately held technology, healthcare, specialty consumer goods and service companies. The Company ~~has made all~~had a maximum of ~~its capital contributions~~approximately $32 million in ~~the fund and had no outstanding~~ unfunded commitments at December 31, ~~2017~~2021 with respect to ~~this~~the private equity funds measured at NAV whereby the Company may be called prior to April 30, 2022 to provide additional capital to fund the purchase of investments and the expenses of a new private equity fund. The Company expects to fund any capital calls on these commitments using the distributions of principal and interest from a mature private equity fund. The underlying assets of the ~~fund~~funds are expected to be liquidated over the period

of approximately one year to ~~five~~nine years from December 31, ~~2017. The~~2021. In addition, the Company does not have the ~~contractual option~~ability to redeem or withdraw from the funds, or to sell, assign, pledge or transfer its investment, without the consent from the General Partner or Managers of each fund, but will receive distributions based on the liquidation of the underlying assets and the interest proceeds from the underlying assets. ~~In addition, the Company does not have the ability to withdraw from the fund, or to sell, assign, pledge or transfer its investment, without the consent from the general partner of the fund.~~

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 gains or ~~loses~~losses 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, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:


	December 31, 2021
	Level 1		Level 2		Level 3		Total
	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds	$	13,085	$	—	$	—	$	13,085
Municipal securities	—		2,843,221		—		2,843,221
Mortgage-backed securities	—		137,002		—		137,002
Corporate securities	—		523,853		—		523,853
Collateralized loan obligations	—		314,153		—		314,153
Other asset-backed securities	—		200,209		—		200,209
Total fixed maturity securities	13,085		4,018,438		—		4,031,523
Equity securities:
Common stock	797,024		—		—		797,024
Non-redeemable preferred stock	—		65,501		—		65,501
Private equity funds measured at net asset value (1)							108,414
Total equity securities	797,024		65,501		—		970,939
Short-term investments:
Short-term bonds	1,453		15,748		—		17,201
Money market instruments	122,917		—		—		122,917
Other	9		—		—		9
Total short-term investments	124,379		15,748		—		140,127
Total assets at fair value	$	934,488	$	4,099,687	$	—	$	5,142,589
Liabilities
Other liabilities:
Options sold	301		—		—		301
Total liabilities at fair value	$	301	$	—	$	—	$	301


	December 31, 2017									December 31, 2020
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
	(Amounts in thousands)									(Amounts in thousands)
Assets									Assets
Fixed maturity securities:									Fixed maturity securities:
U.S. government bonds	$	13,236	$	—	$	—	$	13,236	U.S. government bonds	$	13,816	$	—	$	—	$	13,816
Municipal securities	—		2,556,532		—		2,556,532		Municipal securities	—		2,791,212		—		2,791,212
Mortgage-backed securities and agencies	—		27,165		—		27,165
Mortgage-backed securities									Mortgage-backed securities	—		93,264		—		93,264
Corporate securities	—		137,542		—		137,542		Corporate securities	—		241,366		—		241,366
Collateralized loan obligations	—		105,202		—		105,202
Collateralized debt obligations									Collateralized debt obligations	—		256,891		—		256,891
Other asset-backed securities	—		53,100		—		53,100		Other asset-backed securities	—		153,261		—		153,261
Total fixed maturity securities	13,236		2,879,541		—		2,892,777		Total fixed maturity securities	13,816		3,535,994		—		3,549,810
Equity securities:									Equity securities:
Common stock	429,367				—		429,367		Common stock	691,782		—		—		691,782
Non-redeemable preferred stock	—		34,869		—		34,869		Non-redeemable preferred stock	—		32,660		—		32,660
Private equity fund	—		—		1,481		1,481
Private equity fund measured at net asset value ⁽¹⁾							71,523
Private equity funds measured at net asset value (1)									Private equity funds measured at net asset value (1)							79,409
Total equity securities	429,367		34,869		1,481		537,240		Total equity securities	691,782		32,660		—		803,851
Short-term investments:									Short-term investments:
Short-term bonds	29,998		2,020		—		32,018		Short-term bonds	21,999		4,929		—		26,928
Money market instruments	270,693		—		—		270,693		Money market instruments	348,676		—		—		348,676
Other									Other	5		—		—		5
Total short-term investments	300,691		2,020		—		302,711		Total short-term investments	370,680		4,929		—		375,609
Other assets:									Other assets:
Note receivable	—		5,565		—		5,565		Note receivable	—		5,725		—		5,725
Total return swaps	—		—		—		—
Total assets at fair value	$	743,294	$	2,921,995	$	1,481	$	3,738,293	Total assets at fair value	$	1,076,278	$	3,579,308	$	—	$	4,734,995
Liabilities
Other liabilities:
Total return swaps	—		1,200		—		1,200
Options sold	123		—		—		123
Total liabilities at fair value	$	123	$	1,200	$	—	$	1,323


