UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________ 
FORM 10-K
____________________________ 
ANNUAL REPORT PURSUANT TO SECTION
☒Annual Report Pursuant to Section 13 ORor 15(d)
OF THE SECURITIES EXCHANGE ACT OF of the Securities Exchange Act of 1934
For for the Fiscal Year Ended December 31, 20172023
or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ___________  to ___________
Commission File No. 001-12257
____________________________ 

MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
____________________________ 
California95-2211612
California95-2211612
(State or other jurisdiction
of
incorporation or organization)
(I.R.S. Employer

Identification No.)
4484 Wilshire Boulevard
Los Angeles, CaliforniaCalifornia90010
(Address of principal executive offices)(Zip Code)
____________________________ 
Registrant’s telephone number, including area code: (323) 937-1060
____________________________ 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockMCYNew York Stock Exchange

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

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

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

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

Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files).    Yes  x☒    No  ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerx☒Accelerated filer¨☐
Non-accelerated filer¨☐(Do not check if a smaller reporting company)Smaller reporting company¨☐
Emerging growth companyo☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the Registrantregistrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value of the Registrant’sregistrant’s common equity held by non-affiliates of the Registrantregistrant at June 30, 20172023 was $1,471,397,454$803,841,584 (which represents 27,248,10126,555,718 shares of common equity held by non-affiliates multiplied by $54.00,$30.27, the closing sales price on the New York Stock Exchange for such date, as reported by the Wall Street Journal).

At February 2, 2018,8, 2024, the Registrantregistrant had issued and outstanding an aggregate of 55,332,07755,371,127 shares of its Common Stock.
____________________________ 

Documents Incorporated by Reference
Certain information from the Registrant’sregistrant’s definitive proxy statement for the 20182024 Annual Meeting of Shareholders is incorporated herein by reference into Part III hereof.






MERCURY GENERAL CORPORATION
INDEX TO FORM 10-K
 
Page
Item 1
1
Item 1A
114
Item 1B
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 21C
2327
Item 2
29
Item 3
2330
Item 4
2430
Item 5
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
2531
Item 6
2632
Item 7
2833
Item 7A
52
Item 8
54
Item 9
9396
Item 9A
9396
Item 9B
9496
Item 9C
97
Item 10
9598
Item 11
9598
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
9598
Item 13
9598
Item 14
9598
Item 15
9699
Item 16
103
101104
S-S-11



PART I


Item 1.Business

Item 1.Business

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 1412 insurance subsidiaries (referred to herein collectively as the "Insurance Companies") in 11 states, principally California. The Company also writes homeowners, commercial automobile, commercial property, mechanical protection, and umbrella insurance. The Company's insurance policies are mostly sold through independent agents who receive a commission for selling policies. The Company believes that it has thorough underwriting and claims handling processes that, together with its agent relationships, provide the Company with competitive advantages.


The direct premiums written for the years ended December 31, 2017, 2016,2023, 2022 and 20152021 by state and line of insurance business were:


Year Ended December 31, 20172023
(Dollars in thousands)
Private
Passenger  Automobile		HomeownersCommercial
Automobile
Other Lines (2)
Total
California$2,317,678 $813,056 $246,253 $235,735 $3,612,722 79.3 %
Texas123,390 147,854 53,430 5,592 330,266 7.2 %
Other states (1)
400,714 158,094 46,538 10,154 615,500 13.5 %
Total$2,841,782 $1,119,004 $346,221 $251,481 $4,558,488 100.0 %
62.4 %24.5 %7.6 %5.5 %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%  


Year Ended December 31, 20162022
(Dollars in thousands)
Private
Passenger  Automobile		HomeownersCommercial
Automobile
Other Lines (2)
Total
California$2,142,265 $716,651 $193,809 $216,022 $3,268,747 80.8 %
Texas97,620 105,269 43,641 6,174 252,704 6.2 %
Other states (1)
358,973 118,419 39,312 10,375 527,079 13.0 %
Total$2,598,858 $940,339 $276,762 $232,571 $4,048,530 100.0 %
64.3 %23.2 %6.8 %5.7 %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%  


Year Ended December 31, 20152021
(Dollars in thousands)
Private
Passenger  Automobile
 Homeowners 
Commercial
Automobile
 Other Lines Total  
Private
Passenger Automobile
California$1,946,922
 $333,397
 $78,735
 $96,791
 $2,455,845
 81.5%
Florida (1)
153,206
 9
 27,281
 738
 181,234
 6.0%
Other states (2)
245,645
 68,843
 47,495
 13,834
 375,817
 12.5%
California
California$2,286,017 $642,291 $181,957 $188,446 $3,298,711 84.4 %
Other states (1)
Other states (1)
354,730 159,197 77,916 16,975 608,818 15.6 %
Total$2,345,773
 $402,249
 $153,511
 $111,363
 $3,012,896
 100.0%Total$2,640,747 $$801,488 $$259,873 $$205,421 $$3,907,529 100.0 100.0 %
77.9% 13.3% 5.1% 3.7% 100.0%  
67.6
_____________
(1)
The Company is writing and expects to continue writing nominal premiums in the Florida homeowners market.
(2)
No individual state accounts for more than 4% of total direct premiums written.

(1)    No individual state accounted for more than 5% of total direct premiums written.
(2)    No individual line of insurance business accounted for more than 5% of total direct premiums written.

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


1

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


The following table presents the Company's published maximum limits of liability:coverage:


Insurance typePublished maximum limits of liabilitycoverage
Private Passenger Automobile - bodily injury (BI)
$250,000500,000 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 majority of the Company’s automobile policies have liabilitycoverage limits that are equal to or less than $100,000 per person and $300,000 per accident for BI and $50,000 per accident for property damage.
(2) The Company obtainshas a per-risk reinsurance treaty covering losses of $10 million in excess of $5 million, and facultative reinsurance coverage for losses above a Company retention limit of up to $7$15 million.
(3) The majority of the Company’s homeownerhomeowners policies have liability coverage limits of $300,000 or less, a replacement value of $500,000 or less, and a total insured value of $1,000,000 or less.
(4) The majority of the Company’s umbrella policies have liabilitycoverage limits of $1,000,000. The commercial umbrella liability is 100% reinsured.


The principal executive offices of Mercury General are located in Los Angeles, California. The home office of the Insurance Companies and the information technology center are located in Brea, California. The Company also owns an office buildingsbuilding in Rancho Cucamonga and Folsom, California, which areis used to support California operations, and future expansion, and in Clearwater, Florida andanother in Oklahoma City, Oklahoma, which house Company employeessupports the Company's operations outside of California and houses several third party tenants. The Company has approximately 4,300 employees. The Company maintains branch offices in a number of locations in California; Clearwater, Florida; Kennesaw, Georgia; Lake Forest, Illinois; Las Vegas, Nevada; Bridgewater, New Jersey; Melville, New York; Independence, Ohio; Oklahoma City, Oklahoma; Austin, Texas; and AustinShanghai, China.

Human Capital

The Company had approximately 4,100 employees at December 31, 2023. The Company's employees are critical to its continued success, and San Antonio, Texas. it focuses significant attention on attracting and retaining talented and motivated individuals. The Company pays its employees fairly and competitively and offers a wide range of benefits regardless of gender, race, religion, or ethnicity. The Company benchmarks and sets pay ranges based on market data and considering such factors as employees' roles, experiences and performance, and the location of their job. Individual goals are set annually for each employee, and attainment of those goals is an element of the employee’s performance assessment. The Company regularly reviews its compensation practices, both in terms of its overall workforce and individual employees, to ensure its pay is fair and equitable. In addition, the Company reviews its staffing levels periodically to ensure they are aligned with its business needs.


The Company also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues, in order to improve the employee experience and identify opportunities to continually strengthen its culture. The Company devotes extensive resources to employee training and development, including tuition assistance for career-enhancing academic and professional programs. The Company recognizes that its success is based on the talents and dedication of those it employs, and it is highly invested in their success.

The Company is committed to hiring, developing and supporting a diverse and inclusive workplace. All of the Company's employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace, must adhere to a code of conduct that sets standards for appropriate behavior, and are required to take annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination.

The Company sponsors a wellness program designed to enhance physical, financial and mental well-being for all of its employees, and encourages healthy behaviors through regular communications, educational sessions, voluntary progress tracking, wellness challenges, and other incentives. The vast majority of the Company's employees currently work from home
2

as a result of the "Mercury's My Workplace" policy that allows most of its employees to work from anywhere in the U.S..

Available Information


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


Organization
Mercury General, an insurance holding company, is the parent of Mercury Casualty Company, a California automobile insurer founded in 1961 by George Joseph, the Company’s Chairman of the Board of Directors. 



Mercury General conducts its business through the following subsidiaries: 
Insurance Companies
Formed or

Acquired
A.M. Best

Rating
Primary States
Mercury Casualty Company ("MCC")(1)
19611961AA+CA, AZ, NV, NY, VA
Mercury Insurance Company ("MIC")(1)
19721972AA+CA
California Automobile Insurance Company ("CAIC")(1)
19751975AA+CA
California General Underwriters Insurance Company, Inc. ("CGU")(1)
19851985ANon-ratedCA
Mercury Insurance Company of Illinois19891989AA+IL, PANJ
Mercury Insurance Company of Georgia19891989AA+GA
Mercury Indemnity Company of Georgia19911991AA+GA
Mercury National Insurance Company1991A+IL, MI
American Mercury Insurance Company19961996AA-OK, GA,CA, TX, VA
American Mercury Lloyds Insurance Company ("AML")19961996AA-TX
Mercury County Mutual Insurance Company20002000AA-TX
Mercury Insurance Company of Florida2001A+FL, PA
Mercury Indemnity Company of America20012001AA+FL, NJ
Workmen’s Auto InsuranceOrion Indemnity Company ("WAIC"OIC")(1)(2)
20152015ANon-ratedCA
Non-Insurance CompaniesFormed or
Acquired		Purpose
Non-Insurance Companies
Formed or
Acquired
Purpose
Mercury Select Management Company, Inc.19971997AML’s attorney-in-fact
Mercury Insurance Services LLC20002000Management services to subsidiaries
AIS Management LLC20092009Parent company of AIS and PoliSeek
Auto Insurance Specialists LLC ("AIS")20092009Insurance agency
PoliSeek AIS Insurance Solutions, Inc. ("PoliSeek")20092009Insurance agency
Animas Funding LLC ("AFL")20132013Special purpose investment vehicle
Fannette Funding LLC ("FFL")20142014Special purpose investment vehicle
Mercury Plus Insurance Services LLC2018Insurance agency
Mercury Information Technology Services LLC2023Parent company of Mercury Shanghai
Mercury (Shanghai) Information Technology Services Co., Ltd. ("Mercury Shanghai")2024Software development and related technical services to other subsidiaries
_____________
(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)The term "California Companies" refers to MCC, MIC, CAIC, CGU, and OIC.



3

Production and Servicing of Business
The Company sells its policies through a network of approximately 10,4006,390 independent agents, its 100% owned insurance agencies, AIS and PoliSeek, and directly through internet sales portals. All of the independent agents collectively accounted for more than 87% of the Company's direct premiums written in 2017,Approximately 1,630, 1,030, and no single independent agent accounted for more than 1% of the Company’s direct premiums written during the last three years. Approximately 2,1001,110 of the independent agents are located in California, Florida, and approximately 1,600 are located in Florida.Texas, respectively. The independent agents and agencies are independent contractors selected and contracted by the Company and generally also represent competing insurance companies. Certain of these independent agencies are under the common ownership of a parent company; however, they each operate autonomously with their own contractual agreements with the Company and hence are accounted for as separate independent agencies. Excluding AIS and PoliSeek, independent agents and agencies collectively accounted for approximately 89% of the Company's direct premiums written in 2023 and no single independent agent or agency accounted for more than 1.9% of the Company’s direct premiums written during any of the last three years. AIS and PoliSeek represented the Company as independent agentsagencies prior to their acquisition in 2009, and continue to act as independent agentsagencies selling policies for a number of other insurance companies. Policies sold directly through the internet sales portals are assigned to and serviced by the Company's agents and agencies, including AIS and PoliSeek.


The Company believes that it compensates its agents above the industry average. Net commissions incurred in 20172023 were approximately 16%15% of net premiums written.


The Company’s advertising budget is allocated among television, radio, newspaper, internet, and direct mailing media with the intent to provide the best coverage available within targeted media markets. While the majority of these advertising costs are borne by the Company, a portion of these costs are reimbursed by the Company’s independent agents based upon the number of account leads generated by the advertising. The Company believes that its advertising program is important to generate leads and create brand awareness, and remain competitive in the current insurance climate.awareness. In 2017,2023, the Company incurred approximately $37$9 million in net advertising expense.


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


The Company offers standard, non-standard, and preferred private passenger automobile insurance in 11 states. The Company also offers homeowners insurance in 1110 states, commercial automobile insurance in 94 states, and mechanical protection insurance in most states.


In California, "good drivers," as defined by the California Insurance Code, accounted for approximately 84%87% of allthe Company's California voluntary private passenger automobile policies-in-force at December 31, 2017,2023, while higher risk categories accounted for approximately 16%13%. The Company's private passenger automobile renewal rate in California (the rate of acceptance of offers to renew) averagesaveraged approximately 95%, 96%., and 97% in 2023, 2022, and 2021, respectively.


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


Loss and Loss Adjustment Expense Reserves ("Loss Reserves") and Reserve Development
The Company maintains loss reserves for both reported and unreported claims. Loss reserves for reported claims are estimated based upon a case-by-case evaluation of the type of claim involved and the expected development of such claims. Loss reserves for unreported claims are determined on the basis of historical information by line of insurance business. Inflation is reflected in the reserving process through analysis of cost trends and review of historical reserve settlement.


The Company’s ultimate liability may be greater or less than management estimates of reported loss reserves. The Company does not discount to a present value that portion of loss reserves expected to be paid in future periods. However, the Company is required to discount loss reserves for federal income tax purposes.






4

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


RECONCILIATION OF NET LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Year Ended December 31, Year Ended December 31,
2017 2016 2015 202320222021
(Amounts in thousands) (Amounts in thousands)
Gross reserves at January 1(1)
$1,290,248
 $1,146,688
 $1,091,797
Less reinsurance recoverables on unpaid losses(13,161) (14,253) (14,192)
Reinsurance recoverables on unpaid losses
Net reserves at January 1(1)
1,277,087
 1,132,435
 1,077,605
Acquisition of WAIC reserves—
 —
 18,677
Incurred losses and loss adjustment expenses related to:     
Current year
Current year
Current year2,390,453
 2,269,769
 2,132,837
Prior years54,431
 85,369
 12,658
Total incurred losses and loss adjustment expenses2,444,884
 2,355,138
 2,145,495
Loss and loss adjustment expense payments related to:     
Current year
Current year
Current year1,550,789
 1,508,362
 1,455,245
Prior years724,570
 702,124
 654,097
Total payments2,275,359
 2,210,486
 2,109,342
Net reserves at December 31(1)
1,446,612
 1,277,087
 1,132,435
Reinsurance recoverables on unpaid losses64,001
 13,161
 14,253
Gross reserves at December 31(1)
$1,510,613
 $1,290,248
 $1,146,688
_____________ 

(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)
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.


Inflationary trends accelerated to their highest level in decades in 2022, which had a significant impact on the cost of automobile parts and labor as well as medical expenses for bodily injuries, and supply chain and labor shortage issues lengthened the time to repair vehicles. Bodily injury costs were also under pressure from social inflation. The severe inflationary trend continued into 2023, but began moderating as the year progressed.

The decrease in the provision for insured events of prior years in 2023 of approximately $35.9 million primarily resulted from lower than estimated losses and loss adjustment expenses in the private passenger automobile and homeowners lines of insurance business, partially offset by unfavorable reserve development in the commercial property line of insurance business. The moderating inflationary trend in 2023 relative to 2022 discussed above was a major contributor to the favorable reserve development in the private passenger automobile line of insurance business for 2023.

The increase in the provision for insured events of prior years in 20172022 of approximately $54.4$47.3 million primarily resulted from higher than estimated losses and loss adjustment expenses in Californiathe automobile line of insurance business. The inflationary pressures and property linesthe supply chain and labor shortage issues discussed above were major contributors to the adverse reserve development in the automobile line of insurance business which experienced loss severities in prior accident periods that were higher than previously estimated.for 2022.


The increasedecrease in the provision for insured events of prior years in 20162021 of approximately $85.4$26.1 million primarily resulted from the California and Florida automobile lines of business, which experienced loss severities in prior accident periods that were higherlower than previously estimated.

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

The Company experienced estimated pre-tax catastrophe losses and loss adjustment expenses in the homeowners and private passenger automobile lines of approximately $168 million ($79 millioninsurance business.

The Company recorded catastrophe losses net of reinsurance benefits), $27of approximately $239 million, $102 million, and $19$104 million in 2017, 2016,2023, 2022, and 2015,2021, respectively. There were Catastrophe losses due to events that occurred in 2023 totaled approximately $247 million, with no reinsurance benefits used for catastrophethese losses, resulting primarily from rainstorms and hail in 2016Texas and 2015. The losses in 2017 primarily resulted from wildfires in NorthernOklahoma, winter storms and Southern California, severe rainstorms in California, and the impact of Tropical Storm Hilary in California. In addition, the Company experienced favorable development of approximately $8 million on prior years' catastrophe losses in 2023. Catastrophe losses due to the events that occurred in 2022 totaled approximately $101 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze of Winter Storm Elliott and other extreme weather events in Texas, Oklahoma and Georgia, winter storms in California, and the impact of Hurricane HarveyIan in Florida. In addition, the Company experienced unfavorable development of approximately $1 million on prior years' catastrophe losses in 2022.
5

Catastrophe losses due to the events that occurred in 2021 totaled approximately $109 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze of Winter Storm Uri and other extreme weather events in Texas and Oklahoma, rainstorms, wildfires and winter storms in California, and the impact of Hurricane IrmaIda in FloridaNew Jersey and Georgia. TheNew York. In addition, the Company experienced favorable development of approximately $5 million on prior years' catastrophe losses in 2016 primarily resulted from severe storms outside of California and rainstorms in California. The losses in 2015 primarily resulted from severe storms outside of California, and rainstorms and wildfires in California.2021.


Statutory Accounting Principles
The Company’s results are reported in accordance with GAAP, which differ in some respects from amounts reported under SAP prescribed by insurance regulatory authorities. Some of the significant differences under GAAP are described below:
•Policy acquisition costs such as commissions, premium taxes, and other costs that vary with and are primarily related to the successful acquisition of new and renewal insurance contracts, are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, whereas under SAP, these costs are expensed as incurred.
•Certain assets are included in the consolidated balance sheets, whereas under SAP, such assets are designated as "nonadmitted assets," and charged directly against statutory surplus. These assets consist primarily of premium receivables that are outstanding for more than 90 days, deferred tax assets that do not meet statutory requirements for recognition, furniture, equipment, leasehold improvements, capitalized software, and prepaid expenses.
•Amounts related to ceded reinsurance are shown gross as prepaid reinsurance premiums and reinsurance recoverables, whereas under SAP, these amounts are netted against unearned premium reserves and loss and loss adjustment expense reserves.
•Fixed-maturity securities are reported at fair value, whereas under SAP, these securities are reported at amortized cost, or the lower of amortized cost, or fair value, depending on the specific type of security.
•Equity securities are marked to market through the consolidated statements of operations, whereas under SAP, these securities are marked to market through unrealized gains and losses in surplus.
•Goodwill is reported as the excess of cost of an acquired entity over the fair value of the underlying assets and assessed periodically for impairment. Intangible assets are amortized over their useful lives. Under SAP, goodwill is reported as the excess of cost of an acquired entity over the statutory book value and amortized over 10 years. Its carrying value is limited to 10% of adjusted surplus. Under SAP, intangible assets are not recognized.
•The differing treatment of income and expense items results in a corresponding difference in federal income tax expense. Changes in deferred income taxes are reflected as an item of income tax benefit or expense, whereas under SAP, changes in deferred income taxes are recorded directly to statutory surplus as regards policyholders. Admittance testing under SAP may result in a charge to unassigned surplus for non-admitted portions of deferred tax assets. Under GAAP, a valuation allowance may be recorded against the deferred tax assets and reflected as an expense.
•Certain assessments paid to regulatory agencies that are recoverable from policyholders in future periods are expensed, whereas under SAP, these assessments are recorded as receivables.


Operating Ratios (SAP basis)



Loss and Expense Ratios
Loss and expense ratios are used to evaluate the underwriting experience of property and casualty insurance companies. Under SAP, losses and loss adjustment expenses are stated as a percentage of premiums earned because losses occur over the life of a policy, while underwriting expenses are stated as a percentage of premiums written rather than premiums earned because most underwriting expenses are incurred when policies are written and are not spread over the policy period. The statutory underwriting profit margin is the extent to which the combined loss and expense ratios are less than 100%. 







6

The following table presents, on a statutory basis, the Insurance Companies’ loss, expense and combined ratios, and the private passenger automobile industry combined ratio. Although theThe Insurance Companies’ ratios (Company-wide) include lines of insurance business other than private passenger automobile that accounted for 23.7%approximately 37.6% of direct premiums written in 2017,2023; hence, the Company believes its ratios can be comparedcombined ratio (for private passenger automobile only) is more comparable to the industry ratios.
  Year Ended December 31,
  2017 2016 2015 2014 2013
Loss ratio 76.6% 75.3% 72.6% 71.0% 72.7%
Expense ratio 25.3% 25.7% 26.7% 27.7% 27.2%
Combined ratio 101.9% 101.0%
99.3% 98.8%
(2) 
99.9%
Industry combined ratio (all writers)(1)
 N/A
 106.0% 104.1% 101.9% 103.4%
Industry combined ratio (excluding direct writers)(1)
 N/A
 99.7%  100.2%  99.8% 100.7%
 Year Ended December 31,
 20232022 202120202019
Loss ratio (Company-wide)82.3 %85.1 %73.8 %67.4 %75.2 %
Expense ratio (Company-wide)23.5 %24.4 %24.9 %26.2 %24.5 %
Combined ratio (Company-wide)105.8 %109.5 %

98.7 %93.6 %99.7 %
Combined ratio (Company's private passenger automobile only)103.0 %110.3 %96.0 %88.3 %98.2 %
Industry combined ratio (all writers)(1)
N/A111.7 %100.7 %90.5 %98.1 %
Industry combined ratio (excluding direct writers)(1)
N/A104.6 %  99.4 %  91.4 %97.3 %
____________
(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)Source: A.M. Best, Aggregates & Averages (2019 through 2022), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).

Premiums to Surplus Ratio
The following table presents the Insurance Companies’ statutory ratios of net premiums written to policyholders’ surplus. Guidelines established by the National Association of Insurance Commissioners (the "NAIC") indicate that this ratio should be no greater than 3 to 1.
 Year Ended December 31,
 20232022202120202019
 (Amounts in thousands, except ratios)
Net premiums written$4,464,199 $3,978,017 $3,855,369 $3,611,543 $3,731,723 
Policyholders’ surplus$1,667,187 $1,502,424 $1,827,210 $1,768,103 $1,539,998 
Ratio2.7 to 12.7 to 12.1 to 12.0 to 12.4 to 1
 Year Ended December 31,
 2017 2016 2015 2014 2013
 (Amounts in thousands, except ratios)
Net premiums written$3,215,910
 $3,155,788
 $2,999,392
 $2,840,922
 $2,728,999
Policyholders’ surplus$1,589,226
 $1,441,571
 $1,451,950
 $1,438,281
 $1,528,682
Ratio2.0 to 1
 2.2 to 1
 2.1 to 1
 2.0 to 1
 1.8 to 1


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


Tax considerations are important in portfolio management. The Company closely monitors the timing and recognition of capital gains and losses to maximize the realization of any deferred tax assets arising from capital losses. The Company had no capital loss carryforward at December 31, 2017.2023.











7

Investment Portfolio
The following table presents the composition of the Company’s total investment portfolio:
December 31, December 31,
2017 2016 2015 202320222021
Cost(1)
 Fair Value 
Cost(1)
 Fair Value 
Cost(1)
 Fair Value
Cost(1)
Fair Value
Cost(1)
Fair Value
Cost(1)
Fair Value
    (Amounts in thousands)       (Amounts in thousands) 
Taxable bonds$356,018
 $359,240
 $373,335
 $375,495
 $426,905
 $414,396
Tax-exempt state and municipal bonds2,467,212
 2,533,537
 2,422,075
 2,439,058
 2,377,370
 2,465,607
Total fixed maturities2,823,230
 2,892,777
 2,795,410
 2,814,553
 2,804,275
 2,880,003
Equity securities474,197
 537,240
 331,770
 357,327
 313,528
 315,362
Short-term investments302,693
 302,711
 375,700
 375,680
 185,353
 185,277
Total investments$3,600,120
 $3,732,728
 $3,502,880
 $3,547,560
 $3,303,156
 $3,380,642
__________ 
(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.

The Company applies the fair value option to all fixed maturity and equity securities and short-term investments at the time the eligible item is first recognized. For more detailed discussion on the Company's investment portfolio, including credit ratings, see "Liquidity and Capital Resources—C. Invested Assets" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 3. Investments, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."

Investment Results
The following table presents the investment results of the Company for the most recent five years:
Year Ended December 31, Year Ended December 31,
2017 2016 2015 2014 2013 20232022202120202019
  (Dollars in thousands)    (Dollars in thousands) 
Average invested assets at cost(1) (2)
$3,582,122
 $3,390,769
 $3,293,948
 $3,204,592
 $3,028,198
Net investment income(3)
         
Before income taxes$124,930
 $121,871
 $126,299
 $125,723
 $124,538
Before income taxes
Before income taxes
After income taxes$109,243
 $107,140
 $110,382
 $111,456
 $109,506
Average annual yield on investments(3)
         
Before income taxes3.5% 3.6% 3.8% 3.9% 4.1%
Before income taxes
Before income taxes4.6 %3.4 %2.8 %3.1 %3.5 %
After income taxes3.1% 3.2% 3.4% 3.5% 3.6%After income taxes3.9 %3.0 %2.5 %2.8 %3.1 %
Net realized investment gains (losses) after income taxes$54,373
 $(22,266) $(54,474) $52,770
 $(7,424)
 __________
(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.
(3)
During 2017, net investment income before and after income taxes increased due to higher average invested assets. Average annual yield on investments before and after income taxes decreased slightly, primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments.

(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, 2023, fixed maturity securities with call features totaled $3.2 billion at fair value and $3.3 billion at amortized cost.
(3)Net investment income before and after income taxes for 2023 increased compared to 2022, primarily due to higher average yield combined with higher average invested assets. Average annual yield on investments before and after income taxes for 2023 increased compared to 2022, primarily due to the maturity and replacement of lower yielding investments purchased when market interest rates were lower with higher yielding investments, as a result of increasing overall market interest rates, as well as higher yields on investments based on floating interest rates.

Competitive Conditions
The Company operates in the highly competitive property and casualty insurance industry subject to competition on pricing, claims handling, consumer recognition, coverage offered and product features, customer service, and geographic coverage. Some of the Company’s competitors are larger and well-capitalized national companies that sell directly to consumers or have broad distribution networks of employed or captive agents.



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Reputation for customer service and price are the principal means by which the Company competes with other insurers. In addition, the marketing efforts of independent agents can provide a competitive advantage. Based on the most recent regularly published statistical compilations of premiums written in 2016,2022, the Company was the sixthseventh largest writer of private passenger automobile insurance in California and the fifteenthsixteenth largest in the United States.


The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions. The Company has historically seen premium growth during hard market conditions. The Company believes that the automobile insurance market is hardening within most states was hard during 2023 as insurance carriers generally raisingincreased rates although this also depends on individual state profitabilityreflecting high inflation and the carriers’ growth appetite.loss severity and tightened their underwriting. In addition, in California, several insurance carriers stopped writing new business policies.


Reinsurance


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


The Company is the assuming reinsurer under a Catastrophe Portfolio Participation Reinsurance Contract ("Contract") effective through December 31, 2025. The Company reimburses a group of affiliates of a ceding company for a proportional share of a portfolio of catastrophe losses based on the premiums ceded to the Company under the Contract, to the extent the actual loss ratio exceeds the threshold loss ratio of 73.5%. The total assumed premium under the Contract is $15.0 million for each of the 12 month periods ending December 31, 2023 through 2025 and $10.0 million for the 12 months ended December 31, 2022. The total possible amount of losses for the Company under the Contract is $30.0 million for each of the 12 month periods ending December 31, 2023 through 2025 and $25.0 million for the 12 months ended December 31, 2022. The Company recognized $15.0 million and $10.0 million in earned premiums and $9.6 million and $8.4 million in incurred losses under the Contract for the 12 months ended December 31, 2023 and 2022, respectively.

The Company is the ceding party to a Catastrophe Reinsurance Treaty ("Treaty") covering a wide range of perils that is effective through June 30, 2018.2024. For the 12 months ending June 30, 2018,2024 and 2023, the Treaty provides $205$1,111 million and $936 million of coverage, respectively, on a per occurrence basis after covered catastrophe losses exceed the $10 million Company retention limit subject to reinstatement premiums based on the amount of reinsurance benefits paid to the Company, up to the maximum reinstatement premium of $19$100 million if the full amount of benefit is used. The first $190and $60 million, of losses above the Company's $10 million retention are covered 100% by the reinsurers. Losses above $200 million are shared pro-rata with 5% coverage by the reinsurers and 95% retention by the Company, up to $15 million total coverage provided by the reinsurers.respectively. 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 annual premium forTreaty includes additional restrictions as noted in the Treaty is approximately $19 million and $6 milliontables below.

Coverage on individual catastrophes provided for the 12 months ending June 30, 20182024 under the Treaty is presented below in various layers:

 Catastrophe Losses and LAE
In Excess ofUp toPercentage of Coverage
 (Amounts in millions)
Retained$— $100 — %
Layer of Coverage100 140 5.0 
Layer of Coverage (1) (3)
140 610 100.0 
Layer of Coverage (2) (3) (4)
610 1,120 99.8 
Layer of Coverage1,120 1,250 100.0 
__________ 
(1) Approximately 4% of this layer covers California, Arizona and 2017, respectively. Nevada only.
(2) Approximately 30% of this layer covers California, Arizona and Nevada only.
(3) Layer of Coverage represents multiple actual treaty layers that are grouped for presentation purposes.
(4) Approximately 10% of this layer covers only California wildfires and fires following an earthquake in California, and is not subject to reinstatement.





9


Coverage on individual catastrophes provided for the 12 months ended June 30, 2023 under the Treaty is presented below in various layers:
 Catastrophe Losses and LAE
In Excess ofUp toPercentage of Coverage
 (Amounts in millions)
Retained$— $60 — %
Layer of Coverage60 100 19.5 
Layer of Coverage100 200 98.8 
Layer of Coverage (1)
200 530 98.6 
Layer of Coverage (2) (3) (4)
530 930 100.0 
Layer of Coverage930 1,035 98.9 
__________ 
(1) 5% of this layer covers California, Arizona and Nevada only.
(2) 33% of this layer covers California, Arizona and Nevada only.
(3) Layer of Coverage represents multiple actual treaty layers that are grouped for presentation purposes.
(4) 6.3% of this layer covers only California wildfires and fires following an earthquake in California, and is not subject to reinstatement.

The table below presents the combined total reinsurance premiums under the Treaty (annual premiums and reinstatement premiums) for the 12 months ending June 30, 2024 and 2023, respectively:

Treaty
Annual Premium (1)
 Reinstatement Premium (2)
Total Combined Premium (2)
 (Amounts in millions)
For the 12 months ending June 30, 2024$99 $— $99 
For the 12 months ended June 30, 2023$74 $— $74 
__________ 
(1)    The increase in the annual premium reflectsis primarily due to higher reinsurance coverage and rates and growth in the increased coverage. Forcovered book of business.
(2)    The reinstatement premium and the total combined premium for the treaty period ending June 30, 2024 are projected amounts to be paid based on the assumption that there will be no reinstatements occurring during this treaty period. The reinstatement premium for the treaty period ended June 30, 2023 is zero, as there were no actual reinstatement premiums paid.

The Treaty ending June 30, 2024 and 2023 each provides for one full reinstatement of coverage limits. Reinstatement premiums are based on the amount of reinsurance benefits used by the Company at 100% of the annual premium rate, with the exception of the reinstatement restrictions noted in the tables above, up to the maximum reinstatement premium of approximately $95 million and $72 million if the full amount of benefit is used for the 12 months endedending June 30, 2017, the Treaty provided $115 million of coverage on a per occurrence basis after covered catastrophe losses exceeded a $100 million Company retention.2024 and 2023, respectively.


During the fourth quarter of 2017, the Company incurred a total of approximately $109 million in losses, before reinsurance benefits, resulting from two catastrophe events, consisting of the Northern California wildfires with approximately $84 million in losses and the Southern California wildfires with approximately $25 million in losses. The impact of these catastrophe losses on the Company's results of operations was significantly mitigated due to the Treaty. The total combined loss from these wildfires, netamount of reinsurance benefits, totaled $20 million, whichreinstatement premiums is the Company's total retention on the two catastrophe events, $10 million each. In addition, the Company recorded a total of approximately $12 million inas ceded reinstatement premiums written forat the time of the catastrophe event based on the total amount of reinsurance benefits used up under the Treaty.

Reinsurance benefits of $15 millionexpected to be used for the second catastrophe event, the Southern California wildfires,and such reinstatement premiums are not subject to reinstatement. As a result, forrecognized ratably over the remaining term of the Treaty as ceded reinstatement premiums earned.

The catastrophe events that runs through June 30, 2018,occurred in 2023 caused approximately $247 million in losses to the Company’sCompany, resulting primarily from rainstorms and hail in Texas and Oklahoma, winter storms and rainstorms in California, and the impact of Tropical Storm Hilary in California. No reinsurance benefits were available for future covered catastrophe losses under the Treaty are reduced by $15 million on the first layerfor these losses as none of the reinsurance treaty, which has a stated coverage limit of $30 million2023 catastrophe events individually resulted in losses in excess of the Company's $10Company’s per-occurrence retention limit of $100 million retention. Reinsuranceand $60 million under the Treaty for the 12 months ending June 30, 2024 and 2023, respectively.

The catastrophe events that occurred in 2022 caused approximately $105 million in losses to the Company as of December 31, 2023, resulting primarily from the deep freeze of Winter Storm Elliott and other extreme weather events in Texas, Oklahoma and Georgia, winter storms in California, and the impact of Hurricane Ian in Florida. No reinsurance benefits were available under the Treaty for coveredthese losses as none of the 2022 catastrophe events individually resulted in losses in excess
10

of the Company’s per-occurrence retention limit of $60 million and $40 million remain fully available for future covered catastrophe losses through the end ofunder the Treaty term.for the 12 months ending June 30, 2023 and 2022, respectively.

The Company has reinsurance for PIP claims in Michigan through the Michigan Catastrophic Claims Association, a private non-profit unincorporated association created by the Michigan Legislature. The reinsurance covers losses in excess of $545,000 per person and has no maximum limit. Michigan law provides for unlimited lifetime coverage for medical costs caused by automobile accidents. The Company ceased writing personal automobile insurance in Michigan in 2016.


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


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


Department of Insurance Oversight

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


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


Insurance rates in California, Georgia, New York, New Jersey, and Nevada require prior approval from the state DOI, while insurance rates in Illinois, Texas, Virginia, Oklahoma, and Arizona must only be filed with the respective DOI before they are implemented. Oklahoma and Florida havehas a modified version of prior approvaluse and file laws. Insurance laws and regulations in all states in which the Company operates provide that rates must not be excessive, inadequate, or unfairly discriminatory.


The DOI in each state in which the Company operates is responsible for conducting periodic financial and market conduct examinations of the Insurance Companies in their states. Market conduct examinations typically review compliance with insurance statutes and regulations with respect to rating, underwriting, claims handling, billing, and other practices. For more detailed information on the Company’s current financial and market conduct examinations, see "Liquidity and Capital Resources—F. Regulatory Capital Requirements" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."


For a discussion of current regulatory matters in California, see "Regulatory and Legal Matters" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 17.18. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."


The operations of the Company are dependent on the laws of the states in which it does business and changes in those laws can materially affect the revenue and expenses of the Company. The Company retains its own legislative advocates in California. The Company made direct financial contributions of approximately $69,000$24,000 and $307,000$83,000 to officeholders and candidates in 20172023 and 2016,2022, respectively. The Company believes in supporting the political process and intends to continue to make such contributions in amounts which it determines to be appropriate.


The Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations. The risk-based capital ("RBC") formula is used by insurance regulators to monitor capital and surplus levels. It was designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance business having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. The Company periodically monitors the RBC level of each of the Insurance Companies. As of December 31, 2017, 2016,2023, 2022 and 2015,2021, each of the Insurance Companies exceeded the minimum required RBC level. For more detailed information, see "Liquidity and Capital Resources—F. Regulatory Capital Requirements" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."


11

Own Risk and Solvency Assessment


Insurance companies are required to file an Own Risk and Solvency Assessment ("ORSA") with the insurance regulators in their domiciliary states. The ORSA is required to cover, among many items, a company’s risk management policies, the material risks to which the company is exposed, how the company measures, monitors, manages and mitigates material risks, and how much economic and regulatory capital is needed to continue to operate in a strong and healthy manner. The ORSA is intended to be used by state insurance regulators to evaluate the risk exposure and quality of the risk management processes within insurance companies to assist in conducting risk-focused financial examinations and for determining the overall financial condition of insurance companies. The Company filed its most recent ORSA Summary Report with the California DOI in November 2017.2023. Compliance with the ORSA requirements did not have a material impact on the Company's consolidated financial statements.


Insurance Assessments



The California Insurance Guarantee Association ("CIGA") was created to pay claims on behalf of insolvent property and casualty insurers. Each year, these claims are estimated by CIGA and the Company is assessed for its pro-rata share based on prior year California premiums written in the particular line. These assessments are currently limited to 2% of premiums written in the preceding year and are recouped through a mandated surcharge to policyholders in the year after the assessment. There were no material CIGA assessments in 2017.2023.


The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowner policy directly with the CEA. The Company receives a small fee for placing business with the CEA, which is recorded as other revenue in the consolidated statements of operations. Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made after CEA capital has been expended and are based upon each company’s participation percentage multiplied by the amount of the total assessment. Based upon the most recent information provided by the CEA, the Company’s maximum total exposure to CEA assessments at April 3, 2017,30, 2023, the most recent date at which information was available, was $66.2$85.6 million. There was no assessment made in 2017.2023.


The Insurance Companies in other states are also subject to the provisions of similar insurance guaranty associations. There were no material assessments or payments during 20172023 in other states.


Holding Company Act
The California Companies are subject to California DOI regulation pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). The California DOI may examine the affairs of each of the California Companies at any time. The Holding Company Act requires disclosure of any material transactions among affiliates within a holding company system. Some transactions and dividends defined to be "extraordinary," require advance notice and may not be made if the California DOI disapproves the transaction within 30 days after notice. Such transactions include, but are not limited to, extraordinary dividends; management agreements, service contracts, and cost-sharing arrangements, and modifications thereto; all guarantees that are not quantifiable, or, if quantifiable, exceed the lesser of one-half of 1% of admitted assets or 10% of policyholders’ surplus as of the preceding December 31; derivative transactions or series of derivative transactions; certain reinsurance transactions agreementsor modifications thereofthereto in which the reinsurance premium or a change in the insurer’s liabilities equals or exceeds 5% of the policyholders’ surplus as of the preceding December 31; sales, purchases, exchanges, loans, and extensions of credit; and investments, in the net aggregate, involving more than the lesser of 3% of the respective California Companies’ admitted assets or 25% of statutory surplus as regards policyholders as of the preceding December 31. An extraordinary dividend is a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company’s statutory policyholders’ surplus as of the preceding December 31 or the insurance company’s statutory net income for the preceding calendar year. The Holding Company Act also requires filing of an annual enterprise risk report identifying the material risks within the insurance holding company system.


