UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-K

____________________________

~~ANNUAL REPORT PURSUANT TO SECTION 13 OR~~


☒	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2019


☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ___________ to ___________

~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the Fiscal Year Ended~~ ~~December 31, 2018~~

Commission File No. 001-12257

____________________________

MERCURY GENERAL CORPORATION

(Exact name of registrant as specified in its charter)

____________________________



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

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

~~____________________________~~

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

____________________________

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



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

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

~~NONE~~None

____________________________

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No ¨☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filer	x☒	Accelerated filer	¨☐
Non-accelerated filer	¨☐	Smaller reporting company	¨☐
Emerging growth company	o☐

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

The aggregate market value of the registrant’s common equity held by non-affiliates of the registrant at June 30, ~~2018~~2019 was ~~$1,242,701,986~~$1,704,918,875 (which represents ~~27,276,163~~27,278,702 shares of common equity held by non-affiliates multiplied by ~~$45.56,~~$62.50, the closing sales price on the New York Stock Exchange for such date, as reported by the Wall Street Journal).

At February ~~7, 2019,~~6, 2020, the registrant had issued and outstanding an aggregate of ~~55,340,077~~55,357,691 shares of its Common Stock.

____________________________

Documents Incorporated by Reference

Certain information from the registrant’s definitive proxy statement for the ~~2019~~2020 Annual Meeting of Shareholders is incorporated herein by reference into Part III hereof.

MERCURY GENERAL CORPORATION

INDEX TO FORM 10-K



		Page
PART I

Item 1	Business	1
	General	1
	Website Access to Information	2
	Organization	2
	Production and Servicing of Business	3
	Underwriting	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	910
	Information about the Company's Executive Officers ~~of the Company~~	11
~~Item 1A~~	~~Risk Factors~~	12
Item 1B1A	~~Unresolved Staff Comments~~Risk Factors	2313
Item 1B	Unresolved Staff Comments	25
Item 2	Properties	2425
Item 3	Legal Proceedings	2425
Item 4	Mine Safety Disclosures	2425

PART II

Item 5	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2526
Item 6	Selected Financial Data	2728
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2829
Item 7A	Quantitative and Qualitative Disclosures about Market Risks	5150
Item 8	Financial Statements and Supplementary Data	5352
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	9293
Item 9A	Controls and Procedures	9293
Item 9B	Other Information	9394

PART III

Item 10	Directors, Executive Officers, and Corporate Governance	9495
Item 11	Executive Compensation	9495
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	9495
Item 13	Certain Relationships and Related Transactions, and Director Independence	9495
Item 14	Principal Accounting Fees and Services	9495

PART IV

Item 15	Exhibits and Financial Statement Schedules	9596

SIGNATURES		~~100~~101
Financial Statement Schedules		S-1

PART I


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 14 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, ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017 by state and line of insurance business were:

Year Ended December 31, ~~2018~~2019

(Dollars in thousands)


	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total					Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	2,346,403		$	458,065		$	120,234		$	114,838		$	3,039,540		85.6	%	$	2,478,477		$	520,062		$	139,367		$	123,735		$	3,261,641		86.4	%
Florida ⁽¹⁾	126,756			7			14,149			114			141,026			4.0	%
Other states ⁽²⁾	230,417			66,838			64,069			9,027			370,351			10.4	%
Other states ⁽¹⁾																		342,005			78,478			77,960			14,506			512,949			13.6	%
Total	$	2,703,576		$	524,910		$	198,452		$	123,979		$	3,550,917		100.0	%	$	2,820,482		$	598,540		$	217,327		$	138,241		$	3,774,590		100.0	%
	76.1		%	14.8		%	5.6		%	3.5		%	100.0		%			74.6		%	15.9		%	5.8		%	3.7		%	100.0		%

•

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 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:

BI reserves—approximately 75% of total reserves

Material damage ("MD") reserves, including collision and comprehensive property damage—approximately 10% of total reserves

Loss adjustment expense reserves—approximately 15% 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		% of Total
	Claims Closed	Dollars Paid	Claims Closed	Dollars Paid
BI claims closed in the accident year reported	38%	13%	38%	12%
BI claims closed one year after the accident year reported	77%	51%	78%	52%
BI claims closed two years after the accident year reported	93%	79%	93%	77%
BI claims closed three years after the accident year reported	98%	90%	98%	90%

BI claims closed in the accident year reported are generally the smaller and less complex claims that settle for approximately ~~$4,000~~$5,000 to ~~$5,000~~$6,000 on average, whereas the total average settlement, once all claims are closed in a particular accident year, is approximately ~~$10,000~~$12,000 to ~~$16,000.~~$17,000. 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, ~~2018,~~2019, the accident years that are most likely to develop are the ~~2016~~2017 through ~~2018~~2019 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, social inflation, and gasoline prices, among other factors; however, the magnitude of the impact of such factors on the inflation rate is unknown.

The Company believes that it is reasonably possible that the California automobile BI severity could vary from recorded amounts by as much as 10%, 8%, and 6% for 2019, 2018, ~~2017,~~ and ~~2016~~2017 accident years, respectively; however, the variation could be more or less than these amounts.