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

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

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



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock	MCY	New York Stock Exchange


					Page
PART I

			~~Page~~
~~PART I~~

Item 1	Business			1
Item 1A			~~General~~Risk Factors		114
Item 1B			~~Website Access to Information~~		2
	~~Organization~~	2
	~~Production and Servicing of Business~~	3
	~~Underwriting~~	4
	~~Claims~~	4
	~~Loss and Loss Adjustment Expense Reserves and Reserve Development~~	4
	~~Statutory Accounting Principles~~	5
	~~Investments~~	6
	~~Competitive Conditions~~	7
	~~Reinsurance~~	8
	~~Regulation~~	8
	~~Executive Officers of the Company~~	11
~~Item 1A~~	~~Risk Factors~~	12
~~Item 1B~~	Unresolved Staff Comments	2327
Item 2			Properties		2327
Item 3			Legal Proceedings		2327
Item 4			Mine Safety Disclosures		2428

PART II

Item 5			Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		2529
Item 6			~~Selected Financial Data~~Reserved		2631
Item 7			Management’s Discussion and Analysis of Financial Condition and Results of Operations		2832
Item 7A			Quantitative and Qualitative Disclosures about Market Risks		5254
Item 8			Financial Statements and Supplementary Data		5456
Item 9			Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		9399
Item 9A			Controls and Procedures		9399
Item 9B			Other Information		94100
Item 9C			Disclosure Regarding Foreign Jurisdictions that Prevent Inspections		100

PART III

Item 10			Directors, Executive Officers, and Corporate Governance		95101
Item 11			Executive Compensation		95101
Item 12			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		95101
Item 13			Certain Relationships and Related Transactions, and Director Independence		95101
Item 14			Principal Accounting Fees and Services		95101

PART IV

Item 15			Exhibits and Financial Statement Schedules		96102
Item 16			Form 10-K Summary		106

SIGNATURES					~~101~~107
Financial Statement Schedules					S-~~S-1~~1


	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines (2)			Total
California	$	2,286,017		$	642,291		$	181,957		$	188,446		$	3,298,711		84.4	%
Other states (1)	354,730			159,197			77,916			16,975			608,818			15.6	%
Total	$	2,640,747		$	801,488		$	259,873		$	205,421		$	3,907,529		100.0	%
	67.6		%	20.5		%	6.6		%	5.3		%	100.0		%



	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	2,117,882		$	404,645		$	102,204		$	109,779		$	2,734,510		84.1	%
Florida ⁽¹⁾	140,288			4			17,089			680			158,061			4.9	%
Other states ⁽²⁾	221,871			65,269			58,939			10,282			356,361			11.0	%
Total	$	2,480,041		$	469,918		$	178,232		$	120,741		$	3,248,932		100.0	%
	76.3		%	14.5		%	5.5		%	3.7		%	100.0		%


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



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


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


⁽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."


⁽¹⁾	Under statutory accounting principles ("SAP"), reserves are stated net of reinsurance recoverables on unpaid losses whereas under U.S. generally accepted accounting principles ("GAAP"), reserves are stated gross of reinsurance recoverables on unpaid losses.


⁽¹⁾	~~Source: A.M. Best,~~ ~~Aggregates & Averages~~ ~~(2013 through 2016), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).~~


⁽²⁾	~~Combined ratio for 2014 does not sum due to rounding.~~


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


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


⁽²⁾	~~At December 31, 2017, fixed maturity securities with call features totaled $2.9 billion at fair value and amortized cost.~~


~~Item 1.~~	~~Business~~


	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California (3)	$	2,266,115		$	579,747		$	161,619		$	149,627		$	3,157,108		86.4	%
Other states (1) (4)	302,819			99,194			79,169			15,871			497,053			13.6	%
Total	$	2,568,934		$	678,941		$	240,788		$	165,498		$	3,654,161		100.0	%
	70.3		%	18.6		%	6.6		%	4.5		%	100.0		%