California-domiciled insurance companies are also required to notify the California DOI of any dividend after declaration, but prior to payment. There are similar limitations imposed by other states on the Insurance Companies’ ability to pay dividends. As of December 31, 2017,2023, the Insurance Companies are permitted to pay in 2018,2024, without obtaining DOI approval for extraordinary dividends, $167$163 million in dividends to Mercury General, of which $134$140 million may be paid by the California Companies.


The Holding Company Act also provides that the acquisition or change of "control" of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the
12

California DOI. In general, a presumption of "control" arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person that controls a California insurance company, such as Mercury General. A person seeking to acquire "control," directly or indirectly, of the Company must generally file with the California DOIan application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.


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


Assigned Risks
Automobile liability insurers in California are required to sell BI liability, property damage liability, medical expense, and uninsured motorist coverage to a proportionate number (based onInformation about the insurer’s share of the California automobile casualty insurance market) of those drivers applying for placement as "assigned risks." Drivers seek placement as assigned risks because their driving records or other relevant characteristics, as defined by the Proposition, make them difficult to insure in the voluntary market. In

2017, assigned risks represented less than 0.1% of total automobile direct premiums written and less than 0.1% of total automobile direct premium earned. The Company attributes the low level of assignments to the competitive voluntary market. Many of the other states in which the Company conducts business offer programs similar to that of California. These programs are not a significant contributor to the business written in those states.

Company's Executive Officers of the Company
The following table presents certain information concerning the executive officers of the Company as of February 2, 2018:
8, 2024:
NameAgePosition
NameAgePosition
George Joseph10296Chairman of the Board
Gabriel Tirador5953Chief Executive Officer
Victor G. Joseph37President and Chief ExecutiveOperating Officer
Allan Lubitz59Senior Vice President and Chief Information Officer
Theodore R. Stalick6054Senior Vice President and Chief Financial Officer
Kelly Butler41Vice President and Chief Underwriting Officer
Katie Gibbs34Vice President and Chief Experience Officer
Christopher Graves5852Vice President and Chief Investment Officer
Robert HoulihanBrandt N. Minnich5761Vice President and Chief Sales Development Officer
Wilson Pang47Vice President and Chief Technology Officer
Randall R. Petro60Vice President and Chief Claims Officer
Mark Ribisi61President and Chief Executive Officer of AIS Management LLC
Jeffrey M. Schroeder47Vice President and Chief Product Officer
Victor G. Joseph31Vice President and Chief Underwriting Officer
Brandt N. Minnich51Vice President and Chief Marketing Officer
Randall R. Petro54Vice President and Chief Claims Officer
Heidi C. Sullivan5549Vice President and Chief Human Capital Officer
Erik Thompson5549Vice President Advertising and Public RelationsChief Marketing Officer
Charles Toney6256Vice President and Chief Actuary
Judy A. Walters7771Vice President, Corporate Affairs and Secretary
Simon Zhang47Vice President and Chief Data & Analytics Officer


Mr. George Joseph, Chairman of the Board of Directors, has served in this capacity since 1961. He held the position of Chief Executive Officer of the Company for 45 years from 1961 through 2006. Mr. Joseph has more than 5060 years’ experience in the property and casualty insurance business.


Mr. Tirador, President and Chief Executive Officer, served as the Company’s assistant controller from 1994 to 1996. In 1997 and 1998, he served as the Vice President and Controller of the Automobile Club of Southern California. He rejoined the Company in 1998 as Vice President and Chief Financial Officer. He was appointed President and Chief Operating Officer in October 2001 and Chief Executive Officer in 2007. Mr. Tirador has over 2030 years' experience in the property and casualty insurance industry and is an inactive Certified Public Accountant.


Mr. Lubitz, SeniorVictor Joseph, President and Chief Operating Officer, has been employed by the Company in various capacities since 2009, and was appointed Vice President and Chief InformationUnderwriting Officer joined the Company in 2008. Prior to joining the Company, he served as SeniorJuly 2017, Executive Vice President and Chief InformationOperating Officer of H&R Block/Option One Mortgage from 2003 to 2007. He held executive roles including Chief Information Officer of Ditech Mortgagein January 2022, and President of ANR Consulting Group from 2000 to 2003. Prior to 2000, he held several positions at TRW, Experian, and First American Corporation, most recently as a Senior Vice President and Chief Information Officer.Operating Officer in January 2024. Mr. Victor Joseph is Mr. George Joseph’s son.


Mr. Stalick, Senior Vice President and Chief Financial Officer, joined the Company as Corporate Controller in 1997. He was appointed Chief Accounting Officer in October 2000 and Vice President and Chief Financial Officer in 2001. In July 2013, he was named Senior Vice President and Chief Financial Officer. Mr. Stalick is an inactivea Certified Public Accountant.


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Ms. Butler, Vice President and Chief Underwriting Officer, joined the Company as a Casualty Claims Adjuster in 2004 and worked in various capacities including as Director of Personal Property Underwriting. Ms. Butler was appointed Vice President and Chief Underwriting Officer in January 2022.

Ms. Gibbs, Vice President and Chief Experience Officer, joined the Company in 2022. Prior to joining the Company, she served as Vice President, Product Development for Kemper Insurance from 2019 to 2022. Prior to 2019, she held various leadership positions in Product and Corporate Strategy at American Family Insurance and its subsidiaries.

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

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

Mr. Victor Joseph, Vice President and Chief Underwriting Officer has been employed by the Company in various capacities since 2009, and was appointed Vice President and Chief Underwriting Officer in July 2017. Mr. Victor Joseph is Mr. George Joseph’s son.



Mr. Minnich, Vice President and Chief MarketingSales Development Officer, joined the Company as an underwriter in 1989. In 2007, he joined Superior Access Insurance Services as Director of Agency Operations. In 2008 he rejoined the Company as an Assistant Product Manager, and in 2009, he was named Senior Director of Marketing, a role he held until appointed to his current position later in 2009. Mr. Minnich has over 2530 years' experience in the property and casualty insurance industry and is a Chartered Property and Casualty Underwriter.


Mr. Pang, Vice President and Chief Technology Officer, joined the Company in 2023. Prior to joining the Company, he served as Chief Technology Officer for Appen from 2018 to 2023 and Chief Data Officer for Ctrip from 2017 to 2018. Prior to 2017, he held various leadership positions at eBay and IBM.

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


Mr. Ribisi, President and Chief Executive Officer of AIS Management LLC, joined the Company in 2009 as President and Chief Executive Officer of AIS Management LLC, a significant subsidiary of the Company. Prior to joining the Company, he served as Vice President and Chief Operating Officer for Aon’s Personal Lines Division from 2002 to 2009. Mr. Ribisi has over 35 years' experience in the property and casualty insurance industry and is a Certified Insurance Counselor.

Mr. Schroeder, Vice President and Chief Product Officer, has been employed by the Company since 2010. Prior to his appointment as Vice President and Chief Product Officer, he served as President and Chief Operating Officer of OIC. Prior to joining the Company, Mr. Schroeder was a Product Manager at 21st Insurance Company. 

Ms. Sullivan, Vice President and Chief Human Capital Officer, joined the Company in 2012. Prior to joining the Company, she served as Senior Vice President, Human Capital for Arcadian Health Plan from 2008 to 2012. Prior to 2008, she held various leadership positions at Kaiser Permanente, Progressive Insurance, and Score Educational Centers. 


Mr. Thompson, Vice President, Advertising and Public Relations,Chief Marketing Officer, joined the Company as Director of Advertising in 2005, and was appointed Vice President, Advertising and Public Relations in October 2017. Prior to joining the Company, Mr. Thompson held various leadership positions in advertising, marketing, and public relations at several organizations, including Universal Studios, Inc., Turner, and Columbia TriStar Television. 


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


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


Mr. Zhang, Vice President and Chief Data & Analytics Officer, joined the Company in 2023. Prior to joining the Company, he co-founded a data analytics company, GrowingIO and worked there for 8 years. He served as Senior Director of Business Analytics for LinkedIn from 2010 to 2015. Mr. Zhang has over 20 years of experience in the data analytics and data science fields.

Item 1A.Risk Factors
Item 1A.Risk Factors
The Company’s business involves various risks and uncertainties in addition to the normal risks of business, some of which are discussed in this section. It should be noted that the Company’s business and that of other insurers may be adversely affected by a downturn in general economic conditions and other forces beyond the Company’s control. In addition, other risks
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and uncertainties not presently known or that the Company currently believes to be immaterial may also adversely affect the Company’s business. Any such risks or uncertainties, or any of the following risks or uncertainties, that develop into actual events could result in a material and adverse effect on the Company’s business, financial condition, results of operations, or liquidity.


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


Risks Related to the Company’s Business

The Company remains highly dependent upon California to produce revenues and operating profits.
For the year ended December 31, 2017,2023, the Company generated 84%approximately 80% of its direct automobile insurance premiums written in California. The Company’s financial results are subject to prevailing regulatory, legal, economic, demographic, competitive, and other conditions in the states in which the Company operates and changes in any of these conditions could negatively impact the Company’s results of operations.


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



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


The Company’s success depends on its ability to accurately underwrite risks and to charge adequate premiums to policyholders.
The Company’s financial condition, results of operations, and liquidity depend on its ability to underwrite and set premiums accurately for the risks it assumes. Premium rate adequacy is necessary to generate sufficient premium to offset losses, loss adjustment expenses, and underwriting expenses and to earn a profit. In order to price its products accurately, the Company must collect and properly analyze a substantial volume of data; develop, test, and apply appropriate rating formulae; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. The Company’s ability to undertake these efforts successfully, and as a result, price accurately, is subject to a number of risks and uncertainties, including but not limited to:
•availability of sufficient reliable data;
•incorrect or incomplete analysis of available data;
•uncertainties inherent in estimates and assumptions, generally;
•selection and application of appropriate rating formulae or other pricing methodologies;
•successful innovation of new pricing strategies;
•recognition of changes in trends and in the projected severity and frequency of losses;
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•the Company’s ability to forecast renewals of existing policies accurately;
•unanticipated court decisions, legislation or regulatory action;
•ongoing changes in the Company’s claim settlement practices;
•changes in operating expenses;
•changing driving patterns;
•extra-contractual liability arising from bad faith claims;
•catastrophes, including those which may be related to climate change;
•unexpected medical inflation; and
•unanticipated inflation in automobile repair costs, automobile parts prices, and used car prices.


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


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

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



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


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


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




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


The Company’s ability to retain its existing business or to attract new business in its Insurance Companies is affected by its rating by A.M. Best Company.Best. A.M. Best Company currently rates all of the Insurance Companies with sufficient operating history to be rated as either A+ (Superior) or A-A (Excellent). On September 28, 2017,February 17, 2023, A.M. Best Company affirmed allthe Financial Strength Rating ("FSR") of the Company’s ratings and the NegativeA (Excellent) with Stable outlook for the A+Company's A rated entities. The Company is workingentities and upgraded the FSR from A- (Excellent) to removeA (Excellent) with Stable outlook for the Negative outlook back to Stable in the next ratings cycle.Company's A- rated entities. The Company believes that if it is unable to maintain its A.M. Best ratings within the A ratings range, it may face greater challenges to grow its premium volume sufficiently to attain its financial performance goals, which may adversely affect the Company’s business, financial condition, and results of operations. Two of the smaller Insurance Companies, California General Underwriters Insurance Company, Inc. and Workmen's Auto Insurance Company, are not rated by A.M. Best Company and the rating is not critical to the type of business they produce.


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

The Company’s future capital requirements, including to fund future growth opportunities, depend on many factors, including its ability to underwrite new business successfully, its ability to establish premium rates and reserves at levels sufficient to cover losses, the success of its expansion plans, the performance of its investment portfolio and its ability to obtain financing. The Company may seek to obtain financing through equity or debt issuances, or sales of all or a portion of its investment portfolio or other assets. The Company’s ability to obtain financing also depends on economic conditions affecting financial markets and financial strength and claims-paying ability ratings, which are assigned based upon an evaluation of the Company’s ability to meet its financial obligations. The Company’s current financial strength rating with Fitch and Moody's is AA- and A2, respectively. If the Company were to seek financing through the capital markets in the future, there can be no assurance that the Company would obtain favorable ratings from rating agencies. Any equity or debt financing, if available at all, may not be available on terms that are favorable to the Company. In the case of equity financing, the Company’s shareholders could experience dilution. In addition, such securities may have rights, preferences, and privileges that are senior to those of the Company’s current shareholders. If the Company cannot obtain adequate capital on favorable terms or at all, its business, financial condition, and results of operations could be adversely affected.


Changes in market interest rates, defaults on securities and tax considerations may have an adverse effect on the Company’s investment portfolio, which may adversely affect the Company’s financial results.
The Company’s financial results are affected, in part, by the performance of its investment portfolio. The Company’s investment portfolio contains interest rate sensitive-investments, such as municipal and corporate bonds. Increases in market

interest rates may have an adverse impact on the value of the investment portfolio by decreasing the value of fixed income securities. Declining market interest rates could have an adverse impact on the Company’s investment income as it invests positive cash flows from operations and as it reinvests proceeds from maturing and called investments in new investments that could yield lower rates than the Company’s investments have historically generated. Defaults in the Company’s investment portfolio may produce operating losses and negatively impact the Company’s results of operations.


Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions, and other factors beyond the Company’s control. Market interest rates have been at historic lows for the last several years. Many observers, including the Company, believe that market interest rates will rise as the economy improves. Although the Company takes measures to manage the risks of investing in a changing interest rate environment, it may not be able to mitigate interest rate sensitivity effectively. The Company’s mitigation efforts include maintaining a high quality portfolio and managing the duration of the portfolio to reduce the effect of interest rate changes. Despite its mitigation efforts, a significant change in interest rates could have a material adverse effect on the Company’s financial condition and results of operations. Although the Company monitors the timing and recognition of capital gains and losses in an effort to maximize the realization of deferred tax assets arising from capital losses, no guaranty can be provided that such monitoring or the Company's tax strategies will be effective.


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


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During periods of market disruption, including periods of significantly changing interest rates, rapidly widening credit spreads, inactivity or illiquidity, it may be difficult to value certain of the Company’s securities if trading becomes less frequent and/or market data become less observable. There may be certain asset classes in historically active markets with significant observable data that become illiquid due to changes in the financial environment. In such cases, the valuations associated with such securities may rely more on management's judgment and include inputs and assumptions that are less observable or require greater estimation as well as valuation methods that are more sophisticated or require greater estimation. The valuations generated by such methods may be different from the value at which the investments ultimately may be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within the Company’s consolidated financial statements, and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on the Company’s financial condition or results of operations.


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


Deterioration of the municipal bond market in general or of specific municipal bonds held by the Company may result in a material adverse effect on the Company’s financial condition, results of operations, and liquidity.
At December 31, 2017, 67.9%2023, approximately 44% of the Company’s total investment portfolio at fair value and 87.6%approximately 53% of its total fixed maturity investmentssecurities at fair value were invested in tax-exempt municipal bonds. With such a large percentage of the Company’s investment

portfolio invested in municipal bonds, the performance of the Company’s investment portfolio, including the cash flows generated by the investment portfolio, is significantly dependent on the performance of municipal bonds. If the value of municipal bond markets in general or any of the Company’s municipal bond holdings deteriorates, the performance of the Company’s investment portfolio, financial condition, results of operations, and liquidity may be materially and adversely affected.


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


There is uncertainty involved in the availability of reinsurance and the collectability of reinsurance recoverable.
The Company reinsures a portion of its potential losses on the policies it issues to mitigate the volatility of the losses on its financial condition and results of operations. The availability and cost of reinsurance is subject to market conditions, which are outside of the Company’s control. From time to time, market conditions have limited, and in some cases, prevented insurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. As a result, the Company may not be able to successfully purchase reinsurance and transfer a portion of the Company’s risk through reinsurance arrangements. In addition, as is customary, the Company initially pays all claims and seeks to recover the reinsured losses from its reinsurers. Although the Company reports as assets the amount of claims paid which the Company expects to recover from reinsurers, no assurance can be given that the Company will be able to collect from its reinsurers. If the amounts actually recoverable under the Company’s reinsurance treaties are ultimately determined to be less than the amount it has reported as recoverable, the Company may incur a loss during the period in which that determination is made.



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


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


The Company depends on independent agents who may discontinue sales of its policies at any time.
The Company sells its insurance policies primarily through a network of approximately 10,4006,390 independent agents. The Company must compete with other insurance carriers for these agents’ business. Some competitors offer a larger variety of products, lower prices for insurance coverage, higher commissions, or more attractive non-cash incentives. To maintain its relationship with these independent agents, the Company must pay competitive commissions, be able to respond to their needs quickly and adequately, and create a consistently high level of customer satisfaction. If these independent agents find it preferable to do business with the Company’s competitors, it would be difficult to renew the Company’s existing business or attract new business. State regulations may also limit the manner in which the Company’s producers are compensated or incentivized. Such developments could negatively impact the Company’s relationship with these parties and ultimately reduce revenues.


The Company’s expansion plans may adversely affect its future profitability.
The Company intends to continue to expand its operations in several of the states in which the Company has operations and may expand into states in which it has not yet begun operations. The intended expansion will necessitate increased expenditures. The Company intends to fund these expenditures out of cash flows from operations. The expansion may not occur, or if it does occur, may not be successful in providing increased revenues or profitability. If the Company’s cash flows from operations are insufficient to cover the costs of the expansion, or if the expansion does not provide the benefits anticipated, the Company’s financial condition, results of operations, and ability to grow its business may be harmed.


Any inability of the Company to realize its deferred tax assets, if and when they arise, may have a material adverse effect on the Company’s financial condition and results of operations.
The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability and capital gain generation. Although management believes that it is more likely than not that the deferred tax assets will be realized, some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable income of an appropriate character and in a sufficient amount to utilize these tax benefits in the future. Any determination that the Company would not be able to realize all or a portion of its deferred tax assets in the future would result in a charge to earnings in the period in which the determination is made. This charge could have a material adverse effect on the Company’s results of operations and financial condition. In addition, the assumptions used to make this determination are subject to change from period to period based on changes in tax laws or variances between the Company’s projected operating performance and actual results. As a result, significant management judgment is required in assessing the possible need for a
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deferred tax asset valuation allowance. The changes in the estimates and assumptions used in such assessments and decisions can materially affect the Company’s results of operations and financial condition.


The carrying value of the Company’s goodwill and other intangible assets could be subject to an impairment write-down.
At December 31, 2017,2023, the Company’s consolidated balance sheets reflected approximately $43 million of goodwill and $21$8 million of other intangible assets. The Company evaluates whether events or circumstances have occurred that suggest that the fair values of its goodwill and other intangible assets are below their respective carrying values. The determination that the fair values of the Company’s goodwill and other intangible assets are less than their carrying values may result in an impairment write-down. An impairment write-down would be reflected as expense and could have a material adverse effect on the Company’s results of operations during the period in which it recognizes the expense. In the future, the Company may incur impairment charges related to goodwill and other intangible assets already recorded or arising out of future acquisitions.


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

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

Risks Related to the Company’s Industry

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

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

The Company may undertake strategic marketing and operating initiatives to improve its competitive position and drive growth. If the Company is unable to successfully implement new strategic initiatives or if the Company’s marketing campaigns do not attract new customers, the Company’s competitive position may be harmed, which could adversely affect the Company’s business and results of operations. Additionally, in the event of a failure of any competitor, the Company and other insurance companies would likely be required by state law to absorb the losses of the failed insurer and would be faced with an unexpected surge in new business from the failed insurer’s former policyholders.

The Company may be adversely affected by changes in the private passenger automobile insurance industry.
Approximately 62% of the Company’s direct premiums written for the year ended December 31, 2023 were generated from private passenger automobile insurance policies. Adverse developments in the market for personal automobile insurance or the personal automobile insurance industry in general, whether related to changes in competition, pricing or regulations,
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could cause the Company’s results of operations to suffer. The property-casualty insurance industry is also exposed to the risks of severe weather conditions, such as rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, wild fires, sinkholes, earthquakes and, to a lesser degree, explosions, terrorist attacks, and riots. The automobile insurance business is also affected by cost trends that impact profitability. Factors which negatively affect cost trends include inflation in automobile repair costs, automobile parts costs, new and used car valuations, medical costs, and changes in non-economic costs due to changes in the legal and regulatory environments. In addition, the advent of driverless cars and usage-based insurance could materially alter the way that automobile insurance is marketed, priced, and underwritten.

The Company cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on its business.
Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, droughts, other storms and fires) in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that may be chief contributors to global climate change. The Company cannot predict the impact that changing climate conditions, if any, will have on its business or its customers, although the impact on the Company's results of operations or financial condition of incurred losses related to natural disasters that may result from changing climate conditions is mitigated to the extent its reinsurance programs provide coverage for such losses. See "Reinsurance" in "Item 1. Business" for information regarding the Company's reinsurance programs. It is also possible that the legal, regulatory and social responses to climate change could have a negative effect on the Company’s results of operations or financial condition.

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

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

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

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

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

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

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

Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company operates have laws and regulations that limit its ability to exit a market, or reduce risk by cancellation or non-renewal of individual policies. For example, these states may, for public policy reasons, limit an insurer’s ability to cancel and non-renew private passenger automobile or homeowners insurance policies. They may also prohibit the Company from withdrawing one or more lines of insurance business from the state unless prior approval is received from the state DOI. In some states, the regulations restricting withdrawal extend to significant reductions in the amount of insurance written, not only to a complete withdrawal. Laws and regulations that limit the Company’s ability to cancel and non-renew policies in some states or locations and that subject withdrawal plans to prior approval requirements may restrict the Company’s ability to control its risk exposure or exit unprofitable markets, which may harm its business and results of operations.

Other Regulations. The Company must also comply with regulations involving, among other matters:
•the use of non-public consumer information and related privacy issues;
•the use of credit history in underwriting and rating;
•limitations on the ability to charge policy fees;
•limitations on types and amounts of investments;
•the payment of dividends;
•the acquisition or disposition of an insurance company or of any company controlling an insurance company;
•involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental charges;
•reporting with respect to financial condition;
•periodic financial and market conduct examinations performed by state insurance department examiners; and
•the other regulations discussed in this Annual Report on Form 10-K.

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

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

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

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

The insurance industry faces litigation risks, which, if resolved unfavorably, could result in substantial penalties and/or monetary damages, including punitive damages. In addition, insurance companies incur material expenses defending litigation and their results of operations or financial condition could be adversely affected if they fail to accurately project litigation expenses.
Insurance companies are subject to a variety of legal actions including breach of contract claims, tort claims, fraud and misrepresentation claims, employee benefit claims, and wage and hour claims. In addition, insurance companies incur and likely will continue to incur potential liability for claims related to the insurance industry in general and to the Company’s business in particular, such as those related to allegations for failure to pay claims, termination or non-renewal of coverage, interpretation of policy language, policy sales practices, reinsurance matters, and other similar matters. Such actions can also include allegations of fraud, misrepresentation, and unfair or improper business practices and can include claims for punitive damages.

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

The Company and the Insurance Companies are named as defendants in a number of lawsuits. Those that management believes could have a material effect on the Company's consolidated financial statements are described more fully in "Overview—B. Regulatory and Legal Matters" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 18. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." Litigation, by its very nature, is unpredictable and the outcome of these cases is uncertain. The precise nature of the relief that may be sought or granted in any lawsuit is uncertain and may negatively impact the manner in which the Company conducts its business, which could materially increase the Company’s legal expenses and negatively impact the results of operations. In addition, potential litigation involving new claim, coverage, and business practice issues could adversely affect the Company’s business by changing the way policies are priced, extending coverage beyond its underwriting intent, or increasing the size of claims.

Risks Related to Technology and Cybersecurity

The Company relies on its information technology systems, and those of its service providers, to manage many aspects of its business, and any failure of these systems to function properly or any interruption in their operation could result in a material adverse effect on the Company’s business, financial condition, and results of operations.
The Company depends on the accuracy, reliability, and proper functioning of its information technology systems.systems, networks and online sites, including systems maintained by third-party vendors with which we do business (collectively, “IT Systems”). The Company relies on these information technology systemsIT Systems to effectively manage many aspects of its business, including underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, and to maintain its policyholder data. The CompanyWe and our providers face various and evolving cybersecurity risks that threaten the confidentiality, integrity and availability of our IT Systems and data, including personal information, that we process. These risks include the risk of a cyber incident, which has deployed,generally increased as the number, intensity and continues to enhance, new information technology systems that are designed to manage manysophistication of these functions acrossattempted attacks by threat actors have increased globally, especially given the states in which it operatesuse of more advanced hacking tools and techniques and the linesuse of insuranceartificial intelligence, including by computer hackers, state-sponsored actors, information service interruptions and cyber terrorists, opportunistic hackers and hacktivists, as well as through diverse attack vectors, such as social engineering/phishing, malware (including ransomware), malfeasance by insiders, human or technological error, and as a result of bugs, misconfigurations or exploited vulnerabilities in software or hardware. Techniques used in cyber incidents evolve frequently, may originate from less regulated and remote areas of the world and be difficult to detect and may not be recognized until
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launched against a target. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, making it offers. See "Overview—A. General—Technology"impossible for us to entirely eliminate this risk.
Like many companies, we have been, and expect to continue to be, the target of cyber incidents. While these incidents have not had a material impact to date, as our reliance on technology increases, so do the risks of a security incident. For example, unauthorized parties, whether within or outside the Company, may disrupt or gain access to our IT Systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, computer viruses or other malicious codes, and similar means of unauthorized and destructive tampering. Though we have adopted cybersecurity measures, such measures cannot provide absolute security, and there can be no assurance that our cybersecurity risk management program and processes, including our policies, controls or procedures, will be fully complied with or effective in "Item 7. Management’s Discussionprotecting our systems and Analysis of Financial Condition and Results of Operations." information.

The failure of hardware or software that supports the Company’s information technology systems, the loss of data contained in the systems, or any delay or failure in the full deployment of the Company’s information technology systems could disrupt its business and could result in decreased premiums, increased overhead costs, and inaccurate reporting, all of which could have a material adverse effect on the Company’s business, financial condition, and results of operations.


In addition, despite system redundancy, the implementation of security measures, and the existence of a disaster recovery plan for the Company’s information technology systems, these systems are vulnerable to damage or interruption from:
•earthquake, fire, flood and other natural disasters;
•terrorist attacks and attacks by computer viruses, hackers, phishing, ransomware, or other exploits;
•power loss in areas not covered by backup power generators;
•unauthorized access; and

•computer systems, internet, telecommunications or data network failure.


It is possible that a systemAn actual or perceived IT System failure, accident, or security breach could result in a material disruption to the Company’s business.business and result in the theft, misuse, loss, corruption or improper use or disclosure of data, including personal information or confidential business information. In addition, substantial costs may be incurred to remedy the damages caused by these disruptions. Following implementation of information technology systems,IT Systems, the Company may from time to time install new or upgraded business management systems. To the extent that a critical system fails or is not properly implemented and the failure cannot be corrected in a timely manner, the Company may experience disruptions to the business that could have a material adverse effect on the Company’s results of operations. This could result in government investigations, lawsuits (including class actions), enforcement actions and other legal and financial liability, and/or loss of confidence in the availability and security of our products and services, all of which could seriously harm our reputation and brand and impair our ability to attract and retain clients. Cyberattacks could also compromise our own trade secrets and other sensitive information and result in such information being disclosed to others and becoming less valuable, which could negatively affect our business. Although the Company seeks to mitigate the impact and severity of potential cyber threats through cyber insurance coverage, not every risk or liability can be insured, and for risks that are insurable, the policy limits and terms of coverage reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. In addition, disputes with insurance carriers, including over policy terms, reservation of rights, applicability of coverage (including exclusions), compliance with provisions (including notice) and/or insolvency of insurance carriers, may significantly affect the amount or timing of recovery.


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


The Company collects and retains large volumes of internal and policyholder data, including personally identifiable information, for business purposes including underwriting, claims and billing purposes, and relies upon the various information technology systems that enter, process, summarize and report such data. The Company also maintains personally identifiable information about its employees. The confidentiality and protection of the Company’s policyholder, employee and Company data are critical to the Company’s business. The Company’s policyholders and employees have a high expectation that the Company will adequately protect their personal information. As such, we are subject to various federal, state and local laws, regulations and industry standards. The regulatory environment, as well as the requirements imposed by the payment card industry and insurance regulators, governing information, security and privacy laws is increasingly demanding and continues to evolve.evolve, resulting in a patchwork of legislation that can be subject to differing interpretation. Maintaining compliance with applicable information security and privacy regulations may increase the Company’s operating costs and adversely impact its
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ability to market products and services to its policyholders. Any failure or perceived failure by us to comply with laws, regulations, policies or regulatory guidance relating to privacy or data security may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity, and could cause our customers and consumers to lose trust in us, which could have an adverse effect on our reputation and business.

General Risk Factors

The Company is controlled by a small number of shareholders who will be able to exert significant influence over matters requiring shareholder approval, including change of control transactions.
George Joseph and Gloria Joseph collectively own more than 50% of the Company’s common stock. Accordingly, George Joseph and Gloria Joseph have the ability to exert significant influence on the actions the Company may take in the future, including change of control transactions. From time to time, certain institutional investors also each own over 5% of the Company's common stock. This concentration of ownership may conflict with the interests of the Company’s other shareholders and lenders.

Future equity or debt financing may affect the market price of the Company’s common stock and rights of the current shareholders, and the future exercise of options and granting of shares will result in dilution in the investment of the Company’s shareholders.
The Company may raise capital in the future through the issuance and sale of its common stock or debt securities. The Company cannot predict what effect, if any, such future financing will have on the market price of its common stock. Sales of substantial amounts of its common stock in the public market or issuance of substantial amounts of debt securities could adversely affect the market price of the Company’s outstanding common stock, and may make it more difficult for shareholders to sell common stock at a time and price that the shareholder deems appropriate. Furthermore, holders of some of the Company's securities may have rights, preferences, and privileges that are senior to those of the Company’s current shareholders. In addition, the Company has issued and may issue options to purchase shares of its common stock as well as restricted stock units ("RSUs") to incentivize its executives and key employees. In the event that any options to purchase common stock are exercised or any shares of common stock are issued when the RSUs vest, shareholders will suffer dilution in their investment.

Applicable insurance laws may make it difficult to effect a penetrated or compromised information technology systemchange of control of the Company or the intentional, unauthorized, inadvertentsale of any of its Insurance Companies.
Before a person can acquire control of a U.S. insurance company or negligent releaseany holding company of a U.S. insurance company, prior written approval must be obtained from the DOI of the state where the insurer is domiciled. Prior to granting approval of an application to acquire control of the insurer or disclosureholding company, the state DOI will consider a number of data could result in theft, loss, fraudulentfactors relating to the acquirer and the transaction. These laws and regulations may discourage potential acquisition proposals and may delay, deter or unlawful useprevent a change of policyholder, employeecontrol of the Company or the sale by the Company data which could harmof any of its Insurance Companies, including transactions that some or all of the Company’s reputation or result in remedial and other expenses, fines or lawsuits. shareholders might consider to be desirable.

Although the Company seeks to mitigate the impact and severity of potential cyber threats through cyber insurance coverage, not every risk or liability can be insured, and for risks that are insurable, the policy limits and terms of coverage reasonably obtainablehas consistently paid cash dividends in the marketpast, it may not be sufficientable to cover all actual lossespay or liabilities incurred.increase cash dividends in the future.
The Company has consistently paid cash dividends since the public offering of its common stock in November 1985 and has consistently increased the dividend per share until 2022. As a result of challenging business conditions, the Company reduced the dividend per share during 2022 for the first time since 1985. Future cash dividends will depend upon a variety of factors, including the Company’s profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by the Board of Directors. The Company’s ability to pay dividends or increase the dividend per share may also be limited by the ability of the Insurance Companies to make distributions to the Company, which may be restricted by financial, regulatory or tax constraints, and by the terms of the Company’s debt instruments. In addition, disputes with insurance carriers, including over policy terms, reservation of rights,there can be no assurance that the applicability of coverage (including exclusions), compliance with provisions (including notice) and/Company will pay dividends or increase the insolvency of one or more of our insurers, may significantly affectdividend per share even if the amount or timing of recovery.necessary financial and regulatory conditions are met and if sufficient cash is available for distribution.


Changes in accounting standards issued by the Financial Accounting Standards Board (the "FASB") or other standard-setting bodies may adversely affect the Company’s consolidated financial statements.
The Company’s consolidated financial statements are subject to the application of GAAP, which is periodically revised and/or expanded. Accordingly, the Company is required to adopt new or revised accounting standards from time to time issued by recognized authoritative bodies, including the FASB. It is possible that future changes the Company is required to adopt
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could change the current accounting treatment that the Company applies to its consolidated financial statements and that such changes could have a material adverse effect on the Company’s financial condition and results of operations.


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

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


Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on the Company’s stock price.
The Company is required to include in its Annual Report on Form 10-K a report by its management regarding the effectiveness of the Company’s internal control over financial reporting, which includes, among other things, an assessment of the effectiveness

of the Company’s internal control over financial reporting as of the end of its fiscal year, including a statement as to whether or not the Company’s internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in the Company’s internal control over financial reporting identified by management. Areas of the Company’s internal control over financial reporting may require improvement from time to time. If management is unable to assert that the Company’s internal control over financial reporting is effective now or in any future period, or if the Company’s independent auditors are unable to express an opinion on the effectiveness of those internal controls, investors may lose confidence in the accuracy and completeness of the Company’s financial reports, which could have an adverse effect on the Company’s stock price.


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

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


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


Uncertain economic conditions may negatively affectPandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases could disrupt the Company’sCompany's business and operating results.
Uncertain economic conditions could adversely affect the Company in the form of consumer behavior and pressure on its investment portfolio. Consumer behavior could include policy cancellations, modifications, or non-renewals, which may reduce cash flows from operations and investments, may harm the Company’s financial position, and may reduce the Insurance Companies’ statutory surplus. Uncertain economic conditions also may impair the ability of the Company’s customers to pay premiums as they become due, and as a result, the Company’s bad debt reserves and write-offs could increase. It is also possible that claims fraud may increase. The Company’s investment portfolios could be adversely affected as a result of financial and business conditions affecting the issuers of the securities in the Company’s investment portfolio. In addition, declines in the Company’s profitability could result in a charge to earnings for the impairment of goodwill, which would not affect the Company’s cash flows but could decrease its earnings, and could adversely affect its stock price.results of operations and financial condition.


The CompanyCompany's operations may be adversely affected if economic conditions result in either inflationsubject to disruptions due to the occurrence of public health emergencies, such as the COVID-19 pandemic, or deflation.other similar unexpected events, some of which may be intensified by the effects of a government response to such an event. In an inflationary environment, established reserves may become inadequateMarch 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization and increaseshortly thereafter, the Company’s loss ratio, and market interest rates may rise and reduce the valuePresident of the Company’s fixed maturity portfolio.United States declared a National Emergency. The departments of insurance may not approve premium rate increasesCOVID-19 pandemic has caused significant economic and financial turmoil both in timethe United States and globally.



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High inflation levels could have adverse consequences for the Company, to adequately mitigate inflated loss costs. Inthe insurance industry and the U.S. economy generally.

The U.S. economy experienced elevated levels of inflation in 2022. Although the inflation moderated in 2023, it has created a deflationary environment, some fixed maturity issuersheightened level of risk for the Company, the insurance industry and the U.S. economy generally throughout 2022 and much of 2023. Rising inflation may have difficulty meeting their debt service obligations and thereby reduceimpact the valuereliability of the Company’s fixed maturity portfolio; equity investments may decrease in value;Company's loss reserve estimates and policyholders may experience difficulties paying their premiums to the Company, which could adversely affect premium revenue.

Risks Related to the Company’s Industry
The private passenger automobile insurance industry is highly competitive, and the Company may not be able to compete effectively against larger or better-capitalized companies.
The Company competes with many property and casualty insurance companies selling private passenger automobile insurance in the states in which the Company operates. Many of these competitors are better capitalized than the Company, have higher A.M. Best ratings, and have a larger market share in the states in which the Company operates. The superior capitalization of the competitors may enable them to offer lower rates, to withstand larger losses, and to more effectively take advantage of new marketing opportunities. The Company’s competition may also become increasingly better capitalized in the future as the traditional barriers between insurance companies and banks and other financial institutions erode and as the property and casualty industry continues to consolidate. The Company’s ability to compete against these larger, better-capitalized competitors depends on its ability to deliver superior serviceaccurately price insurance products, and may create additional volatility in the fair value of its strong relationships with independent agents.

The Company may undertake strategic marketinginvestments. Additionally, regulatory agencies, such as various state Departments of Insurance, the U.S. government and operating initiatives to improve its competitive position and drive growth. If the Company is unable to successfully implement new strategic initiatives or if the Company’s marketing campaigns do not attract new customers, the Company’s competitive positionFederal Reserve may be harmed,slow to approve rate changes or adopt measures to attempt to control inflation during the highly inflationary periods, which could adversely affect the Company’s businessCompany's ability to generate profits and results of operations. Additionally,cash flow. Continuing significant inflation could have a prolonged effect on the U.S. economy and could in turn increase the event of a failure of any competitor, the CompanyCompany's operating and other insurance companies would likely be required by state law to absorb the losses of the failed insurer and would be faced with an unexpected surge in new business from the failed insurer’s former policyholders.

The Company may be adversely affected by changes in the private passenger automobile insurance industry.
76.3% of the Company’s direct premiums written for the year ended December 31, 2017 were generated from private passenger automobile insurance policies. Adverse developments in the market for personal automobile insurance or the personal automobile insurance industry in general, whether related to changes in competition, pricing or regulations, could cause the Company’s results of operations to suffer. The property-casualty insurance industry is also exposed to the risks of severe weather conditions, such as rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, wild fires, sinkholes, earthquakes and, to a lesser degree, explosions, terrorist attacks, and riots. The automobile insurance business is also affected by cost trends that impact profitability. Factors which negatively affect cost trends include inflation in automobile repair costs, automobile parts costs, new and used car valuations, medical costs, and changes in non-economicloss costs due to changes in the legalhigher labor and regulatory environments. In addition, the advent of driverless carsmaterials costs, and usage-based insurance could materially alter the way that automobile insurance is marketed, priced, and underwritten.

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

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

The Company’s financial condition, results of operations, and liquidity are dependent in part on tax policy implemented at the federal and/or state level. For example, a significant portion of the Company’s investment portfolio consists of municipal securities that receive beneficial tax treatment under applicable federal tax law. The Company’s results are also subject to federal and state tax rules applicable to dividends received from its subsidiaries and its equity holdings. Additionally, changes in tax laws could have an adverse effect on deferred tax assets and liabilities included in the Company’s consolidated balance sheets and results of operations. Certain elements of the Tax Cuts and Jobs Act of 2017 (the "Act"), enacted into law on December 22, 2017, are pending final regulations from the Internal Revenue Service and state taxing jurisdictions. The Company cannot predict whether any tax legislation, in addition to the Act, will be enacted in the near future or whether any such changes to existing federal or state tax law would have a material adverse effect on the Company's financial condition and results of operations.

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

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

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


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

Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company operates have laws and regulations that limit its ability to exit a market. For example, these states may limit a private passenger automobile insurer’s ability to cancel and non-renew policies or they may prohibit the Company from withdrawing one or more lines of insurance business from the state unless prior approval is received from the state DOI. In some states, these regulations extend to significant reductions in the amount of insurance written, not only to a complete withdrawal. Laws and regulations that limit the Company’s ability to cancel and non-renew policies in some states or locations and that subject withdrawal plans to prior approval requirements may restrict the Company’s ability to exit unprofitable markets, which may harm its business and results of operations.