During the years ~~2014~~2015 through ~~2018,~~2019, 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:



	High	Low
Immediate preceding accident year	1.4%	(5.1)%
Second preceding accident year	7.5%	(3.1)%
Third preceding accident year	5.2%	(2.9)%

The following table presents the effects on the California automobile BI loss reserves for the ~~2018~~2019, ~~2017~~2018, and ~~2016~~2017 accident years based on possible variations in the severity recorded; however, the variation could be more or less than these ~~amounts.~~amounts:

California Automobile Bodily Injury Inflation Reserve Sensitivity Analysis


Accident Year		Number of Claims Expected		Actual Recorded Severity at 12/31/2018			Implied Inflation Rate Recorded ⁽¹⁾			(A) Pro-forma severity if actual severity is lower by 10% for 2018, 8% for 2017, and 6% for 2016		(B) Pro-forma severity if actual severity is higher by 10% for 2018, 8% for 2017, and 6% for 2016		Favorable loss development if actual severity is less than recorded (Column A)		Unfavorable loss development if actual severity is more than recorded (Column B)				Number of Claims Expected		Actual Recorded Severity at 12/31/2019			Implied Inflation Rate Recorded ⁽¹⁾			(A) Pro-forma severity if actual severity is lower by 10% for 2019, 8% for 2018, and 6% for 2017		(B) Pro-forma severity if actual severity is higher by 10% for 2019, 8% for 2018, and 6% for 2017		Favorable loss development if actual severity is less than recorded (Column A)		Unfavorable loss development if actual severity is more than recorded (Column B)
2019																				29,638	(2)	$	17,052	(2)	12.8	%	(2)	$	15,347	$	18,757	$	50,533,000	$	(50,533,000	)
2018		29,073	(2)	$	15,571	(2)	12.9	%	(2)	$	14,014	$	17,128	$	45,267,000	$	(45,267,000	)		28,710	(2)	$	15,119	(2)	9.5	%	(2)	$	13,909	$	16,329	$	34,739,000	$	(34,739,000	)
2017		28,659	(2)	$	13,790	(2)	13.6	%	(2)	$	12,687	$	14,893	$	31,611,000	$	(31,611,000	)		28,389	(2)	$	13,808	(2)	10.2	%	(2)	$	12,980	$	14,636	$	23,506,000	$	(23,506,000	)
2016		29,502	(2)	$	12,140	(2)	10.4	%	(2)	$	11,412	$	12,868	$	21,477,000	$	(21,477,000	)		29,356	(2)	$	12,525	(2)	—			—		—		—		—
2015		32,136		$	10,992		—			—		—		—		—
Total Loss Development—Favorable (Unfavorable)	Total Loss Development—Favorable (Unfavorable)													$	98,355,000	$	(98,355,000	)	Total Loss Development—Favorable (Unfavorable)													$	108,778,000	$	(108,778,000	)

Assessing the Company’s methodology for estimating loss reserves by comparing it to generally accepted

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

Developing a range of reserves based on actuarial methodologies in order to evaluate the Company’s total recorded loss reserves; and

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

~~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 paid loss method analyzes historical payment patterns to estimate the amount of losses yet to be paid.

•

catastrophes. For catastrophe losses on individual properties that are expected to be total losses, the Company typically establishes reserves at the policy limits.

Derivative Financial Instruments

The Company accounts for all derivative instruments, other than those that meet the normal purchases and sales exception, as either an asset or liability, measured at fair value, which is based on information obtained from independent parties. In addition, changes in fair value are recognized in earnings unless specific hedge accounting criteria are met. The Company’s derivative instruments include total return swaps and options sold. See Note 8.9.Derivative Financial Instruments.

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings per share is based on the weighted average shares of common stock and potential dilutive securities outstanding during the periods presented. At December 31, ~~2018~~2019 and ~~2017,~~2018, potential dilutive securities consisted of outstanding stock options. See Note ~~16.~~17. Earnings Per Share, for the required disclosures relating to the calculation of basic and diluted earnings per share.

Income Taxes

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

At December 31, ~~2018,~~2019, the Company’s deferred income taxes were in a net ~~asset~~liability position, which included a combination of ordinary and capital deferred tax benefits and expenses. 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. 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 full benefits of its deferred tax assets. Although realization is not assured, management believes that it is more likely than not that the Company’s deferred tax assets will be realized.

Reinsurance

Liabilities for unearned premiums and unpaid losses are stated in the accompanying consolidated financial statements before deductions for ceded reinsurance. Unpaid losses and unearned premiums that are ceded to reinsurers are carried in reinsurance recoverables and other assets, respectively, in the Company's consolidated balance sheets. Earned premiums are stated net of deductions for ceded reinsurance.

The Company is party to a Catastrophe Reinsurance Treaty ("Treaty") covering a wide range of perils that is effective through June 30, ~~2019.~~2020. The Treaty provides ~~$205~~$600 million of coverage on a per occurrence basis after covered catastrophe losses exceed the ~~$10~~$40 million Company retention limit. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies, such as homeowners, but does cover losses from fires following an earthquake. In addition, the Treaty provides for one full reinstatement of coverage limits and excludes losses from wildfires on certain coverage layers of the Treaty.

The Company recognized ceded premiums earned of approximately $57 million, $49 million, and $27 million in 2019, 2018, and ~~$16 million in 2018,~~ 2017, ~~and 2016,~~ respectively, which are included in net premiums earned in its consolidated statements of operations, and ceded losses and loss adjustment expenses of approximately $(71) million, $257 million, and $90 million in 2019, 2018, and ~~$2 million in 2018,~~ 2017, ~~and 2016,~~ 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 2019 primarily resulted from the re-estimation of the catastrophe loss reserves, including estimated subrogation, on the 2018 Camp and Woolsey Fires and the 2017 Southern California wildfires, which have previously been ceded to reinsurers under the Treaty, in conjunction with the sale of the Company's subrogation rights during the

first quarter of 2019. The re-estimation primarily benefited the Company's reinsurers. See Note 12. Loss and Loss Adjustment Expense Reserves for additional information.