	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	2,059,459		$	369,407		$	86,981		$	104,854		$	2,620,701		82.6	%
Florida ⁽¹⁾	154,593			9			24,973			1,067			180,642			5.7	%
Other states⁽²⁾	238,651			67,481			54,112			10,310			370,554			11.7	%
Total	$	2,452,703		$	436,897		$	166,066		$	116,231		$	3,171,897		100.0	%
	77.3		%	13.8		%	5.2		%	3.7		%	100.0		%


	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total						Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	1,946,922		$	333,397		$	78,735		$	96,791		$	2,455,845		81.5	%	California	$	2,478,477		$	520,062		$	139,367		$	123,735		$	3,261,641		86.4	%
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	%
Other states (1)																		Other states (1)	342,005			78,478			77,960			14,506			512,949			13.6	%
Total	$	2,345,773		$	402,249		$	153,511		$	111,363		$	3,012,896		100.0	%	Total	$	2,820,482		$	598,540		$	217,327		$	138,241		$	3,774,590		100.0	%
	77.9		%	13.3		%	5.1		%	3.7		%	100.0		%				74.6		%	15.9		%	5.8		%	3.7		%	100.0		%


	Catastrophe Losses and LAE
	In Excess of		Up to		Percentage of Coverage

	(Amounts in millions)
Retained	$	—	$	40	—	%
Layer of Coverage	40		100		70
Layer of Coverage (1)(2)	100		450		100
Layer of Coverage (1) (3) (4)(5)	450		850		100


Treaty	Annual Premium (1)		Reinstatement Premium (2)		Total Combined Premium (2)

	(Amounts in millions)
For the 12 months ending June 30, 2022	$	55	$	—	$	55
For the 12 months ended June 30, 2021	50		—		50


Location	Purpose	Size in Square Feet	Percent Occupied by the Company at December 31, 2021
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	162,000	51	%
Oklahoma City, OK	Administrative	100,000	25	%


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



2017	High		Low
1st Quarter	$	64.52	$	56.45
2nd Quarter	63.23		53.23
3rd Quarter	61.51		52.52
4th Quarter	60.19		51.87


	2016		2017		2018		2019		2020		2021
Mercury General	$	100.00	$	92.77	$	94.33	$	93.18	$	105.95	$	112.51
Industry Peer Group	100.00		121.32		122.03		144.27		148.84		184.26
S&P 500 Index	100.00		121.83		116.49		153.17		181.35		233.40



	2012		2013		2014		2015		2016		2017
Mercury General	$	100.00	$	132.55	$	158.95	$	137.00	$	185.31	$	171.92
Industry Peer Group	100.00		132.89		161.63		155.39		187.53		227.51
S&P 500 Index	100.00		132.39		150.51		152.59		170.84		208.14


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


	% of Total
	Claims Closed	Dollars Paid
BI claims closed in the accident year reported	37%	12%
BI claims closed one year after the accident year reported	79%	51%
BI claims closed two years after the accident year reported	93%	75%
BI claims closed three years after the accident year reported	97%	88%


	High	Low
Immediate preceding accident year	2.0%	(5.1)%
Second preceding accident year	7.5%	0.1%
Third preceding accident year	5.2%	(1.0)%



	High	Low
Immediate preceding accident year	(2.2)%	(5.1)%
Second preceding accident year	2.3%	(3.1)%
Third preceding accident year	2.0%	(2.9)%



Accident Year	Number of Claims Expected ⁽¹⁾		Actual Recorded Severity at 12/31/17 ⁽¹⁾			Implied Inflation Rate Recorded ⁽²⁾			(A) Pro-forma severity if actual severity is lower by 10% for 2017, 5% for 2016, and 3% for 2015		(B) Pro-forma severity if actual severity is higher by 10% for 2017, 5% for 2016, and 3% for 2015		Favorable loss development if actual severity is less than recorded (Column A)		Unfavorable loss development if actual severity is more than recorded (Column B)
2017	27,880	(3)	$	13,603	(3)	20.5	%	(3)	$	12,243	$	14,963	$	37,917,000	$	(37,917,000	)
2016	29,339	(3)	$	11,291	(3)	8.1	%	(3)	$	10,726	$	11,856	$	16,577,000	$	(16,577,000	)
2015	32,176		$	10,446		3.9	%		$	10,133	$	10,759	$	10,071,000	$	(10,071,000	)
2014	32,189		$	10,057		—			—		—		—		—
Total Loss Development—Favorable (Unfavorable)													$	64,565,000	$	(64,565,000	)