Other Regulations. The Company must also comply with regulations involving, among other matters:
the use of non-public consumer information and related privacy issues;
the use of credit history in underwriting and rating;
limitations on the ability to charge policy fees;
limitations on types and amounts of investments;
the payment of dividends;
the acquisition or disposition of an insurance company or of any company controlling an insurance company;
involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental charges;
reporting with respect to financial condition;
periodic financial and market conduct examinations performed by state insurance department examiners; and
the other regulations discussed in this Annual Report on Form 10-K.

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

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

Regulation may become more restrictive in the future, which may adversely affect the Company’s business, financial condition and results of operations.
No assurance can
The Company's business, financial condition and results of operations could be given that states will not make existing insurance-related lawsadversely affected by geopolitical conflicts and regulations more restrictiverelated disruptions in the future or enact new restrictive laws. New or more restrictive regulationglobal economy.

The escalation of geopolitical conflicts and tensions in any state in which the Company conducts business could make it more expensive for it to continue to conduct business in these states, restrict the premiums the Company is able to charge or otherwise change the way the Company does business. In such events, the Company may seek to reduce its writings in or to withdraw entirely from these states. In addition, from time to time, the United States Congress and certain federal agencies investigate the current conditionvarious parts of the insurance industry to determine whether federal regulation is necessary. The Company cannot predict whetherworld, including increased trade barriers or restrictions on global trade, could result in, among other things, heightened cybersecurity threats, prolonged supply chain disruptions, protracted or increased inflation, lower consumer demand, fluctuations in interest rates, and to what extent new laws and regulations that wouldincreased volatility in financial markets, which could adversely affect its business will be adopted, the timing of any such adoption and what effects, if any, they may have on the Company’sCompany's business, financial condition and results of operations.


Assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds, and other mandatory pooling arrangements may reduce the Company’s profitability.
Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insured parties as the result of impaired or insolvent insurance companies. Many states also have laws that established second-injury funds

to provide compensation to injured employees for aggravation of a prior condition or injury which are funded by either assessments based on paid losses or premium surcharge mechanisms. In addition, as a condition to the ability to conduct business in various states, the Insurance Companies must participate in mandatory property and casualty shared-market mechanisms or pooling arrangements, which provide various types of insurance coverage to individuals or other entities that otherwise are unable to purchase that coverage from private insurers. The effect of these assessments and mandatory shared-market mechanisms or changes in them could reduce the Company’s profitability in any given period or limit its ability to grow its business.

The insurance industry faces litigation risks, which, if resolved unfavorably, could result in substantial penalties and/or monetary damages, including punitive damages. In addition, insurance companies incur material expenses defending litigation and their results of operations or financial condition could be adversely affected if they fail to accurately project litigation expenses.
Insurance companies are subject to a variety of legal actions including breach of contract claims, tort claims, fraud and misrepresentation claims, employee benefit claims, and wage and hour claims. In addition, insurance companies incur and likely will continue to incur potential liability for claims related to the insurance industry in general and to the Company’s business in particular, such as those related to allegations for failure to pay claims, termination or non-renewal of coverage, interpretation of policy language, policy sales practices, reinsurance matters, and other similar matters. Such actions can also include allegations of fraud, misrepresentation, and unfair or improper business practices and can include claims for punitive damages.

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

The Company and the Insurance Companies are named as defendants in a number of lawsuits. Those that management believes could have a material effect on the Company's consolidated financial statements are described more fully in "Overview—B. Regulatory and Legal Matters" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 17. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." Litigation, by its very nature, is unpredictable and the outcome of these cases is uncertain. The precise nature of the relief that may be sought or granted in any lawsuit is uncertain and may negatively impact the manner in which the Company conducts its business, which could materially increase the Company’s legal expenses and negatively impact the results of operations. In addition, potential litigation involving new claim, coverage, and business practice issues could adversely affect the Company’s business by changing the way policies are priced, extending coverage beyond its underwriting intent, or increasing the size of claims.

Risks Related to the Company’s Stock
The Company is controlled by a small number of shareholders who will be able to exert significant influence over matters requiring shareholder approval, including change of control transactions.
George Joseph and Gloria Joseph collectively own more than 50% of the Company’s common stock. Accordingly, George Joseph and Gloria Joseph have the ability to exert significant influence on the actions the Company may take in the future, including change of control transactions. Certain institutional investors also each own between 5% and 15% of the Company's common stock. This concentration of ownership may conflict with the interests of the Company’s other shareholders and lenders.

Future equity or debt financing may affect the market price of the Company’s common stock and rights of the current shareholders, and the future exercise of options and granting of shares will result in dilution in the investment of the Company’s shareholders.
The Company may raise capital in the future through the issuance and sale of its common stock or debt securities. The Company cannot predict what effect, if any, such future financing will have on the market price of its common stock. Sales of substantial amounts of its common stock in the public market or issuance of substantial amounts of debt securities could adversely affect the market price of the Company’s outstanding common stock, and may make it more difficult for shareholders to sell common stock at a time and price that the shareholder deems appropriate. Furthermore, holders of some of the Company's securities may have rights, preferences, and privileges that are senior to those of the Company’s current shareholders. In addition, the Company has issued and may issue options to purchase shares of its common stock as well as restricted stock units ("RSUs") to incentivize its executives and key employees. In the event that any options to purchase common stock are exercised or any shares of common stock are issued when the RSUs vest, shareholders will suffer dilution in their investment.

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

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

Although the Company has consistently paid increasing cash dividends in the past, it may not be able to pay or continue to increase cash dividends in the future.
The Company has consistently paid cash dividends since the public offering of its common stock in November 1985 and has consistently increased the dividend per share during that time. However, future cash dividends will depend upon a variety of factors, including the Company’s profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by the Board of Directors. The Company’s ability to pay dividends or continue to increase the dividend per share may also be limited by the ability of the Insurance Companies to make distributions to the Company, which may be restricted by financial, regulatory or tax constraints, and by the terms of the Company’s debt instruments. In addition, there can be no assurance that the Company will continue to pay dividends or increase the dividend per share even if the necessary financial and regulatory conditions are met and if sufficient cash is available for distribution.

Item 1B.Unresolved Staff Comments
Item 1B.Unresolved Staff Comments
None.


Item 1C.Cybersecurity
Risk Management and Strategy
A.Processes for Assessing, Identifying, and Managing Material Risks from Cybersecurity Threats
The Company has developed and implemented a cybersecurity risk management program designed to protect the confidentiality, integrity, and availability of its critical systems and information. The Company's cybersecurity risk management is integrated into and embedded in its overall enterprise risk management framework, and shares common methodologies, reporting channels and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.
The Enterprise Risk Management Committee oversees cybersecurity risks Company-wide while the Company’s Chief Technology Officer (“CTO”), a member of the Enterprise Risk Management Committee, oversees the Information Security business unit's cybersecurity management programs and activities. The Company’s cybersecurity risk management program includes the following key elements:
•formal cybersecurity risk assessment designed to help identify material cybersecurity risks to the Company’s critical systems, information, services, and its broader enterprise information technology environment led by the Company's Information Security business unit and reported to its Enterprise Risk Management Committee;
•a team comprised of information security, information technology, infrastructure, and compliance personnel responsible for directing the Company’s cybersecurity risk assessment and security processes and its cybersecurity incident response;
•third-party cybersecurity service provider, as needed, to conduct independent review and testing of the Company's cybersecurity risks and report to the Company;
•systems for protecting information technology systems and monitoring for suspicious events, such as threat protection, firewall and anti-virus software;
•cybersecurity awareness and prevention training for all employees;
•a Security Incident Response Plan designed to respond to cybersecurity incidents, which is regularly tested;
•a Vendor Risk Management Process for vetting third party service providers with access to the Company’s information technology systems.
The Information Security business unit regularly evaluates the Company's cybersecurity risk profile and reports to the Board of Directors (the “Board”). In the event that a significant cybersecurity incident is identified, the Company engages a third-party cybersecurity incident response consultant, as needed, to provide an independent evaluation of the incident.
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B.Oversight of Cybersecurity Risks Associated with Third Party Service Providers
The Company oversees and identifies material risks from cybersecurity threats related to its use of third-party service providers in accordance with its Vendor Risk Management Process. The contracts with service providers are reviewed during the onboarding process, renewal periods, and as necessary. The contracts require service providers to report cybersecurity incidents that impact the Company's data or information systems or that can otherwise disrupt its operations to the Company on a timely basis.
C.Impact of Cybersecurity Threats on Business Strategy and Results of Operations
The Company has experienced cybersecurity incidents in the past, and has been impacted by cybersecurity incidents experienced by its service providers, but none has materially affected the Company's operations. The Company has not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected the Company, including its operations, business strategy, results of operations, or financial condition. The Company faces certain ongoing risks from cybersecurity threats that, if realized, are reasonably likely to materially affect the Company, including its operations, business strategy, results of operations, or financial condition. See "Risks Related to Technology and Cybersecurity" in "Part I – Item 1A. Risk Factors" for additional information.

Governance
A.Board of Directors' Oversight of Risks from Cybersecurity Threats
The Company’s Board considers cybersecurity risk as critical to the enterprise. The full Board oversees the Company’s Enterprise Risk Management program which incorporates cybersecurity risks together with other top operational, reporting and compliance risks the Company manages. The full Board is kept apprised by Management of the Company’s cybersecurity risk assessment results, and an escalation process exists to inform the Board of high-severity cybersecurity incidents that may occur. In addition, the Board periodically engages independent third-party technology experts to test the Company’s information technology systems, including cybersecurity.
The Company's Enterprise Risk Management Committee provides the Board with an overview of cybersecurity risks regularly. Additionally, the Company's Chief Executive Officer (“CEO”) provides the Board with an Information Security Incident Report for Board meetings, which summarizes new incidents that did not require "off-cycle" escalation to the Board, and status updates on previously reported high severity incidents, as well as a cybersecurity incident analysis report issued by a third-party cybersecurity service provider.
B.Management’s Role in Assessing and Managing Material Risks from Cybersecurity Threats
The Company's Information Security business unit primarily manages the day-to-day operations of monitoring cybersecurity risks to the Company's information systems, takes prevention, detection, and remediation measures for cybersecurity incidents, makes initial assessment of reported cybersecurity incidents, and reports such incidents to the Company's CEO, Chief Operating Officer (“COO”), CTO, Board and Enterprise Risk Management Committee as well as certain regulatory bodies, as needed. The following five management personnel are primarily responsible for assessing and managing the Company's material risks from cybersecurity threats:
•Gabriel Tirador, Chief Executive Officer: The Company’s CEO, along with its COO, oversees the Technology team who monitors the Company’s information technology systems for suspicious events. The Company’s CEO reports to the Board regarding cybersecurity incidents and issues. The Company’s CEO, COO and CTO oversee the use of third-party cybersecurity consultants by the Information Security business unit to engage in periodic evaluations. Mr. Tirador has over 30 years' experience in the property and casualty insurance industry and in the Company and is an inactive Certified Public Accountant. As CEO of the Company, he has overseen its Technology business unit for over 20 years, among other business units.
•Victor Joseph, President and Chief Operating Officer: The Company’s President and COO oversees the technology team who monitors the Company’s information technology systems for suspicious events. Mr. Joseph has overseen the technology team since 2022. Mr. Joseph has been employed by the Company in various capacities since 2009, and was appointed Executive Vice President and COO in January 2022 and President and COO in January 2024.
•Theodore R. Stalick, Senior Vice President and Chief Financial Officer: The Company’s CFO oversees its enterprise risk management program which, among others, includes oversight of cybersecurity risk management and serves as Chairperson of the Company's Enterprise Risk Management Committee. Mr. Stalick has been the Company's CFO since 2001. Mr. Stalick is a Certified Public Accountant and has a Bachelors Degree in Business Administration, Accounting and Finance concentration, and an MBA, Business Analytics concentration.
•Wilson Pang, Vice President and Chief Technology Officer: The Company’s CTO regularly provides the
28

Board with updates on cybersecurity risk management or significant reported cybersecurity incidents. The Company’s CTO works with the Company’s CEO, COO and Head of Information Security to determine the severity of cybersecurity incidents. The Company’s CTO also works with its Head of Information Security to direct action in the event of a severe cybersecurity incident. Mr. Pang has over 20 years’ experience in the technology industry. He has served in Chief Technology Officer and Chief Data Officer roles in several public companies and has deep expertise in technology, data, and artificial intelligence. He has a Master’s and a Bachelor’s Degree in electrical engineering.
•Dustin Howard, Head of Information Security: The Company’s Head of Information Security supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external cybersecurity service providers; and alerts and reports produced by security tools deployed in the information technology environment. The Company’s Head of Information Security also oversees the creation of remediation action plans with the affected business units. Mr. Howard has over 30 years’ experience managing various aspects of information technology, and has extensive expertise in information security, compliance, and information technology infrastructure and service delivery. He has served in Head of Information Security, Chief Information Officer and Vice President roles in several public companies and has maintained Certified Information Systems Security Professional (“CISSP”) certification since 2001. He has a Bachelor’s Degree in Business Administration and a Master’s Degree in Information Systems.
The five management personnel above also serve in the Company's Enterprise Risk Management Committee and are informed about and discuss updates to the cybersecurity risk management programs and cybersecurity incidents, including any prevention and detection measures as well as mitigation and remediation measures for any reported cybersecurity incidents. The Enterprise Risk Management Committee oversees the Company's overall risk management processes that include oversight of material risks from cybersecurity threats. The CEO and CFO are also members of the Company's Disclosure Committee. The CTO and Head of Information Security participate in Disclosure Committee meetings, as needed, to facilitate discussion and provide information on cybersecurity incidents reported. The CEO, CTO and Head of Information Security provide the Board with information and updates on cybersecurity risks and incidents as in-house technology and cybersecurity experts during Board meetings or as needed.
Depending on the nature and severity of the reported cybersecurity incidents, the Enterprise Risk Management Committee may recommend activation of the Crisis Management Plan under the Company's Business Continuity Management Program. The Disclosure Committee is informed by the CEO of significant cybersecurity incidents for purposes of determining materiality.

Item 2.Properties
Item 2.Properties
The Company owns the following buildings which are mostly occupied by the Company’s employees.support all business segments. Space not occupied by the Company may be leased to independent third party tenants.
LocationPurposeSize in
Square Feet
Percent Occupied by
the Company at
December 31, 2023
Brea, CAProperty held for sale156,000 100 %
Brea, CAHome office and I.T. facilities80,000 100 %
Folsom, CAAdministrative88,000 100 %
Los Angeles, CAExecutive offices41,000 95 %
Oklahoma City, OKAdministrative100,000 10 %
Location Purpose 
Size in
Square Feet
 
Percent Occupied by
the Company at
December 31, 2017
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 164,000
 62%
Oklahoma City, OK Administrative 100,000
 25%


The Company leases additional office space for operations. Office location is not crucial to the Company’s operations, and the Company anticipates no difficulty in extending these leases or obtaining comparable office space. In addition, the Company owns 5.9 acres of land in Rancho Cucamonga, California.

In August 2017, the Company completed the sale of approximately six acres of land located in Brea, California (the "Property"), for a total sale price of approximately $12.2 million. Approximately $5.7 million of the total sale price was received in the form of a promissory note (the "Note") and the remainder in cash. The Note is secured by a first trust deed and an assignment of rents on the Property, and bears interest at an annual rate of 3.5%, payable in monthly installments. The Note matures in August 2020.

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


Office location is not crucial to the Company’s operations. Although the Company occupies space in owned buildings and leased office space, and all team members may utilize this office space to carry out Company business, most of its workforce chooses to work from home, as a result of the "Mercury's My Workplace" policy that allows most of its employees to work from anywhere in the U.S. beginning January 2022. Consequently, the Company is in the process of reducing its office footprint.



29

Item 3.Legal Proceedings
Item 3.Legal Proceedings
The Company is, from time to time, named as a defendant in various lawsuits or regulatory actions incidental to its insurance business. The majority of lawsuits brought against the Company relate to insurance claims that arise in the normal course of business and are reserved for through the reserving process. For a discussion of the Company’s reserving methods, see "Overview-C. Critical Accounting Policies and Estimates" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" 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 also establishes reservesaccruals for estimated liabilities 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 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. In addition, the Company accrues for anticipated legal defense costs associated with such lawsuits and regulatory actions. 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 or cash flows.


In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see "Overview—B. Regulatory and Legal Matters" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 17.18. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data," which is incorporated herein by reference.


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


Item 4.Mine Safety Disclosure
Item 4.Mine Safety Disclosures
Not applicable.

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

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

Market Information
The shares of the Company's common sharesstock are listed and traded on the New York Stock Exchange (Symbol:(trading symbol: MCY). The following table presents the high and low sales prices per share (as reported on the New York Stock Exchange) during the last two years.
2017High Low
1st Quarter$64.52
 $56.45
2nd Quarter63.23
 53.23
3rd Quarter61.51
 52.52
4th Quarter60.19
 51.87
2016High Low
1st Quarter$56.02
 $42.97
2nd Quarter55.95
 49.69
3rd Quarter56.14
 52.00
4th Quarter61.19
 50.32
The closing price of the Company’s common stock on February 2, 20188, 2024 was $48.98.$40.01.
Holders
As of February 2, 2018,8, 2024, there were approximately 111141 holders of record of the Company’s common stock.
Dividends
Since the public offering of its common stock in November 1985, the Company has paid regular quarterly dividends on its common stock. During 2017 and 2016, the Company paid dividends on its common stock of $2.4925 and $2.4825 per share, respectively. On February 2, 2018, the Board of Directors declared a $0.6250 quarterly dividend payable on March 29, 2018 to shareholders of record on March 15, 2018.


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


Holding Company Act
Pursuant to the Holding Company Act, California-domiciled insurance companies are required to notify the California DOI of any dividend after declaration, but prior to payment. There are similar limitations imposed by other states on the Insurance Companies’ ability to pay dividends. As of December 31, 2017,2023, the Insurance Companies are permitted to pay in 2018,2024, without obtaining DOI approval for extraordinary dividends, $167$163 million in dividends to Mercury General, of which $134$140 million may be paid by the California Companies.


For a discussion of certain restrictions on the payment of dividends to Mercury General by some of its insurance subsidiaries, see Note 12.13. Dividends, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."

31

Performance Graph

The following graph compares the cumulative total shareholder returns on the Company’s Common Stock (Symbol:common stock (trading symbol: MCY) with the cumulative total returns on the Standard and Poor’s 500 Composite Stock Price Index ("S&P 500 Index") and the Company’s industry peer group over the last five years. The graph assumes that $100 was invested on December 31, 20122018 in each of the Company’s Common Stock, the S&P 500 Index and the industry peer group and the reinvestment of all dividends.

1969

2012 2013 2014 2015 2016 2017
2018201820192020202120222023
Mercury General$100.00
 $132.55
 $158.95
 $137.00
 $185.31
 $171.92
Industry Peer Group100.00
 132.89
 161.63
 155.39
 187.53
 227.51
S&P 500 Index100.00
 132.39
 150.51
 152.59
 170.84
 208.14
The industry peer group consists of Alleghany Corporation, Allstate Corporation, American Financial Group, Arch Capital Group Ltd, Berkley (W.R.), Berkshire Hathaway 'B', Chubb Corporation, Cincinnati Financial Corporation, CNA Financial Corporation, Erie Indemnity Company, Hanover Insurance Group, Markel Corporation, Old Republic International, Progressive Corporation, RLI Corporation, Selective Insurance Group, and Travelers Companies, Inc., and XL Group, plc.
Recent Sales of Unregistered Securities
None.

Share Repurchases
The Company has had a stock repurchase program since 1998.does not currently have any share repurchases authorized by the Board. The Company was authorized to repurchase shareshas not repurchased any of its common stock under the program in open market transactions at the discretion of management. No stock has been repurchasedCommon Stock since 2000. The Company’s Board of Directors authorized a $200 million stock repurchase on July 29, 2016, and the authorization expired and the program was discontinued in July 2017.


Item 6.Selected Financial Data
The following selected financial and operating data are derived from the Company’s audited consolidated financial statements. The selected financial and operating data should be read in conjunction with "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."

Item 6.Reserved
32
 Year Ended December 31,
 2017 2016 2015 2014 2013
   (Amounts in thousands, except per share data)  
Income Data:         
Net premiums earned$3,195,437
 $3,131,773
 $2,957,897
 $2,796,195
 $2,698,187
Net investment income124,930
 121,871
 126,299
 125,723
 124,538
Net realized investment gains (losses)83,650
 (34,255) (83,807) 81,184
 (11,422)
Other11,945
 8,294
 8,911
 8,671
 9,738
Total revenues3,415,962
 3,227,683
 3,009,300
 3,011,773
 2,821,041
Losses and loss adjustment expenses2,444,884
 2,355,138
 2,145,495
 1,986,122
 1,962,690
Policy acquisition costs555,350
 562,545
 539,231
 526,208
 505,517
Other operating expenses233,475
 235,314
 250,839
 249,381
 219,478
Interest15,168
 3,962
 3,168
 2,637
 1,260
Total expenses3,248,877
 3,156,959
 2,938,733
 2,764,348
 2,688,945
Income before income taxes167,085
 70,724
 70,567
 247,425
 132,096
Income tax expense (benefit)22,208
 (2,320) (3,912) 69,476
 19,953
Net income$144,877
 $73,044
 $74,479
 $177,949
 $112,143
Per Share Data:         
Basic earnings per share$2.62
 $1.32
 $1.35
 $3.23
 $2.04
Diluted earnings per share$2.62
 $1.32
 $1.35
 $3.23
 $2.04
Dividends paid per share$2.4925
 $2.4825
 $2.4725
 $2.4625
 $2.4525

 December 31,
 2017 2016 2015 2014 2013
   (Amounts in thousands, except per share data)  
Balance Sheet Data:         
Total investments$3,732,728
 $3,547,560
 $3,380,642
 $3,403,822
 $3,158,312
Total assets5,101,323
 4,788,718
 4,628,645
 4,600,289
 4,315,181
Loss and loss adjustment expense reserves1,510,613
 1,290,248
 1,146,688
 1,091,797
 1,038,984
Unearned premiums1,101,927
 1,074,437
 1,049,314
 999,798
 953,527
Notes payable371,335
 320,000
 290,000
 290,000
 190,000
Shareholders’ equity1,761,387
 1,752,402
 1,820,885
 1,875,446
 1,822,486
Book value per share31.83
 31.70
 33.01
 34.02
 33.15

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

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

Forward-looking Statements
    
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. Certain statements contained in this report are forward-looking statements based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the demand for the Company’s insurance products, inflation and general economic conditions, including general market risks associated with the Company’s investment portfolio; the accuracy and adequacy of the Company’s pricing methodologies; catastrophes in the markets served by the Company; uncertainties related to estimates, assumptions and projections generally; the possibility that actual loss experience may vary adversely from the actuarial estimates made to determine the Company’s loss reserves in general; the Company’s ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in states where the Company operates; legislation adverse to the automobile insurance industry or business generally that may be enacted in the states where the Company operates; the Company’s success in managing its business in non-California states; the presence of competitors with greater financial resources and the impact of competitive pricing and marketing efforts; the ability of the Company to successfully manage its claims organization outside of California; the Company's ability to successfully allocate the resources used in the states with reduced or exited operations to its operations in other states; changes in driving patterns and loss trends; acts of war and terrorist activities; pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases; court decisions and trends in litigation and health care and auto repair costs and marketing efforts;costs; and legal, cyber security,cybersecurity, regulatory and litigation risks.


From time to time, forward-looking statements are also included in the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K, in press releases, in presentations, on its web site, and in other materials released to the public. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or, in the case of any document the Company incorporates by reference, any other report filed with the SEC or any other public statement made by the Company, the date of the document, report or statement. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events or otherwise.


OVERVIEW
A. General
The operating results of property and casualty insurance companies are subject to significant quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and severity of losses, the effect of weather and natural disasters on losses, general economic conditions, the general regulatory environment in states in which an insurer operates, state regulation of insurance including premium rates, changes in fair value of investments, and other factors such as changes in tax laws. The property and casualty insurance industry has been highly cyclical, with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. These cycles can have a significant impact on the Company’s ability to grow and retain business.


The Company is headquartered in Los Angeles, California and writes primarily personal automobile lines of business selling policies through a network of independent agents, 100% owned insurance agents and direct channels, in 11 states: Arizona, California, Florida, Georgia, Illinois, Nevada, New Jersey, New York, Oklahoma, Texas, and Virginia. The Company also offers homeowners, commercial automobile, commercial property, mechanical protection, fire, and umbrella insurance. Private passenger automobile lines of insurance business accounted for 76.3%approximately 62% of the $3.2$4.6 billion of the Company’s direct premiums written in 2017,2023, and 85%approximately 82% of the private passenger automobile premiums were written in California. 
The Company was unable to profitably grow its business in Michigan and Pennsylvania since it began writing insurance in those states in 2004. Michigan and Pennsylvania combined net premiums earned were $15.4 million and $18.6 million in 2015 and 2014, respectively, and combined ratios were 137% and 130% in 2015 and 2014, respectively. During the second quarter of 2016, the Company implemented an exit plan to focus resources on other states with better opportunities for sustainable growth, and with the approval of the regulators in Michigan and Pennsylvania, the Company ceased accepting new business in those states in May 2016. The Company has substantially completed the run-off of its Michigan and Pennsylvania operations in 2017, with the exception of a limited number of claims that remained open at December 31, 2017.
In line with the goal of improving operating efficiencies outside California and overall long-term profitability, the Company restructured its claims operations in states outside of California resulting in a workforce reduction of approximately 100 employees,

primarily in the Company's New Jersey and Florida branch offices. As a result, during the second quarter of 2016, the Company recorded a charge, primarily in loss and loss adjustment expenses, of approximately $2 million for employee termination costs.
This section discusses some of the relevant factors that management considers in evaluating the Company’s performance, prospects, and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety of management’s discussion and analysis, the Company’s consolidated financial statements and notes thereto, and all other items contained within this Annual Report on Form 10-K.


20172023 Financial Performance Summary
The Company’s net income (loss) for the year ended December 31, 2017 increased to $144.92023 was $96.3 million, or $2.62$1.74 per diluted share, from $73.0
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compared to $(512.7) million, or $1.32$(9.26) per diluted share, for the same period in 2016.2022. Included in net income is $124.9(loss) was $234.6 million of pre-tax net investment income that was generated during 20172023 on a portfolio of $3.7$5.2 billion, at fair value, at December 31, 2017,2023, compared to $121.9$168.4 million of pre-tax net investment income that was generated during 20162022 on a portfolio of $3.5$4.9 billion, at fair value, at December 31, 2016.2022. Also included in net income are(loss) were pre-tax net realized investment gains (losses) of $83.7$101.0 million and $(34.3)$(488.1) million in 20172023 and 2016,2022, respectively, and pre-tax catastrophe losses, net of reinsurance benefits,and reinstatement premiums earned, of approximately $79.0$239.2 million and $27.0$101.3 million in 20172023 and 2016,2022, respectively. Pre-tax net realized investment gains for 2023 resulted largely from the increase in fair value of fixed maturity securities as well as the increase in fair value of equity securities.


During 2017, theThe Company continued its marketing efforts to enhance name recognition and lead generation.generation in 2023, although it reduced the spending for advertising and marketing as part of its cost saving initiative. The Company believes that its marketing efforts, combined with its ability to maintain relatively low prices and a strong reputation, make the Companyits insurance products competitive in California and in other states.


The Company believes its thorough underwriting process gives it an advantage over its competitors. The Company’s agent relationships and underwriting and claims processes are its most important competitive advantages.


The Company’s operating results and growth have allowed it to consistently generate positive cash flow from operations, which was approximately $341$453 million and $292$353 million in 20172023 and 2016,2022, respectively. Cash flow from operations has been used to pay shareholder dividends and help support growth.


Economic and Industry Wide Factors
•Regulatory Uncertainty—The insurance industry is subject to strict state regulation and oversight and is governed by the laws of each state in which each insurance company operates. State regulators generally have substantial power and authority over insurance companies including, in some states, approving rate changes and rating factors, restricting cancellation and non-renewal of insurance policies, and establishing minimum capital and surplus requirements. In many states, insurance commissioners may emphasize different agendas or interpret existing regulations differently than previous commissioners. There is no certainty that current or future regulations and the interpretation of those regulations by insurance commissioners and the courts will not have an adverse impact on the Company.
•Cost Uncertainty—Because insurance companies pay claims after premiums are collected, the ultimate cost of an insurance policy is not known until well after the policy revenues are earned. Consequently, significant assumptions are made when establishing insurance rates and loss reserves. While insurance companies use sophisticated models and experienced actuaries to assist in setting rates and establishing loss reserves, there can be no assurance that current rates or current reserve estimates will be adequate. Furthermore, there can be no assurance that insurance regulators will approve rate increases when the Company’s actuarial analyses indicate that they are needed.
•Economic Conditions—Many businesses are experiencing the effects of uncertain conditions in the global economy and capital markets, reduced consumer spending and confidence, and continued volatility, which could adversely impact theThe Company’s financial condition, results of operations, and liquidity.liquidity may be negatively impacted by global, national and local economic conditions, such as recessions, increased levels of unemployment, inflation, and large fluctuations in interest rates. Further, volatility in global capital markets could adversely affect the Company’s investment portfolio. The Company is unablenot able to predict the impacttiming and effect of currentthese factors, or their duration and future global economic conditions on the United States, and California, where the majority of the Company’s business is produced.
severity.
•Inflation—The largest cost component for automobile insurers is losses, which include medical, replacement automobile parts, and labor costs. There can be significant variation in the overall increases in medical cost inflation, and it is often years after the respective fiscal period ends before sufficient claims have closed for the inflation rate to be known with a reasonable degree of certainty. Therefore, it can be difficult to establish reserves and set premium rates, particularly when actual inflation rates may be higher or lower than anticipated.
•Loss Frequency—Another component of overall loss costs is loss frequency, which is the number of claims per risk insured. Loss frequency trends are affected by many factors such as fuel prices, the economy, the prevalence of distracted

driving, and collision avoidance and other technology in vehicles. Loss trends were generally flat or slightly down in 2017.vehicles, and stay-at-home orders issued by state and local governments due to the pandemic.
•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 market is hardening within most states was hard during 2023 as insurance carriers generally raisingincreased rates although this also depends on individual state profitabilityreflecting high inflation and the carriers’ growth appetite.loss severity and tightened their underwriting. In addition, in California, several insurance carriers stopped writing new business policies.

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Technology

The Company implemented Guidewire’s InsuranceSuitehas made significant progress in 2010, which is a widely adopted industry software leader. Over the past several years, InsuranceSuite has been deployed inmigrating most of the states and lines of business in which the Company operates. Throughout 2017, there have been numerous enhancements to the Company's information technologyits products from legacy systems to make them easier and more intuitive for agents, customers, shoppers, and internal users.a single platform in 2023. The Company will continue to invest in improving user experiences withthe modernization of its information technology systems. and data science platforms as well as enhanced security protections in 2024.
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 2017,2023, the Company implemented rate changes in eleven11 states. In California, theThe following are recent rate increases were implemented or approved by the California DOI or pending its approval for lines of insurance business that exceededaccounted for 5% or more of the Company's total net premiums earned in 2017:2023:

▪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,January 2023, the California DOI issued an Amended Noticeapproved a 6.9% rate increase on the private passenger automobile line of Non-Compliance to a Notice of Non-Compliance originally issuedinsurance business for MIC and CAIC. These rate increases became effective in February 2004 (as amended, “2004 NNC”) alleging that the Company charged rates in violation of the California Insurance Code, willfully permitted its agents to charge broker fees in violation of California law, and willfully misrepresented the actual price insurance consumers could expect to pay for insurance by the amount of a fee charged by the consumer's insurance broker.March 2023. The California DOI sought to impose a fineapproved an additional 6.99% rate increase on the private passenger automobile line of insurance business 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,MIC and to suspend certificates of authority for a period of one year.CAIC in June 2023. These rate increases became effective in July 2023. In addition, in January 2012, the administrative law judge bifurcated the 2004 NNC between (a) the California DOI’s order to show cause (the “OSC”), in which2024, the California DOI assertsapproved a 22.5% rate increase for MIC and a 3.8% rate increase for CAIC on the false advertising allegationsprivate passenger automobile line of insurance business. These rate increases are expected to become effective in late February of 2024. The private passenger automobile line of insurance business of MIC and accusation,CAIC represented approximately 48% and (b)5%, respectively, of the California DOI’s notice of noncompliance (the “NNC”),Company's total net premiums earned in which2023.
•In March 2023, the California DOI asserts the unlawfulapproved a 12.6% 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, basedincrease on the Company’s failure to exhaust its administrative remedies, andCalifornia homeowners line of insurance business. This rate increase became effective in May 2023. In addition, in May 2023, the Company appealed.filed an application with the California DOI for a 6.99% rate increase on the California homeowners line of insurance business. The CourtCalifornia homeowners line 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 excessinsurance business represented approximately 16% of the Company's approved rates, and assessed a civil penaltytotal net premiums earned 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 the2023.

Commissioner’s interpretation of certain provisions of the California Insurance Code. Subsequent to the filing of the Writ, a consumer group petitioned and was granted the right to intervene in the Superior Court action. The Court did not order a stay, and the $27.6 million assessed penalty was paid in March 2015. The Company filed an amended Writ on September 11, 2015, adding an explicit request for a refund of the penalty, with interest.

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, to the Company in June 2017 in order to avoid accruing further interest. Because the matter has been appealed, the Company has not yet recognized the $30.9 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 motion 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 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.

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 also establishes reservesaccruals for estimated liabilities 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. In addition, the Company accrues for anticipated legal defense costs associated with such lawsuits and regulatory actions. 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—LitigationContingencies 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
35

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.
•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.


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

(1) Inflation

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

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•BI reserves—approximately 75%70% of total reserves

•Material damage ("MD") reserves, including collision and comprehensive property damage—approximately 10% of total reserves
•Loss adjustment expense reserves—approximately 15%20% of total reserves.
Loss development on MD reserves is generally insignificant because MD claims are generally settled in a shorter period than BI claims. The majority of the loss adjustment expense reserves are estimated costs to defend BI claims, which tend to require longer periods of time to settle as compared to MD claims.


BI loss reserves are generally the most difficult to estimate because they take longer to close than other coverages. BI coverage in the Company’s policies includes injuries sustained by any person other than the insured, except in the case of uninsured

or underinsured motorist BI coverage, which covers damages to the insured for BI caused by uninsured or underinsured motorists. BI payments are primarily for medical costs and general damages.


The following table presents the typical closure patterns of BI claims in the Company's California personal automobile insurance coverage:
 % of Total
 Claims ClosedDollars Paid
BI claims closed in the accident year reported37%12%
BI claims closed one year after the accident year reported78%51%
BI claims closed two years after the accident year reported94%76%
BI claims closed three years after the accident year reported98%88%
 % of Total
 Claims Closed Dollars Paid
BI claims closed in the accident year reported39% 12%
BI claims closed one year after the accident year reported77% 54%
BI claims closed two years after the accident year reported93% 79%
BI claims closed three years after the accident year reported98% 93%


BI claims closed in the accident year reported are generally the smaller and less complex claims that settle for approximately $3,500$8,000 to $4,000,$9,000 on average, whereas the total average settlement, once all claims are closed infor a particular accident year, is approximately $10,000$18,000 to $14,000.$28,000. The Company creates incurred and paid loss triangles to estimate ultimate losses utilizing historical payment and reserving patterns and evaluates the results of this analysis against its frequency and severity analysis to establish BI loss reserves. The Company adjusts development factors to account for inflation trends it sees in loss severity. As a larger proportion of claims from an accident year are settled, there emerges a higher degree of certainty for the loss reserves established for that accident year. Consequently, there is generally a decreasing likelihood of loss reserve development on any particular accident year, as those periods age. At December 31, 2017,2023, the accident years that are most likely to develop are the 20152021 through 20172023 accident years; however, it is possible that older accident years could develop as well.


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


In 2022, inflationary trends accelerated to their highest level since the 1980s. Excessive inflation led to significant increases in loss severities related to vehicle repairs and bodily injuries. The severe inflationary trend continued into 2023, but began moderating as the year progressed. In addition, the COVID-19 pandemic created greater uncertainty in the reserve estimates. A greater number of large claims may emerge from the 2020 through 2023 accident years compared to the prior accident years as claimants may have been reluctant to go to a medical provider due to the pandemic but subsequently seek monetary compensation to ease the economic hardship attributable to the pandemic. Based on these factors and uncertainty attributable to the pandemic and inflation, the reserve estimates for the 2020 through 2023 accident years are subject to a high degree of variability.

The Company believes that it is reasonably possible that the California automobile BI severity could vary from recorded amounts by as much as 10%12%, 5%,8% and 3%6% for 2017, 2016,2023, 2022 and 20152021 accident years, respectively. respectively; however, the variation could be more or less than these amounts.




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During the years 20132019 through 2017,2023, the changes in the loss severity amounts for the three preceding accident years from the prior year amounts (BI severity variance from prior year) have ranged as follows:
 HighLow
Immediate preceding accident year7.9%(2.9)%
Second preceding accident year5.4%(1.0)%
Third preceding accident year3.6%(2.6)%

 High Low
Immediate preceding accident year(2.2)% (5.1)%
Second preceding accident year2.3% (3.1)%
Third preceding accident year2.0% (2.9)%

The following table presents the effects on the California automobile BI loss reserves for the 2017, 2016,2023, 2022 and 20152021 accident years based on possible variations in the severity recorded; however, the variationactual variations could be more or less than these amounts.amounts:


California Automobile Bodily Injury Inflation Reserve Sensitivity Analysis
 
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
12/31/2023
Implied
Inflation Rate
Recorded (1)
(A) Pro-forma
severity if actual
severity is lower by
12% for 2023,
8% for 2022, and
6% for 2021
(B) Pro-forma
severity if actual
severity is higher by
12% for 2023,
8% for 2022, and
6% for 2021
Favorable loss
development if
actual severity is
less than recorded
(Column A)		Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
202320,642 $28,070 7.3 %(2)$24,702 $31,438 $69,522,000 $(69,522,000)
202220,969 $26,154 12.3 %$24,062 $28,246 $43,867,000 $(43,867,000)
202120,522 $23,284 12.8 %$21,887 $24,681 $28,669,000 $(28,669,000)
202018,591 $20,645 — — — — — 
Total Loss Development—Favorable (Unfavorable)$142,058,000 $(142,058,000)
___________
(1)
(1)    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. The Company believes that severity increases are caused by litigation, medical costs, inflation, and increased utilization of medical procedures.
(2)    The severe inflationary trend of 2022 began to moderate in 2023, which contributed to the decrease in implied inflation rate recorded for the 2023 accident year.

The number of claims expected and the actual recorded severity for the 2014 and 2015 accident years are not comparable with the amounts previously reported on this table in prior filings. These amounts have been restated to be on a consistent reporting basis with the 2016 and 2017 accident years.
(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.
(3)
During 2016, the Company implemented a claims strategy that reduced the number of small dollar settlements offered shortly after the claims were reported. This strategy reduced the total number of claims expected, which had the effect of increasing the actual recorded severity across the total claims population. There were fewer small dollar claims in the calculation of actual recorded severity for the 2016 and 2017 accident years compared to prior accident years. Consequently, the implied inflation rate recorded for these accident years is skewed upward due to this strategy change.
(2) Claim Count Development
The Company generally estimates ultimate claim counts for an accident period based on development of claim counts in prior accident periods. Typically, almost every claim is reported within one year following the end of an accident year and at that point the Company has a high degree of certainty as to the ultimate claim count. There are many factors that can affect the number of claims reported after an accident period ends. These factors include changes in weather patterns, a change in the number of litigated files, the number of automobiles insured, and whether the last day of the accident period falls on a weekday or a weekend. However, the Company is unable to determine which, if any, of the factors actually impact the number of claims reported and, if so, by what magnitude.