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

Share-Based Compensation

Share-based compensation expenses for all stock options granted or modified are based on their estimated grant-date fair 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 years. The Company estimates forfeitures expected to occur in determining the amount of compensation cost to be recognized in each period. The fair value of stock option awards is estimated using the Black-Scholes option pricing model with the grant-date assumptions and weighted-average fair values.

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

Revenue from Contracts with Customers

On January 1, 2018, the Company adopted Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition method. The Company had no cumulative-effect adjustment and its consolidated financial statement line items were not impacted as a result of the adoption, mostly because the accounting for insurance contracts was outside of the scope of Topic 606 and the application of the key aspects of revenue recognition of Topic 606 to the Company's in-scope transactions, such as the timing of recognition of revenue (at a point in time vs. over time) and the estimation of refund liability, resulted in recognition of revenues and related expenses consistent with that under the legacy accounting guide, Topic 605.

The Company's revenue from contracts with customers that are in scope of Topic 606 represents the commission income that the Company's 100% owned insurance agencies, Auto Insurance Specialists LLC ("AIS") and PoliSeek AIS Insurance Solutions, Inc. ("Poliseek"), earned from third-party insurers. The Company's commission income from third-party insurers was approximately ~~$16.0~~$16.3 million and ~~$15.2~~$16.0 million representing approximately ~~0.5%~~0.4% and ~~0.4%~~0.5% of the consolidated total revenue, for the years ended December 31, 2019 and 2018, respectively, with related expenses of approximately $10.5 million ~~and $10.2 million,~~ for each of the ~~year~~years ended December 31, ~~2018~~2019 and ~~2017, respectively.~~2018. Due to the immateriality of the Company's commission income and its related expenses to the overall consolidated financial statements, the commission income, net of related expenses, is included in other revenues in the Company's consolidated statements of operations, and in other income of the Property and Casualty business segment in the Company's segment reporting in accordance with Topic 280, Segment Reporting (see Note ~~19.~~20. Segment Information).

AIS and PoliSeek are primarily engaged in the marketing and sales of insurance policies in private passenger automobile, commercial automobile and homeowners lines of business. Their revenues primarily consist of commission income received from property and casualty insurers. Approximately 80% of their total revenue is generated from sales of policies issued by the Company's insurance subsidiaries, which are eliminated as intercompany transactions in consolidation, with the remaining from sales of policies issued by third-party property and casualty insurers. The primary performance obligation of AIS and Poliseek in return for the commission income from the insurers is to complete the sale of the policy and deliver the control of the policy to the insurer prior to the policy effective date. In addition, AIS and PoliSeek provide administrative services to the insurer or the policyholder subsequent to the sale of the policy as needed, including processing of endorsements, collection of premiums, and answering general questions concerning the policyholder's account. The administrative services and the costs to perform such services are deemed immaterial in the context of the contract and to the Company's consolidated financial statements, and hence, such services are not identified as a separate performance obligation and the costs to perform such services are not accrued at the time of the sale of the policy but are expensed as incurred as part of the overall operating expenses.

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. ~~The commission~~Commission income receivable at December 31, ~~2018~~2019 and ~~2017~~2018 was approximately $1.2 ~~million .~~million.

A refund liability is recorded for the expected amount of the commission income that has to be returned to the insurers based on estimated policy cancellations. The refund liability is computed for the entire portfolio of contracts as a practical expedient, ~~rather than for each contract or performance obligation. The estimated policy cancellations and the resulting refund liability are computed~~ using the expected value method based on all relevant information, including historical data. The refund liability at December 31, ~~2018~~2019 and ~~2017~~2018 was approximately $0.7 million, which was included in other liabilities in the Company's consolidated balance sheets.

As of December 31, ~~2018~~2019 and ~~2017,~~2018, the Company had no contract assets, contract liabilities, or capitalized costs to obtain or fulfill a contract, or remaining performance obligations associated with ~~revenues from contracts with customers.~~unrecognized revenues.

Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, ~~"Intangibles~~"Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service ~~Contract.~~Contract." ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software under Subtopic 350-40. This ASU also requires an entity