Accident Year	Number of Claims Expected		Actual Recorded Severity at 12/31/2021			Implied Inflation Rate Recorded (1)			(A) Pro-forma severity if actual severity is lower by 12% for 2021, 8% for 2020, and 6% for 2019		(B) Pro-forma severity if actual severity is higher by 12% for 2021, 8% for 2020, and 6% for 2019		Favorable loss development if actual severity is less than recorded (Column A)		Unfavorable loss development if actual severity is more than recorded (Column B)
2021	20,503	(2)	$	21,796	(2)	3.9	%	(2)	$	19,180	$	24,412	$	53,636,000	$	(53,636,000)
2020	18,681	(2)	$	20,972	(2)	19.5	%	(2)	$	19,294	$	22,650	$	31,347,000	$	(31,347,000)
2019	29,240		$	17,543		11.6	%		$	16,490	$	18,596	$	30,790,000	$	(30,790,000)
2018	28,497		$	15,722		—			—		—		—		—
Total Loss Development—Favorable (Unfavorable)													$	115,773,000	$	(115,773,000)


⁽²⁾	~~Implied inflation rate is calculated by dividing the difference between the current and prior year actual recorded severity by the prior year actual recorded severity.~~


2021 Accident Year	Claims Reported	Amount Recorded at 12/31/2021 at Approximately 6.0% Claim Count Development		Total Expected Amount If Claim Count Development is 0%		Total Expected Amount If Claim Count Development is 10%
Claim count	19,346	20,503		19,346		21,281
Approximate average cost per claim	Not meaningful	$	21,796	$	21,796	$	21,796
Total dollars	Not meaningful	$	446,883,000	$	421,665,000	$	463,841,000
Total Loss Development—Favorable (Unfavorable)				$	25,218,000	$	(16,958,000)



2017 Accident Year	Claims Reported	Amount Recorded at 12/31/17 at 4.7% Claim Count Development		Total Expected Amount If Claim Count Development is 0%		Total Expected Amount If Claim Count Development is 10%
Claim count	26,628	27,880		26,628		29,291
Approximate average cost per claim	Not meaningful	$	13,603	$	13,603	$	13,603
Total dollars	Not meaningful	$	379,252,000	$	362,221,000	$	398,445,000
Total Loss Development—Favorable (Unfavorable)				$	17,031,000	$	(19,193,000	)



	Year Ended December 31, 2017
	(Losses) Gains Recognized in Income
	Sales			Changes in fair value			Total
	(Amounts in thousands)
Net realized investment (losses) gains:
Fixed maturity securities ⁽¹⁾⁽²⁾	$	(2,097	)	$	50,403		$	48,306
Equity securities ⁽¹⁾⁽³⁾	(2,213		)	37,486			35,273
Short-term investments ⁽¹⁾	1			38			39
Note receivable ⁽¹⁾	—			(122		)	(122		)
Total return swaps	(1,035		)	(1,102		)	(2,137		)
Options sold	2,294			(3		)	2,291
Total	$	(3,050	)	$	86,700		$	83,650



	Year Ended December 31, 2016
	(Losses) Gains Recognized in Income
	Sales			Changes in fair value			Total
	(Amounts in thousands)
Net realized investment (losses) gains:
Fixed maturity securities ⁽¹⁾⁽²⁾	$	(15,806	)	$	(56,584	)	$	(72,390	)
Equity securities ⁽¹⁾⁽³⁾	(499		)	23,722			23,223
Short-term investments ⁽¹⁾	(524		)	57			(467		)
Total return swaps	107			11,426			11,533
Options sold	3,846			—			3,846
Total	$	(12,876	)	$	(21,379	)	$	(34,255	)


⁽¹⁾	~~The changes in fair value of the investment portfolio and note receivable resulted from the application of the fair value option.~~


⁽²⁾	The increases in fair value of fixed maturity securities during 2017 were primarily due to the overall improvement in the market conditions affecting fixed maturity securities, while the fair value in 2016 was adversely affected by the increases in market interest rates.