The COVID-19 pandemic created greater uncertainty in the claims count development for the 2020 through 2023 accident years. The Company believes that the reduced services for non-critical cases at medical facilities and fear of infection during the pandemic combined with the economic hardship caused by the pandemic may increase the late reporting of claims seeking settlement for monetary compensation. At December 31, 2017,2023, there were 26,62819,318 California automobile BI claims reported for the 20172023 accident year and the Company estimates that these are expected to ultimately grow by approximately 4.7%6.9%. The Company believes that while actual development in recent years has ranged approximately from 3% to 5%7%, it is reasonable to expect that the range of the development could be as great as between 0% and 10%.  ActualHowever, actual development may be more or less than the expected range.










38

The following table presents the effects on loss development of different claim countcounts within the broader possible range at December 31, 2017:2023:

California Automobile Bodily Injury Claim Count Reserve Sensitivity Analysis
2023 Accident YearClaims Reported
Amount Recorded
at 12/31/2023 at  Approximately 6.9%
Claim Count
Development
Total Expected
Amount If Claim
Count Development is
0%		Total Expected
Amount If Claim
Count Development is
10%
Claim count19,318 20,642 19,318 21,250 
Approximate average cost per claimNot meaningful$28,070 $28,070 $28,070 
Total dollarsNot meaningful$579,421,000 $542,256,000 $596,488,000 
Total Loss Development—Favorable (Unfavorable)$37,165,000 $(17,067,000)
2017 Accident YearClaims 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 count26,628
 27,880
 26,628
 29,291
Approximate average cost per claimNot meaningful
 $13,603
 $13,603
 $13,603
Total dollarsNot meaningful
 $379,252,000
 $362,221,000
 $398,445,000
Total Loss Development—Favorable (Unfavorable)  $17,031,000
 $(19,193,000)




(3) Unexpected Losses From Older Accident Periods

Unexpected losses are generally not provided for in the current loss reserve because they are not known or expected or differ materially from reasonable loss development expectations, and therefore they tend to be unquantifiable. Once known or otherwise quantifiable, the Company establishes a provision for the losses, but it is not possible to provide any meaningful sensitivity analysis as to the potential size of any unexpected losses. These losses can be caused by many factors, including unexpected legal interpretations of coverage, ineffective claims handling, regulations extending claims reporting periods, assumption of unexpected or unknown risks, adverse court decisions as well as many unknown factors. During 2017, the Company incurred losses totaling approximately $15 million related to adverse legal outcomes on three separate large claims from accident periods prior to 2014.


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

At December 31, 2017
At December 31, 20172023 and 2016,2022, the Company recorded its point estimate of approximately $1.51$2.79 billion and $1.29$2.58 billion ($1.452.75 billion and $1.28$2.56 billion, net of reinsurance), respectively, in loss and loss adjustment expense reserves, which included approximately $668.4 million$1.61 billion and $534.8 million$1.45 billion ($626.7 million1.61 billion and $532.5 million,$1.45 billion, net of reinsurance), respectively, of incurred-but-not-reported liabilities ("IBNR"). IBNR includes estimates, based upon past experience, of ultimate developed costs, which may differ from case estimates, unreported claims that occurred on or prior to December 31, 20172023 and 2016,2022, and estimated future payments for reopened claims. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date; however, since the provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.


The Company evaluates its loss reserves quarterly. When management determines that the estimated ultimate claim cost requires a decrease for previously reported accident years, favorable development occurs and a reduction in losses and loss adjustment expenses is reported in the current period. If the estimated ultimate claim cost requires an increase for previously reported accident years, unfavorable development occurs and an increase in losses and loss adjustment expenses is reported in the current period. For 2017,2023, the Company reported unfavorablefavorable development of approximately $54$36 million on the 20162022 and prior accident years’ loss and loss adjustment expense reserves. The unfavorablefavorable development in 20172023 was primarily from higherattributable to lower than estimated California automobilelosses and property losses.

During 2017, the Company recorded catastrophe losses of approximately $168 million ($79 million net of reinsurance benefits), resulting primarily from wildfires in Northern and Southern California, severe rainstorms in California, and the impact of Hurricane Harvey in Texas and Hurricane Irma in Florida and Georgia.

Investments
The Company’s fixed maturity and equity investments are classified as "trading" and carried at fair value as required when applying the fair value option, with changes in fair value reflected in net realized investment gains or lossesloss adjustment expenses in the consolidated statements of operations. 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.

Fair Value of Financial Instruments
Financial instruments recorded in the consolidated balance sheets include investments, note receivable, other receivables, total return swaps, accounts payable, options sold, and secured and unsecured notes payable. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Due to their short-term maturity, the carrying values of other receivables and accounts payable approximate their fair values. All investments are carried on the consolidated balance sheets at fair value, as described in Note 2. Financial Instruments, of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."

The Company’s financial instruments include securities issued by the U.S. government and its agencies, securities issued by states and municipal governments and agencies, certain corporate and other debt securities, equity securities, and exchange traded funds.98.0% of the fair value of these financial instruments held at December 31, 2017 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 Measurement, of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."

Income Taxes
At December 31, 2017, the Company’s deferred income taxes were in a net liability position mainly due to deferred tax liabilities generated by unrealized gains on securities held and deferred acquisition costs. These deferred tax liabilities were substantially offset by deferred tax assets resulting from unearned premiums, loss reserve discounting, and expense accruals. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. Management’s recoverability assessment of the Company’s deferred tax assets which are ordinary in character takes into consideration the Company’s strong history of generating ordinary taxable income and a reasonable expectation that it will continue to generate ordinary taxable income in the future. Further, the Company has the capacity to recoup its ordinary deferred tax assets through tax loss carryback claims for taxes paid in prior years. Finally, the Company has various deferred tax liabilities 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 unrealized losses related to these debt securities, which represent a portion of the unrealized loss positions at period-end, are fully realizable at maturity. Management believes its long-term time horizon for holding these securities allows it to avoid any forced sales prior to maturity. 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. Finally, the Company has the capacity to recoup capital deferred tax assets through tax capital loss carryback claims for taxes paid within permitted carryback periods.
The Company has the capability to implement tax planning strategies as it has a steady history of generating positive cash flows from operations and believes that its liquidity needs can be met in future periods without the forced sale of its investments. This capability assists management in controlling the timing and amount of realized losses 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 to avoid losing the benefits of its deferred tax assets. Management will continue to assess the need for a valuation allowance on a quarterly basis. Although realization is not assured, management believes it is more likely than not that the Company’s deferred tax assets will be realized.

The Company’s effective income tax rate can be affected by several factors. These generally include tax-exempt investment income, nondeductible expenses, and periodically, non-routine tax items such as adjustments to unrecognized tax benefits related to tax uncertainties. The effective tax rate was 13.3% (17.7% excluding the effect of the Act) for 2017, compared to (3.3)% for 2016. The increase in the effective tax rate excluding the effect of the Act was mainly due to a significant increase in pretax income of $96.4 million. Excluding the effect of the Act, the Company’s effective tax rate for the years ended December 31, 2017 and 2016 was lower than the statutory tax rate primarily as a result of tax-exempt investment income earned.

As a result of enactment of the Act on December 22, 2017 that is effective for tax years beginning January 1, 2018, the Company made certain tax adjustments for the twelve months ended December 31, 2017. Adjustments were made to reflect the

Company's deferred tax balances at December 31, 2017 that were computed at the new corporate rate of 21%, rather than the preenactment rate of 35%. Additional adjustments were made to account for the impact of the Act on the realizability of the Company's tax credit carryforwards and tax balances at December 31, 2017. The amounts of income tax adjustments resulting from the Act related to loss reserve discounting and alternative minimum tax ("AMT") credits are provisional amounts based on reasonable estimates of the Company’s tax obligations using the latest information available and are subject to changes as additional information becomes available. These adjustments resulted in a net tax benefit of approximately $7.4 million, which is reflected in net income for the twelve months ended December 31, 2017. 

At December 31, 2017, the Company’s AMT credit balance was $57.9 million. The AMT credit, previously classified as deferred tax asset that was included in deferred income taxes in the Company’s consolidated balance sheets, was reclassified to current income taxes receivable as a result of the Act. The AMT credit will be used to offset future federal tax obligations, and as tax refunds, until its benefits are fully realized by December 31, 2021. The Company is currently evaluating other impacts that the Act may have on business and investment strategies as well as financial results in future years, and has not yet determined the extent of such impacts. There are complex factors at play, including the effect of insurance regulation, which will likely require the tax benefits to be passed on to consumers, and changing dynamics in the capital markets, which may result in a shift in the Company’s allocation between taxable and tax-exempt investments.

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 "Regulatory and Legal Matters" above and Note 17. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."

Premiums
The Company’s insurance premiums are recognized as income ratably over the term of the policies and in proportion to the amount of insurance protection provided. Unearned premiums are carried as a liability on the consolidated balance sheets and are computed monthly on a pro-rata basis. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of 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.

RESULTS OF OPERATIONS
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Revenues

Net premiums earned and net premiums written in 2017 increased 2.0% and 1.9%, respectively, from 2016. The increases in net premiums earned and net premiums written were primarily due to higher average premiums per policy arising from rate increases in the California private passenger automobile and homeowners lines of insurance business, partially offset by unfavorable reserve development in the commercial property line of insurance business. The moderating inflationary trend in 2023 after the severe inflation in 2022 was a major contributor to the favorable reserve development in the private passenger automobile line of insurance business for 2023.

The Company recorded catastrophe losses net of reinsurance of approximately $239 million in 2023. Catastrophe losses due to the events that occurred during 2023 totaled approximately $247 million, with no reinsurance benefits used for these losses. The majority of the 2023 catastrophe losses resulted from rainstorms and growthhail in Texas and Oklahoma, winter storms and rainstorms in California, and the impact of Tropical Storm Hilary in California. In addition, the Company experienced favorable development of approximately $8 million on prior years' catastrophe losses in 2023.
39


RESULTS OF OPERATIONS
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Revenues

Net premiums earned and net premiums written in 2023 increased 8.1% and 12.2%, respectively, from 2022. The increase in net premiums earned and written was primarily due to rate increases in the California automobile and homeowners lines of insurance business and in certain lines of insurance business in states outside of California, combined with increases in the number of homeowners policies written inoutside of California.

Net premiums earned included ceded premiums earned of $26.9$109.4 million and $15.8$81.0 million in 20172023 and 2016,2022, respectively. Net premiums written included ceded premiums written of $33.9$109.6 million and $17.0$81.3 million in 20172023 and 2016,2022, respectively. CededThe increase in ceded premiums earned and ceded premiums written increased in 2017, as a result of increasedresulted mostly from higher reinsurance coverage on the Treaty effective July 1, 2017 and reinstatement premiums paid after the use of reinsurance benefits following the Northernrates and Southern California wildfiresgrowth in the fourth quartercovered book of 2017.business.


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


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

Year Ended December 31,
20232022
 (Amounts in thousands)
Net premiums earned$4,274,378 $3,952,482 
Change in net unearned premiums189,821 25,535 
Net premiums written$4,464,199 $3,978,017 

 Year Ended December 31,
 2017 2016
 (Amounts in thousands)
Net premiums earned$3,195,437
 $3,131,773
Change in net unearned premiums20,473
 24,015
Net premiums written$3,215,910
 $3,155,788



Expenses


Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. The following table presents the Insurance Companies' consolidatedCompanies’ loss, expense, and combined ratios determined in accordance with GAAP:
Year Ended December 31,
20232022
Loss ratio82.3 %85.1 %
Expense ratio23.1 %23.6 %
Combined ratio
105.4 %108.7 %
 Year Ended December 31,
 2017 2016
Loss ratio76.5% 75.2%
Expense ratio24.7% 25.5%
Combined ratio101.2% 100.7%

Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The Company’s loss ratio was affected by favorable development of approximately $36 million and unfavorable development of approximately $54 million and $85$47 million on prior accident years’ loss and loss adjustment expense reserves for the years ended December 31, 20172023 and 2016,2022, respectively. The favorable development in 2023 was primarily attributable to lower than estimated losses and loss adjustment expenses in the private passenger automobile and homeowners lines of insurance business, partially offset by unfavorable reserve development in the commercial property line of insurance business. The moderating inflationary trend in 2023 after the severe inflation in 2022 was a major contributor to the favorable reserve development in the private passenger automobile line of insurance business for 2023. The unfavorable development in 20172022 was primarily attributable to higher than estimated Californialosses and loss adjustment expenses in the automobile and property losses, whileline of insurance business. Inflationary trends accelerated to their highest level in decades in 2022, contributing to the unfavorableadverse reserve development in 2016 was primarily from the California and Florida automobile linesline of business. insurance business for 2022.

The 20172023 loss ratio was also negatively impacted by a total of approximately $79$247 million of catastrophe losses, netexcluding favorable development of reinsurance benefits,approximately $8 million on prior years' catastrophe losses, primarily due to wildfiresrainstorms and hail in NorthernTexas and Southern California, severeOklahoma, winter storms and rainstorms in California, and the impact of Hurricane HarveyTropical Storm Hilary in Texas and Hurricane Irma in Florida and Georgia.California. The 20162022 loss ratio was also negatively impacted by a total of approximately $27$101 million of catastrophe losses, mostlyexcluding unfavorable
40

development of approximately $1 million on prior years' catastrophe losses, primarily due to severethe deep freeze of Winter Storm Elliott and other extreme weather events in Texas, Oklahoma and Georgia, winter storms outside ofin California, and rainstormsthe impact of Hurricane Ian in California. Florida.

Excluding the effect of estimated prior periods’ loss development and catastrophe losses, the loss ratio was 72.3%77.4% and 71.6%81.3% for the years ended December 31, 20172023 and 2016,2022, respectively. The increasedecrease in the adjusted loss ratio was primarily due to higher loss severity,an increase in net premiums earned resulting from rate increases in the California automobile and homeowners lines of insurance business and in certain lines of insurance business in states outside of California, partially offset by higher average premiums per policy.increases in loss severity in the automobile and homeowners lines of insurance business.


Expense ratio is calculated by dividing the sum of policy acquisition costs and other operating expenses by net premiums earned. The lower expense ratio decreased, aided in part by the rate increases discussed above. Expenses for real estate operations and office leases decreased as a result of the year ended December 31, 2017 was primarily attributablesale of certain office buildings and termination of certain office leases, as the majority of the Company's employees continue to lower policy acquisition costs andwork from home. In addition, advertising expenses compared to the year ended December 31, 2016.decreased.


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


Income tax expense (benefit) was $22.2$3.1 million and $(2.3)$(158.0) million for the years ended December 31, 20172023 and 2016,2022, respectively. The $24.5$161.1 million increase in income tax expense was mainly due to a significant increase in pretaxpre-tax income of $96.4$770.1 million.

The Company’s effective income tax rate can be affected by several factors. These generally include large changes in fully-taxable income including net realized investment gains or losses, tax-exempt investment income, nondeductible expenses, and periodically, non-routine tax items such as adjustments to unrecognized tax benefits related to tax uncertainties. Income tax expense of $3.1 million partially offset by a neton pre-tax income of approximately $99.4 million, including tax-exempt investment income of $86.6 million, resulted in an effective tax rate of 3.1%, below the statutory tax rate of 21%, for 2023, and income tax benefit of $158.0 million on pre-tax loss of approximately $7.4$670.7 million, resulting fromincluding tax-exempt investment income of approximately $75.3 million, resulted in an effective tax rate of 23.6% for the income tax effect of the Act.corresponding period in 2022.
Investments
The following table presents the investment results of the Company:

Year Ended December 31,
2017 2016
Year Ended December 31,Year Ended December 31,
202320232022
(Amounts in thousands) (Amounts in thousands)
Average invested assets at cost (1)
$3,582,122
 $3,390,769
Net investment income (2)
   
Before income taxes$124,930
 $121,871
Before income taxes
Before income taxes
After income taxes$109,243
 $107,140
Average annual yield on investments (2)
   
Before income taxes3.5% 3.6%
Before income taxes
Before income taxes4.6 %3.4 %
After income taxes3.1% 3.2%After income taxes3.9 %3.0 %
Net realized investment gains (losses)$83,650
 $(34,255)
__________ 
(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 respective period.
(2)
(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)Net investment income before and after income taxes increased due to higher average invested assets. Average annual yield on investments before and after income taxes decreased slightly, primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments.
The following tables present the components of net realized investment (losses) gains included in net income:
 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
 $48,306
Equity securities (1)(3)
(2,213) 37,486
 35,273
Short-term investments (1)
1
 38
 39
Note receivable (1)
—
 (122) (122)
Total return swaps(1,035) (1,102) (2,137)
Options sold2,294
 (3) 2,291
Total$(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) $(72,390)
Equity securities (1)(3)
(499) 23,722
 23,223
Short-term investments (1)
(524) 57
 (467)
Total return swaps107
 11,426
 11,533
Options sold3,846
 —
 3,846
Total$(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.
(3)
The increases in fair value of equity securities during 2017 and 2016 were primarily due to an overall improvement in the equity markets.

Net Income
 Year Ended December 31,
 2017 2016
 (Amounts in thousands, except per share data)
Net income$144,877
 $73,044
Basic average shares outstanding55,316
 55,249
Diluted average shares outstanding55,327
 55,302
Basic Per Share Data:   
Net income$2.62
 $1.32
Net realized investment gains (losses), net of tax$0.98
 $(0.40)
Diluted Per Share Data:   
Net income$2.62
 $1.32
Net realized investment gains (losses), net of tax
$0.98
 $(0.40)


Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
Net premiums earned and net premiums written in 2016 increased 5.9% and 5.2%, respectively, from 2015. The increases in net premiums earned and net premiums written were primarily due to higher average premiums per policy arising from rate increases in the California private passenger automobile line of insurance businessyield combined with higher average invested assets. Average annual yield on investments before and growth in the number of homeowners and commercial automobile policies written in California.

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

 Year Ended December 31,
 2016 2015
 (Amounts in thousands)
Net premiums earned$3,131,773
 $2,957,897
Change in net unearned premiums24,015
 41,495
Net premiums written$3,155,788
 $2,999,392

Expenses
The following table presents the Company’s consolidated loss, expense, and combined ratios determined in accordance with GAAP:
 Year Ended December 31,
 2016 2015
Loss ratio75.2% 72.5%
Expense ratio25.5% 26.7%
Combined ratio100.7% 99.2%

The Company’s loss ratio was affected by unfavorable development of approximately $85 million and $13 million on prior accident years’ loss and loss adjustment expense reserves for the years ended December 31, 2016 and 2015, respectively. The unfavorable development in 2016 wasafter income taxes increased primarily from the California and Florida automobile lines of business. The unfavorable development in 2015 was primarily from the California homeowners and automobile lines of business outside of California, which

was partially offset by favorable development in the California personal automobile line of business. The 2016 loss ratio was also negatively impacted by a total of $27 million of catastrophe losses mostly due to severe storms outsidethe maturity and replacement of California and rainstorms in California. The 2015 loss ratio was also negatively impacted bylower yielding investments purchased when market interest rates were lower with higher yielding investments, as a totalresult of $19 million of catastrophe losses mostly due to severe storms outside of California, and rainstorms and wildfires in California. Excluding the effect of estimated prior periods’ loss development and catastrophe losses, the loss ratio for the year ended December 31, 2016 was 71.6%, which is comparable to 71.5% for the year ended December 31, 2015.increasing overall market interest rates, as well as higher yields on investments based on floating interest rates.

The lower expense ratio for the year ended December 31, 2016 was primarily attributable to lower advertising expenses and lower overall compensation costs, including bonuses, compared to the year ended December 31, 2015.

Income tax benefit was $2.3 million and $3.9 million for the years ended December 31, 2016 and 2015, respectively. The $1.6 million decrease in income tax benefit was mainly due to an increase in liability for uncertain tax positions in 2016 combined with a decrease in liability for uncertain tax positions in 2015.
Investments
The following table presents the investment results of the Company:
41
 Year Ended December 31,
 2016 2015
 (Amounts in thousands)
Average invested assets at cost (1)
$3,390,769
 $3,293,948
Net investment income (2)
   
Before income taxes$121,871
 $126,299
After income taxes$107,140
 $110,382
Average annual yield on investments (2)
   
Before income taxes3.6% 3.8%
After income taxes3.2% 3.4%
Net realized investment losses$(34,255) $(83,807)

__________ 
(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 respective period.
(2)
Net investment income before and after income taxes and average annual yield on investments before and after income taxes decreased slightly, primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments.

The following tables present the components of net realized investment gains (losses) gains included in net income:
Year Ended December 31, 2023
Gains (Losses) Recognized in Income
 Sales
Changes in fair value
Total
 (Amounts in thousands)
Net realized investment gains (losses):
Fixed maturity securities (1)(2)
$(1,463)$62,833 $61,370 
Equity securities (1)(3)
(14,265)45,046 30,781 
Short-term investments (1)
(4)107 103 
Note receivable (1)
— 174 174 
Options sold8,955 (369)8,586 
Total$(6,777)$107,791 $101,014 
 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) $(72,390)
Equity securities (1)(3)
(499) 23,722
 23,223
Short-term investments (1)
(524) 57
 (467)
Total return swaps107
 11,426
 11,533
Options sold3,846
 —
 3,846
Total$(12,876) $(21,379) $(34,255)


Year Ended December 31, 2022Year Ended December 31, 2022
Gains (Losses) Recognized in IncomeGains (Losses) Recognized in Income
Sales
Changes in fair value
Total
(Amounts in thousands)
Year Ended December 31, 2015
(Losses) Gains Recognized in Income
Sales 
Changes in fair value 
 Total
(Amounts in thousands)
Net realized investment (losses) gains:     
Net realized investment gains (losses):
Fixed maturity securities (1)(2)
Fixed maturity securities (1)(2)
Fixed maturity securities (1)(2)
$136
 $(39,304) $(39,168)
Equity securities (1)(3)
(17,459) (22,988) (40,447)
Short-term investments (1)
(1,396) 561
 (835)
Total return swap1,062
 (7,500) (6,438)
Options sold3,021
 60
 3,081
Total$(14,636) $(69,171) $(83,807)
__________ 
(1)
The changes in fair value of the investment portfolio resulted from the application of the fair value option.
(2)
The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio. The fair values in 2016 and 2015 were adversely affected by the increase in market interest rates.
(3)
In 2016, the increases in the fair value of equity securities were primarily due to an overall improvement in the equity markets. In 2015, the decreases in the fair value of equity securities were primarily due to a decline in the value of the Company's holdings in industrial stocks.

(1)The changes in fair value of the investment portfolio and note receivable resulted from the application of the fair value option.
(2)The increase in fair value of fixed maturity securities in 2023 was primarily due to decreases in certain long-term interest rates and the decrease in fair value of fixed maturity securities in 2022 was primarily due to increases in overall market interest rates.
(3)The increase in fair value of equity securities in 2023 was primarily due to the overall improvement in equity markets, and the decrease in fair value of equity securities in 2022 was primarily due to the overall decline in equity markets.

Net Income (Loss)
 Year Ended December 31,
20232022
 (Amounts in thousands, except per share data)
Net income (loss)$96,336 $(512,672)
Basic average shares outstanding55,371 55,371 
Diluted average shares outstanding55,371 55,371 
Basic Per Share Data:
Net income (loss)$1.74 $(9.26)
Net realized investment gains (losses), net of tax$1.44 $(6.96)
Diluted Per Share Data:
Net income (loss)$1.74 $(9.26)
Net realized investment gains (losses), net of tax$1.44 $(6.96)

42

 Year Ended December 31,
 2016 2015
 (Amounts in thousands, except per share data)
Net income$73,044
 $74,479
Basic average shares outstanding55,249
 55,157
Diluted average shares outstanding55,302
 55,209
Basic Per Share Data:   
Net income$1.32
 $1.35
Net realized investment losses, net of tax$(0.40) $(0.99)
Diluted Per Share Data:   
Net income$1.32
 $1.35
Net realized investment losses, net of tax$(0.40) $(0.99)


Year Ended December 31, 2022 Compared to Year Ended December 31, 2021


See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Form 10-K for the year ended December 31, 2022 for a discussion of changes in its results of operations from the year ended December 31, 2021 to the year ended December 31, 2022.



LIQUIDITY AND CAPITAL RESOURCES
A. General
The Company is largely dependent upon dividends received from its insurance subsidiaries in the current and prior years to pay debt service costs and to make distributions to its shareholders. Under current insurance law, the Insurance Companies are entitled to pay ordinary dividends of approximately $167$163 million in 20182024 to Mercury General. The Insurance Companies paid Mercury General ordinary dividends of $109 million during 2017. As of December 31, 2017,2023, Mercury General had approximately $171$43 million in investments and cash that could be utilized to satisfy its direct holding company obligations.


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


B. Cash Flows

The Company has generated positive cash flow from operations since the public offering of its common stock in November 1985. The Company does not attempt to match the duration and timing of asset maturities with those of liabilities; rather, it manages its portfolio with a view towards maximizing total return with an emphasis on after-tax income. With combined cash and short-term investments of $594.1$729.4 million at December 31, 20172023 as well as a $50 million revolvingof undrawn credit in its unsecured credit facility, the Company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments. Investment maturities are also available to meet the Company’s liquidity needs. However, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that the Company’s sources of funds will be sufficient to meet its liquidity needs or that the Company will not be required to raise additional funds to meet those needs or for future business expansion, through the sale of equity or debt securities or from credit facilities with lending institutions.


Net cash provided by operating activities for the year ended December 31, 20172023 was $341.4$453.0 million, an increase of $49.7$100.4 million compared to the year ended December 31, 2016.2022. The increase was primarily due to a decreaseincreases in operating expensespremium collections, investment income received and policy acquisition costs paid and an increase in premiums collected,income taxes refunded, partially offset by higher income taxes andincreases in payments for losses and loss adjustment expenses paid.and policy acquisition costs. The Company utilized the cash provided by operating activities during the year ended December 31, 20172023 primarily for the net purchases of investment securities and payment of dividends to its shareholdersshareholders. The average annual net cash provided by operating activities for the past 10 years was approximately $389 million, and net purchases of investment securities.cash generated from operations was sufficient to meet the liquidity requirements over this period.


The following table presents the estimated fair value of fixed maturity securities at December 31, 20172023 by contractual maturity in the next five years.
Fixed Maturity Securities
(Amounts in thousands)
Due in one year or less$303,986 
Due after one year through two years174,127 
Due after two years through three years271,312 
Due after three years through four years318,084 
Due after four years through five years175,442 
$1,242,951 
 Fixed Maturity Securities
 (Amounts in thousands)
Due in one year or less$200,963
Due after one year through two years170,194
Due after two years through three years126,688
Due after three years through four years122,103
Due after four years through five years113,359
 $733,307


See "D. Debt" below for cash flow related to outstanding debt.

43


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



The following table presents the composition of the total investment portfolio of the Company at December 31, 2017:2023:
Cost(1)
 Fair Value
Cost(1)
Cost(1)
Fair Value
(Amounts in thousands) (Amounts in thousands)
Fixed maturity securities:   
U.S. government bonds
U.S. government bonds
U.S. government bonds$13,355
 $13,236
Municipal securities2,490,150
 2,556,532
Mortgage-backed securities26,454
 27,165
Corporate securities136,013
 137,542
Collateralized loan obligations104,323
 105,202
Other asset-backed securities52,935
 53,100
2,823,230
 2,892,777
4,394,983
Equity securities:   
Common stock368,619
 429,367
Common stock
Common stock
Non-redeemable preferred stock34,429
 34,869
Private equity fund1,481
 1,481
Private equity fund measured at net asset value (2)
69,668
 71,523
474,197
 537,240
Private equity funds measured at net asset value (2)
654,939
Short-term investments302,693
 302,711
Total investments$3,600,120
 $3,732,728
 __________
(1)
Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at cost.
(2)
The fair value is measured using the net asset value practical expedient. See Note 4. Fair Value Measurements of the Notes to Consolidated Financial Statements for additional information.

(1)Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at cost.
(2)The fair value is measured using the net asset value practical expedient. See Note 4. Fair Value Measurements, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for additional information.

At December 31, 2017, 67.9%2023, 43.8% of the Company’s total investment portfolio at fair value and 87.6%53.0% of its total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. Equity holdings consist of non-redeemable preferred stocks, dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70%50% corporate dividend received deduction, and private equity funds. At December 31, 2017, 89.4%2023, 92.2% of short-term investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis. The Company does not have any direct investment in sub-prime lenders.
Fixed Maturity Securities and Short-Term Investments
Fixed maturity securities include debt securities, which may have fixed or variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of the Company’s asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs, tax planning considerations, or other economic factors. Short-term investments include money market accounts, options, and short-term bonds that are highly rated short duration securities and redeemable within one year.

A primary exposure for the fixed maturity securities is interest rate risk. The longer the duration, the more sensitive the
44

asset is to market interest rate fluctuations. As assets with longer maturity dates tend to produce higher current yields, the Company’s historical investment philosophy has resulted in a portfolio with a moderate duration. The Company's portfolio is heavily weighted in investment grade tax-exempt municipal bonds. 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 holdings, that are heavily weighted with high coupon issues, are expected to be called prior to maturity. Modified duration measures the length of time it takes, on average, to receive the present value of all the cash flows produced by a bond, including reinvestment of interest. As it measures four factors (maturity, coupon rate, yield and call terms) which determine sensitivity to changes in interest rates, modified duration is considered a better indicator of price volatility than simple maturity alone.

The following table presents the maturities and durations of the Company's fixed maturity securities and short-term investments:
December 31, 2023December 31, 2022
(in years)
Fixed Maturity Securities
Nominal average maturity:
excluding short-term investments11.412.4
including short-term investments11.012.0
Call-adjusted average maturities:
excluding short-term investments3.84.9
including short-term investments3.64.8
Modified duration reflecting anticipated early calls:
excluding short-term investments3.13.6
including short-term investments3.03.5
Short-Term Investments——
 December 31, 2017 December 31, 2016
 (in years)
Fixed Maturity Securities   
Nominal average maturity:   
excluding short-term investments12.9 11.9
including short-term investments11.6 10.5
Call-adjusted average maturities:   
excluding short-term investments5.3 4.5
including short-term investments4.8 4.0
Modified duration reflecting anticipated early calls:   
excluding short-term investments4.4 4.1
including short-term investments4.0 3.7
Short-Term Investments— —


Another exposure related to the fixed maturity securities is credit risk, which is managed by maintaining a weighted-average portfolio credit quality rating of A+, at fair valueat December 31, 2017,2023, consistent with the average rating at December 31, 2016.2022. The Company’s municipal bond holdings, of which 99.1%82.4% were tax exempt, represented 88.4%64.3% of its fixed maturity portfolio at December 31, 2017,2023, at fair value, and arewere broadly diversified geographically.


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


Taxable holdings consist principally of investment grade issues. At December 31, 2017,2023, fixed maturity holdings rated below investment grade and non-rated bonds totaled $48.3$6.4 million and $78.6$15.1 million, respectively, at fair value, and represented 1.7%0.1% and 2.7%0.3%, respectively, of total fixed maturity securities. The majority of non-rated issues are a result of municipalities pre-funding and collateralizing those issues with U.S. government securities with an implicit AAA equivalent credit risk. At December 31, 2016,2022, fixed maturity holdings rated below investment grade and non-rated bonds totaled $51.6$6.6 million and $86.6$26.5 million, respectively, at fair value, and represented 1.8%0.2% and 3.1%0.6%, respectively, of total fixed maturity securities.


Credit ratings forDuring 2023, approximately 82.3% of the Company's fixed maturity portfolio were stable in 2017, with 80.7% of fixed maturity securities at fair value experiencing no change in their overall rating. 10.2% and 9.1% of fixed maturity securities at fair value experienced no changes in their overall credit ratings, and approximately 14.5% and 3.2% experienced upgrades and downgrades, respectively, in 2017. The downgrades were slight and still within the investment grade portfolio in 2017.respectively.



45

The following table presents the credit quality ratings of the Company’s fixed maturity securities by security type at fair value:
 December 31, 2017 December 31, 2023
Security Type 
AAA(1)
 
AA(1)
 
A(1)
 
BBB(1)
 
Non-Rated/Other (1)
 
Total Fair Value(1)
Security Type
AAA(1)
AA(1)
A(1)
BBB(1)
Non-Rated/Other (1)
Total Fair Value(1)
 (Dollars in thousands) (Dollars in thousands)
U.S. government bonds:            
U.S. government bonds and agencies:
Agencies
Agencies
Agencies
Treasuries $13,236
 $—
 $—
 $—
 $—
 $13,236
Total 13,236
 —
 —
 —
 —
 13,236
 100.0% —
 —
 —
 —
 100.0%
100.0 100.0 %— %— %— %— %100.0 %
Municipal securities:            
Insured
Insured
Insured 26,243
 148,277
 259,337
 29,587
 17,194
 480,638
Uninsured 47,913
 681,402
 1,056,239
 217,002
 73,338
 2,075,894
Total 74,156
 829,679
 1,315,576
 246,589
 90,532
 2,556,532
 2.9% 32.5% 51.5% 9.5% 3.6% 100.0%
3.2 3.2 %39.4 %50.3 %6.5 %0.6 %100.0 %
Mortgage-backed securities:            
Commercial
Commercial
Commercial —
 7,027
 8,262
 4,012
 —
 19,301
Agencies 2,472
 —
 —
 —
 —
 2,472
Non-agencies:            
Prime —
 —
 355
 75
 1,116
 1,546
Prime
Prime
Alt-A —
 —
 —
 1,043
 2,803
 3,846
Total 2,472
 7,027
 8,617
 5,130
 3,919
 27,165
 9.1% 25.9% 31.7% 18.9% 14.4% 100.0%
41.2 41.2 %51.3 %7.0 %— %0.5 %100.0 %
Corporate securities:            
Basic materials —
 —
 —
 6,238
 2,702
 8,940
Communications
Communications
Communications —
 —
 159
 5,664
 
 5,823
Consumer, cyclical —
 —
 1,147
 10,329
 5,459
 16,935
Consumer, non-cyclical —
 —
 314
 3,692
 —
 4,006
Energy —
 —
 3,091
 16,124
 25,632
 44,847
Financial —
 452
 17,491
 20,336
 4,928
 43,207
Industrial —
 —
 162
 4,308
 —
 4,470
Technology —
 —
 —
 —
 2,288
 2,288
Utilities —
 —
 6,310
 146
 570
 7,026
Total —
 452
 28,674
 66,837
 41,579
 137,542
 —
 0.3% 20.8% 48.6% 30.3% 100.0%
— — %13.7 %51.3 %34.4 %0.6 %100.0 %
Collateralized loan obligations:            
Corporate 10,924
 3,269
 91,009
 —
 —
 105,202
Corporate
Corporate
Total 10,924
 3,269
 91,009
 —
 —
 105,202
 10.4% 3.1% 86.5% —
 —
 100.0%
21.1 21.1 %28.8 %50.1 %— %— %100.0 %
            
Other asset-backed securities 17,099
 13,215
 7,449
 15,337
 —
 53,100
 32.2% 24.9% 14.0% 28.9% —
 100.0%
Other asset-backed securities
Other asset-backed securities
— — %— %62.1 %37.9 %— %100.0 %
Total $117,887
 $853,642
 $1,451,325
 $333,893
 $136,030
 $2,892,777
 4.1% 29.5% 50.2% 11.5% 4.7% 100.0%
10.2 10.2 %32.7 %46.8 %9.8 %0.5 %100.0 %
__________
(1)
Intermediate ratings are included at each level (e.g., AA includes AA+, AA and AA-).

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


U.S. Government Bonds
The Company had $13.2$174.5 million and $12.3$158.6 million, or 0.5%4.0% and 0.4%3.9% of its fixed maturity portfolio, at fair value, in U.S. government bonds at December 31, 20172023 and 2016,2022, respectively. In April 2017, Moody's and Fitch affirmed theirratings for U.S. government-issued
46

debt were Aaa and AA+, respectively, at December 31, 2023, and Aaa and AAA, ratings, respectively, for U.S. government issued debt, although a significant increase in government deficits and debt could lead to a downgrade.at December 31, 2022. The Company understands that market participants continue to use rates of return on U.S. government debt as a risk-free rate and have continued to invest in U.S. Treasury securities. The modified duration of the U.S. government bonds portfolio reflecting anticipated early calls was 2.10.9 years and 2.21.4 years at December 31, 20172023 and 2016,2022, respectively.
Municipal Securities
The Company had $2.56$2.78 billion and $2.45$2.74 billion, or 88.4%64.3% and 87.0%67.0% of its fixed maturity securities portfolio, at fair value, ($2.49 billion and $2.43 billion at amortized cost) in municipal securities at December 31, 20172023 and 2016,2022, respectively, of which $480.6$431.2 million and $722.7$395.2 million, respectively, were insured by bond insurers. The underlying ratings for insured municipal bonds have been factored into the average rating of the securities by the rating agencies with no significant disparity between the absolute bond ratings and the underlying credit ratings as of December 31, 20172023 and 2016.2022.


At December 31, 20172023 and 2016,2022, respectively, 62.9%70.3% and 60.6%65.5% of the insured municipal securities, at fair value, most of which were investment grade, were insured by bond insurers that provide credit enhancement in addition to the ratings reflected by the financial strength of the underlying issuers. At December 31, 20172023 and 2016,2022, the average rating of the Company’s insured municipal securities was A+, which correspondscorresponded to the average rating of the investment grade bond insurers. The remaining 37.1%29.7% and 39.4%34.5% of insured municipal securities at December 31, 20172023 and 2016,2022, respectively, were insured by non-rated or below investment grade bond insurers that the Company believes did not provide credit enhancement. The modified duration of the municipal securities portfolio reflecting anticipated early calls was 4.53.0 years and 4.33.6 years at December 31, 20172023 and 2016,2022, respectively.


The Company considers the strength of the underlying credit as a buffer against potential market value declines which may result from future rating downgrades of the bond insurers. In addition, the Company has a long-term time horizon for its municipal bond holdings, which generally allows it to recover the full principal amounts upon maturity and avoid forced sales prior to maturity of bonds that have declined in market value due to the bond insurers’ rating downgrades. Based on the uncertainty surrounding the financial condition of these insurers, it is possible that there will be additional downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair value of those municipal bonds.
Mortgage-Backed Securities
At December 31, 20172023 and 2016,2022, respectively, the mortgage-backed securities portfolio of $27.2$186.9 million and $39.8$166.3 million, or 0.9%4.3% and 1.4%4.1% of the Company's fixed maturity securities portfolio, at fair value, ($26.5 million and $39.1 million at amortized cost) was categorized as loans to "prime" borrowers except for $3.8 millionresidential and $4.5 million at fair value ($3.8 million and $4.5 million at amortized cost) of Alt-A mortgages. Alt-A mortgage backed securities are at fixed or variable rates and include certain securities that are collateralized by residential mortgage loans issued to borrowers with credit profiles stronger than those of sub-prime borrowers, but do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation.commercial real estate borrowers. The Company had holdings of $19.3$33.0 million and $30.0$27.3 million, at fair value, ($18.8 million and $29.6 million at amortized cost) in commercial mortgage-backed securities at December 31, 20172023 and 2016,2022, respectively.


The weighted-average rating of the Company’s Alt-A mortgage-backed securities was B- at December 31, 2017 and 2016 . The weighted-average rating of the entire mortgage backed securities portfolio was A- at December 31, 2017, compared to AAA+ and AA at December 31, 2016.2023 and 2022, respectively. The modified duration of the mortgage-backed securities portfolio reflecting anticipated early calls was 4.98.7 years and 3.77.3 years at December 31, 20172023 and 2016,2022, respectively.
Corporate Securities
At December 31, 2017 and 2016, respectively, the companyThe Company had corporate securities of $137.5$599.6 million and $189.7$569.6 million or 4.8%at December 31, 2023 and 6.7%2022, respectively, which represented 13.9% of its fixed maturity securities portfolio.portfolio, at fair value, at each of those dates. The weighted-average rating was BBB-A- at December 31, 20172023 and 2016.2022. The modified duration reflecting anticipated early calls was 2.62.4 years and 2.43.1 years at December 31, 20172023 and 2016,2022, respectively.
Collateralized Loan Obligations
TheAt December 31, 2023 and 2022, respectively, the Company had collateralized loan obligations of $105.2$484.9 million and $86.5$320.3 million, which represented 3.6%or 11.2% and 3.1%7.8% of its fixed maturity securities portfolio, at December 31, 2017 and 2016, respectively.fair value. The weighted-average rating was AA- and A+ and

Aat December 31, 2023 and the2022, respectively. The modified duration reflecting anticipated early calls was 6.23.5 years and 4.44.6 years at December 31, 20172023 and 2016,2022, respectively.