to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and present such expense in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. ASU 2018-15 ~~will be~~became effective for the Company ~~beginning~~on January 1, 2020 ~~with early adoption permitted. The Company is in the process of evaluating the~~and did not have any material impact ~~of ASU 2018-15~~ on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, ~~"Fair~~"Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value ~~Measurement.~~Measurement." The amendments in this ASU require certain existing disclosure requirements in Topic 820 to be modified or removed, and certain new disclosure requirements to be added to the Topic. In addition, this ASU allows entities to exercise more discretion when considering fair value measurement disclosures. ASU 2018-13 ~~will be~~became effective for the Company ~~beginning~~on January 1, 2020 ~~with early adoption permitted. The Company is in the process of evaluating the~~and did not have any material impact ~~of ASU 2018-13~~ on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment." ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step 2 of the goodwill impairment test and requires an entity to recognize an impairment charge for the amount by 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~~became effective for the Company ~~beginning~~on January 1, 2020 ~~with early adoption permitted. The Company does~~and did not ~~anticipate that ASU 2017-04 will~~ have aany material impact on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The amendments in this ASU replace the "incurred loss" methodology for recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of information including past events, current conditions and reasonable and supportable forecasts that affect the collectibility of reported amounts of financial assets that are not accounted for at fair value through net income, such as loans, certain debt securities, trade receivables, net investment in leases, off-balance sheet credit exposures and reinsurance ~~receivables.~~recoverables. Under the current GAAP incurred loss methodology, recognition of the full amount of credit losses is generally delayed until the loss is probable of occurring. Current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the probability threshold. Subsequently, the FASB has issued an additional ~~ASU~~ASUs on Topic 326 that ~~does~~do not change the core principle of the guidance in ASU 2016-13 but ~~merely clarifies~~clarify or certain aspects of it. ASU 2016-13 and the additional ~~ASU~~ASUs on Topic 326 ~~will be~~became effective for the Company ~~beginning~~on January 1, 2020. ~~While the~~The Company ~~is in the process of evaluating the impact of ASU 2016-13, it does not expect~~adopted this ASU using a modified retrospective transition method by recognizing the cumulative-effect adjustment of approximately $2 million to ~~have a material impact~~retained earnings at January 1, 2020. The cumulative-effect adjustment primarily resulted from reestimating credit losses on the outstanding balances of the Company's reinsurance recoverables and premiums receivables at the adoption date of the new standard. The Company will make the required disclosures under Topic 326, starting with 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 February 2016,~~that include the ~~FASB issued ASU 2016-02, "Leases (Topic 842)~~," which supersedes the guidance in Accounting Standards Codification ("ASC") 840, "Leases." Subsequently, the FASB has issued additional ASUs on Topic 842 that do not change the core principle of the guidance in ASU 2016-02 but merely clarify or expand certain aspects of it. 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 and the additional ASUs on Topic 842 are effective for the Company beginning January 1, 2019. The Company adopted ASU 2016-02 along with the related additional ASUs on Topic 842 on January 1, 2019, using a transition method of applying the new standard at the beginning of the period of adoption and recognizing a cumulative-effect adjustment, if any, to the beginning balance of retained earnings in the period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward its historical lease classification of operating lease for all of its existing leases at theinitial adoption date. Adoption of the new standard resulted in the recognition of operating lease right-of-use ("ROU") assets and operating lease liabilities of approximately $41 million and $43 million, respectively, at the adoption date for the Company's operating leases. The difference of approximately $2 million between the operating lease ROU assets and operating lease liabilities represents reclassification of deferred rent liability (the difference

between the straight-line rent expenses and paid rent amounts under the leases) to operating lease ROU assets from other liabilities at the adoption date. The Company did not have any cumulative-effect adjustment as a result of the adoption. The standard is not expected to materially impact the Company's future consolidated net income or cash flows. The standard will have no impact on its financial covenant compliance under its current unsecured credit facility agreement.

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 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,
	2019		2018
	(Amounts in thousands)
Assets
Investments	$	4,312,161	$	3,768,091
Note receivable	5,665		5,557
Liabilities
Total return swaps	—		4,851
Options sold	77		3
Unsecured notes	394,279		362,674

December 31,
2018 2017
(Amounts in thousands)
Assets
Investments $ 3,768,091
$ 3,732,728
Note receivable 5,557
5,565
Liabilities
Total return swaps 4,851
1,200
Options sold 3
123
Unsecured notes 362,674
385,583

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 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 are included in other liabilities in the Company's consolidated balance sheets.

Total Return Swaps

The fair values of the total return swaps reflect the estimated amounts that, upon termination of the contracts, would be received for selling an asset or paid to transfer a liability in an orderly transaction, ~~at December 31, 2018 and 2017~~ based on models using inputs, such as interest rate yield curves and credit spreads, observable for substantially the full term of the contract.

Unsecured Notes

The fair value of the Company’s publicly traded $375 million unsecured notes at December 31, ~~2018~~2019 and ~~2017~~2018 was obtained from a third party pricing service.

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,
	2019		2018			2017
	(Amounts in thousands)
Fixed maturity securities	$	104,379	$	(53,927	)	$	50,403
Equity securities	90,920		(77,494		)	37,486
Short-term investments	1,295		(1,237		)	38
Total gains (losses)	$	196,594	$	(132,658	)	$	87,927

Year Ended December 31,
2018 2017 2016
(Amounts in thousands)
Fixed maturity securities $ (53,927 ) $ 50,403
$ (56,584 )
Equity securities (77,494 ) 37,486
23,722
Short-term investments (1,237 ) 38
57
Total (losses) gains $ (132,658 ) $ 87,927
$ (32,805 )

The following table presents gross gains (losses) realized on the sales of investments:



	Year Ended December 31,
	2019								2018								2017
	(Amounts in thousands)
	Gross Realized Gains		Gross Realized Losses			Net			Gross Realized Gains		Gross Realized Losses			Net			Gross Realized Gains		Gross Realized Losses			Net
Fixed maturity securities	$	2,413	$	(1,066	)	$	1,347		$	549	$	(3,563	)	$	(3,014	)	$	604	$	(2,701	)	$	(2,097	)
Equity securities	47,411		(28,089		)	19,322			43,420		(45,607		)	(2,187		)	20,835		(23,048		)	(2,213		)
Short-term investments	177		(2,133		)	(1,956		)	61		(2,429		)	(2,368		)	21		(20		)	1