Other Asset-Backed Securities

The Company had other asset-backed securities of $53.1$96.2 million and $37.0$136.5 million, which represented 1.8%2.2% and 1.3%3.3% of its fixed maturity securities portfolio, at fair value, at December 31, 20172023 and 2016,2022, respectively. The weighted-average rating was A- and A+ at December 31, 2023 and A and the2022, respectively. The modified duration reflecting anticipated early calls
47

was 1.12.2 years and 1.53.1 years as ofat December 31, 20172023 and 2016,2022, respectively.
Equity Securities
Equity holdings of $537.2$730.7 million and $357.3$699.6 million, at fair value, as of December 31, 20172023 and 2016,2022, respectively, consisted 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. The net gains (losses) due to changes in fair value of the Company’s equity portfolio were $37.5$45.0 million and $23.7$(185.7) million in 20172023 and 2016,2022, respectively. The primary cause offor the increase in thefair value of the Company's equity securities in 2023 was the overall improvement in the equity markets, and the primary cause for the decrease in 2017.fair value of the Company's equity securities in 2022 was the overall decline in equity markets.
The Company’s common stock allocation is intended to enhance the return of and provide diversification for the total portfolio. At December 31, 2017, 14.4%2023, 14.0% of the total investment portfolio, at fair value, was held in equity securities, compared to 10.1%14.2% at December 31, 2016.2022.


The following table presents the equity security portfolio by industry sector at December 31, 20172023 and 2016:2022:
 December 31,
 20232022
 CostFair ValueCostFair Value
  (Amounts in thousands) 
Equity securities:
Basic materials$20,521 $20,274 $5,091 $5,597 
Communications19,667 20,045 23,035 22,824 
Consumer, cyclical35,118 42,889 39,289 53,261 
Consumer, non-cyclical57,277 67,806 48,869 62,534 
Energy83,758 95,427 87,205 103,949 
Financial106,078 104,008 105,568 105,964 
Funds116,006 110,656 172,897 125,428 
Industrial53,794 73,443 53,677 70,645 
Technology59,133 87,310 56,406 67,264 
Utilities103,587 108,835 76,806 82,086 
$654,939 $730,693 $668,843 $699,552 
 December 31,
 2017 2016
 Cost Fair Value Cost Fair Value
   (Amounts in thousands)  
Equity securities:       
Basic materials$16,265
 $20,728
 $10,834
 $12,895
Communications17,233
 21,289
 15,596
 15,935
Consumer, cyclical23,508
 29,720
 25,950
 28,481
Consumer, non-cyclical23,773
 27,246
 23,798
 22,125
Energy47,145
 53,905
 45,230
 52,654
Financial76,335
 86,778
 56,167
 59,226
Funds102,796
 109,115
 37,750
 34,840
Industrial29,262
 37,540
 26,050
 29,665
Technology29,787
 39,371
 19,409
 22,450
Utilities108,093
 111,548
 70,986
 79,056
 $474,197
 $537,240
 $331,770
 $357,327

D. Debt
Notes payableThe Company's debt consists of the following:

December 31,
LenderInterest RateExpiration20232022
(Amounts in thousands)
Senior unsecured notes(1)
Publicly traded4.40%March 15, 2027$375,000 $375,000 
Unsecured credit facility(2)
Bank of America, Wells Fargo Bank, BMO Bank, and U.S. BankTerm SOFR plus 112.5-150.0 basis pointsNovember 16, 2026200,000 25,000 
    Total principal amount575,000 400,000 
Less unamortized discount and debt issuance costs(3)
1,271 1,670 
Total$573,729 $398,330 
__________
(1)    On March 8, 2017, the Company completed a public debt offering issuing $375 million of senior notes. The notes are unsecured senior obligations of the Company, with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off the total outstanding balance of $320 million under the existing loan and credit facility agreements and terminated the agreements on March 8, 2017. The remainder of the proceeds from the notes was used for general corporate
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        December 31,
  Lender Interest Rate Expiration 2017 2016
        (Amounts in thousands)
           
Secured credit facility(1)
 Bank of America LIBOR plus 40 basis points December 3, 2018 $—
 $120,000
Secured loan(1)
 Union Bank LIBOR plus 40 basis points December 3, 2017 —
 20,000
Unsecured credit facility(1)
 Bank of America and Union Bank LIBOR plus 112.5-162.5 basis points December 3, 2019 —
 180,000
Senior unsecured notes(2)
 Publicly traded 4.40% March 15, 2027 375,000
 —
Unsecured credit facility(3)
 Bank of America and Wells Fargo Bank LIBOR plus 112.5-162.5 basis points March 29, 2022 —
 —
    Total principal amount       375,000
 320,000
Less unamortized discount and debt issuance costs(4)
       3,665
 —
Total       $371,335
 $320,000
purposes. The Company incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate, including debt issuance costs, of approximately 4.45%.
__________ (2)    On March 31, 2021, the Company entered into an unsecured $75 million five-year revolving credit facility. On November 18, 2022, the Company entered into the First Amendment to this credit facility. The First Amendment extended the maturity date of the loan to November 16, 2026 from March 31, 2026 with possible further extension if certain conditions are met, increased the aggregate commitments by all the lenders to $200 million from $75 million, and replaced the LIBOR with the term SOFR. On November 30, 2023, the Company entered into the Second Amendment to this credit facility, which further increased the aggregate commitments by all the lenders to $250 million from $200 million. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from Term SOFR plus 112.5 basis points when the ratio is under 20% to Term SOFR plus 150.0 basis points when the ratio is greater than or equal to 30%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 20% to 22.5 basis points when the ratio is greater than or equal to 30%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 27.1% at December 31, 2023, resulting in a 17.5 basis point commitment fee on any undrawn portion of the credit facility. As of February 13, 2024, a total of $200 million was drawn under this facility on a three-month revolving basis at an annual interest rate of approximately 6.84%, with $50 million available to be drawn. The Company contributed $150 million of the total amount drawn to the surplus of its consolidated insurance subsidiaries, and used the remainder for general corporate purposes.
(1)
On March 8, 2017, the loan and credit facility agreements were terminated and the Company repaid the total outstanding amounts with the proceeds from its public offering of $375 million of senior notes.
(2)
On March 8, 2017, the Company completed a public debt offering issuing $375 million of senior notes. The notes are unsecured senior obligations of the Company, with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off amounts outstanding under the existing loan and credit facilities and for general corporate purposes. The Company incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate, including debt issuance costs, of approximately 4.45%.
(3)
On March 29, 2017, the Company entered into an unsecured credit agreement that provides for revolving loans of up to $50 million and matures on March 29, 2022. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is greater than or equal to 25%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 15% to 22.5 basis points when the ratio is greater than or equal to 25%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 17.6% at December 31, 2017, resulting in a 15 basis point commitment fee on the $50 million undrawn portion of the credit facility. As of February 2, 2018, there have been no borrowings under this facility.
(4)
The unamortized discount and debt issuance costs of approximately $3.7 million are associated with the publicly traded $375 million senior unsecured notes. These are amortized to interest expense over the life of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from the carrying amount of the debt. The unamortized debt issuance cost of approximately $0.2 million associated with the $50 million five-year unsecured revolving credit facility maturing on March 29, 2022 is included in other assets in the Company's consolidated balance sheets and amortized to interest expense over the term of the credit facility.

(3)    The unamortized discount and debt issuance costs are associated with the publicly traded $375 million senior unsecured notes. These are amortized to interest expense over the life of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from the carrying amount of the debt. The unamortized debt issuance cost of approximately $0.8 million associated with the $250 million unsecured revolving credit facility maturing on November 16, 2026 is included in other assets in the Company's consolidated balance sheets and amortized to interest expense over the term of the credit facility.

The Company was in compliance with all of its financial covenants pertaining to minimum statutory surplus, debt to total capital ratio, and RBC ratio under the unsecured credit facility at December 31, 2017.2023.


For a further discussion, see Note 7.8. Notes Payable, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
E. Uses of Capital
Dividends

Cash returned to shareholders through dividends in 2023, 2022 and 2021 totaled approximately $70.3 million, $105.5 million and $140.2 million, respectively. On February 9, 2024, the Board of Directors declared a $0.3175 quarterly dividend per share payable on March 27, 2024 to shareholders of record on March 13, 2024, with an expected payout of approximately $18 million. The Company currently expects quarterly dividends to continue in future periods, although the declaration and amount of any future cash dividends are at the discretion and subject to the approval of its Board of Directors. The decisions of the Company's Board of Directors regarding the amount and payment of dividends will depend on many factors, such as its financial condition, results of operations, capital requirements, business conditions, debt service obligations, industry practice, legal requirements, regulatory constraints, and other factors that its Board of Directors may deem relevant. The Company expects to fund its future dividend payments primarily with a combination of cash expected to be generated from future operations and cash and short-term investments on hand.

For a further discussion, see Note 13. Dividends, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Capital Expenditures
In 2017, the Company made
The Company's capital expenditures including capitalized software, ofwere approximately $10.5$36.8 million, $35.5 million and $41.4 million for 2023, 2022 and 2021, respectively, and they were primarily related to Information Technology.improving the Company's information technology infrastructure and corporate facilities. The Company expects the capital spending for 2024, primarily for continued investments in its technology assets, to be somewhat larger than that for 2023. The Company expects to fund its 2024 capital expenditures primarily with a combination of cash expected to be generated from future operations and cash and short-term investments on hand.
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Contractual Obligations

The Company’s material cash requirements include the following contractual obligations at December 31, 2023:
Contractual Obligations (4)
Payments Due By Period
Total20242025202620272028Thereafter
   (Amounts in thousands)  
Debt (including interest)(1)
$672,215 $30,174 $30,174 $228,617 $383,250 $— $— 
Lease obligations(2)
21,552 9,495 5,884 3,572 2,211 335 55 
Loss and loss adjustment expense reserves(3)
2,785,702 1,646,189 530,418 262,648 159,753 85,910 100,784 
Total contractual obligations$3,479,469 $1,685,858 $566,476 $494,837 $545,214 $86,245 $100,839 
__________ 
(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, 2023 because the debt amounts above include interest 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, office equipment, and electronic data processing equipment that expire at various dates through the year 2028. Lease obligations include $3.4 million in lease commitments that have not yet commenced as of December 31, 2023. See Note 7. Leases, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for additional information on lease obligations.
(3)Loss and loss adjustment expense reserves represents an estimate of amounts necessary to settle all outstanding claims, including IBNR as of December 31, 2023. 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. For more detailed information on the Company's historical loss experience and payment patterns, see "Overview—C. Critical Accounting Estimates" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as Note 12. Loss and Loss Adjustment Expense Reserves, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
(4)The table excludes liabilities of $3.9 million related to uncertainty in tax settlements as the Company is unable to reasonably estimate the timing and amount of related future payments.

The Company expects to meet these contractual obligations primarily with a combination of cash expected to be generated from future operations and cash and short-term investments on hand, except for the payment of the principal of the debt, which is expected to be made with a future borrowing.
F. Regulatory Capital Requirements
The Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations. The RBC formula is used by insurance regulators to monitor capital and surplus levels. It was designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance business having differing risk characteristics, as

well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. The Company periodically monitors the RBC level of each of the Insurance Companies. As of December 31, 2017, 2016,2023, 2022 and 2015,2021, each of the Insurance Companies exceeded the minimum required RBC level, as determined by the NAIC and adopted by the state insurance regulators. None of the Insurance Companies’ RBC ratios were less than 400%350% of the authorized control level RBC as of December 31, 2017, 20162023, none less than 330% as of December 31, 2022, and 2015.none less than 400% as of December 31, 2021. Generally, an RBC ratio of 200% or less would require some form of regulatory or company action.


Among other considerations, industry and regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to statutory policyholders’ surplus should not exceed 3.0 to 1. Based on the combined surplus of all the Insurance Companies of $1.59$1.67 billion at December 31, 2017,2023 and net premiums written in 20172023 of 3.2$4.5 billion, the ratio of premiums written to surplus was 2.022.68 to 1.


Insurance companies are required to file an Own Risk and Solvency Assessment ("ORSA") with the insurance regulators in their domiciliary states. The ORSA is required to cover, among many items, a company’s risk management policies, the
50

material risks to which the company is exposed, how the company measures, monitors, manages and mitigates material risks, and how much economic and regulatory capital is needed to continue to operate in a strong and healthy manner. The ORSA is intended to be used by state insurance regulators to evaluate the risk exposure and quality of the risk management processes within insurance companies to assist in conducting risk-focused financial examinations and for determining the overall financial condition of insurance companies. The Company filed its most recent ORSA Summary Report with the California DOI in November 2017.2023. Compliance with the ORSA requirements did not have a material impact on the Company's consolidated financial statements.


The DOI in each state in which the Company operates is responsible for conducting periodic financial and market conduct examinations of the Insurance Companies in their states. Market conduct examinations typically review compliance with insurance statutes and regulations with respect to rating, underwriting, claims handling, billing, and other practices.


The following table presents a summary of recent examinations:
State
StateExam TypePeriod Under ReviewStatus
CA, FL, GA, IL, OK, TXCoordinated Multi-state FinancialFinancial2018-20212011 to 2013Received final report.examination reports.
CATXMarket ConductFinancial20222014 to 2017Fieldwork is expected to beginExamination commenced in the secondfourth quarter of 2018.
CAMarket Conduct Claims2015Field work is completed. Awaiting draft report.
CARating and Underwriting2014Field work is completed. Awaiting draft report.
VAMarket Conduct2014 to 2015Received draft report and awaiting final report.
TXMarket Conduct2016Fieldwork is expected to begin in the first quarter of 2018.2023.


During the course of and at the conclusion of thesethe examinations, the examining DOI generally reports findings to the Company, and noneCompany. No material findings were noted in the final examination reports of the findings reported to date are expected to be material to the Company’scoordinated multi-state financial position.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2017, the Company had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.

CONTRACTUAL OBLIGATIONS

The Company’s significant contractual obligations at December 31, 2017 are summarized as follows:examination.
51
Contractual Obligations (4)
  Payments Due By Period
 Total 2018 2019 2020 2021 2022 Thereafter
     (Amounts in thousands)    
Debt (including interest)(1)
$531,750
 $16,500
 $16,500
 $16,500
 $16,500
 $16,500
 $449,250
Lease obligations(2)
31,930
 10,818
 8,024
 5,791
 3,855
 2,769
 673
Loss and loss adjustment expense reserves(3)
1,510,613
 992,747
 256,359
 127,562
 74,094
 34,005
 25,846
Total contractual obligations$2,074,293
 $1,020,065
 $280,883
 $149,853
 $94,449
 $53,274
 $475,769


__________ 
(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, 2017,2023, 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, 2016.2022.
The following table presents municipal securities by state in descending order of holdings at fair value at December 31, 2017:2023:
StatesFair ValueAverage Rating
(Amounts in thousands)
Florida$301,743 A
Texas234,404 AA-
California217,330 AA-
New York206,272 AA-
Illinois172,500 A+
Other states1,645,009 A+
Total$2,777,258 
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, 2017,2023, the municipal securities portfolio was broadly diversified among the states and the largest holdings were in populous states such as TexasFlorida and California.Texas. 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%47.0% of the Company’s fixed maturity portfolio at December 31, 2017. 3.7%2023. 8.6% 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%2023. 0.2% 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, 2017.2023. 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, 2017,2023, the Company’s primary objective for common equity investments was current income. The fair
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value of the equity investments consisted of $429.4$597.9 million in common stocks, $34.9$51.6 million in non-redeemable preferred stocks,

and $73.0$81.2 million in private equity funds. Common stocks are typically valued for future economic prospects as perceived by the market.
Common stocks represented 11.5%11.4% of total investments at fair value.value at December 31, 2023. 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, 20172023 and 2016:2022:
December 31,
20232022
(Amounts in thousands, except Average Beta)
Average Beta0.87 0.84 
Hypothetical reduction of 25% in the overall value of the stock market$129,742 $116,518 
Hypothetical reduction of 50% in the overall value of the stock market$259,483 $233,036 
  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, 2017,2023, which represented 77.4%82.6% of total investments at December 31, 20172023, 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 4.03.0 years at December 31, 2017, compared to 3.7 years and 3.2 years at December 31, 2016 and 2015, respectively.2023. 
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, 20172023 would decrease by $127.4$134.1 million or $254.8and $268.2 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.



53

Item 8.Financial Statements and Supplementary Data

Item 8.Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page
Reports of Independent Registered Public Accounting Firm (KPMG LLP, Los Angeles, CA, Auditor Firm ID: 185)
55
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 20172023 and 20162022
5758
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016,2023, 2022, and 20152021
5859
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, 2016,2023, 2022, and 20152021
5960
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016,2023, 2022, and 20152021
6061
Notes to Consolidated Financial Statements
6162

54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo 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, 20172023 and 2016,2022, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2023, and the related notes and financial statement schedules I, II, and IV (collectively, the “consolidatedconsolidated 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, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2023, 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, 2017,2023, 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, 201813, 2024 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, 2023, the loss and loss adjustment expense reserves balance was $2.79 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
55

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, 201813, 2024

56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo 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 andsubsidiaries’ subsidiaries' (the “Company”)Company) internal control over financial reporting as of December 31, 2017,2023, 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, 2017,2023, 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, 20172023 and 2016,2022, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2023, and the related notes and financial statement schedules I, II, and IV (collectively, the “consolidatedconsolidated financial statements”statements), and our report dated February 8, 201813, 2024 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, 201813, 2024

57

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 December 31,
 20232022
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $4,394,983; $4,226,790)$4,319,336 $4,088,311 
Equity securities (cost $654,939; $668,843)730,693 699,552 
Short-term investments (cost $179,375; $123,928)178,491 122,937 
Total investments5,228,520 4,910,800 
Cash550,903 289,776 
Receivables:
Premiums607,025 571,910 
      Allowance for credit losses on premiums receivable(5,300)(5,800)
                   Premiums receivable, net of allowance for credit losses601,725 566,110 
Accrued investment income59,128 52,474 
Other25,603 11,358 
Total receivables686,456 629,942 
Reinsurance recoverables (net of allowance for credit losses $12; $0)31,947 25,895 
Deferred policy acquisition costs293,844 266,475 
Fixed assets, net151,183 171,442 
Operating lease right-of-use assets14,406 20,183 
Current income taxes4,081 55,136 
Deferred income taxes33,013 42,903 
Goodwill42,796 42,796 
Other intangible assets, net8,333 9,212 
Other assets57,915 49,628 
Total assets$7,103,397 $6,514,188 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and loss adjustment expense reserves$2,785,702 $2,584,910 
Unearned premiums1,735,660 1,545,639 
Notes payable573,729 398,330 
Accounts payable and accrued expenses175,219 151,686 
Operating lease liabilities14,231 21,924 
Other liabilities270,711 289,568 
Total liabilities5,555,252 4,992,057 
Commitments and contingencies
Shareholders’ equity:
Common stock without par value or stated value:
Authorized 70,000 shares; issued and outstanding 55,371; 55,37198,947 98,947 
Retained earnings1,449,198 1,423,184 
Total shareholders’ equity1,548,145 1,522,131 
Total liabilities and shareholders’ equity$7,103,397 $6,514,188 

See accompanying Notes to Consolidated Financial Statements.


58
 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 investments3,732,728
 3,547,560
Cash291,413
 220,318
Receivables:   
Premiums474,060
 459,152
Accrued investment income39,368
 41,205
Other6,658
 11,329
Total receivables520,086
 511,686
Reinsurance recoverables56,349
 13,306
Deferred policy acquisition costs198,151
 200,826
Fixed assets, net145,223
 155,910
Current income taxes61,257
 —
Deferred income taxes—
 45,277
Goodwill42,796
 42,796
Other intangible assets, net20,728
 25,625
Other assets32,592
 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 premiums1,101,927
 1,074,437
Notes payable371,335
 320,000
Accounts payable and accrued expenses108,252
 112,334
Current income taxes—
 9,962
Deferred income taxes22,932
 —
Other liabilities224,877
 229,335
Total liabilities3,339,936
 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; 55,28997,523
 95,529
Retained earnings1,663,864
 1,656,873
Total shareholders’ equity1,761,387
 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,
 202320222021
Revenues:
Net premiums earned$4,274,378 $3,952,482 $3,741,948 
Net investment income234,630 168,356 129,727 
Net realized investment gains (losses)101,014 (488,080)111,658 
Other19,609 10,308 10,024 
Total revenues4,629,631 3,643,066 3,993,357 
Expenses:
Losses and loss adjustment expenses3,517,853 3,362,219 2,760,155 
Policy acquisition costs708,525 654,612 633,385 
Other operating expenses279,656 279,718 283,397 
Interest24,169 17,232 17,113 
Total expenses4,530,203 4,313,781 3,694,050 
Income (loss) before income taxes99,428 (670,715)299,307 
Income tax expense (benefit)3,092 (158,043)51,370 
Net income (loss)$96,336 $(512,672)$247,937 
Net income (loss) per share:
Basic$1.74 $(9.26)$4.48 
Diluted$1.74 $(9.26)$4.48 


See accompanying Notes to Consolidated Financial Statements.


59
 Year Ended December 31,
 2017 2016 2015
Revenues:     
Net premiums earned$3,195,437
 $3,131,773
 $2,957,897
Net investment income124,930
 121,871
 126,299
Net realized investment gains (losses)83,650
 (34,255) (83,807)
Other11,945
 8,294
 8,911
Total revenues3,415,962
 3,227,683
 3,009,300
Expenses:     
Losses and loss adjustment expenses2,444,884
 2,355,138
 2,145,495
Policy acquisition costs555,350
 562,545
 539,231
Other operating expenses233,475
 235,314
 250,839
Interest15,168
 3,962
 3,168
Total expenses3,248,877
 3,156,959
 2,938,733
Income before income taxes167,085
 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,
 202320222021
Common stock, beginning of year$98,947 $98,943 $98,970 
Proceeds of stock options exercised— — 215 
Share-based compensation expense— 15 141 
Withholding tax on stock options exercised— (11)(383)
Common stock, end of year98,947 98,947 98,943 
Retained earnings, beginning of year1,423,184 2,041,338 1,933,627 
Net income (loss)96,336 (512,672)247,937 
Dividends paid to shareholders(70,322)(105,482)(140,226)
Retained earnings, end of year1,449,198 1,423,184 2,041,338 
Total shareholders’ equity, end of year$1,548,145 $1,522,131 $2,140,281 


See accompanying Notes to Consolidated Financial Statements.


60
 Year Ended December 31,
 2017 2016 2015
Common stock, beginning of year$95,529
 $90,985
 $88,705
Proceeds of stock options exercised2,102
 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 expense60
 142
 142
Excess tax benefits related to share-based compensation—
 913
 27
Common stock, end of year97,523
 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 year1,656,873
 1,721,030
 1,782,937
Net income144,877
 73,044
 74,479
Dividends paid to shareholders(137,886) (137,201) (136,386)
Retained earnings, end of year1,663,864
 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,
 202320222021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)$96,336 $(512,672)$247,937 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization72,240 82,390 79,056 
Net realized investment (gains) losses(101,014)488,080 (111,658)
Net (gains) losses on sales of fixed assets(5,879)86 (17)
Loss on property held for sale— 841 — 
(Increase) decrease in premiums receivable(35,615)49,630 (26,670)
(Increase) decrease in reinsurance recoverables(6,052)19,105 3,488 
Changes in current and deferred income taxes60,945 (131,500)(18,097)
Increase in deferred policy acquisition costs(27,369)(8,216)(11,265)
Increase in loss and loss adjustment expense reserves200,792 358,480 235,126 
Increase in unearned premiums190,021 25,840 113,926 
Increase (decrease) in accounts payable and accrued expenses23,162 (15,844)(26,724)
Other, net(14,579)(3,631)16,482 
      Net cash provided by operating activities452,988 352,589 501,584 
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases(784,752)(1,794,817)(1,460,641)
Sales276,805 856,291 336,201 
Calls or maturities294,309 480,023 518,557 
Equity securities available for sale in nature:
Purchases(1,356,493)(1,042,913)(958,008)
Sales1,356,132 1,154,523 943,857 
Changes in securities payable and receivable(36,435)22,124 8,327 
(Increase) decrease in short-term investments(48,446)38,141 270,383 
Purchases of fixed assets(36,810)(35,508)(41,442)
Sales of fixed assets29,876 3 27 
Other, net10,377 5,749 9,069 
Net cash used in investing activities(295,437)(316,384)(373,670)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders(70,322)(105,482)(140,226)
Proceeds from stock options exercised— — 215 
Payments on finance lease obligations(1,102)(1,504)(825)
Proceeds from bank loan175,000 25,000 — 
Net cash provided by (used in) financing activities103,576 (81,986)(140,836)
Net increase (decrease) in cash261,127 (45,781)(12,922)
Cash:
Beginning of year289,776 335,557 348,479 
End of year$550,903 $289,776 $335,557 
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid$23,000 $16,665 $16,616 
Income taxes (refunded) paid, net$(57,853)$(26,542)$69,467 


See accompanying Notes to Consolidated Financial Statements.


61
 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 amortization55,343
 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 costs2,675
 936
 (4,560)
Increase in loss and loss adjustment expense reserves220,365
 143,560
 36,214
Increase in unearned premiums27,490
 25,124
 42,552
Decrease in accounts payable and accrued expenses(4,178) (10,586) (35,086)
Share-based compensation60
 142
 142
Other, net42,462
 (4,392) 21,773
      Net cash provided by operating activities341,405
 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)
Sales100,709
 396,766
 260,946
Calls or maturities575,735
 647,059
 386,644
Equity securities available for sale in nature:     
Purchases(831,310) (714,113) (748,217)
Sales679,571
 696,138
 805,417
Calls7,100
 —
 2,851
Changes in securities payable and receivable(44,740) 29,958
 (1,387)
Changes in short-term investments and purchased options73,005
 (191,530) 187,492
Purchase of fixed assets(19,443) (16,979) (20,112)
Sale of fixed assets6,239
 14
 141
Business acquisition, net of cash acquired—
 —
 7,771
Other, net1,934
 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 exercised2,162
 1,632
 2,111
Net proceeds from issuance of senior notes371,011
 —
 —
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 cash71,095
 (43,903) (25,686)
Cash:     
Beginning of year220,318
 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 1412 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%62% of the Company’s direct premiums written in 20172023, 2022, and 2021, and approximately 82%, 201682%, and 2015, of which approximately 85%, 84%, and 83%87% of the private passenger automobile premiums were written in California during 2017, 2016,in 2023, 2022, and 2015,2021, 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
Insurance Companies
Mercury Casualty Company ("MCC")American Mercury National Insurance Company
Mercury Insurance Company ("MIC")
American Mercury Lloyds Insurance Company(1)
California Automobile Insurance Company ("CAIC")
American Mercury LloydsCounty Mutual Insurance Company(1)(2)
California General Underwriters Insurance Company, Inc.
Mercury County Mutual InsuranceIndemnity Company(2)
of America
Mercury Insurance Company of IllinoisMercury InsuranceOrion Indemnity Company of Florida
Mercury Insurance Company of GeorgiaMercury Indemnity Company of America
Mercury Indemnity Company of Georgia
Workmen's Auto Insurance Company ("WAIC")(4)
Non-Insurance Companies
Mercury Select Management Company, Inc.AIS Management LLC
Mercury Insurance Services LLCAuto Insurance Specialists LLC
Animas Funding LLC ("AFL")(3)
PoliSeek AIS Insurance Solutions, Inc.
Fannette Funding LLC ("FFL")(3)
Mercury Plus Insurance Services LLC
Mercury Information Technology Services LLC(4)
Mercury (Shanghai) Information Technology Services Co., Ltd. ("Mercury Shanghai")(5)
 __________
(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)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)Parent company of Mercury Shanghai.
(5)Mercury Shanghai provides software development and related technical services to the Company's subsidiaries.

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, 20162023, 2022 and 2015.2021.
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
62

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. 98.4% of the fair value of its investments at December 31, 2023 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.


63

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.


TheFrom 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, 20172023 and 2016.2022. 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, 20172023 and 2016,2022, the Company had no outstandingapproximately $8 million and $9 million, respectively, in unfunded commitments to these VIEs whereby the Company may be called by the partnerships during the commitment period to fund the purchase of new investments and the expenses of the partnerships.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 $17approximately $15 million and $19$14 million at December 31, 20172023 and 2016,2022, respectively.

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,
2017 2016 2015
(Amounts in millions)
Year Ended December 31,Year Ended December 31,
2023202320222021
(Amounts in millions)(Amounts in millions)
Deferred policy acquisition cost amortization$555.4
 $562.5
 $539.2
Net advertising expense37.4
 39.6
 44.0
Fixed Assets
Fixed assets are stated at historical cost less accumulated depreciation and amortization. A fixed asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and is presented separately from other fixed assets. 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
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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, 2016,2023, 2022, and 2015.2021.
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, 20172023 and 2016,2022, 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 $3.22was $4.46 billion, $3.16$3.98 billion, and $3.00$3.86 billion in 2017, 2016,2023, 2022, and 2015,2021, respectively.
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
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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 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.
•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 (Loss) Per Share
Basic earnings (loss) per share excludes dilution and reflects net income (loss) divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings (loss) 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, potential2023, 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 (Loss) Per Share, for the required disclosures relating to the calculation of basic and diluted earnings (loss) 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
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tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in earnings in the period that includes the enactment date.


At December 31, 2017, theThe Company’s deferred income taxes were in a net liability position, which includedusually include a combination of ordinary and capital deferred tax benefits and expenses. At December 31, 2023, the Company’s deferred income taxes were in a net asset position mainly due to deferred tax assets generated by unearned premiums and loss reserve discounting. These deferred tax assets were substantially offset by deferred tax liabilities resulting from deferred policy acquisition costs. 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. 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 thatunrealized losses related to these debt securities, which represent a portion of the unrealized loss positions at December 31, 2023, 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 realized gains on the real estate holdings could be used to realize both ordinary and capital deferred tax assets. 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 prudentcapability to implement tax planning strategies and 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 generationforced 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 maximizeavoid 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. In addition, the Company accrues for anticipated legal defense costs associated with lawsuits, claims or regulatory actions. 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 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. EarnedReinsurance 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.


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The Company is the assuming reinsurer under a Catastrophe Portfolio Participation Reinsurance Contract ("Contract") effective through December 31, 2025. The Company reimburses up to $30 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, 2024. The Treaty provides $1,111 million of coverage on a per occurrence basis after covered catastrophe losses exceed the $100 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 certain upper layers of coverage, and includes some additional minor territorial and coverage restrictions.

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

Year Ended December 31,
202320222021
 (Amounts in thousands)
Premiums Written
Direct$4,531,942 $4,018,057 $3,877,476 
Ceded(109,644)(81,256)(65,521)
Assumed15,353 10,743 13,361 
     Net$4,437,651 $3,947,544 $3,825,316 
Premiums Earned
Direct$4,339,333 $3,993,771 $3,764,626 
Ceded(109,445)(80,950)(65,017)
Assumed15,481 10,821 13,301 
     Net$4,245,369 $3,923,642 $3,712,910 

The Company recognized ceded premiums earned of approximately $109 million, $81 million, and $65 million in 2023, 2022, and 2021, 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, $(13) million, and $(10) million in 2023, 2022, and 2021, 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 each of 2022 and 2021 was primarily the result of favorable development on prior years' catastrophe losses that had previously been ceded to the Company's reinsurers.

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 expenseexpenses for all stock options granted or modified isare based on thetheir 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 sharesyears. 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 grant was 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. If such goals are not 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

In May 2017,The Company's revenue from contracts with customers that are in scope of Topic 606 represents the FASB issued Accounting Standards Updatecommission income that the Company's 100% owned insurance agencies, Auto Insurance Specialists LLC ("ASU"AIS") 2017-09, "Compensation - Stock Compensation (Topic 718)and PoliSeek AIS Insurance Solutions, Inc. ("Poliseek"), Scopeearned from third-party insurers. The Company's commission income from third-party insurers was approximately $20.8 million, $18.2 million and $20.2 million, with related expenses of Modification Accounting." ASU 2017-09 provides guidance about which changesapproximately $11.4 million, $11.0 million and $12.8 million, for the years ended December 31, 2023, 2022 and 2021, respectively. Due to the terms or conditionsimmateriality of a share-based payment award require an entitythe Company's commission income and its related expenses 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 itsoverall consolidated financial statements, the commission income, net of related expenses, is included in other revenues in the Company's consolidated statements of operations, and related disclosures.in other income of the Property and Casualty business segment in the Company's segment reporting in accordance with Topic 280,

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In January 2017,Segment Reporting (see Note 19. Segment Information).

AIS and PoliSeek are primarily engaged in the FASB issued ASU 2017-04, "Intangibles - Goodwillmarketing and Other (Topic 350), Simplifyingsales 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 Testcommission 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, 2023 and 2022 was approximately $1.6 million and $1.3 million, respectively.

A refund liability is recorded for Goodwill Impairment." ASU 2017-04 removes the requirementexpected amount of the commission income that has to comparebe returned to the implied fairinsurers 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, 2023 and 2022 was approximately $1.0 million and $0.8 million, respectively, which was included in other liabilities in the Company's consolidated balance sheets.

As of goodwillDecember 31, 2023 and 2022, 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

The majority of the Company's cloud computing arrangements relate to service contracts with third parties that host the Company's data and computing infrastructure that are used in providing services to and supporting transactions with its carrying amount as partexisting or potential policyholders and insurance agents. The balance of Step 2capitalized implementation costs for cloud computing arrangements, net of accumulated amortization, was $0.2 million and $1.1 million at December 31, 2023 and 2022, respectively, which is included in other assets in the goodwill impairment testCompany's consolidated balance sheets. The accumulated amortization was $5.5 million and requires an entity$4.7 million at December 31, 2023 and 2022, respectively. The total amortization expense related to recognize an impairment chargesuch capitalized implementation costs was $0.9 million, $2.8 million, $3.9 million for the amount byyears ended December 31, 2023, 2022, and 2021, respectively, which the carrying amount of a reporting unit exceeds its fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company beginning 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 assetincluded in 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 classifiedoperating expenses in the Company's consolidated statementstatements of cash flows. ASU 2016-15 is effectiveoperations.

Allowance 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.Credit Losses


In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The amendments in this ASU replace uses the "incurred"expected 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 offor financial assets that are not accounted for at fair value through net income. The Company's investment portfolio, excluding accrued investment income, was not affected by Topic 326 as it applies the fair value option to all of its investments. The estimated allowance amounts for credit losses at December 31, 2023 and December 31, 2022 primarily related to premiums receivable.

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 Company
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monitors the overall credit risk of premiums receivable by regularly reviewing macroeconomic indicators such as loans, certain debt securities, trade receivables, net investmenttrends in leases, off-balance sheetunemployment, 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 exposureslosses on premiums receivable:
 Year Ended December 31,
 202320222021
 
Beginning balance$5,800 $6,000 $10,000 
     Provision during the period for expected credit losses2,819 4,213 (893)
Write-off amounts during the period(3,879)(5,027)(3,693)
Recoveries during the period of amounts previously written off560 614 586 
Ending balance$5,300 $5,800 $6,000 

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. Underrecoverables related to credit risk, and changes in the current GAAP incurredallowance are presented as a component of losses and loss methodology, recognitionadjustment 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 amountdefault 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.

The following table presents a summary of changes in allowance for credit losses is generally delayed untilon reinsurance recoverables:

 Year Ended December 31,
 202320222021
 
Beginning balance$— $— $91 
     Provision during the period for expected credit losses12 — (91)
Write-off amounts during the period— — — 
Recoveries during the period of amounts previously written off— — — 
Ending balance$12 $— $— 

Accrued Interest Receivables

The Company made certain accounting policy elections for its accrued interest receivables on the loss is probableadoption date of occurring. Current GAAP restrictsTopic 326 as allowed: a) an election to present accrued interest receivable balances separately from the abilityassociated financial assets on the balance sheet, and b) an election not to recordmeasure 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 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
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off the accrued interest receivable immediately if management determines that it is not reasonably expected that the payment will be received. The Company's accrued interest receivable balances are expected, but do not yet meetincluded in accrued investment income receivables in its consolidated balance sheets. There were no accrued interest receivable amounts considered uncollectible or written off for the probability threshold.years ended December 31, 2023, 2022 and 2021.

Recently Issued Accounting Standards

In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." ASU 2016-132023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. ASU 2023-09 will be effective for the Company in the annual period beginning with the first quarter ending March 31, 2020. While theJanuary 1, 2025, though early adoption is permitted. The Company is evaluating the presentational effect that ASU 2023-09 will have on its consolidated financial statements and expects presentation changes to its note on income taxes.

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information, including significant segment expenses, on an annual and interim basis for all public entities to enable investors to develop more useful financial analyses. Currently, Topic 280 requires that a public entity disclose certain information about its reportable segments. For example, a public entity is required to report a measure of segment profit or loss that the Chief Operating Decision Maker (“CODM”) uses to assess segment performance and make decisions about allocating resources. Topic 280 also requires other specified segment information, such as depreciation, amortization and depletion expense amounts, to be disclosed under certain circumstances. The amendments in ASU 2023-07 do not change or remove those disclosure requirements. The amendments in ASU 2023-07 also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments in ASU 2023-07 retrospectively to all prior periods presented in the process offinancial statements. The Company is currently evaluating the impact of this ASU 2016-13, iton its consolidated financial statements and related disclosures.

In March 2020, the 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 was effective for all entities as of March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848," which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Company does not expect this ASU to have aany 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 these ASUs.


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,
 20232022
 (Amounts in thousands)
Assets
Investments$5,228,520 $4,910,800 
Note receivable9,974 — 
Liabilities
Options sold1,955 162 
Notes payable557,710 375,631 
71
 December 31,
 2017 2016
 (Amounts in thousands)
Assets   
Investments$3,732,728
 $3,547,560
Note receivable5,565
 —
Total return swaps—
 667
Liabilities   
Total return swaps1,200
 765
Options sold123
 20
Secured notes—
 140,000
Unsecured notes385,583
 180,000

Investments


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 cost of investments sold is determined on a first-in and first-out method, and realized and unrealized gains and losses are included in net realized investment gains (losses) in the Company's consolidated statements of operations. See Note 3. Investments for additional information.

Note Receivable
Note receivable was recognized as part of the sale of land in August 2017 (See Note 5. Fixed Assets for additional information on the sale transaction). The Company elected to apply the fair value option to this security at the time it was first recognized. The fair value of note receivable is included in other assets in the Company's consolidated balance sheets, while the changes in fair value of note receivable are included in net realized investment gains (losses) in the Company's consolidated statements of operations.


Options Sold

The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Company as realized gains from investments on the expiration date. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Company has realized a gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Liabilities for covered call options of $0.12 million and $0.02 million wereare included in other liabilities in the Company's consolidated balance sheets at December 31, 2017 and 2016, respectively.sheets.


Total Return SwapsNotes payable


The fair values of the total return swaps reflect the estimated amounts that, upon termination of the contracts, would be received for selling an asset or paid to transfer a liability in an orderly transaction at December 31, 2017 and 2016 based on models using inputs, such as interest rate yield curves and credit spreads, observable for substantially the full term of the contract.

Secured Notes

The fair values of the Company's $120 million secured note and $20 million secured note atDecember 31, 2016 approximated their carrying values.

Unsecured Notes

The fair value of the Company’s publicly traded $375 million unsecured notenotes at December 31, 2017 was2023 and 2022 and its $200 million and $25 million drawn under the unsecured credit facility at December 31, 2023 and 2022 were obtained from a third party pricing service. The fair value of the Company's $180 million unsecured note at December 31, 2016 approximated the carrying value.services.


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


3. Investments


The following table presents gains (losses) due to changes in fair value of investments that are measured at fair value pursuant to application of the fair value option:
 Year Ended December 31,
 202320222021
 (Amounts in thousands)
Fixed maturity securities$62,833 $(260,223)$(39,649)
Equity securities45,046 (185,694)107,701 
Short-term investments107 88 (141)
       Total gains (losses)$107,986 $(445,829)$67,911 
 Year Ended December 31,
 2017 2016 2015
 (Amounts in thousands)
Fixed maturity securities$50,403
 $(56,584) $(39,304)
Equity securities37,486
 23,722
 (22,988)
Short-term investments38
 57
 561
     Total gains (losses)$87,927
 $(32,805) $(61,731)



The following table presents gross gains (losses) realized on the sales of investments:
Year Ended December 31, Year Ended December 31,
2017 2016 2015 202320222021
(Amounts in thousands) (Amounts in thousands)
Gross
Realized
Gains
 
Gross
Realized
Losses
 Net 
Gross
Realized
Gains
 
Gross
Realized
Losses
 Net 
Gross
Realized
Gains
 
Gross
Realized
Losses
 Net Gross
Realized
Gains		Gross
Realized
Losses		NetGross
Realized
Gains		Gross
Realized
Losses		NetGross
Realized
Gains		Gross
Realized
Losses		Net
Fixed maturity securities$604
 $(2,701) $(2,097) $3,327
 $(19,133) $(15,806) $631
 $(495) $136
Equity securities20,835
 (23,048) (2,213) 29,446
 (29,945) (499) 41,305
 (58,764) (17,459)
Short-term investments21
 (20) 1
 6
 (530) (524) —
 (1,396) (1,396)
Contractual Maturity
At December 31, 2017,2023, fixed maturity holdings rated below investment grade and non-rated comprised 3.4%0.4% of total investments at fair value. Additionally, the Company owns securities that are credit enhanced by financial guarantors that are subject to uncertainty related to market perception of the guarantors’ ability to perform. Determining the estimated fair value of municipal bonds could become more difficult should markets for these securities become illiquid. 
72

The following table presents the estimated fair values of the Company's fixed maturity securities at December 31, 20172023 by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Fair Value
(Amounts in thousands)
Fixed maturity securities:
Due in one year or less$306,970 
Due after one year through five years935,982 
Due after five years through ten years888,429 
Due after ten years2,187,955 
Total$4,319,336 
 Estimated Fair Value
 (Amounts in thousands)
Fixed maturity securities: 
Due in one year or less$200,963
Due after one year through five years532,344
Due after five years through ten years286,031
Due after ten years1,873,439
Total$2,892,777


Investment Income
The following table presents a summary of net investment income:

Year Ended December 31, Year Ended December 31,
2017 2016 2015 202320222021
(Amounts in thousands) (Amounts in thousands)
Fixed maturity securities$102,790
 $104,111
 $108,122
Equity securities18,554
 14,629
 14,630
Short-term investments8,753
 8,936
 9,033
Cash and Short-term investments
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 1Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2Pricing 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 3Pricing 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
73

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%98.4% of its investment portfolio from an independent pricing service. For private equity funds that were classified as Level 3 and included in equity securitiesservice 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.2023.

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$33.0 million and $30.0$27.3 million in commercial mortgage-backed securities at December 31, 20172023 and 2016,2022, 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: Private equity funds, excluding a private equity fund measured at net asset value ("NAV"), are valued At December 31, 2023 and 2022, the Company did not have any financial assets or financial liabilities 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 knowledgeable outside security broker related to liquidity assumptions.Level 3 measurements.
Fair value measurement using NAV practical expedient - The fair valuevalues of the Company's investment in private equity fundfunds measured at net asset value isare determined using NAVnet asset value ("NAV") as advised by the external fund managermanagers and the third party administrator.administrators. The NAV of the Company's limited partnership or limited liability company interest in thissuch 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. TheAt December 31, 2023, the Company had capital
74

invested in three such funds: the strategy of the fundtwo such funds with a combined fair value of approximately $79.2 million at December 31, 2023 is to provide current income to investors by investing mainly in equity tranches and sub-investment grade rated debt tranches ofsecured loans, CLOs or CLO issuers, in the new and secondary markets, and equity interests in vehicles established to purchase and warehouse loansloans; and the strategy of the other such fund with a fair value of approximately $2.0 million at December 31, 2023 is to achieve long-term capital appreciation through privately-negotiated venture capital investments in anticipation of a CLO closing or to satisfy regulatory risk retention requirements associatedseed- and early-stage portfolio companies with certain CLOs.technology-enabled business models. The Company has made all of its capital contributionshad approximately $8 million in the fund and had no outstanding unfunded commitments at December 31, 20172023 with respect to this fund.the private equity funds measured at NAV. The underlying assets of the fundfunds are expected to be liquidated over the period of approximately one year to fivenine years from December 31, 2017. The2023. In addition, the Company does not have the contractual optionability 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 loseslosses 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, 2023
 Level 1Level 2Level 3Total
 (Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies$123,182 $51,268 $— $174,450 
Municipal securities— 2,777,258 — 2,777,258 
Mortgage-backed securities— 186,887 — 186,887 
Corporate securities— 599,630 — 599,630 
Collateralized loan obligations— 484,947 — 484,947 
Other asset-backed securities— 96,164 — 96,164 
Total fixed maturity securities123,182 4,196,154 — 4,319,336 
Equity securities:
Common stock597,888 — — 597,888 
Non-redeemable preferred stock— 51,563 — 51,563 
Private equity funds measured at net asset value (1)
81,242 
Total equity securities597,888 51,563 — 730,693 
Short-term investments:
Short-term bonds12,015 1,838 — 13,853 
Money market instruments164,595 — — 164,595 
Other43 — — 43 
Total short-term investments176,653 1,838 — 178,491 
Other assets:
Note receivable— 9,974 — 9,974 
Total assets at fair value$897,723 $4,259,529 $— $5,238,494 
Liabilities
Other liabilities:
Options sold1,955 — — 1,955 
Total liabilities at fair value$1,955 $— $— $1,955 

75

December 31, 2017 December 31, 2022
Level 1 Level 2 Level 3 Total Level 1Level 2Level 3Total
(Amounts in thousands) (Amounts in thousands)
Assets       
Fixed maturity securities:       
Fixed maturity securities:
Fixed maturity securities:
U.S. government bonds
U.S. government bonds
U.S. government bonds$13,236
 $—
 $—
 $13,236
Municipal securities—
 2,556,532
 —
 2,556,532
Mortgage-backed securities and agencies—
 27,165
 —
 27,165
Mortgage-backed securities
Corporate securities—
 137,542
 —
 137,542
Collateralized loan obligations—
 105,202
 —
 105,202
Collateralized debt obligations
Other asset-backed securities—
 53,100
 —
 53,100
Total fixed maturity securities13,236

2,879,541

—

2,892,777
Equity securities:       
Common stock429,367
 
 —
 429,367
Common stock
Common stock
Non-redeemable preferred stock—
 34,869
 —
 34,869
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)
Total equity securities429,367

34,869

1,481

537,240
Short-term investments:       
Short-term bonds29,998
 2,020
 —
 32,018
Short-term bonds
Short-term bonds
Money market instruments270,693
 —
 —
 270,693
Other
Total short-term investments300,691

2,020

—

302,711
Other assets:       
Note receivable—
 5,565
 —
 5,565
Total return swaps—
 —
 —
 —
Total assets at fair value$743,294

$2,921,995

$1,481

$3,738,293
Liabilities       
Other liabilities:       
Total return swaps—
 1,200
 —
 1,200
Other liabilities:
Other liabilities:
Options sold
Options sold
Options sold123
 —
 —
 123
Total liabilities at fair value$123
 $1,200
 $—
 $1,323
__________ 
(1)The fair value is measured using the NAV practical expedient; therefore, it is not categorized within the fair value hierarchy. The fair value amount is presented in this table to permit reconciliation of the fair value hierarchy to the amounts presented in the Company's consolidated balance sheets.


 December 31, 2016
 Level 1 Level 2 Level 3 Total
 (Amounts in thousands)
Assets       
Fixed maturity securities:       
U.S. government bonds and agencies$12,275
 $—
 $—
 $12,275
Municipal securities—
 2,449,292
 —
 2,449,292
Mortgage-backed securities—
 39,777
 —
 39,777
Corporate securities—
 189,688
 —
 189,688
Collateralized debt obligations—
 86,525
 —
 86,525
Other asset-backed securities—
 36,996
 —
 36,996
Total fixed maturity securities12,275

2,802,278

—

2,814,553
Equity securities:       
Common stock316,450
 —
 —
 316,450
Non-redeemable preferred stock—
 31,809
 —
 31,809
Private equity funds—
 —
 9,068
 9,068
Total equity securities316,450

31,809

9,068

357,327
Short-term investments:       
Short-term bonds70,393
 20,233
 —
 90,626
Money market instruments285,054
 —
 —
 285,054
Total short-term investments355,447

20,233

—

375,680
Other assets:      

Total return swaps—
 667
 —
 667
Total assets at fair value$684,172

$2,854,987

$9,068

$3,548,227
Liabilities       
Other liabilities:       
Total return swaps$—
 $765
 $—
 $765
Options sold20
 —
 —
 20
Total liabilities at fair value$20
 $765
 $—
 $785

The following table presents a summary of changes in fair value of Level 3 financial assets:
  Private Equity Funds
  Year Ended December 31,
  2017 2016
  (Amounts in thousands)
Beginning balance $9,068
 $10,431
Net realized gains (losses) included in earnings 691
 (1,363)
Purchases 1,481
 —
Sales/settlements (9,759) —
Ending balance $1,481
 $9,068
The amount of total gains (losses) for the period included in earnings attributable to assets still held at December 31 $—
 $(1,363)

There were no transfers between Levels 1, 2, and 3 of of the fair value hierarchy in 20172023 and 2016.2022.


At December 31, 20172023 and 2016, the Company did not have any nonrecurring2022, there were no material assets or liabilities measured at fair value measurements of nonfinancial assets or nonfinancial liabilities.




on a nonrecurring basis.
Financial Instruments Disclosed, But Not Carried, at Fair Value
The following tables present the carrying value and fair value of the Company’s financial instruments disclosed, but not carried, at fair value, and the level within the fair value hierarchy at which such instruments are categorized:
 December 31, 2023
 Carrying ValueFair ValueLevel 1Level 2Level 3
 (Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes$373,729 $357,765 $— $357,765 $— 
Unsecured credit facility200,000 199,945 — 199,945 — 
Total$573,729 $557,710 $— $557,710 $— 
76

December 31, 2022
Carrying ValueFair ValueLevel 1Level 2Level 3
December 31, 2017
Carrying Value Fair Value Level 1 Level 2 Level 3
         
(Amounts in thousands)(Amounts in thousands)
Liabilities         
Notes payable:         
Notes payable:
Notes payable:
Unsecured notes$371,335
 $385,583
 $—
 $385,583
 $—
Unsecured notes
Unsecured notes
Unsecured credit facility
Total
 December 31, 2016
 Carrying Value Fair Value Level 1 Level 2 Level 3
          
 (Amounts in thousands)
Liabilities         
Notes payable:         
Secured notes$140,000
 $140,000
 $—
 $140,000
 $—
Unsecured notes180,000
 180,000
 —
 180,000
 —
Secured Notes
The fair values of the Company’s $120 million secured note and $20 million secured note at December 31, 2016 were estimated based on assumptions and inputs, such as the market value of underlying collateral and reset rates, for similarly termed notes that are observable in the market. In addition, the fair values of these secured notes approximated their carrying values, as the interest rates on these securities were variable and approximated current market interest rates.
Unsecured Notes
The fair value of the Company’s publicly traded $375 million unsecured notenotes at December 31, 20172023 and 2022 was based on the spreads above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. See Note 8. Notes Payable for additional information on unsecured notes.
Unsecured Credit Facility
The fair value of the Company's $180$200 million and $25 million drawn under the unsecured notecredit facility at December 31, 2016 was2023 and 2022 are based on the unadjusted quoted price for similar notes in active markets. In addition, the fair value of this unsecured note approximated its carrying value, as the interest rate on this security was variable and approximated current market interest rates.
See Note 7.8. Notes Payable for additional information on secured and unsecured notes.credit facility.


5. Fixed Assets
The following table presents the components of fixed assets:
 December 31,
 20232022
 (Amounts in thousands)
Land$9,713 $18,152 
Buildings and improvements65,408 105,526 
Furniture and equipment30,862 45,829 
Capitalized software344,654 314,092 
Leasehold improvements2,892 5,471 
453,529 489,070 
Less: accumulated depreciation and amortization(302,346)(317,628)
Fixed assets, net$151,183 $171,442 
 December 31,
 2017 2016
 (Amounts in thousands)
Land$18,152
 $26,770
Buildings and improvements136,827
 134,952
Furniture and equipment118,647
 114,156
Capitalized software202,488
 190,092
Leasehold improvements9,632
 9,369
 485,746
 475,339
Less: accumulated depreciation and amortization(340,523) (319,429)
Fixed assets, net$145,223
 $155,910



Depreciation expense, including amortization of leasehold improvements, was $21.1$33.8 million, $34.3 million, and $32.5 million for 2023, 2022, and 2021, respectively.

An office building located in Clearwater, Florida was initially classified as a property held for sale at December 31, 2022, and $20.2 million and $20.5of the property held for sale, which represented the fair value of the property less the estimated costs to sell, was included in other assets in the Company's consolidated balance sheets on that date. The loss of $0.8 million during 2017, 2016, and 2015, respectively.
In August 2017,recognized for the held-for-sale classification was included in other operating expenses in the Company's consolidated statements of operations for the year ended December 31, 2022. The Company completed the sale of approximately six acres of land located in Brea, California (the "Property"),this property on March 31, 2023 for a total sale price of approximately $12.2 million. Approximately $5.7$19.6 million, and recognized a loss of $1.8 million associated with the sale, which was included in other revenues in the Company's consolidated statements of operations for the year ended December 31, 2023. $9.8 million of the total sale price was received in the form of a promissory note (the "Note"). $8.5 million of the sale price, after settlement of selling expenses and outstanding amounts due on the remainderproperty, was received in cash. Only the cash received on the sale of the property is included in the Company's consolidated statements of cash flows for the year ended December 31, 2023. The Note is secured by a first trust deed and an assignment of rents on the Property,property sold, and bears interest at an annual rate of 3.5%, payable7.0% for the first two years, with an adjustment to the greater of 7.0% or the rate on a one-year U.S. Treasury Bill at the two-year anniversary for the remainder of the term. The term of the Note is four years and interest is paid in monthly installments. In connection with the sale of the property, the Company entered into a lease agreement whereby the Company leased 14,883 square feet of office space, or approximately 9% of the total space of the property sold, from the new owner of the property. The Note matureslease term is five years, commencing on April 1, 2023, and the average annual base rent is approximately $0.4 million.
77


The Company completed the sale of an office building located in August 2020,Rancho Cucamonga, California in May 2023 for a total sale price of $22.3 million, and its fair valuerecognized a gain of $7.9 million associated with the sale, which is included in other revenues in the Company's consolidated statements of operations for the year ended December 31, 2023. The Company received $21.4 million in cash, after settlement of selling expenses. In connection with the sale of the property, the Company entered into a lease agreement whereby the Company leased 6,000 square feet of office space, or approximately 5% of the total space of the property sold, from the new owner of the property. The lease term is two years, commencing on May 16, 2023, and the average annual base rent is approximately $0.2 million. This office building was initially classified as a property held for sale at March 31, 2023, and $13.6 million of the property held for sale, which represented the carrying amount of the property, was included in other assets in the Company's consolidated balance sheets. Only the cash portionsheets until completion of the totalsale.

In addition, an office building located in Brea, California was classified as a property held for sale priceat September 30, 2023, and $10.8 million of the Property, excludingproperty held for sale, which represented the Note, is reportedcarrying amount of the property, was included in other assets in the Company's consolidated statements of cash flows. Interest earned on the Note is recognized in other revenues in the Company's consolidated statements of operations.balance sheets at December 31, 2023. The Company recognizedis actively engaged in selling this office building as most of its employees currently work from home and this property is being used on a gain of approximately $3.3 million on the sale transaction, which is included in other revenues in its consolidated statements of operations.limited basis.


6. Deferred Policy Acquisition Costs
Deferred policy acquisition costs were as follows:
 December 31,
 202320222021
 (Amounts in thousands)
Balance, beginning of year$266,475 $258,259 $246,994 
Policy acquisition costs deferred735,894 662,828 644,650 
Amortization(708,525)(654,612)(633,385)
Balance, end of year$293,844 $266,475 $258,259 

7. Leases

The Company has operating leases for office space for insurance operations and administrative functions, automobiles for certain employees and general uses, and office equipment such as printers and computers. In addition, the Company has finance leases for electronic data processing ("EDP") equipment. As of December 31, 2023, the Company's leases had remaining terms ranging from less than one year to approximately six years. These leases may contain provisions for periodic adjustments to rates and charges applicable under such lease agreements. These rates and charges also may vary with the Company's level of use. Certain of these leases include one or more options to renew or early terminate, and the exercise of these options is at the Company's sole discretion. Certain leases also include options to purchase the leased property. The Company's lease agreements do not contain any residual value guarantees.

The Company determines if an arrangement is a lease at inception. Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

The Company uses its estimated incremental borrowing rate for leases for office space, office equipment and EDP equipment, which is derived from information available at the lease commencement date, in determining the present value of lease payments, as the rate implicit in the lease is not readily available for such leases. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. For automobile leases, the Company uses the rate implicit in the lease at the lease commencement date in determining the present value of lease payments, as the readily-determinable implicit rate is provided in such leases.

The Company's lease terms include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company does not use the short-term lease exemption practical expedient and records all leases on the balance sheets, including leases with a term of twelve months or less. The Company accounts for the lease and non-lease components as a single lease component for leases for office space, automobiles, and office equipment, while it accounts for the lease components separately from the non-lease components for EDP equipment leases.



78

 December 31,
 2017 2016 2015
 (Amounts in thousands)
Balance, beginning of year$200,826
 $201,762
 $197,202
Policy acquisition costs deferred552,675
 561,610
 543,791
Amortization(555,350) (562,546) (539,231)
Balance, end of year$198,151
 $200,826
 $201,762
The components of lease cost along with its classification on the Company's consolidated statements of operations were as follows:

Year Ended December 31,
Lease CostClassification202320222021
(Amounts in thousands)
Operating lease cost (1)
Other operating expenses$11,674 $14,747 $15,846 
Finance lease cost:
     Amortization of assetsOther operating expenses1,241 1,288 719 
     Interest on lease liabilitiesInterest expense40 54 25 
Variable lease cost (1)
Other operating expenses1,100 2,184 1,500 
Sublease income (2)
Other revenue(799)(492)(11)
Net lease cost$13,256 $17,781 $18,079 
__________ 
7.(1) Includes short-term leases, which are immaterial.
(2) The Company subleased certain leased office space to third parties in 2023, 2022 and 2021.

The components of lease assets and liabilities along with their classification on the Company's consolidated balance sheets were as follows:
December 31,
Lease Assets and LiabilitiesClassification20232022
(Amounts in thousands)
Operating lease assetsOperating lease right-of-use assets$14,406 $20,183 
Operating lease liabilitiesOperating lease liabilities14,231 21,924 
Finance lease assetsOther assets2,996 4,233 
Finance lease liabilitiesOther liabilities2,841 3,573 

Weighted-average lease term and discount rate were as follows:
December 31,
20232022
Weighted-average remaining lease term (in years):
      Operating leases2.62.9
      Finance leases2.53.5

Weighted-average discount rate:
      Operating leases4.37 %2.84 %
      Finance leases
1.37 %1.29 %

Supplemental cash flow and other information related to leases was as follows:
Year Ended December 31,
202320222021
 (Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
      Operating cash flows from operating leases$14,010 $15,815 $16,158 
      Operating cash flows from finance leases41 54 25 
      Financing cash flows from finance leases1,102 1,504 825 
 
ROU assets obtained in exchange for lease liabilities:
      Operating leases6,587 4,677 4,904 
      Finance leases— 1,951 1,115 
79


Maturities of lease liabilities as of December 31, 2023 were as follows:
YearOperating LeasesFinance Leases
 (Amounts in thousands)
2024$7,282 $1,449 
20254,039 1,032 
20262,351 405 
20271,362 — 
2028243 — 
          Total lease payments$15,277 $2,886 
Less: Imputed interest1,046 45 
          Total lease obligations$14,231 $2,841 

As of December 31, 2023, the Company had additional lease commitments that have not yet commenced of approximately $3 million with each lease term of approximately four to six years. These leases will commence in 2024.

8. Notes Payable


The following table presents information about the Company's notes payable:
        December 31,
  Lender Interest Rate Expiration 2017 2016
        (Amounts in thousands)
Secured credit facility(1)
 Bank of America LIBOR plus 40 basis points December 3, 2018 $—
 $120,000
Secured loan(1)
 Union Bank LIBOR plus 40 basis points December 3, 2017 —
 20,000
Unsecured credit facility(1)
 Bank of America and Union Bank LIBOR plus 112.5-162.5 basis points December 3, 2019 —
 180,000
Senior unsecured notes(2)
 Publicly traded 4.40% March 15, 2027 375,000
 —
Unsecured credit facility(3)
 Bank of America and Wells Fargo Bank LIBOR plus 112.5-162.5 basis points March 29, 2022 —
 —
    Total principal amount       375,000
 320,000
Less unamortized discount and debt issuance costs(4)
       3,665
 —
Total       $371,335
 $320,000
December 31,
LenderInterest RateExpiration20232022
(Amounts in thousands)
Senior unsecured notes(1)
Publicly traded4.40%March 15, 2027$375,000 $375,000 
Unsecured credit facility(2)
Bank of America, Wells Fargo Bank, BMO Bank, and U.S. BankTerm SOFR plus 112.5-150.0 basis pointsNovember 16, 2026200,000 25,000 
    Total principal amount575,000 400,000 
Less unamortized discount and debt issuance costs(3)
1,271 1,670 
Total$573,729 $398,330 
__________
(1)
On March 8, 2017, the loan and credit facility agreements were terminated and the Company repaid the total outstanding amounts with the proceeds from its public offering of $375 million of senior notes.
(2)
(1)On March 8, 2017, the Company completed a public debt offering issuing $375 million of senior notes. The notes are unsecured senior obligations of the Company, with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off the total outstanding balance of $320 million under the existing loan and credit facility agreements and terminated the agreements on March 8, 2017. The remainder of the proceeds from the notes was used for general corporate purposes. The Company incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate, including debt issuance costs, of approximately 4.45%.
(2)On March 31, 2021, the Company entered into an unsecured $75 million five-year revolving credit facility. On November 18, 2022, the Company entered into the First Amendment to this credit facility. The First Amendment extended the maturity date of the loan to November 16, 2026 from March 31, 2026 with possible further extension if certain conditions are met, increased the aggregate commitments by all the lenders to $200 million from $75 million, and replaced the LIBOR with the term SOFR. On November 30, 2023, the Company entered into the Second Amendment to this credit facility, which further increased the aggregate commitments by all the lenders to $250 million from $200 million. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from Term SOFR plus 112.5 basis points when the ratio is under 20% to Term SOFR plus 150.0 basis points when the ratio is greater than or equal to 30%. Commitment fees for the undrawn portions of the Company, with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off amounts outstanding under the existing loan and credit facilities and for general corporate purposes. The Company incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate, including debt issuance costs, of approximately 4.45%.
(3)
On March 29, 2017, the Company entered into an unsecured credit agreement that provides for revolving loans of up to $50 million and matures on March 29, 2022. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is greater than or equal to 25%. Commitment fees for the undrawn portions of the

credit facility range from 12.5 basis points when the ratio is under 15%20% to 22.5 basis points when the ratio is greater than or equal to 25%30%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 17.6%27.1% at December 31, 2017,2023, resulting in a 1517.5 basis point commitment fee on the $50 millionany undrawn portion of the credit facility. As of February 2, 2018, there have been no borrowings13, 2024, a total of $200 million was drawn under this facility on a three-month revolving basis at an annual interest rate of approximately 6.84%,
80

with $50 million available to be drawn. The Company contributed $150 million of the total amount drawn to the surplus of its consolidated insurance subsidiaries, and used the remainder for general corporate purposes.
(3)The unamortized discount and debt issuance costs are associated with the publicly traded $375 million senior unsecured notes. These are amortized to interest expense over the life of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from the carrying amount of the debt. The unamortized costs of approximately $0.8 million associated with entering into the $250 million unsecured revolving credit facility maturing on November 16, 2026 are included in other assets in the Company's consolidated balance sheets and amortized to interest expense over the term of the credit facility.
(4)
The unamortized discount and debt issuance costs of approximately $3.7 million are associated with the publicly traded $375 million senior unsecured notes. These are amortized to interest expense over the life of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from the carrying amount of the debt. The unamortized debt issuance cost of approximately $0.2 million associated with the $50 million five-year unsecured revolving credit facility maturing on March 29, 2022 is included in other assets in the Company's consolidated balance sheets and amortized to interest expense over the term of the credit facility.


The Company was in compliance with all of its financial covenants pertaining to minimum statutory surplus, debt to total capital ratio, and risk based capital ("RBC") ratio under the unsecured credit facility at December 31, 2017.2023.


Debt maturities for each of the next five years and thereafter as of December 31, 20172023 are as follows:
MaturityAmounts
(in thousands)
2024$— 
2025— 
2026200,000 
2027375,000 
2028— 
Thereafter— 
Total$575,000 

Maturity Amounts
  
(in thousands)

2018 $—
2019 —
2020 —
2021 —
2022 —
Thereafter 375,000
Total $375,000

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

The From time to time, the Company also enters into derivative contracts to enhance returns on its investment portfolio.

On February 13, 2014, Fannette Funding LLC ("FFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into a total return swap agreement with Citibank. Under the agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap is secured by approximately $30 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 145 basis points prior to the renewal of the agreement in January 2017 and LIBOR plus 128 basis points subsequent to the January 2017 renewal, on approximately $108 million of underlying obligations as of December 31, 2017 and 2016. The agreement had an initial term of one year, subject to annual renewal. In January 2018, the agreement was renewed through August 15, 2018, and the interest rate was changed to LIBOR plus 120 basis points.

On August 9, 2013, Animas Funding LLC ("AFL"), a special purpose investment vehicle, formed and consolidated by the Company, entered into a three-year total return swap agreement with Citibank, which has been renewed for an additional one-year term through February 17, 2018. The total portfolio of underlying obligations was liquidated during June 2017, and the total return swap agreement between AFL and Citibank was terminated on July 7, 2017. Under the agreement, AFL received the income equivalent on underlying obligations due to Citibank and paid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap was secured by approximately $40 million of U.S. Treasuries as collateral, which were included in short-term investments on the consolidated balance sheets. The Company paid interest, which was equal to LIBOR plus 135 basis points prior to the amendment of the agreement in January 2017 and LIBOR plus 128 basis points subsequent to the amendment, on approximately $152 million of underlying obligations as of December 31, 2016.



The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains or losses in the consolidated statements of operations:
Liability Derivatives
Asset Derivatives Liability Derivatives December 31, 2023December 31, 2022
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 (Amounts in thousands)
(Amounts in thousands)
Total return swaps - Other assets$—
 $667
 $—
 $—
Options sold - Other liabilities—
 —
 123
 20
Total return swaps - Other liabilities—
 —
 1,200
 765
Total derivatives$—
 $667
 $1,323
 $785
 
 Gains Recognized in Income
 Year Ended December 31,
202320222021
 (Amounts in thousands)
Options sold - Net realized investment gains (losses)$8,586 $5,887 $3,045 
Total$8,586 $5,887 $3,045 
 (Losses) Gains Recognized in Income
 Year Ended December 31,
 2017 2016 2015
 (Amounts in thousands)
Total return swaps - Net realized investment (losses) gains$(2,137) $11,533
 $(6,438)
Options sold - Net realized investment gains2,291
 3,846
 3,081
Total$154
 $15,379
 $(3,357)


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



9.
81

10. Goodwill and Other Intangible Assets


Goodwill
There were no changes in the carrying amount of goodwill during 20172023 and 2016.2022. No accumulated goodwill impairment losses existed at December 31, 2023 and 2022. Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during 20172023 and 2016.2022. All of the Company's goodwill is associated with the Property and Casualty business segment (See Note 21.19. Segment Information for additional information on the reportable business segment).


Other Intangible Assets
The following table presents the components of other intangible assets:
Gross Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount		Useful Lives
 (Amounts in thousands)(in years)
As of December 31, 2023
Customer relationships$54,862 $(53,704)$1,158 11
Trade names15,400 (9,625)5,775 24
Technology4,300 (4,300)— 10
Insurance license1,400 — 1,400 Indefinite
Total intangible assets, net$75,962 $(67,629)$8,333 
As of December 31, 2022
Customer relationships$54,862 $(53,467)$1,395 11
Trade names15,400 (8,983)6,417 24
Technology4,300 (4,300)— 10
Insurance license1,400 — 1,400 Indefinite
Total intangible assets, net$75,962 $(66,750)$9,212 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 Useful Lives
 (Amounts in thousands) (in years)
As of December 31, 2017       
Customer relationships$52,890
 $(43,617) $9,273
 11
Trade names15,400
 (5,775) 9,625
 24
Technology4,300
 (3,870) 430
 10
Insurance license1,400
 —
 1,400
 Indefinite
Total intangible assets, net$73,990
 $(53,262) $20,728
  
        
As of December 31, 2016       
Customer relationships$52,430
 $(39,332) $13,098
 11
Trade names15,400
 (5,133) 10,267
 24
Technology4,300
 (3,440) 860
 10
Insurance license1,400
 —
 1,400
 Indefinite
Total intangible assets, net$73,530
 $(47,905) $25,625
  

In 2015, the Company recognized $1.4 million of other intangible assets for a state insurance license related to the acquisition of Workmen's Auto Insurance Company. See Note 20. Acquisition for the acquisition's cost allocation.


Other intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during 20172023 and 2016.2022.


Other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Other intangible assets amortization expense was $5.4$0.9 million, $6.1$1.0 million, and $6.0$1.1 million for the years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, respectively. None of the intangible assets with definite useful lives are anticipated to have a residual value.


The following table presents the estimated future amortization expense related to other intangible assets as of December 31, 2017:2023:
Year Ending December 31,Amortization Expense
 (Amounts in thousands)
2024$851 
2025807 
2026807 
2027807 
2028807 
Thereafter2,854 
Total$6,933 







82
Year Ending December 31,Amortization Expense
 (Amounts in thousands)
2018$5,427
20194,997
2020850
2021830
2022806
Thereafter6,418
Total$19,328


10.11. Income Taxes

Income tax provision
The Company and its subsidiaries file a consolidated federal income tax return. The income tax expense (benefit) consisted of the following components:
Year Ended December 31, Year Ended December 31,
2017 2016 2015 202320222021
(Amounts in thousands) (Amounts in thousands)
Federal     
Current$10,898
 $17,444
 $21,942
Current
Current
Deferred10,934
 (21,947) (25,594)
$21,832
 $(4,503) $(3,652)
$
State     
Current$955
 $2,239
 $943
Current
Current
Deferred(579) (56) (1,203)
$376
 $2,183
 $(260)
$
Total     
Current
Current
Current$11,853
 $19,683
 $22,885
Deferred10,355
 (22,003) (26,797)
Total$22,208
 $(2,320) $(3,912)
 
    As a result of the Tax Cuts and Jobs Act of 2017 (the "Act"), the Company’s deferred tax assets and liabilities were remeasured using the new corporate tax rate of 21% that is effective for tax years beginning January 1, 2018, rather than the pre-enactment corporate tax rate of 35%. Additionally, the Company recorded a provisional 6.6% sequestration reduction to its alternative minimum tax (“AMT”) credit resulting from repeal of the corporate AMT and reclassification of AMT credit carryforwards to current taxes receivable as a refundable credit. These adjustments resulted in a net tax benefit of approximately $7.4 million, which is reflected in net income for the twelve months ended December 31, 2017.

In computing taxable income, property and casualty insurers reduce underwriting income by losses and loss adjustment expenses incurred. The amount of the deduction for losses incurred associated with unpaid losses is discounted at the interest rates

and for the loss payment patterns prescribed by the U.S. Treasury.

The Inflation Reduction Act changesof 2022 introduced a new Corporate Alternative Minimum Tax (“CAMT”) on the prescribed interest rates to rates based on corporate bond yield curves and extends theadjusted financial statement income of applicable time periods for the loss payment pattern. These changes arecorporations. The provision is effective for tax years beginning after 2017December 31, 2022, and are subjectwas enacted on August 16, 2022. The Company has determined that averaged adjusted financial statement income is below the thresholds such that the Company does not expect to a transition rule that spreads the additional tax payments from the amount determined by applying these changes versus the previous calculated amount over the subsequent eight years beginning in 2018. The changes included in the Act related to discounting of unpaid losses are broad and complex. The Securities Exchange Commission has issued rules that would allowbe liable for a measurement period of up to one year after the enactment date of the Act to finalize the recording of the related tax impacts. The transitional impact of the Act will be finalized and recorded by the measurement period.any CAMT.

The following table presents a reconciliation of the tax expense based on the statutory rate to the Company's actual tax expense (benefit) in the consolidated statements of operations:
Year Ended December 31,
Year Ended December 31, 202320222021
2017 2016 2015 (Amounts in thousands)
(Amounts in thousands)
Computed tax expense at 35%$58,480
 $24,753
 $24,699
Computed tax expense (benefit) at 21%
Tax-exempt interest income(26,038) (26,197) (26,993)
Dividends received deduction(2,296) (2,303) (1,613)
State tax expense158
 1,907
 (287)
State tax (benefit) expense
Nondeductible expenses348
 303
 575
Cumulative impact from change in tax rate(11,449) —
 —
Reduction of AMT credit carryforward due to sequestration4,088
 —
 —
Other, net(1,083) (783) (293)
Income tax expense (benefit)$22,208
 $(2,320) $(3,912)
Deferred 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 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. The Company believes that through the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in order to maximize the
83

full benefits of its deferred tax assets.

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

 December 31,
 20232022
 (Amounts in thousands)
Deferred tax assets:
20% of net unearned premiums$75,394 $67,285 
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes25,340 21,606 
Expense accruals11,262 11,578 
Tax asset on net unrealized loss on securities carried at fair value166 22,802 
Other deferred tax assets8,743 6,511 
Total gross deferred tax assets120,905 129,782 
Deferred tax liabilities:
Deferred policy acquisition costs(61,707)(55,960)
Tax depreciation in excess of book depreciation(6,801)(11,029)
Undistributed earnings of insurance subsidiaries(1,511)(1,898)
Tax amortization in excess of book amortization(8,904)(7,466)
Other deferred tax liabilities(8,969)(10,526)
Total gross deferred tax liabilities(87,892)(86,879)
Net deferred tax assets$33,013 $42,903 

 December 31,
 2017 2016
 (Amounts in thousands)
Deferred tax assets:   
20% of net unearned premiums$47,110
 $77,104
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes6,451
 9,864
Write-down of impaired investments387
 726
Tax credit carryforwards230
 47,238
Expense accruals6,192
 11,090
Other deferred tax assets3,174
 8,828
Total gross deferred tax assets63,544
 154,850
    
Deferred tax liabilities:   
Deferred policy acquisition costs(41,612) (70,289)
Tax liability on net unrealized gain on securities carried at fair value(27,574) (15,612)
Tax depreciation in excess of book depreciation(5,686) (10,446)
Undistributed earnings of insurance subsidiaries(3,907) (3,985)
Tax amortization in excess of book amortization(2,280) (3,030)
Other deferred tax liabilities(5,417) (6,211)
Total gross deferred tax liabilities(86,476) (109,573)
    
Net deferred tax (liabilities) assets$(22,932) $45,277

In accordance with the Act, the Company’s deferred tax assets and liabilities were remeasured using the newly enacted corporate tax rateThe Company had federal net operating loss carryforwards of 21%. Additionally, the Company’s alternative minimum tax credit carryforward balance of $57.9approximately $19.7 million and $47.2$5.7 million at December 31, 20172023 and 2016, respectively, was reclassified to current income taxes receivable as a refundable credit. The Company believes it will realize the full benefit2022, respectively. $2.1 million of the AMT credit no later than the tax year endingtotal federal net operating loss carryforward at December 31, 2021.2023 will begin to expire in 2028 and the remaining $17.6 million can be carried forward indefinitely for federal tax purposes.

Uncertainty in Income Taxes
The Company recognizes tax benefits related to positions taken, or expected to be taken, on its tax returns, only if the positions are "more-likely-than-not" sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements.


There was a $3.3 million decrease to theThe total amount of unrecognized tax benefits related to tax uncertainties decreased by approximately $2.1 million during 2017.the 12 months ended December 31, 2023. The decrease was the result of tax positions taken regarding federal tax credits, settlement ofa resolution related to a California Franchise Tax Board audit for tax years 2003 through 2010,2012 and state tax apportionment issues based on management’s judgment and latest information available. The Company does not expect any changes in such unrecognized tax benefits to have a material impact on its consolidated financial statements within the next 12 months.2013.


The Company and its subsidiaries file income tax returns with the Internal Revenue Service and the taxing authorities of various states. Tax years that remain subject to examination by major taxing jurisdictions are 20142020 through 20162022 for federal taxes, and 2011 and 2020 through 20162022 for California state taxes. For tax years 2003 through 2010, the Company achieved a resolution with the Franchise Tax Board (“FTB”) in December 2017 and paid a $4.6 million negotiated settlement amount in accordance with the settlement agreement provided by the FTB and signed by the Company. The Company believes that resolution ofhas certain unresolved tax years 2003 through 2010 has the potential to establish guidance for future audit assessments proposed by the FTB for future tax years.

The Company is currently under examinationassessment issues for tax yearsyear 2011 through 2016. For tax years 2011 through 2013, the FTB issued Notices of Proposed Assessments ("NPAs")for California state taxes that are not material to the Company, which the Company intends to formally protest. If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with the FTB, an appeal with the California Office of Tax Appeals, or litigation in Superior Court. For tax years 2014 through 2016, the FTB commenced its audit in December 2017.
The Company believes that the resolution of these examinations and assessments will not have a material impact on the consolidated financial statements. Tax years 2012 through 2019 for California state taxes have been resolved with no outstanding issues.


The following table presents a reconciliation of the beginning and ending balances of unrecognized tax benefits:
December 31,
20232022
 (Amounts in thousands)
Balance at January 1$4,380 $4,380 
Additions (reductions) based on tax positions related to:
     Current year— — 
     Prior years(2,118)— 
Balance at December 31$2,262 $4,380 
84

 December 31,
 2017 2016
 (Amounts in thousands)
Balance at January 1$12,954
 $12,165
Additions (reductions) based on tax positions related to:   
     Current year85
 688
     Prior years(3,365) 101
Additions (reductions) as a result of lapse of the applicable statute of limitations—
 —
Balance at December 31$9,674
 $12,954


If unrecognized tax benefits were recognized, $10.1approximately $3.9 million and $11.8$6.6 million, including accrued interest, penalties and federal tax benefit related to unrecognized tax benefits, would impact the Company’s effective tax rate at December 31, 20172023 and 2016,2022, respectively.

The Company does not expect the total amount of unrecognized tax benefits to materially increase within the next 12 months.