Year Ended December 31,
2018 2017 2016
(Amounts in thousands)

Gross
Realized
Gains

Gross
Realized
Losses
Net
Gross
Realized
Gains

Gross
Realized
Losses
Net
Gross
Realized
Gains

Gross
Realized
Losses
Net
Fixed maturity securities $ 549
$ (3,563 ) $ (3,014 ) $ 604
$ (2,701 ) $ (2,097 ) $ 3,327
$ (19,133 ) $ (15,806 )
Equity securities 43,420
(45,607 ) (2,187 ) 20,835
(23,048 ) (2,213 ) 29,446
(29,945 ) (499 )
Short-term investments 61
(2,429 ) (2,368 ) 21
(20 ) 1
6
(530 ) (524 )

Contractual Maturity

At December 31, ~~2018~~2019, fixed maturity holdings rated below investment grade and non-rated comprised ~~3.0%~~1.3% of total investments at fair value. Additionally, the Company owns securities that are credit enhanced by financial guarantors that are subject to uncertainty related to market perception of the guarantors’ ability to perform. Determining the estimated fair value of municipal bonds could become more difficult should markets for these securities become illiquid.

The following table presents the estimated fair values of the Company's fixed maturity securities at December 31, ~~2018~~2019 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	$	105,929
Due after one year through five years	548,638
Due after five years through ten years	287,005
Due after ten years	2,151,703
Total	$	3,093,275

Estimated Fair Value
(Amounts in thousands)
Fixed maturity securities:
Due in one year or less $ 166,423
Due after one year through five years 377,334
Due after five years through ten years 208,815
Due after ten years 2,232,589
Total $ 2,985,161

Investment Income

The following table presents a summary of net investment income:



	Year Ended December 31,
	2019			2018			2017
	(Amounts in thousands)
Fixed maturity securities	$	102,254		$	102,198		$	102,790
Equity securities	32,233			30,496			18,554
Short-term investments	12,381			8,789			8,753
Total investment income	$	146,868		$	141,483		$	130,097
Less: investment expense	(5,605		)	(5,645		)	(5,167		)
Net investment income	$	141,263		$	135,838		$	124,930

Year Ended December 31,
2018 2017 2016
(Amounts in thousands)
Fixed maturity securities $ 102,198
$ 102,790
$ 104,111
Equity securities 30,496
18,554
14,629
Short-term investments 8,789
8,753
8,936
Total investment income $ 141,483
$ 130,097
$ 127,676
Less: investment expense (5,645 ) (5,167 ) (5,805 )
Net investment income $ 135,838
$ 124,930
$ 121,871

4. Fair Value Measurements

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



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



Level 2	Pricing inputs are other than quoted prices in active markets, which are based on the following:
	a. Quoted prices for similar assets or liabilities in active markets;
	b. Quoted prices for identical or similar assets or liabilities in non-active markets; or
	c. Either directly or indirectly observable inputs as of the reporting date.



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

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

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

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities

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

The Company obtained unadjusted fair values on ~~98.2%~~97.9% of its investment portfolio from an independent pricing service. For a private equity fund that was classified as Level 3 and included in equity securities at December 31, ~~2018~~2019 and ~~2017,~~2018, the Company obtained specific unadjusted broker quotes based on net fund value and, to a lesser extent, unobservable inputs from at least ~~one~~1 knowledgeable outside security broker to determine the fair value. The fair value of the private equity fund was ~~$1.4~~$1.2 million and ~~$1.5~~$1.4 million at December 31, ~~2018~~2019 and ~~2017,~~2018, respectively.

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 ~~$24.8~~$18.9 million and ~~$19.3~~$24.8 million in commercial mortgage-backed securities at December 31, ~~2018~~2019 and ~~2017~~2018, 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 fund: Private equity fund ~~excluding private equity fund~~that is not measured at net asset value ("NAV"), is valued based on underlying investments of the fund or assets similar to such investments in active markets, taking into consideration specific unadjusted broker quotes based on net fund value and unobservable inputs from at least ~~one~~1 knowledgeable outside security broker related to liquidity assumptions.

Fair value measurement using NAV practical expedient - The fair ~~value~~values of ~~the Company's investment in~~ private equity ~~fund~~funds measured at net asset value isare determined using NAV as advised by the external fund ~~manager~~managers and the third party ~~administrator.~~administrators. The NAV of the Company's limited partnership or limited liability company interest in ~~this~~such a fund is based on the manager's and the administrator's valuation of the underlying holdings in accordance with the fund's governing documents and GAAP. In accordance with applicable accounting guidance, ~~this investment,~~private equity funds measured at fair value using the NAV practical expedient isare not classified in the fair value hierarchy. The strategy of ~~the fund~~these funds is to provide current income to investors by investing mainly in ~~equity tranches and sub-investment grade rated debt tranches of~~secured loans, CLOs or CLO issuers, ~~in the new and secondary markets,~~ and equity interests in vehicles established to purchase and

warehouse ~~loans in anticipation of a CLO closing or to satisfy regulatory risk retention requirements associated with certain CLOs.~~loans. The Company has made all of its capital contributions in ~~the fund~~such funds and had no outstanding unfunded commitments at December 31, ~~2018~~2019 with respect to ~~this fund.~~the funds. The underlying assets of the ~~fund~~funds are expected to be liquidated over the period of approximately one to ~~five~~10 years from December 31, ~~2018. The~~2019. In addition, the Company does not have the ~~contractual option~~ability to redeem or withdraw from the funds, or to sell, assign, pledge or transfer its investment, without the consent from the General Partner or Managers of each fund, but will receive distributions based on the liquidation of the underlying assets and the interest proceeds from the underlying assets. ~~In addition, the Company does not have the ability to withdraw from the fund, or to sell, assign, pledge or transfer its investment, without the consent from the general partner of the fund.~~