The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income taxes. The Company recognized an accrued net (benefit) expense related to interest and penaltypenalties of $(1,104,000), $606,000,approximately $(1.2) million, $0.4 million, and $112,000$0.3 million for the years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, respectively. The net benefit for the year ended December 31, 2017 is largely due to reversal of accrued interest and penalty following the settlement with the FTB for tax years 2003 through 2010. The Company carried an accrued interest and penalty balance of $2,417,000approximately $2.5 million and $3,521,000$3.7 million at December 31, 20172023 and 2016,2022, respectively.


11.12. Loss and Loss Adjustment Expense Reserves
The following table presents the activity in loss and loss adjustment expense reserves:
 Year Ended December 31,
 202320222021
 (Amounts in thousands)
Gross reserves at January 1$2,584,910 $2,226,430 $1,991,304 
Reinsurance recoverables on unpaid losses(25,323)(41,379)(54,461)
Net reserves at January 12,559,587 2,185,051 1,936,843 
Incurred losses and loss adjustment expenses related to:
Current year3,553,801 3,314,938 2,786,246 
Prior years(35,948)47,281 (26,091)
Total incurred losses and loss adjustment expenses3,517,853 3,362,219 2,760,155 
Loss and loss adjustment expense payments related to:
Current year2,080,690 1,862,006 1,601,998 
Prior years1,243,196 1,125,677 909,949 
Total payments3,323,886 2,987,683 2,511,947 
Net reserves at December 312,753,554 2,559,587 2,185,051 
Reinsurance recoverables on unpaid losses32,148 25,323 41,379 
Gross reserves at December 31$2,785,702 $2,584,910 $2,226,430 
 Year Ended December 31,
 2017 2016 2015
 (Amounts in thousands)
Gross reserves at January 1$1,290,248
 $1,146,688
 $1,091,797
Less reinsurance recoverables on unpaid losses(13,161) (14,253) (14,192)
Net reserves at January 11,277,087
 1,132,435
 1,077,605
Acquisition of WAIC reserves—
 —
 18,677
Incurred losses and loss adjustment expenses related to:     
Current year2,390,453
 2,269,769
 2,132,837
Prior years54,431
 85,369
 12,658
Total incurred losses and loss adjustment expenses2,444,884
 2,355,138
 2,145,495
Loss and loss adjustment expense payments related to:     
Current year1,550,789
 1,508,362
 1,455,245
Prior years724,570
 702,124
 654,097
Total payments2,275,359
 2,210,486
 2,109,342
Net reserves at December 311,446,612
 1,277,087
 1,132,435
Reinsurance recoverables on unpaid losses64,001
 13,161
 14,253
Gross reserves at December 31$1,510,613
 $1,290,248
 $1,146,688


During 2022, inflationary trends accelerated to their highest level in decades, which had a significant impact on the cost of automobile parts and labor as well as medical expenses for bodily injuries, and supply chain and labor shortage issues lengthened the time to repair vehicles. Bodily injury costs were also under pressure from social inflation. The severe inflationary trend continued into 2023, but began moderating as the year progressed. These factors contributed to higher losses and loss adjustment expenses related to the current accident year for 2023 and 2022 compared to 2021.

The decrease in the provision for insured events of prior years in 2023 of approximately $35.9 million primarily resulted from lower than estimated losses and loss adjustment expenses in the private passenger automobile and homeowners lines of insurance business, partially offset by unfavorable reserve development in the commercial property line of insurance business. The moderating inflationary trend in 2023 relative to 2022 discussed above was the major contributor to the favorable reserve development in the private passenger automobile line of insurance business for 2023.

The increase in the provision for insured events of prior years in 20172022 of approximately $54.4$47.3 million primarily resulted from higher than estimated losses in California automobile and property lines, which experienced higher loss severity on liability coverages including Bodily Injury and Property Damage and higher loss adjustment expenses than originally estimated.in the automobile line of insurance business. The inflationary pressures and the supply chain and labor shortage issues discussed above were major contributors to the adverse reserve development in the automobile line of insurance business for 2022.



The increasedecrease in the provision for insured events of prior years in 20162021 of approximately $85.4$26.1 million primarily resulted from the California and Florida automobile lines of business which experienced higher loss severity on liability coverages including Bodily Injury, Combined Single Limits and Property Damagelower than was originally estimated.

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

The Company experienced pre-tax catastropheestimated losses and loss adjustment expenses in the homeowners and private passenger automobile lines of approximately $168 million ( $79 millioninsurance business.

The Company recorded catastrophe losses net of reinsurance benefits), $27of approximately $239 million, $102 million, and $19$104 million in 2017, 2016,2023, 2022, and 2015,2021, respectively. There wereCatastrophe losses due to the events that occurred in 2023 totaled approximately
85

$247 million, with no reinsurance benefits used for catastrophethese losses, resulting primarily from rainstorms and hail in 2016Texas and 2015. The losses in 2017 were primarily due to wildfires in NorthernOklahoma, winter storms and Southern California, severe rainstorms in California, and the impact of Tropical Storm Hilary in California. In addition, the Company experienced favorable development of approximately $8 million on prior years' catastrophe losses in 2023. Catastrophe losses due to the events that occurred in 2022 totaled approximately $101 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze of Winter Storm Elliott and other extreme weather events in Texas, Oklahoma and Georgia, winter storms in California, and the impact of Hurricane HarveyIan in Florida. In addition, the Company experienced unfavorable development of approximately $1 million on prior years' catastrophe losses in 2022. Catastrophe losses due to the events that occurred in 2021 totaled approximately $109 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze of Winter Storm Uri and other extreme weather events in Texas and Oklahoma, rainstorms, wildfires and winter storms in California, and the impact of Hurricane IrmaIda in FloridaNew Jersey and Georgia. TheNew York. In addition, the Company experienced favorable development of approximately $5 million on prior years' catastrophe losses in 2016 were primarily due to severe storms outside of California, and rainstorms in California. The losses in 2015 were primarily due to severe storms outside of California, and rainstorms and wildfires in California.2021.


The following is information about incurred and paid claims development as of December 31, 2017,2023, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts for our two major product lines: automobile and homeowners lines of business. As the information presented is for these two major product lines only, the total incurred and paid claims development shown below does not correspond to the aggregate development presented in the table above, which is for all product lines and includes unallocated claims adjustment expenses. The cumulative number of reported claims represents open claims, claims closed with payment, and claims closed without payment. It does not include an estimated amount for unreported claims. The number of claims is measured by claim event (such as a car accident or storm damage) and an individual claim event may result in more than one reported claim. The Company considers a claim that does not result in a liability as a claim closed without payment. 


The information about incurred and paid claims development for the years ended December 31, 20082014 to 20162022 is presented as unaudited supplementary information.


Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Automobile Insurance)Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Automobile Insurance) As of December 31, 2017Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Automobile Insurance)As of December 31, 2023
                     Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims
Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported ClaimsTotal of Incurred But Not Reported Liabilities Plus Expected Development on Reported ClaimsCumulative Number of Reported Claims
Accident Year For the Years Ended December 31, 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 
2016(1)
 2017 Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported ClaimsCumulative Number of Reported Claims
 (Amounts in thousands) (Amounts in thousands)
2008 $1,505,732
 $1,440,301
 $1,442,691
 $1,455,858
 $1,461,084
 $1,463,659
 $1,465,623
 $1,466,108
 $1,466,137
 $1,466,687
 $
2009   1,372,833
 1,349,025
 1,361,116
 1,361,652
 1,365,551
 1,371,779
 1,372,694
 1,372,259
 1,371,812
 82
 186
2010     1,367,547
 1,357,750
 1,364,307
 1,374,638
 1,379,336
 1,381,056
 1,386,105
 1,388,077
 158
 184
2011       1,343,919
 1,367,000
 1,380,557
 1,388,363
 1,393,878
 1,398,518
 1,405,112
 9,367
 181
2012         1,424,754
 1,408,222
 1,409,104
 1,414,878
 1,426,735
 1,436,034
 1,756
 181
2013           1,448,567
 1,431,058
 1,447,881
 1,458,421
 1,464,071
 4,011
 185
2014(1)
2014(1)
(Amounts in thousands)
(Amounts in thousands)
(Amounts in thousands)(Amounts in thousands)
2014             1,467,175
 1,454,366
 1,473,545
 1,486,322
 12,959
 1802014$1,467,175 $$1,454,366 $$1,473,545 $$1,486,322 $$1,498,504 $$1,501,075 $$1,501,713 $$1,501,850 $$1,502,161 $$1,502,313 $$58 180180
2015               1,551,105
 1,588,443
 1,610,839
 40,444
 17020151,551,105 1,588,443 1,588,443 1,610,839 1,610,839 1,634,435 1,634,435 1,645,950 1,645,950 1,649,170 1,649,170 1,653,878 1,653,878 1,654,843 1,654,843 1,655,267 1,655,267 336 336 170170
2016                 1,672,853
 1,669,642
 102,672
 15420161,672,853 1,669,642 1,669,642 1,713,696 1,713,696 1,731,997 1,731,997 1,732,410 1,732,410 1,740,807 1,740,807 1,743,417 1,743,417 1,745,513 1,745,513 2,544 2,544 155155
2017                   1,703,857
 347,296
 14020171,703,857 1,727,277 1,727,277 1,741,825 1,741,825 1,733,425 1,733,425 1,748,289 1,748,289 1,755,702 1,755,702 1,754,356 1,754,356 4,910 4,910 149149
                 Total $15,002,453
   
201820181,781,817 1,773,502 1,785,071 1,806,240 1,807,297 1,811,302 12,992 147
201920191,916,269 1,911,268 1,959,262 1,954,151 1,951,924 22,464 148
202020201,514,551 1,448,083 1,452,343 1,430,973 36,124 91
202120211,811,064 1,879,751 1,854,319 96,072 104
202220222,255,032 2,264,193 238,987 116
202320232,349,659 673,888 100
Total
__________ 
(1) The information for the years 20082014 to 20162022 is presented as unaudited supplemental information.




86

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Automobile Insurance)Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Automobile Insurance)Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Automobile Insurance)
 For the Years Ended December 31,
For the Years Ended December 31,For the Years Ended December 31,
Accident Year 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 
2016(1)
 2017Accident Year
2014(1)
2015(1)
2016(1)
2017(1)
2018(1)
2019(1)
2020(1)
2021(1)
2022(1)
2023
 (Amounts in thousands)
2008 $992,844
 $1,226,787
 $1,345,354
 $1,418,274
 $1,450,172
 $1,459,216
 $1,463,384
 $1,464,763
 $1,465,832
 $1,466,704
2009   913,340
 1,137,807
 1,260,424
 1,326,439
 1,355,210
 1,363,526
 1,370,564
 1,371,956
 1,371,933
2010     908,954
 1,143,984
 1,268,142
 1,335,871
 1,365,464
 1,375,799
 1,384,333
 1,387,835
2011       926,983
 1,152,459
 1,277,808
 1,347,082
 1,378,920
 1,391,101
 1,394,684
2012         955,647
 1,194,648
 1,304,511
 1,372,828
 1,409,911
 1,422,705
2013           974,445
 1,217,906
 1,340,724
 1,413,999
 1,447,004
(Amounts in thousands)(Amounts in thousands)
2014             967,481
 1,231,413
 1,358,472
 1,432,472
2015               1,040,253
 1,336,223
 1,466,368
2016                 1,094,006
 1,395,199
2017                   1,076,079
                 Total $13,860,983
       All outstanding liabilities before 2008, net of reinsurance  (169)
       Loss and allocated loss adjustment expense reserves, net of reinsurance  $1,141,300
2018
2019
2020
2021
2022
2023
Total
All outstanding liabilities before 2014, net of reinsurance
Loss and allocated loss adjustment expense reserves, net of reinsurance
__________ 
(1) The information for the years 20082014 to 20162022 is presented as unaudited supplemental information.



Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners' Insurance) As of December 31, 2017
                      Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims
Accident Year For the Years Ended December 31,  
 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 
2016(1)
 2017  
  (Amounts in thousands) (Amounts in thousands)
2008 $146,486
 $139,549
 $138,605
 $139,142
 $138,190
 $138,803
 $139,149
 $139,156
 $139,216
 $139,188
 $—
 16
2009   135,889
 135,000
 131,680
 133,087
 133,121
 134,718
 134,597
 134,478
 134,359
 26
 17
2010     165,727
 157,566
 160,983
 160,472
 160,206
 160,015
 159,608
 159,662
 117
 21
2011       167,414
 170,623
 170,052
 169,600
 169,390
 169,621
 170,126
 234
 23
2012         196,063
 188,010
 190,376
 191,548
 192,057
 191,804
 428
 25
2013           191,903
 188,915
 188,026
 186,795
 187,165
 524
 23
2014             199,298
 202,621
 203,218
 202,513
 1,330
 25
2015               234,800
 234,881
 233,501
 4,368
 24
2016                 250,691
 259,489
 9,995
 24
2017                   309,491
 47,502
 28
                  Total $1,987,298
    
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners Insurance)As of December 31, 2023
Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported ClaimsCumulative Number of Reported Claims
Accident YearFor the Years Ended December 31,
2014(1)
2015(1)
2016(1)
2017(1)
2018(1)
2019(1)
2020(1)
2021(1)
2022(1)
2023
(Amounts in thousands)(Amounts in thousands)
2014$199,298 $202,621 $203,218 $202,513 $204,986 $208,003 $208,743 $209,622 $209,071 $208,990 $— 25
2015234,800 234,881 233,501 236,855 238,652 239,941 240,927 237,872 237,994 150 24
2016250,691 259,489 259,497 259,708 260,496 259,984 259,722 259,701 48 24
2017309,491 295,163 288,322 289,869 289,294 291,360 290,909 227 30
2018311,798 308,361 310,695 305,292 306,347 308,345 3,131 25
2019359,643 366,139 361,421 360,609 360,140 1,278 30
2020420,257 411,404 413,882 411,408 5,728 29
2021510,724 511,311 504,086 11,687 31
2022578,489 562,562 23,284 30
2023717,988 147,258 39
Total$3,862,123 
__________ 
(1) The information for the years 20082014 to 20162022 is presented as unaudited supplemental information.



87

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners' Insurance)
  For the Years Ended December 31,
Accident Year 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 
2016(1)
 2017
  (Amounts in thousands)
2008 $86,954
 $122,239
 $129,821
 $135,500
 $137,284
 $138,137
 $138,680
 $138,809
 $138,922
 $138,963
2009   86,034
 119,306
 126,591
 130,928
 132,180
 134,381
 134,378
 134,301
 134,229
2010     95,057
 137,628
 149,084
 155,191
 156,853
 158,053
 158,943
 159,268
2011       111,909
 153,845
 162,870
 166,375
 167,806
 168,621
 168,914
2012         128,618
 175,029
 182,756
 188,121
 190,373
 190,649
2013           133,528
 174,295
 180,858
 183,860
 185,168
2014             139,615
 186,996
 194,605
 198,758
2015               163,196
 213,994
 224,178
2016                 173,537
 234,215
2017                   217,900
                  Total $1,852,242
        All outstanding liabilities before 2008, net of reinsurance  2,141
        Loss and allocated loss adjustment expense reserves, net of reinsurance  $137,195
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners Insurance)
For the Years Ended December 31,
Accident Year
2014(1)
2015(1)
2016(1)
2017(1)
2018(1)
2019(1)
2020(1)
2021(1)
2022(1)
2023
(Amounts in thousands)
2014$139,615 $186,996 $194,605 $198,758 $202,193 $203,333 $207,524 $207,801 $208,737 $208,866 
2015163,196 213,994 224,178 230,480 234,683 235,971 236,143 236,983 237,651 
2016173,537 234,215 245,878 253,919 256,642 258,477 259,045 259,875 
2017217,900 269,254 278,341 283,311 286,531 290,291 290,984 
2018213,038 271,534 286,658 294,099 300,742 303,053 
2019240,240 324,953 340,237 350,288 355,697 
2020271,208 365,910 386,297 395,412 
2021316,314 458,124 473,644 
2022339,242 501,075 
2023474,712 
Total$3,500,969 
All outstanding liabilities before 2014, net of reinsurance1,044 
Loss and allocated loss adjustment expense reserves, net of reinsurance$362,198 
__________ 
(1) The information for the years 20082014 to 20162022 is presented as unaudited supplemental information.




The following is unaudited supplementary information about average historical claims duration as of December 31, 2017.2023.


Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years12345678910
Automobile insurance59.1 %19.0 %9.4 %5.7 %3.1 %1.4 %0.6 %0.3 %0.1 %0.1 %

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years12345678910
Homeowners insurance66.8 %23.0 %4.1 %2.4 %1.5 %0.8 %0.6 %0.3 %0.4 %0.1 %























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Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
 
Years 1 2 3 4 5 6 7 8 9 10
Automobile insurance 65.8% 17.1% 8.5% 5% 2.3% 0.7% 0.4% 0.1% —% 0.1%

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
 
Years 1 2 3 4 5 6 7 8 9 10
Homeowners insurance 66.5% 23.9% 4.8% 2.7% 1.0% 0.7% 0.3% 0.1% —% —%


The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance sheets is as follows.follows:




















Reconciliation of the Disclosure of Incurred and Paid Claims Development
to the Loss and Loss Adjustment Expense Reserves
December 31, 2023
(Amounts in thousands)
Net outstanding liabilities
Automobile insurance$2,009,595 
Homeowners insurance362,198 
Other short-duration insurance lines236,069 
Loss and loss adjustment expense reserves, net of reinsurance recoverables on unpaid losses2,607,862 
Reinsurance recoverables on unpaid losses
Automobile insurance27,528 
Homeowners insurance3,903 
Other short-duration insurance lines717 
Total reinsurance recoverables on unpaid losses32,148 
Insurance lines other than short-duration1,072 
Unallocated claims adjustment expenses144,620 
145,692 
Total gross loss and loss adjustment expense reserves$2,785,702 

  December 31, 2017
  (Amounts in thousands)
Net outstanding liabilities  
Automobile insurance $1,141,300
Homeowners' insurance 137,195
WAIC automobile insurance 12,076
Other short-duration insurance lines 69,327
Loss and loss adjustment expense reserves, net of reinsurance recoverables on unpaid losses 1,359,898
Reinsurance recoverables on unpaid losses  
Automobile insurance 10,004
Homeowners' insurance 53,323
Other short-duration insurance lines 674
Total reinsurance recoverables on unpaid losses 64,001
Insurance lines other than short-duration 1,183
Unallocated claims adjustment expenses 85,531
  86,714
Total gross loss and loss adjustment expense reserves $1,510,613

12.13. Dividends
The following table presents shareholder dividends paid:
Year Ended December 31,
202320222021
 (Amounts in thousands, except per share data)
Total paid$70,322 $105,482 $140,226 
Per share paid$1.2700 $1.9050 $2.5325 
 Year Ended December 31,
 2017 2016 2015
 (Amounts in thousands, except per share data)
Total paid$137,886
 $137,201
 $136,386
Per share paid$2.4925
 $2.4825
 $2.4725


The Insurance Companies are subject to the financial capacity guidelines established by their domiciliary states. The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations. As of December 31, 2017,2023, the insurance subsidiaries of the Company are permitted to pay approximately $167$163 million in dividends in 20182024 to Mercury General without the prior approval of the DOI of domiciliary states. The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay shareholder dividends. During 2017, 2016,2023, 2022, and 2015,2021, the Insurance Companies paid Mercury General ordinary dividends of $109 million, $111 million,$0, $0, and $133$191 million, respectively.


On February 2, 2018,9, 2024, the Board of Directors declared a $0.6250$0.3175 quarterly dividend payable on March 29, 201827, 2024 to shareholders of record on March 15, 2018.13, 2024.


13.14. Statutory Balances and Accounting Practices
The Insurance Companies prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance departments of their domiciliary states. Prescribed statutory accounting practices primarily include those published as statements of statutory accounting principles by the National Association of Insurance Commissioners (the "NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. As of December 31, 2017,2023, there were no material permitted statutory accounting practices utilized by the Insurance Companies.



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

Year Ended December 31,
Year Ended December 31, 202320222021
2017 2016 2015 (Amounts in thousands)
(Amounts in thousands)
Statutory net income(1)
$117,376
 $82,359
 $123,984
Statutory net (loss) income(1)
Statutory capital and surplus$1,589,226
 $1,441,571
 $1,451,950
 __________
(1)
Statutory net income reflects differences from GAAP net income, including changes in the fair value of the investment portfolio as a result of the application of the fair value option.

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

The Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations. The RBC formula is used by insurance regulators to monitor capital and surplus levels. It was designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance business having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. The Company periodically monitors the RBC level of each of the Insurance Companies. As of December 31, 2017, 2016,2023, 2022 and 2015,2021, each of the Insurance Companies exceeded the minimum required RBC level, as determined by the NAIC and adopted by the state insurance regulators. None of the Insurance Companies’ RBC ratios were less than 400%350% of the authorized control level RBC as of December 31, 2017, 20162023, none less than 330% as of December 31, 2022, and 2015.none less than 400% as of December 31, 2021. Generally, an RBC ratio of 200% or less would require some form of regulatory or company action.


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


The Plan includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue Code. The matchingMatching contributions, at a rate set by the Board of Directors, totaled $8.6approximately $11.1 million, $8.2$10.8 million, and $8.5$10.4 million for 2017, 2016,2023, 2022, and 2015,2021, respectively.


The Plan also includes an employee stock ownership plan that covers substantially all employees. The Board of Directors authorizes the Plan to purchase the Company’s common stock in the open market for allocation to the Plan participants. No purchases were made during the past three years.


The Company also provides company-wide annual cash bonuses to all eligible employees based on performance criteria for each recipient and for the Company as a whole. The Company performance goals wereare largely based on the Company's premium growth and combined ratio. The Company paid a total of approximately $3.6 million, $9.1 million, and $36.9 million of company-wide annual cash bonuses to all its eligible employees of $0.0 million, $16.8 million,based on these performance criteria in 2023, 2022, and $20.7 million in 2017, 2016, and 2015,2021, respectively.


15.16. Share-Based Compensation


In February 2015, the Company adopted the 2015 Incentive Award Plan (the "2015 Plan"), replacing the 2005 Equity Incentive Plan (the "2005 Plan") which expired in January 2015. The 2015 Plan was approved at the Company's Annual Meeting of Shareholders in May 2015. A maximum of 4,900,000 shares of common stock under the 2015 Plan are authorized for issuance upon exercise of stock options, stock appreciation rights and other awards, or upon vesting of restrictedRSU or deferred stock awards. AsThe Company had granted 80,000 stock options under the 2015 Plan, 10,000 of which were forfeited, with 4,830,000 shares of common stock available for future grant as of December 31, 2017, only stock options and restricted stock unit2023. No share-based compensation awards have been granted since March 2018 under these plans.the 2015 Plan.


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  Year Ended December 31,
  2017 2016 2015
  (Amounts in thousands)
Cash received from stock option exercises $2,162
 $1,632
 2,111
Compensation cost, all share-based awards 60
 142
 5,208
Excess tax (expense) benefit, all share-based awards (8) 913
 27
The following table presents a summary of cash received, compensation costs recognized and excess tax benefit, related to the Company's share-based awards:

Year Ended December 31,
202320222021
(Amounts in thousands)
Cash received from stock option exercises$— $— $215 
Compensation cost, all share-based awards— 15 141 
Excess tax benefit, all share-based awards— (1)(117)

Stock Option Awards

Beginning January 1, 2008, stock options granted, for which the Company has recognized share-based compensation expense,Stock option awards become exercisable at a rate of 25% per year beginning one year from the date granted, are granted at the closing price of the Company's stock on the date of grant, and expire after 10 years. Prior to January 1, 2008,

In February 2018, the Compensation Committee of the Company's Board of Directors awarded a total of 80,000 stock options granted became exercisable at a rate of 20% per year.

No stock options were awarded in 2017, 2016, and 2015to four senior executives under the 2015 Plan or 2005 Plan.which will vest over the four-year requisite service period. 10,000 of these stock options were forfeited in February 2019 following the departure of a senior executive. The fair values of these stock options awarded in 2013 under the 2005 Plan were estimated on the datesdate of grant using a closed-form option valuation model (Black-Scholes).

The following table provides the assumptions used in the calculation of grant-date fair values of these stock options awarded during 2013 based on the Black-Scholes option pricing model:
2013
Weighted-average grant-date fair value$7.118.09 
Expected volatility33.18 %
Expected volatility33.16% - 33.18%
Weighted-average expected volatility33.17%
Risk-free interest rate0.88% - 1.60%2.62 %
Expected dividend yield5.40% - 5.76%5.40 %
Expected term in months72


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


The following table presents a summary of the stock option activity under the Company’s plans for the year ended December 31, 2017:2023:
SharesWeighted-Average
Exercise Price		Weighted-Average
Remaining Contractual Term
(Years)		Aggregate
Intrinsic Value
(in 000’s)
Outstanding at January 1, 202317,500$43.01 
Exercised— $— 
Canceled or expired— $— 
Outstanding at December 31, 202317,500$43.01 4.1$— 
Exercisable at December 31, 202317,500$43.01 4.1$— 
 Shares 
Weighted-Average
Exercise Price
 
Weighted-Average
Remaining Contractual Term
(Years)
 
Aggregate
Intrinsic Value
(in 000’s)
Outstanding at January 1, 201785,500
 $47.52
    
Granted—
 —
    
Exercised(43,000)
 $50.28
    
Canceled or expired—
 $—
    
Outstanding at December 31, 201742,500
 $44.72
 3.0 $371
Exercisable at December 31, 201742,500
 $44.72
 3.0 $371


The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the stock option exercise price, multiplied by the number of in-the-money stock options) that would have been received by the stock option holders had all stock options been exercised on December 31, 2017.2023. The aggregate intrinsic valuesvalue of stock options exercised was $29,975 and $1,007,175 for 2022 and 2021, respectively. There were $371,000, $591,000, and $303,000 for 2017, 2016, and 2015, respectively.no stock options exercised in 2023. The total fair value of stock options vested duringwas $141,584 for each of 2017, 2016,2022 and 2015 was $142,000.2021. There were no stock options vested in 2023.





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The following table presents information regarding stock options outstanding at December 31, 2017:2023:
 Options OutstandingOptions Exercisable
Exercise PriceNumber of
Options		Weighted-Average
Remaining
Contractual Life
(Years)		Weighted-
Average  Exercise
Price		Number of
Options		Weighted-
Average  Exercise
Price
$43.0117,5004.1$43.01 17,500$43.01 
 Options Outstanding Options Exercisable
Range of Exercise Prices
Number of
Options
 
Weighted-Average
Remaining
Contractual Life
(Years)
 
Weighted-
Average  Exercise
Price
 
Number of
Options
 
Weighted-
Average  Exercise
Price
$33.61-$45.3027,500 4.5 $42.64
 27,500 $42.64
$47.61-$50.3515,000 0.3 $48.52
 15,000 $48.52


As of December 31, 2017, all of stock options outstanding were vested, and no additional compensation expenses related to these stock options will be recognized in the Company's consolidated statements of operations.


Restricted Stock Unit Awards

Under the 2015 Plan and 2005 Plan, the Compensation Committee of the Company’s Board of Directors granted performance-based vesting restricted stock unit awards to the Company’s senior management and key employees.

The following table presents the restricted stock unit grants summary at December 31, 2017:
 Grant Year
 2016 2015
Three-year performance period ending December 31,2018
 2017
Vesting shares, target (net of forfeited)83,250
 85,750
Vesting shares, maximum (net of forfeited)156,094
 160,781

The following table presents a summary of restricted stock unit awards activity, based on target vesting, during the years indicated:
 Year Ended December 31,
 2017 2016 2015
 Shares 
Weighted-
Average Fair
Value per Share
 Shares 
Weighted-
Average  Fair
Value per Share
 Shares 
Weighted-
Average  Fair
Value per Share
Outstanding at January 1271,000
 $51.09
 263,250
 $45.94
 167,000
 $41.15
Granted—
 —
 95,750
 $53.49
 100,250
 $53.80
Vested(82,000) $45.17
 (78,500) $36.82
 —
 —
Forfeited/Canceled(20,000) $53.62
 (9,500)
 $50.46
 (4,000)
 $43.10
Expired—
 —
 —
 —
 —
 —
Outstanding at December 31169,000
 $53.66
 271,000
 $51.09
 263,250
 $45.94

The restricted stock units vest at the end of a three-year performance period beginning with the year of the grant, and then only if, and to the extent that, the Company’s performance during the performance period achieves the threshold established by the Compensation Committee of the Company’s Board of Directors. For 2015 and 2016 grants, vesting is based on the Company’s cumulative underwriting income, annual underwriting income, and net earned premium growth. As of December 31, 2017, 12,500 and 13,500 target restricted stock units granted in 2016 and 2015, respectively, have been forfeited because the recipients were no longer employed by the Company. Expired shares represent shares that did not meet the vesting requirements.

The fair value of each RSU grant was determined based on the closing price of the Company's common stock 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. If the minimum performance goals are not met, no compensation cost will be recognized and any recognized compensation cost would be reversed.

In March 2017, approximately $3.6 million was paid upon the vesting of 61,445 RSUs awarded in 2014 resulting from the attainment of performance goals above the target threshold during the three-year performance period ended December 31, 2016.

In February 2016, 88,074 shares of common stock, net of 58,822 shares withheld for payroll taxes, were issued upon the vesting of 146,896 RSUs awarded in 2013 resulting from the attainment of performance goals above the target threshold during the three-year performance period from 2013 to 2015.

At December 31, 2016,2023, the Company determined that it was probable that the Company's Board of Directors would modify the payment method for the vested 2014 grant awards and pay for the vested awards in cash in lieu of shares of the Company's common stock. As a result, the 2014 grants were reclassified from equity to liability awards at December 31, 2016. $3.4 million of the amount previously recognized in additional paid-in capital for the 2014 grant awards was reclassified to other liabilities in the consolidated balance sheets at December 31, 2016. Additional $0.2 million was reclassified from additional paid-in capital to other liabilities at the vesting date of February 28, 2017 for the 2014 grant awards, based on the additional amount of awards vested from December 31, 2016 through the vesting date.had no unrecognized share-based compensation expense.


16.17. Earnings (Loss) Per Share

The following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share calculations:
Year Ended December 31,
 202320222021
 Net Income
(Numerator)		Weighted Average
Shares
(Denominator)		Per-Share
Amount		Net Loss
(Numerator)		Weighted Average
Shares
(Denominator)		Per-Share
Amount		Net Income
(Numerator)		Weighted Average
Shares
(Denominator)		Per-Share
Amount
 (Amounts and numbers in thousands, except per-share data)
Basic EPS
Income (loss) available to common stockholders$96,336 55,371 $1.74 $(512,672)55,371 $(9.26)$247,937 55,368 $4.48 
Effect of dilutive securities:
Options— — — — — 6 
Diluted EPS
Income (loss) available to common stockholders after assumed conversions$96,336 55,371 $1.74 $(512,672)55,371 $(9.26)$247,937 55,374 $4.48 
 Year Ended December 31,
 2017 2016 2015
 
Income
(Numerator)
 
Weighted
Shares
(Denominator)
 
Per-Share
Amount
 
Income
(Numerator)
 
Weighted
Shares
(Denominator)
 
Per-Share
Amount
 
Income
(Numerator)
 
Weighted
Shares
(Denominator)
 
Per-Share
Amount
 (Amounts and numbers in thousands, except per-share data)
Basic EPS                 
Income available to common stockholders$144,877
 55,316
 $2.62
 $73,044
 55,249
 $1.32
 $74,479
 55,157
 $1.35
Effect of dilutive securities:                 
Options—
 11
   —
 11
   —
 15
  
RSUs—
 —
   —
 42
   —
 37
  
Diluted EPS                 
Income available to common stockholders after assumed conversions$144,877
 55,327
 $2.62
 $73,044
 55,302
 $1.32
 $74,479
 55,209
 $1.35


Potentially dilutive securities representing approximately 0, 27,600, and 67,00017,500 shares of common stock for 2017, 2016, and 2015, respectively, were excluded from the computation of diluted earnings (loss) per common share for each of 2023 and 2022, because their effect would have been anti-dilutive. For 2022, 26 incremental shares were also excluded from the computation of diluted loss per share as the Company generated a net loss in 2022. There were no potentially dilutive securities with anti-dilutive effect for 2021.


17.18. Commitments and Contingencies
Operating
Leases
The Company is obligated under various non-cancellable lease agreements providing for office space, automobiles, office equipment, and officeEDP equipment that expire at various dates through the year 2023. For2028. See Note 7. Leases for additional information on leases that contain predetermined escalationsand future lease payments as of the minimum rentals, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred rent in other liabilities. This liability amounted to $1.5 million and $2.4 million at December 31, 2017 and 2016, respectively. Total rent expense under these lease agreements was $14.7 million, $19.7 million, and $16.0 million for 2017, 2016, and 2015, respectively.

The following table presents future minimum commitments for operating leases as of December 31, 2017:
Year Ending December 31,Operating Leases
 (Amounts in thousands)
2018$10,818
20198,024
20205,791
20213,855
20222,769
Thereafter673
2023.
California Earthquake Authority ("CEA")
The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowners policies directly with the CEA. The Company receives a small fee for placing business with the CEA, which is recorded as other income in the consolidated statements of operations. Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made after CEA capital has been expended and are based upon each company’s participation percentage multiplied by the amount of the total assessment. Based upon the most recent information provided by the CEA, the Company’s maximum total exposure to CEA assessments at April 3, 2017,30, 2023, the most recent date at which information was available, was approximately $66.2$85.6 million. There was no assessment made in 2017.

2023.
Regulatory and Legal Matters


InOn October 5, 2021, the Company received a letter from the California DOI requesting additional information on the
92

amount of premium refunds or credits that the Company has provided or plans to further provide to its private passenger automobile policyholders, and the methodology used in determining such refunds or credits for the time period of March 2006,2020 through at least March 2021, due to reduced driving during the pandemic. On October 6, 2021, the California DOI issued an Amended Notice of Non-Compliance to a Notice of Non-Compliance originally issued in February 2004 (as amended, “2004 NNC”)press release alleging that the Company charged rates in violationand two other insurers have not provided enough premium relief to the policyholders through premium refunds or credits for lower frequency resulting from reduced driving during the pandemic. Two private actions against the Company were also filed during the first quarter of 2022, asserting substantially the same arguments on behalf of an alleged class of similarly situated policyholders, and seeking restitution of the California Insurance Code, willfully permittedallegedly excessive premiums charged during the pandemic. On November 21, 2022, after its agents to charge broker fees in violationreview of California law,loss and willfully misrepresented the actual price insurance consumers could expect to pay for insuranceexpense data requested from and provided 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 assertsnotified the false advertising allegations and accusation, and (b)Company that an additional total refund of approximately $52 million should be provided to its private passenger automobile policyholders, purportedly based upon its analysis of 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.Company’s data. 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, and the Company appealed. The Court of Appeal affirmed the Superior Court's rulingbelieves that the Company was requiredamounts returned to-date, including the mileage reductions on individual policies, have provided appropriate and material relief to exhaust its administrative remedies, but expressly preserved for later appeal thepolicyholders and that there is no legal basis for the ALJ’s dismissal: violation ofCalifornia DOI or 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,courts to require the CommissionerCompany to vacate the Order, to stay the Order while the Superior Court action is pending, and to judicially declare as invalid the Commissioner’s interpretationissue additional refunds. The total amount of certain provisions of the California Insurance Code. Subsequentpremiums returned to the filing of the Writ, a consumer group petitioned and was granted the right to intervene in the Superior Court action. The Court did not order a stay, and the $27.6Company's policyholders through refunds or credits is approximately $128 million, assessed penalty was paid in March 2015.which reduced its net premiums earned for 2020. The Company has also worked with its agents and policyholders to reclassify exposures on an individual policy basis, including reducing mileage on a large number of vehicles since the pandemic began. Management believes the mileage reductions have significantly reduced premiums on those individual policies in a manner consistent with the Company’s filed an amended Writ on September 11, 2015, adding an explicit request for a refund of the penalty,and approved rates. The Company engaged in discussions 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 declinedand on April 24, 2023, the Company entered into a stipulated settlement agreement with the California DOI (the “Settlement Stipulation”), which fully resolved all issues related to dismiss the case on those grounds. The Superior Court also agreedCalifornia DOI’s alleged COVID refund obligations, with the exception of a similar issue involving Orion Indemnity Company, a small consolidated subsidiary of 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,was settled separately with the California DOI filed a noticeon May 15, 2023 for approximately $0.25 million paid to its existing California private passenger automobile policyholders. Under the Settlement Stipulation, the Company agreed to provide an aggregate credit amount of appeal$25 million to the existing California private passenger automobile policyholders of MIC and CAIC, significant consolidated subsidiaries of the Superior Court's judgment enteredCompany, by means of credits against the future private passenger automobile renewal premium obligations over a period not to exceed 18 months commencing on November 17, 2016. WhileJuly 7, 2023. The renewal premium credits are recorded as reductions to the appealCompany’s net premiums earned and written in the periods when the applicable policies are renewed. Although the Company believes the voluntary amounts returned to date have provided appropriate relief to its policyholders and there is still pending,no legal basis for the California DOI returnedto require the entire penalty amount plus accrued interest, a total of $30.9 million,Company to issue additional refunds, the Company agreed to the Company in June 2017 in orderSettlement Stipulation to avoid accruing further interest. Becauseresolve the matter has been appealed, the Company has not yet recognized the $30.9 million as a gain in the consolidated statementsand facilitate timely review and approval 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.its pending rate applications. The Company had filed a motion to dismiss the false advertising portion of the casetwo private actions seeking COVID-related restitution, based on the Superior Court's findings, butCalifornia case law barring such retroactive relief and the ALJ denied that motion afterresolution with the appeal was filed. The ALJ did, however, grantCalifornia DOI. In August 2023, the court granted the Company's alternative requestmotion to stay further proceedings pendingdismiss, and the final determinationjudgment in the Company's favor is now final.

On September 10, 2021, the California DOI served the Company a Notice of Non-Compliance ("NNC"), alleging violations in connection with its 2014 Rating & Underwriting Examination Report, which was adopted by the California DOI in 2019. The NNC itemizes alleged violations, many of which management believes were corrected or otherwise resolved during the course of the appeal.examination, and seeks penalties. The Company has accruedparticipated in lengthy and detailed discussions with the California DOI since the adoption of the examination report, in an attempt to address the issues deemed unresolved by the California DOI, and has taken several additional corrective actions approved by the California DOI. The Company is continuing discussions with the California DOI to resolve the outstanding issues, or at least obtain the agreement of the California DOI to remove the resolved items from the NNC before proceeding to a liabilityformal hearing process if a settlement is not reached. On August 1, 2022, the California DOI publicly announced its intention to pursue an administrative action against the Company with respect to certain outstanding issues. The Company filed a written response to the NNC on September 29, 2022. The response, consisting of a notice of defense, a motion to strike, and a motion to dismiss, challenges the NNC on procedural and substantive grounds. On November 9, 2022, the California DOI served objections and non-substantive responses to the Company's discovery requests. The Company is continuing settlement discussions with the California DOI. The parties are also conferring regarding the possible filing of an Amended NNC that would eliminate the resolved items and identify the remaining issues in dispute should the matter proceed to a hearing. The parties agreed to conduct a mediation to attempt resolution, which is currently scheduled for March 4, 2024. On November 14, 2023, the estimated costCalifornia DOI granted Consumer Watchdog's petition to continue to defend itselfintervene in the false advertising OSC. Based upon its understanding of the facts and the California Insurance Code,NNC, although the Company doeshas not expect thatagreed to allow its involvement in the ultimate resolutionmediation. The Company cannot reasonably predict the likelihood, timing or outcome of any hearing process or administrative action, nor can it reasonably estimate the false advertising OSC will be material to its financial position.amount of penalties, if any.
Litigation
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 Note 1. Summary of Significant Accounting Policies.