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

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


	December 31, 2018								December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(Amounts in thousands)								(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds	$	25,003	$	—	$	—	$	25,003	$	22,637	$	—	$	—	$	22,637
Municipal securities	—		2,620,132		—		2,620,132		—		2,554,208		—		2,554,208
Mortgage-backed securities and agencies	—		30,952		—		30,952
Mortgage-backed securities									—		63,003		—		63,003
Corporate securities	—		105,524		—		105,524		—		235,565		—		235,565
Collateralized loan obligations	—		165,789		—		165,789		—		199,217		—		199,217
Other asset-backed securities	—		37,761		—		37,761		—		18,645		—		18,645
Total fixed maturity securities	25,003		2,960,158		—		2,985,161		22,637		3,070,638		—		3,093,275
Equity securities:
Common stock	430,973		—		—		430,973		586,367		—		—		586,367
Non-redeemable preferred stock	—		31,433		—		31,433		—		49,708		—		49,708
Private equity fund	—		—		1,445		1,445		—		—		1,203		1,203
Private equity fund measured at net asset value ⁽¹⁾							65,780
Private equity funds measured at net asset value ⁽¹⁾															87,473
Total equity securities	430,973		31,433		1,445		529,631		586,367		49,708		1,203		724,751
Short-term investments:
Short-term bonds	31,472		16,784		—		48,256		2,822		30,080		—		32,902
Money market instruments	205,043		—		—		205,043		461,233		—		—		461,233
Total short-term investments	236,515		16,784		—		253,299		464,055		30,080		—		494,135
Other assets:
Note receivable	—		5,557		—		5,557		—		5,665		—		5,665
Total assets at fair value	$	692,491	$	3,013,932	$	1,445	$	3,773,648	$	1,073,059	$	3,156,091	$	1,203	$	4,317,826
Liabilities
Other liabilities:
Total return swaps	—		4,851		—		4,851
Options sold	3		—		—		3		77		—		—		77
Total liabilities at fair value	$	3	$	4,851	$	—	$	4,854	$	77	$	—	$	—	$	77

~~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,
	2019			2018			2017
	(Amounts in thousands)
Gross reserves at January 1	$	1,829,412		$	1,510,613		$	1,290,248
Less reinsurance recoverables on unpaid losses	(180,859		)	(64,001		)	(13,161		)
Net reserves at January 1	1,648,553			1,446,612			1,277,087
Incurred losses and loss adjustment expenses related to:
Current year	2,696,230			2,483,693			2,390,453
Prior years	9,794			93,096			54,431
Total incurred losses and loss adjustment expenses	2,706,024			2,576,789			2,444,884
Loss and loss adjustment expense payments related to:
Current year	1,651,550			1,543,828			1,550,789
Prior years	857,872			831,020			724,570
Total payments	2,509,422			2,374,848			2,275,359
Net reserves at December 31	1,845,155			1,648,553			1,446,612
Reinsurance recoverables on unpaid losses	76,100			180,859			64,001
Gross reserves at December 31	$	1,921,255		$	1,829,412		$	1,510,613

Year Ended December 31,
2018 2017 2016
(Amounts in thousands)
Gross reserves at January 1 $ 1,510,613
$ 1,290,248
$ 1,146,688
Less reinsurance recoverables on unpaid losses (64,001 ) (13,161 ) (14,253 )
Net reserves at January 1 1,446,612
1,277,087
1,132,435
Incurred losses and loss adjustment expenses related to:
Current year 2,483,693
2,390,453
2,269,769
Prior years 93,096
54,431
85,369
Total incurred losses and loss adjustment expenses 2,576,789
2,444,884
2,355,138
Loss and loss adjustment expense payments related to:
Current year 1,543,828
1,550,789
1,508,362
Prior years 831,020
724,570
702,124
Total payments 2,374,848
2,275,359
2,210,486
Net reserves at December 31 1,648,553
1,446,612
1,277,087
Reinsurance recoverables on unpaid losses 180,859
64,001
13,161
Gross reserves at December 31 $ 1,829,412
$ 1,510,613
$ 1,290,248

The increase in the provision for insured events of prior years in 2019 of approximately $9.8 million primarily resulted from higher than estimated defense and cost containment expenses in the California automobile line of insurance business, partially offset by favorable development on prior years’ loss and loss adjustment expense reserves, including catastrophe losses, in certain of the Company's other lines of insurance business.

The increase in the provision for insured events of prior years in 2018 of approximately $93.1 million primarily resulted from higher than estimated California automobile losses resulting from severity in excess of expectations for bodily injury claims as well as higher than estimated defense and cost containment expenses in the California automobile line of insurance business.

The increase in the provision for insured events of prior years in 2017 of approximately $54.4 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~~previously estimated.

The increase in the provision for insured events of prior years in 2016 of approximately $85.4 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 damage than was originally estimated.