The Company also establishes reservesaccruals for estimated liabilities 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 loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an
93

estimate of the possible loss, range of

loss, or a statement that such an estimate cannot be made. In addition, the Company accrues for anticipated legal defense costs associated with such lawsuits and regulatory actions. 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 or cash flows.

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


The Company is also involved in proceedings relating to assessments and rulings made by the FTB. See Note 10.11. Income Taxes.


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

18. Risks and Uncertainties

Many businesses are experiencing the effects of uncertain conditions in the global economy and capital markets, reduced consumer spending and confidence, and continued volatility, which could adversely impact the Company’s financial condition, results of operations, and liquidity. Further, volatility in global capital markets could adversely affect the Company’s investment portfolio. The Company is unable to predict the impact of current and future global economic conditions on the United States, and California, where the majority of the Company’s business is produced.

The Company applies the fair value option to its investment portfolio. Rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within the Company’s financial statements, and the period-to-period changes in value could vary significantly. Decreases in market value may have a material adverse effect on the Company’s financial condition or results of operations.
19. Quarterly Financial Information (Unaudited)
The following table presents summarized quarterly financial data for 2017 and 2016:
  Quarter Ended
  March 31 June 30 September 30 December 31
  (Amounts in thousands, except per share data)
2017        
Net premiums earned $789,770
 $797,666
 $801,205
  $806,796
Change in fair value of financial instruments pursuant to the fair value option 21,857
 20,275
 17,608
 28,065
Income before income taxes 30,599
 68,752
 58,247
 9,487
Net income (loss) 26,980
 51,633
 46,485
 19,779
Basic earnings per share (1)
 0.49
 0.93
 0.84
 0.36
Diluted earnings per share (1)
 0.49
 0.93
 0.84
 0.36
Dividends paid per share 0.6225
 0.6225
 0.6225
  0.6250
         
2016     
  
Net premiums earned $767,085
 $779,321
 $790,850
  $794,517
Change in fair value of financial instruments pursuant to the fair value option 18,531
 37,127
 (21,132) (67,332)
Income before income taxes 26,034
 64,335
 31,625
 (51,270)
Net income (loss) 23,323
 48,873
 26,930
 (26,082)
Basic earnings per share (1)
 0.42
 0.88
 0.49
 (0.47)
Diluted earnings per share (1)
 0.42
 0.88
 0.49
 (0.47)
Dividends paid per share 0.6200
 0.6200
 0.6200
  0.6225
 __________
(1)
The basic and diluted earnings per share do not sum due to rounding.


Net income for 2017 was primarily attributable to net premiums earned, net investment income and net realized investment gains, partially offset by operating expenses, and losses and loss adjustment expenses, including catastrophe losses and unfavorable development on prior accident years' loss and loss adjustment expense reserves. The primary causes of the net income for the fourth quarter of 2017 were the increases in the fair value of the Company’s fixed maturity and equity securities due to the overall market improvement, net investment income, and a net tax benefit of $7.4 million due to the effect of the Act.

Net income for 2016 was primarily attributable to net premiums earned and net investment income, partially offset by net realized investment losses, operating expenses, and losses and loss adjustment expenses, including catastrophe losses and unfavorable development on prior accident years' loss and loss adjustment expense reserves. The primary cause of the net loss for the fourth quarter of 2016 was the declines in the fair value of the Company’s fixed maturity securities due to the rising market interest rates.

20. Acquisition
Pursuant to an October 22, 2014 Stock Purchase Agreement, the Company purchased all the issued and outstanding shares of Workmen’s Auto Insurance Company ("WAIC"), a California domiciled property and casualty insurance company, on January 2, 2015.
WAIC is a Los Angeles-based non-standard, private passenger automobile insurance company that operates predominantly in California. The Company intends to use the WAIC non-standard automobile product to complement the Company’s preferred and standard product offerings.
The Company paid $8 million in cash for the shares of WAIC, of which $2 million had been held in escrow for up to three years as security for any loss development on claims incurred on or prior to June 30, 2014. Based on the evaluation performed at the acquisition date and at December 31, 2015, of the claims reserves for WAIC for losses and loss adjustment expenses incurred on or prior to June 30, 2014, the Company estimated that it would recover the $2 million held in escrow and, therefore, the Company deducted it from cash consideration to arrive at the fair value of total consideration transferred. The Company recovered the $2 million held in escrow in 2016. In accordance with regulatory approval requirements, the Company made a $15 million cash capital contribution to WAIC on January 12, 2015.

21. Segment Information


The Company is primarily engaged in writing personal automobile insurance and provides related property and casualty insurance products to its customers through 1412 subsidiaries in 11 states, principally in California.
The Company has one reportable business segment - the Property and Casualty business segment.
The Company’s Chief Operating Decision Maker evaluates operating results based on pre-tax underwriting results which is calculated as net premiums earned less (a) losses and loss adjustment expenses;expenses and (b) underwriting expenses (policy acquisition costs and other operating expenses).
Expenses are allocated based on certain assumptions that are primarily related to premiums and losses. The Company’s net investment income, net realized investment gains (losses), other income, and interest expense are excluded in evaluating pre-tax underwriting profit. The Company does not allocate its assets, including investments, or income taxes in evaluating pre-tax underwriting profit.
Property and Casualty Lines
The Property and Casualty business segment offers several insurance products to the Company’s individual customers and small business customers. These insurance products are: private passenger automobile, which is the Company’s primary business, and related insurance products such as homeowners, commercial automobile and commercial property. These insurance products are primarily sold to the Company’s individual customers and small business customers, which increases retention of the Company’s private personal automobile client base. The insurance products comprising the Property and Casualty business segment are sold through the same distribution channels, mainly through independent and 100% owned insurance agents, and go through a similar underwriting process.
Other Lines
The Other business segment represents net premiums written and earned from an operating segment that does not meet the quantitative thresholds required to be considered a reportable segment. This operating segment offers automobile mechanical protection warranties which are primarily sold through automobile dealerships and credit unions.












94

The following table presents operating results by reportable segment for the years ended:

Year Ended December 31,
202320222021
 Property & CasualtyOtherTotalProperty & CasualtyOtherTotalProperty & CasualtyOtherTotal
(Amounts in millions)
Net premiums earned$4,245.4 $29.0 $4,274.4 $3,923.6 $28.9 $3,952.5 $3,712.9 $29.0 $3,741.9 
Less:
Losses and loss adjustment expenses3,502.2 15.7 3,517.9 3,347.2 15.0 3,362.2 2,746.3 13.9 2,760.2 
Underwriting expenses973.4 14.7 988.1 922.1 12.3 934.4 902.6 14.1 916.7 
Underwriting (loss) gain(230.2)(1.4)(231.6)(345.7)1.6 (344.1)64.0 1.0 65.0 
Investment income234.6 168.4 129.7 
Net realized investment gains (losses)101.0 (488.1)111.7 
Other income19.6 10.3 10.0 
Interest expense(24.2)(17.2)(17.1)
Pre-tax income (loss)$99.4 $(670.7)$299.3 
Net income (loss)$96.3 $(512.7)$247.9 
 December 31, 2017 December 31, 2016 December 31, 2015
 Property & Casualty Other Total Property & Casualty Other Total Property & Casualty Other Total
 (Amounts in millions)
Net premiums earned$3,160.9
 $34.5
 $3,195.4
 $3,089.9
 $41.9
 $3,131.8
 $2,906.6
 $51.3
 $2,957.9
Less:                 
Losses and loss adjustment expenses2,427.8
 17.1
 2,444.9
 2,333.2
 21.9
 2,355.1
 2,117.3
 28.2
 2,145.5
Underwriting expenses773.1
 15.6
 788.7
 780.4
 17.5
 797.9
 770.0
 20.0
 790.0
Underwriting (loss) gain
(40.0) 1.8
 (38.2) (23.7) 2.5
 (21.2) 19.3
 3.1
 22.4
Investment income    124.9
     121.9
     126.3
Net realized investment gains (losses)    83.7
     (34.3)     (83.8)
Other income    11.9
     8.3
     8.9
Interest expense    (15.2)     (4.0)     (3.2)
Pre-tax income    $167.1
     $70.7
     $70.6
Net income

 

 $144.9
     $73.0
     $74.5

The following table presents the Company’s net premiums earned and direct premiums written by line of insurance business for the years ended:
Year Ended December 31,
 202320222021
 Property & CasualtyOtherTotalProperty & CasualtyOtherTotalProperty & CasualtyOtherTotal
(Amounts in millions)
Private passenger automobile$2,796.1 $— $2,796.1 $2,655.7 $— $2,655.7 $2,613.5 $— $2,613.5 
Homeowners957.7 — 957.7 830.6 — 830.6 698.1 — 698.1 
Commercial automobile303.9 — 303.9 267.9 — 267.9 258.6 — 258.6 
Other187.7 29.0 216.7 169.4 28.9 198.3 142.7 29.0 171.7 
Net premiums earned$4,245.4 $29.0 $4,274.4 $3,923.6 $28.9 $3,952.5 $3,712.9 $29.0 $3,741.9 
Private passenger automobile$2,841.8 $— $2,841.8 $2,598.9 $— $2,598.9 $2,640.7 $— $2,640.7 
Homeowners1,119.0 — 1,119.0 940.3 — 940.3 801.5 — 801.5 
Commercial automobile346.2 — 346.2 276.8 — 276.8 259.9 — 259.9 
Other224.9 26.6 251.5 202.1 30.4 232.5 175.4 30.0 205.4 
Direct premiums written$4,531.9 $26.6 $4,558.5 $4,018.1 $30.4 $4,048.5 $3,877.5 $30.0 $3,907.5 






95
 December 31, 2017 December 31, 2016 December 31, 2015
 Property & Casualty Other Total Property & Casualty Other Total Property & Casualty Other Total
 (Amounts in millions)
Private passenger automobile$2,473.8
 $—
 $2,473.8
 $2,435.7
 $—
 $2,435.7
 $2,308.6
 $—
 $2,308.6
Homeowners431.6
 —
 431.6
 414.0
 —
 414.0
 379.7
 —
 379.7
Commercial automobile171.9
 —
 171.9
 161.3
 —
 161.3
 144.4
 —
 144.4
Other83.6
 34.5
 118.1
 78.9
 41.9
 120.8
 73.9
 51.3
 125.2
Net premiums earned$3,160.9
 $34.5
 $3,195.4
 $3,089.9
 $41.9
 3,131.8
 $2,906.6
 $51.3
 $2,957.9
                  
Private passenger automobile$2,480.0
 $—
 $2,480.0
 $2,452.7
 $—
 $2,452.7
 $2,345.8
 $—
 $2,345.8
Homeowners469.9
 —
 469.9
 436.9
 —
 436.9
 402.2
 —
 402.2
Commercial automobile178.2
 —
 178.2
 166.1
 —
 166.1
 153.5
 —
 153.5
Other92.9
 27.9
 120.8
 89.0
 27.3
 116.3
 81.6
 29.8
 111.4
Direct premiums written$3,221.0
 $27.9
 $3,248.9
 $3,144.7
 $27.3
 $3,172.0
 $2,983.1
 $29.8
 $3,012.9


Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None


Item 9A.Controls and Procedures
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial

Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2023. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based upon its assessment, the Company’s management believes that, as of December 31, 2017,2023, the Company’s internal control over financial reporting is effective based on these criteria.

KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this 20172023 Annual Report on Form 10-K, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,2023, which is included herein.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.


Item 9B.Other Information
NoneItem 9B.Other Information

Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements
During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Adoption of Long-Term Incentive Plan and Initial Awards

On February 7, 2024, the Compensation Committee of the Board of Directors approved the Mercury General Corporation Long-Term Incentive Plan (the “LTIP”) to provide certain key employees with the right to receive cash awards providing an opportunity to participate in the appreciation of the company’s value and in order to retain these key employees
96

and consultants and reward them for contributing to the success of the company and its subsidiaries. The LTIP is administered by the Compensation Committee of the Board of Directors. Initial awards were granted under the LTIP in February 2024, with subsequent awards to employees to be granted in the discretion of the Compensation Committee of the Board of Directors or its delegate. Participants in the LTIP may be granted a number of notional interests, or “Phantom Stock Units.” Each Phantom Stock Unit represents the right to receive payment of the value of a share of the Company’s common stock upon vesting. Phantom Stock Units may be granted subject to vesting conditions, which may include service-based and/or performance-based vesting conditions tied to corporate and/or individual achievement objectives. An employee must remain employed through the date of payment of an award to be eligible for any payout under the LTIP.

Also on February 7, 2024, the Compensation Committee of the Board of Directors approved awards of performance-based Phantom Stock Units (“PSUs”) to the named executive officers of the Company. The named executive officers were each awarded the following “target” number of PSUs: George Joseph, 23,527 PSUs; Gabriel Tirador, 23,979 PSUs; Theodore Stalick, 11,000 PSUs; and Victor Joseph, 11,716 PSUs. The payout value of PSUs granted under the LTIP will be determined based on the achievement of specific, pre-established corporate performance objectives, and in part on individual performance, for each named executive officer during the applicable performance period. The maximum payout level with respect to the PSUs is 150% of the “target” award.

The foregoing description of the LTIP and the awards thereunder is qualified in its entirety by reference to the full text of the LTIP, which is filed as Exhibits 10.49, 10.50 and 10.51 to this Annual Report on Form 10-K.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable
97

PART III
 
Item 10.Directors, Executive Officers, and Corporate Governance
Item 10.Directors, Executive Officers, and Corporate Governance
Item 11.Executive Compensation
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
Item 14.Principal Accounting Fees and Services
Information regarding executive officers of the Company is included in Part I. For other information called for by Items 10, 11, 12, 13 and 14, reference is made to the Company’s definitive proxy statement for its Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after December 31, 20172023 and which is incorporated herein by reference.

98

PART IV
 
Item 15.Exhibits and Financial Statement Schedules

Item 15.Exhibits and Financial Statement Schedules

The following documents are filed as a part of this report:
1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, 20172023 are contained herein as listed in the Index to Consolidated Financial Statements on page 54.
2. Financial Statement Schedules:
Report of Independent Registered Public Accounting Firm
Schedule I—Summary of Investments—Other than Investments in Related Parties
Schedule II—Condensed Financial Information of Registrant
Schedule IV—Reinsurance


All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
Form 10-K Exhibit No.Description of ExhibitIf Incorporated by Reference, Documents with Which Exhibit was Previously Filed with the SEC
3.1
3.2
3.3
3.4
4.13.5
4.1Shareholders’ Agreement dated as of October 7, 1985 among the Company, George Joseph and Gloria Joseph.This document was filed as an exhibit to Registrant’s Registration Statement on Form S-1, File No. 33-899, and is incorporated herein by this reference. (Not available on the SEC website. Filed prior to the SEC Edgar filing mandate).
4.2
4.3
10.1*4.4
99

10.1*Profit Sharing Plan, as Amended and Restated as of March 11, 1994.This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by this reference. (Not available on the SEC website. Filed prior to the SEC Edgar filing mandate).
10.2*Amendment 1994-I to the Mercury General Corporation Profit Sharing Plan.This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference. (Not available on the SEC website. Filed prior to the SEC Edgar filing mandate).

10.3*
10.3*Amendment 1994-II to the Mercury General Corporation Profit Sharing Plan.This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference. (Not available on the SEC website. Filed prior to the SEC Edgar filing mandate).
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
100

10.19*
10.20*
10.21*

10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33
10.29
10.34
10.30
10.35
10.31
10.36
10.32
10.37
101

10.33
10.38
10.34
10.39
10.35
10.40
10.36*
10.41*
10.37*
10.42*
10.38*
10.43*

10.39*
Form of Restricted Stock Unit Award Agreement under the Mercury General Corporation 2005 Equity Incentive Award Plan.
This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 5, 2010, and is incorporated herein by this reference.
10.40
10.44*
This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.
10.41
Amendment Agreement to Credit Agreement, dated as of January 26, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.
This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.
10.42
Second Amendment Agreement to Credit Agreement, dated as of August 4, 2011, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.
This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 5, 2011, and is incorporated herein by this reference.
10.43
Third Amendment Agreement to Credit Agreement, dated as of July 31, 2013, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.
This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 5, 2013, and is incorporated herein by this reference.
10.44
Fourth Amendment Agreement to Credit Agreement, dated as of December 3, 2014, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.
This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2014, and is incorporated herein by this reference.
10.45
Fifth Amendment Agreement to Credit Agreement, dated as of December 28, 2016, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.
This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 29, 2016, and is incorporated herein by this reference.
10.46*
Mercury General Corporation Annual Incentive Plan.
10.47
10.45*
This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended June 30, 2013, and is incorporated herein by this reference.
10.48
First Amendment Agreement to Credit Agreement, dated as of December 3, 2014, among Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.
This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2014, and is incorporated herein by this reference.
10.49*
Mercury General Corporation 2015 Incentive Award Plan
10.50*
10.46*
10.51*
10.47*
10.52*
10.48*

10.49*Filed herewith.
10.50*Filed herewith.
10.51*Filed herewith.
10.52
10.53
This document was filed as an exhibit to Registrant’s Form 10-K for8-K filed with the fiscal year ended December 31, 2014,Securities and Exchange Commission on November 22, 2022, and is incorporated herein by this reference.
102

10.54
19.1Filed herewith.
21.1Filed herewith.
23.1Filed herewith.
31.1
Filed herewith.
31.2
Filed herewith.
32.1
Filed herewith.
32.2
Filed herewith.
101.INS97.1Filed herewith.
101.INSXBRL Instance DocumentDocument-the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema DocumentDocument.
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentDocument.
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentDocument.
101.LABXBRL Taxonomy Extension Label Linkbase DocumentDocument.
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentDocument.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*Denotes management contract or compensatory plan or arrangement.



Item 16. Form 10-K Summary

None
103

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MERCURY GENERAL CORPORATION
BY
/S/    GABRIEL TIRADOR
Gabriel Tirador
President and Chief Executive Officer
February 8, 201813, 2024


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SignatureTitleDate
SignatureTitleDate
/S/    GEORGE JOSEPH  
George Joseph
Chairman of the BoardFebruary 8, 201813, 2024
/S/    GABRIEL TIRADOR
Gabriel Tirador
President and Chief Executive Officer and Director (Principal Executive Officer)February 8, 201813, 2024
/S/    VICTOR G. JOSEPH
Victor G. Joseph
President and Chief Operating Officer and DirectorFebruary 13, 2024
/S/    THEODORE R. STALICK
Theodore R. Stalick
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)February 8, 201813, 2024
/S/    MICHAEL D. CURTIUSGEORGE G. BRAUNEGG  
Michael D. CurtiusGeorge G. Braunegg
DirectorDirectorFebruary 8, 201813, 2024
/S/    RAMONA L. CAPPELLO  
Ramona L. Cappello
DirectorFebruary 13, 2024
/S/    JAMES G. ELLIS
James G. Ellis
DirectorDirectorFebruary 8, 201813, 2024
/S/    VICKY WAI YEE JOSEPH
Vicky Wai Yee Joseph
DirectorFebruary 13, 2024
/S/    JOSHUA E. LITTLE
Joshua E. Little
DirectorDirectorFebruary 8, 201813, 2024
/S/    MARTHA E. MARCON
Martha E. Marcon
DirectorDirectorFebruary 8, 201813, 2024

104

SCHEDULE I
 
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2017
Type of InvestmentCost Fair Value 
Amounts in the
Balance Sheet
 (Amounts in thousands)
Fixed maturity securities:     
U.S. government bonds$13,355
 $13,236
 $13,236
Municipal securities2,490,150
 2,556,532
 2,556,532
Mortgage-backed securities26,454
 27,165
 27,165
Corporate securities136,013
 137,542
 137,542
Collateralized loan obligations104,323
 105,202
 105,202
Other asset-backed securities52,935
 53,100
 53,100
Total fixed maturity securities2,823,230
 2,892,777
 2,892,777
Equity securities:     
Common stock368,619
 429,367
 429,367
Non-redeemable preferred stock34,429
 34,869
 34,869
Private equity fund1,481
 1,481
 1,481
Private equity fund measured at net asset value (1)
69,668
 71,523
 71,523
Total equity securities474,197
 537,240
 537,240
Short-term investments302,693
 302,711
 302,711
Total investments$3,600,120
 $3,732,728
 $3,732,728
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2023
Type of InvestmentCostFair ValueAmounts in the
Balance Sheet
 (Amounts in thousands)
Fixed maturity securities:
U.S. government bonds$174,903 $174,450 $174,450 
Municipal securities2,797,971 2,777,258 2,777,258 
Mortgage-backed securities201,727 186,887 186,887 
Corporate securities626,723 599,630 599,630 
Collateralized loan obligations486,984 484,947 484,947 
Other asset-backed securities106,675 96,164 96,164 
Total fixed maturity securities4,394,983 4,319,336 4,319,336 
Equity securities:
Common stock497,543 597,888 597,888 
Non-redeemable preferred stock64,860 51,563 51,563 
Private equity funds measured at net asset value (1)
92,536 81,242 81,242 
Total equity securities654,939 730,693 730,693 
Short-term investments179,375 178,491 178,491 
Total investments$5,229,297 $5,228,520 $5,228,520 
__________ 
(1)
The fair value is measured using the NAV practical expedient. See Note 4. Fair Value Measurements of the Notes to Consolidated Financial Statements for additional information.

(1)The fair value is measured using the NAV practical expedient. See Note 4. Fair Value Measurements of the Notes to Consolidated Financial Statements for additional information.




See accompanying Report of Independent Registered Public Accounting Firm


S-1

SCHEDULE I, Continued


MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2022
Type of InvestmentCostFair ValueAmounts in the
Balance Sheet
 (Amounts in thousands)
Fixed maturity securities:
U.S. government bonds$159,256 $158,607 $158,607 
Municipal securities2,794,476 2,737,183 2,737,183 
Mortgage-backed securities184,936 166,260 166,260 
Corporate securities607,945 569,553 569,553 
Collateralized loan obligations332,859 320,252 320,252 
Other asset-backed securities147,318 136,456 136,456 
Total fixed maturity securities4,226,790 4,088,311 4,088,311 
Equity securities:
Common stock463,940 558,169 558,169 
Non-redeemable preferred stock64,686 51,236 51,236 
Private equity funds measured at net asset value (1)
140,217 90,147 90,147 
Total equity securities668,843 699,552 699,552 
Short-term investments123,928 122,937 122,937 
Total investments$5,019,561 $4,910,800 $4,910,800 
__________ 
(1)The fair value is measured using the NAV practical expedient. See Note 4. Fair Value Measurements of the Notes to Consolidated Financial Statements for additional information.


See accompanying Report of Independent Registered Public Accounting Firm


S-2
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2016
Type of InvestmentCost Fair Value 
Amounts in the
Balance Sheet
 (Amounts in thousands)
Fixed maturity securities:     
U.S. government bonds and agencies$12,288
 $12,275
 $12,275
Municipal securities2,432,181
 2,449,292
 2,449,292
Mortgage-backed securities39,082
 39,777
 39,777
Corporate securities189,780
 189,688
 189,688
Collateralized loan obligations85,429
 86,525
 86,525
Other asset-backed securities36,650
 36,996
 36,996
Total fixed maturity securities2,795,410
 2,814,553
 2,814,553
Equity securities:
 
 
Common stock286,503
 316,450
 316,450
Non-redeemable preferred stock32,436
 31,809
 31,809
Private equity funds12,831
 9,068
 9,068
Total equity securities331,770
 357,327
 357,327
Short-term investments375,700
 375,680
 375,680
Total investments$3,502,880
 $3,547,560
 $3,547,560


SCHEDULE II


MERCURY GENERAL CORPORATION
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS

 December 31,
 2017 2016
 (Amounts in thousands)
ASSETS   
Investments, at fair value:   
Fixed maturity securities (amortized cost $0; $1,609)$—
 $1,605
Equity securities (cost $113,216; $113,943)141,227
 122,717
Short-term investments (cost $21,233; $629)
21,231
 629
Investment in subsidiaries1,976,400
 1,810,663
Total investments2,138,858
 1,935,614
Cash8,475
 11,786
Accrued investment income178
 189
Amounts receivable from affiliates231
 226
Current income taxes8,857
 —
Deferred income taxes—
 2,702
Income tax receivable from affiliates6,338
 35,237
Other assets663
 414
Total assets$2,163,600
 $1,986,168
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Notes payable$371,335
 $180,000
Accounts payable and accrued expenses—
 348
Amounts payable to affiliates507
 36
Income tax payable to affiliates17,213
 39,539
Current income taxes—
 10,200
Deferred income taxes8,242
 —
Other liabilities4,916
 3,643
Total liabilities402,213
 233,766
Commitments and contingencies   
Shareholders’ equity:   
Common stock97,523
 95,529
Retained earnings1,663,864
 1,656,873
Total shareholders’ equity1,761,387
 1,752,402
Total liabilities and shareholders’ equity$2,163,600
 $1,986,168
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
 December 31,
 20232022
 (Amounts in thousands)
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $9,979; $10,908)$9,949 $10,907 
Equity securities (cost $17,227; $35,041)28,027 51,416 
Short-term investments (cost $571; $27,057)571 27,059 
Investment in subsidiaries2,084,346 1,833,372 
Total investments2,122,893 1,922,754 
Cash4,698 6,218 
Accrued investment income141 149 
Amounts receivable from affiliates503 516 
Current income taxes5,148 55,777 
Deferred income taxes1,544 1,072 
Income tax receivable from affiliates15,161 12,865 
Other assets1,499 1,493 
Total assets$2,151,587 $2,000,844 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable$573,729 $398,330 
Amounts payable to affiliates2,753 90 
Income tax payable to affiliates21,209 75,079 
Other liabilities5,751 5,214 
Total liabilities603,442 478,713 
Commitments and contingencies
Shareholders’ equity:
Common stock98,947 98,947 
Retained earnings1,449,198 1,423,184 
Total shareholders’ equity1,548,145 1,522,131 
Total liabilities and shareholders’ equity$2,151,587 $2,000,844 
 































See accompanying notes to condensed financial information.
See accompanying Report of Independent Registered Public Accounting Firm


S-3






SCHEDULE II, Continued


MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS

 Year Ended December 31,
 2017 2016 2015
 (Amounts in thousands)
Revenues:     
Net investment income$4,090
 $4,032
 $4,314
Net realized investment gains (losses)19,279
 6,062
 (7,026)
Other—
 17
 —
Total revenues23,369

10,111

(2,712)
Expenses:     
Other operating expenses1,918
 2,673
 7,526
Interest14,856
 2,690
 2,127
Total expenses16,774
 5,363
 9,653
Income (loss) before income taxes and equity in net income of subsidiaries6,595
 4,748
 (12,365)
Income tax expense (benefit)1,572
 8,514
 (4,708)
Income (loss) before equity in net income of subsidiaries5,023
 (3,766) (7,657)
Equity in net income of subsidiaries139,854
 76,810
 82,136
Net income$144,877
 $73,044
 $74,479
MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF OPERATIONS

 Year Ended December 31,
 202320222021
 (Amounts in thousands)
Revenues:
Net investment income$2,998 $2,696 $2,560 
Net realized investment gains (losses)1,431 (12,969)26,523 
Total revenues4,429 (10,273)29,083 
Expenses:
Other operating expenses2,526 2,446 2,627 
Interest24,129 17,178 17,088 
Total expenses26,655 19,624 19,715 
(Loss) income before income taxes and equity in net income (loss) of subsidiaries(22,226)(29,897)9,368 
Income tax (benefit) expense(4,379)(10,234)4,930 
(Loss) income before equity in net income (loss) of subsidiaries(17,847)(19,663)4,438 
Equity in net income (loss) of subsidiaries114,183 (493,009)243,499 
Net income (loss)$96,336 $(512,672)$247,937 








































See accompanying notes to condensed financial information.
See accompanying Report of Independent Registered Public Accounting Firm


S-4




SCHEDULE II, Continued


MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS

 Year Ended December 31,
 2017 2016 2015
 (Amounts in thousands)
Cash flows from operating activities:     
Net cash (used in) provided by operating activities$(14,503) $4,731
 $575
Cash flows from investing activities:     
Capital contribution to subsidiaries(140,125) (30,125) (90,125)
Distributions received from special purpose entities5,243
 4,898
 8,883
Dividends received from subsidiaries109,000
 110,800
 133,000
Fixed maturity securities available for sale in nature:     
Purchases(188,467) (1,060) (571)
Sales165,944
 —
 —
Calls or maturities4,000
 —
 —
Equity securities available for sale in nature     
Purchases—
 (64,807) (146,236)
Sales—
 73,942
 192,005
Net decrease in short-term investments—
 515
 8,612
Business acquisition—
 —
 (6,000)
Other, net310
 1,614
 1,945
Net cash provided by investing activities(44,095) 95,777
 101,513
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 exercised2,162
 1,632
 2,111
Net proceeds from issuance of senior notes371,011
 —
 —
Payoff of principal on loan and credit facilities(180,000) —
 —
Proceeds from bank loan—
 30,000
 —
Net cash used in financing activities55,287
 (108,861) (134,275)
Net decrease in cash(3,311) (8,353) (32,187)
Cash:     
Beginning of year11,786
 20,139
 52,326
End of year$8,475
 $11,786
 $20,139
SUPPLEMENTAL CASH FLOW DISCLOSURE     
Interest paid$9,435
 $2,397
 $2,153
Income taxes paid (refunded), net$346
 $(339) $1,807
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
 Year Ended December 31,
 202320222021
 (Amounts in thousands)
Cash flows from operating activities:
Net cash (used in) provided by operating activities$(14,703)$225 $(36,662)
Cash flows from investing activities:
Capital contribution to subsidiaries(150,000)— — 
Capital distribution from subsidiaries— 3,431 — 
Distributions received from special purpose entities6,210 2,904 5,199 
Dividends received from subsidiaries— — 191,000 
Fixed maturity securities available for sale in nature
Purchases— (11,905)— 
Sales— 1,000 — 
Calls or maturities955 — — 
Equity securities available for sale in nature
Purchases(1,172)(5,307)(13,151)
Sales25,848 48,215 38,092 
Decrease (increase) in short-term investments26,481 (6,268)(16,172)
Other, net183 667 791 
Net cash (used in) provided by investing activities(91,495)32,737 205,759 
Cash flows from financing activities:
Dividends paid to shareholders(70,322)(105,482)(140,226)
Proceeds from stock options exercised— — 215 
Proceeds from bank loan175,000 25,000 — 
Net cash provided by (used in) financing activities104,678 (80,482)(140,011)
Net (decrease) increase in cash(1,520)(47,520)29,086 
Cash:
Beginning of year6,218 53,738 24,652 
End of year$4,698 $6,218 $53,738 
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid$22,959 $16,611 $16,590 
Income taxes paid (refunded), net$1,630 $(14,102)$18,841 
 







See accompanying notes to condensed financial information.
See accompanying Report of Independent Registered Public Accounting Firm


S-5




MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION


The accompanying condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.
Distributions received from Special Purpose EntitiesInvestment Vehicles


On February 13, 2014,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. For the three years ended December 31, 2023, the Company had two such special purpose investment vehicles: Fannette Funding LLC ("FFL"), aand Animas Funding LLC. These special purpose investment vehicle, formed by andvehicles are consolidated into the Company. Creditors have no recourse against the Company entered into a total return swap agreement with Citibank. Underin the agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest on the outstanding notional amountevent of the underlying obligations. The total return swap is secureddefault by approximately $30 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 145 basis points prior to the renewal of the agreement in January 2017 and LIBOR plus 128 basis points subsequent to the January 2017 renewal, on approximately $108 million of underlying obligations as of December 31, 2017 and 2016. The agreement had an initial term of one year, subject to annual renewal. In January 2018, the agreement was renewed through August 15, 2018, and the interest rate was changed to LIBOR plus 120 basis points.

On August 9, 2013, Animas Funding LLC ("AFL"), athese special purpose investment vehicle, formed and consolidated by the Company, entered into a three-year total return swap agreement with Citibank, which has been renewed for an additional one-year term through February 17, 2018. The total portfolio of underlying obligations was liquidated during June 2017, and the total return swap agreement between AFL and Citibank was terminated on July 7, 2017. Under the agreement, AFL received the income equivalent on underlying obligations due to Citibank and paid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap was secured by approximately $40 million of U.S. Treasuries as collateral, which were included in short-term investments on the consolidated balance sheets.vehicles. The Company paid interest, which was equalhad no implied or unfunded commitments to LIBOR plus 135 basis points prior to the amendment of the agreement in January 2017 and LIBOR plus 128 basis points subsequent to the amendment, on approximately $152 million of underlying obligations as ofthese entities at December 31, 2016.
Distributions2023 and 2022. The Company's financial or other support provided to these entities and its loss exposure are limited to its collateral and original investment. Mercury General received distributions of $6.2 million, $2.9 million, and $5.2 million in 2023, 2022, and $4.9 million were received in 2017 and 2016,2021, respectively, from these special purpose entities.investment vehicles.
Dividends received from Subsidiaries


Dividends of $109,000,000, $110,800,000$0, $0 and $133,000,000$191 million were received by Mercury General from its 100% owned insurance subsidiaries in 2017, 20162023, 2022 and 2015,2021, respectively, and arewere recorded as a reduction to investment in subsidiaries.
Capitalization of Insurance Subsidiaries


Mercury General made capital contributions to its insurance subsidiaries of $140,125,000, $30,125,000$150 million, $0 and $90,125,000$0 in 2017, 20162023, 2022 and 2015,2021, respectively.
Business Acquisition
Pursuant to an October 22, 2014 Stock Purchase Agreement, In addition, Mercury General purchased allreceived a capital distribution from its insurance subsidiaries of $0, $3,431,433, and $0 in 2023, 2022 and 2021, respectively. The capital distribution for 2022 was related to the issued and outstanding sharesdissolution of Workmen’s Auto Insurance Company ("WAIC"), a California domiciled property and casualtyan insurance company, on January 2, 2015.
WAIC is a Los Angeles-based non-standard, private passenger automobile insurance company that operates predominantlysubsidiary in California.November 2022, pursuant to which Mercury General intends to usereceived the WAIC non-standard automobile product to complementcomplete return of its preferred and standard product offerings.
Mercury General paid $8 million in cash for the shares of WAIC, of which $2 million has been held in escrow for up to three years as security for any loss development on claims incurred on or prior to June 30, 2014. Based on the evaluation performed at the acquisition date and at December 31, 2015, of the claims reserves for WAIC for losses and loss adjustment expenses incurred on or prior to June 30, 2014, the Company estimated that it would recover the $2 million held in escrow and, therefore, the Company deducted it from cash consideration to arrive at the fair value of total consideration transferred. The Company recovered the $2 million held in escrow in 2016. In accordance with regulatory approval requirements, the Company made a $15 million cash capital contribution to WAIC on January 12, 2015.

invested capital.
Notes Payable

On July 2, 2013, Mercury General entered into an unsecured $200 million five-year revolving credit facility. Effective December 3, 2014, Mercury General expanded the borrowing capacity from $200 million to $250 million. Total borrowings were $180 million under the credit facility as of December 31, 2016. The interest rate was approximately 1.73% at December 31, 2016.
On March 8, 2017, the $180 million loan and credit facility agreements were terminated and Mercury General repaid the total outstanding amounts with the proceeds from its public offering of $375 million of senior notes.


On March 8, 2017, Mercury General completed a public debt offering issuing $375 million of senior notes. The notes are unsecured senior obligations of Mercury General, with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off amountsthe total outstanding balance of $320 million under the existing loan and credit facilitiesfacility agreements and terminated the agreements on March 8, 2017. The remainder of the proceeds from the notes was used for general corporate purposes. Mercury General incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate, including debt issuance costs, of approximately 4.45%.
Commitments and Contingencies

The borrowings by MCC, a subsidiary, under the $120 million credit facility and $20 million bank loan were secured by approximately $175 million of municipal bonds owned by MCC, at fair value, held as collateral. The total borrowings of $140 million were guaranteed by Mercury General. On March 8, 2017, these secured credit facility and bank loan agreements were terminated and the Company repaid the total outstanding amounts with the proceeds from its public offering of $375 million of senior notes.


On March 29, 2017, Mercury General31, 2021, the Company entered into an unsecured $75 million five-year revolving credit agreement that provides for revolving loansfacility. On November 18, 2022, the Company entered into the First Amendment to this credit facility. The First Amendment extended the maturity date of upthe loan to $50November 16, 2026 from March 31, 2026 with possible further extension if certain conditions are met, increased the aggregate commitments by all the lenders to $200 million from $75 million, and matures on March 29, 2022.replaced the LIBOR with the term SOFR. On November 30, 2023, the Company entered into the Second Amendment to this credit facility, which further increased the aggregate commitments by all the lenders to $250 million from $200 million. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBORTerm SOFR plus 112.5 basis points when the ratio is under 15%20% to LIBORTerm SOFR plus 162.5150.0 basis points when the ratio is greater than or equal to 25%30%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 15%20% to 22.5 basis points when the ratio is greater than or equal to 25%30%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 17.6%27.1% at December 31, 2017,2023, resulting in a 1517.5 basis point commitment fee on the $50 millionany undrawn portion of the credit facility. As of February 2, 2018, there have been no borrowings13, 2024, a total of $200 million was drawn under this facility.facility on a three-month revolving basis at an annual interest rate of approximately 6.84%, with $50 million available to be drawn. The Company contributed $150 million of the
See accompanying Report of Independent Registered Public Accounting Firm
S-6

total amount drawn to the surplus of its consolidated insurance subsidiaries, and used the remainder for general corporate purposes.
Federal Income Taxes


The Company files a consolidated federal income tax return for the following entities:
 
Mercury Casualty CompanyMercury County Mutual Insurance Company
Mercury Insurance CompanyMercury Insurance Company of Florida
California Automobile Insurance CompanyMercury Indemnity Company of America
Mercury Insurance CompanyMercury Select Management Company, Inc.
California Automobile Insurance CompanyMercury Insurance Services LLC
California General Underwriters Insurance Company, Inc.Mercury SelectAIS Management Company, Inc.LLC
Mercury Insurance Company of IllinoisMercuryAuto Insurance ServicesSpecialists LLC
Mercury Insurance Company of GeorgiaPoliSeek AIS Management LLCInsurance Solutions, Inc.
Mercury Indemnity Company of GeorgiaAuto Insurance SpecialistsAnimas Funding LLC
Mercury National Insurance CompanyPoliSeek AIS Insurance Solutions, Inc.
American Mercury Insurance CompanyAnimasFannette Funding LLC
American Mercury Lloyds Insurance CompanyFannette FundingMercury Plus Insurance Services LLC
Workmen's AutoOrion Indemnity CompanyMercury Information Technology Services LLC
Mercury County Mutual Insurance CompanyMercury (Shanghai) Information Technology Services Co., Ltd.


The method of allocation between the companies is subject to an agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses incurred by the insurance subsidiaries to the extent it can be used in the current consolidated return.






























See accompanying Report of Independent Registered Public Accounting Firm
S-7

SCHEDULE IV
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
REINSURANCE
THREE YEARS ENDED DECEMBER 31,
Property and Liability Insurance Earned Premiums

 2017 2016 2015
 (Amounts in thousands)
Direct amounts$3,221,493
 $3,146,864
 $2,970,424
Ceded to other companies(26,881) (15,846) (12,964)
Assumed825
 755
 437
Net amounts$3,195,437
 $3,131,773
 $2,957,897
SCHEDULE IV
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
REINSURANCE
THREE YEARS ENDED DECEMBER 31,
Property and Liability Insurance Earned Premiums
202320222021
 (Amounts in thousands)
Direct amounts$4,368,342 $4,022,611 $3,793,664 
Ceded to other companies(109,445)(80,950)(65,017)
Assumed15,481 10,821 13,301 
Net amounts$4,274,378 $3,952,482 $3,741,948 
 

See accompanying Report of Independent Registered Public Accounting Firm
S-8