The Company ~~experienced pre-tax~~recorded catastrophe losses ~~and loss adjustment expenses of approximately $289 million ($67 million,~~ net of reinsurance ~~benefits), $168~~of approximately $53 million, ~~($79~~$67 million, ~~net of reinsurance benefits),~~ and ~~$27~~$79 million in 2019, 2018, and 2017, ~~and 2016,~~ respectively. ~~There were~~Catastrophe losses due to the catastrophe events that occurred in 2019 totaled approximately $57 million, with no reinsurance benefits used for these losses, resulting primarily from wildfires and winter storms in California, a hurricane in Texas, and tornadoes and wind and hail storms in the Midwest. These losses were partially offset by favorable development of approximately $4 million on prior years' catastrophe losses, primarily from reductions in ~~2016. The~~the Company's retained portion of losses on the Camp and Woolsey Fires, as described further below. Catastrophe losses before reinsurance benefits totaled approximately $289 million in 2018, ~~were~~ primarily ~~due to~~resulting from wildfires in Northern and Southern California and weather-related catastrophes across several states. ~~The~~Catastrophe losses before reinsurance benefits totaled approximately $168 million in 2017, ~~were~~resulting primarily ~~due to~~from wildfires in Northern and Southern California, severe rainstorms in California, and the impact of hurricanes in Texas, Florida and Georgia.

During the first quarter of 2019, the Company completed the sale of its subrogation rights related to the 2018 Camp and Woolsey Fires and the 2017 Thomas Fire (which was a component of the "2017 Southern California fires") to a third party. The Company’s reinsurers were the primary beneficiaries of this transaction, as they had absorbed most of the losses under the terms of the Treaty. The Company re-estimated its gross and net losses from the 2018 Camp and Woolsey Fires and the 2017 Southern California fires in ~~2016~~conjunction with this sale, and its total gross losses from these catastrophes, after accounting for the assignment of subrogation rights and adjustments made to claims reserves as part of normal reserving procedures, were ~~primarily due~~approximately $208 million, and its total net losses, after reinsurance benefits, were approximately $40 million at March 31, 2019. The Company benefited by approximately $10 million, before taxes, in the first quarter of 2019 from the sale of the subrogation rights, including adjustments made to ~~severe storms outside~~the associated claims as a result of ~~California,~~normal reserving procedures, reductions in the Company's retained portion of losses on the Camp and ~~rainstorms in California.~~Woolsey Fires, and reduced reinstatement premiums recognized.

The following is information about incurred and paid claims development as of December 31, ~~2018,~~2019, 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, ~~2009~~2010 to ~~2017~~2018 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, 2018				Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Automobile Insurance)																															As of December 31, 2019
																						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 Claims				Cumulative Number of Reported Claims
Accident Year		For the Years Ended December 31,																								For the Years Ended December 31,
		2009⁽¹⁾		2010⁽¹⁾		2011⁽¹⁾		2012⁽¹⁾		2013⁽¹⁾		2014⁽¹⁾		2015⁽¹⁾		2016⁽¹⁾		2017⁽¹⁾		2018				Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported Claims			2010⁽¹⁾			2011⁽¹⁾			2012⁽¹⁾			2013⁽¹⁾			2014⁽¹⁾			2015⁽¹⁾			2016⁽¹⁾			2017⁽¹⁾			2018⁽¹⁾			2019						Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported Claims
		(Amounts in thousands)																					(Amounts in thousands)				(Amounts in thousands)																														(Amounts in thousands)
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	$	1,371,971	$	109		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		1,388,055		171				184		$	1,367,547		$	1,357,750		$	1,364,307		$	1,374,638		$	1,379,336		$	1,381,056		$	1,386,105		$	1,388,077		$	1,388,055		$	1,388,086		$	43				184
2011						1,343,919		1,367,000		1,380,557		1,388,363		1,393,878		1,398,518		1,405,112		1,401,178		443			181					1,343,919			1,367,000			1,380,557			1,388,363			1,393,878			1,398,518			1,405,112			1,401,178			1,401,151			73					181
2012								1,424,754		1,408,222		1,409,104		1,414,878		1,426,735		1,436,034		1,438,250		1,075			181								1,424,754			1,408,222			1,409,104			1,414,878			1,426,735			1,436,034			1,438,250			1,439,660			493				181
2013										1,448,567		1,431,058		1,447,881		1,458,421		1,464,071		1,468,294		2,818			185											1,448,567			1,431,058			1,447,881			1,458,421			1,464,071			1,468,294			1,468,237			1,149				185
2014												1,467,175		1,454,366		1,473,545		1,486,322		1,498,504		6,626			180														1,467,175			1,454,366			1,473,545			1,486,322			1,498,504			1,501,075			3,469				180
2015														1,551,105		1,588,443		1,610,839		1,634,435		19,491			170																	1,551,105			1,588,443			1,610,839			1,634,435			1,645,950			9,132				170
2016																1,672,853		1,669,642		1,713,696		50,261			154																				1,672,853			1,669,642			1,713,696			1,731,997			22,097				154
2017																		1,703,857		1,727,277		133,587			148																							1,703,857			1,727,277			1,741,825			58,648				149
2018																				1,781,817		390,346			139																										1,781,817			1,773,502			139,022				146
2019																																																						1,916,269			438,858				140
																		Total		$	15,423,477																														Total			$	16,007,752


	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total					Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	2,059,459		$	369,407		$	86,981		$	104,854		$	2,620,701		82.6	%	$	2,117,882		$	404,645		$	102,204		$	109,779		$	2,734,510		84.1	%
Florida ⁽¹⁾	154,593			9			24,973			1,067			180,642			5.7	%	140,288			4			17,089			680			158,061			4.9	%
Other states ⁽²⁾⁽¹⁾	238,651			67,481			54,112			10,310			370,554			11.7	%	221,871			65,269			58,939			10,282			356,361			11.0	%
Total	$	2,452,703		$	436,897		$	166,066		$	116,231		$	3,171,897		100.0	%	$	2,480,041		$	469,918		$	178,232		$	120,741		$	3,248,932		100.0	%
	77.3		%	13.8		%	5.2		%	3.7		%	100.0		%			76.3		%	14.5		%	5.5		%	3.7		%	100.0		%



Insurance type	Published maximum limits of ~~liability~~coverage
Private Passenger Automobile - bodily injury (BI)	$250,000 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⁾
Umbrella liability	$5,000,000 ⁽⁴⁾



Insurance Companies	Formed or Acquired	A.M. Best Rating	Primary States
Mercury Casualty Company ("MCC")⁽¹⁾	1961	A	CA, AZ, NV, NY, VA
Mercury Insurance Company ("MIC")⁽¹⁾	1972	A	CA
California Automobile Insurance Company ("CAIC")⁽¹⁾	1975	A	CA
California General Underwriters Insurance Company, Inc. ("CGU")⁽¹⁾	1985	Non-rated	CA
Mercury Insurance Company of Illinois	1989	A	IL
Mercury Insurance Company of Georgia	1989	A	GA
Mercury Indemnity Company of Georgia	1991	A	GA
Mercury National Insurance Company	1991	A	IL
American Mercury Insurance Company	1996	A-	OK, ~~GA,~~CA, TX, VA
American Mercury Lloyds Insurance Company ("AML")	1996	A-	TX
Mercury County Mutual Insurance Company	2000	A-	TX
Mercury Insurance Company of Florida	2001	A	FL
Mercury Indemnity Company of America	2001	A	FL, NJ
Workmen’s Auto Insurance Company ("WAIC")⁽¹⁾	2015	Non-rated	CA



Non-Insurance Companies	Formed or Acquired	Purpose
Mercury Select Management Company, Inc.	1997	AML’s attorney-in-fact
Mercury Insurance Services LLC	2000	Management services to subsidiaries
AIS Management LLC	2009	Parent company of AIS and PoliSeek
Auto Insurance Specialists LLC ("AIS")	2009	Insurance agency
PoliSeek AIS Insurance Solutions, Inc. ("PoliSeek")	2009	Insurance agency
Animas Funding LLC ("AFL")	2013	Special purpose investment vehicle
Fannette Funding LLC ("FFL")	2014	Special purpose investment vehicle
Mercury Plus Insurance Services LLC	2018	Insurance agency



	Year Ended December 31,
	2018			2017		2016		2015		2014
Loss ratio	76.6	%		76.6	%	75.3	%	72.6	%	71.0	%
Expense ratio	24.5	%		25.3	%	25.7	%	26.7	%	27.7	%
Combined ratio	101.0	%	⁽²⁾	101.9	%	101.0	%	99.3	%	98.8	%	⁽²⁾
Industry combined ratio (all writers)⁽¹⁾	N/A			102.2	%	106.0	%	104.1	%	101.9	%
Industry combined ratio (excluding direct writers)⁽¹⁾	N/A			99.9	%	99.7	%	100.2	%	99.8	%


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


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


⁽¹⁾	Source: A.M. Best, Aggregates & Averages ~~(2014~~ (2015 through ~~2017)~~2018), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).


⁽²⁾	Combined ~~ratios~~ratio for 2018 ~~and 2014 do~~does not sum due to rounding.


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


⁽²⁾	At December 31, ~~2018,~~2019, fixed maturity securities with call features totaled $2.7 billion at fair value and $2.6 billion at amortized cost.



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

	(Amounts in millions)
Retained	$	—	$	40	—	%
Layer of Coverage ⁽¹⁾	40		350		100
Layer of Coverage (wildfires are not covered for 89.5% of this layer)	350		400		100
Layer of Coverage	400		456		100
Layer of Coverage (wildfires are not covered for 89.5% of this layer)	456		500		100
Layer of Coverage ^{(1) (2)}	500		640		100



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

	(Amounts in millions)
For the 12 months ending June 30, 2020	$	38	$	—	$	38
For the 12 months ended June 30, 2019	22		18		40


	Year Ended December 31,										Year Ended December 31,
	2018		2017		2016		2015		2014		2019		2018		2017		2016		2015
	(Amounts in thousands, except ratios)										(Amounts in thousands, except ratios)
Net premiums written	$	3,495,633	$	3,215,910	$	3,155,788	$	2,999,392	$	2,840,922	$	3,731,723	$	3,495,633	$	3,215,910	$	3,155,788	$	2,999,392
Policyholders’ surplus	$	1,471,547	$	1,589,226	$	1,441,571	$	1,451,950	$	1,438,281	$	1,539,998	$	1,471,547	$	1,589,226	$	1,441,571	$	1,451,950
Ratio	2.4 to 1		2.0 to 1		2.2 to 1		2.1 to 1		2.0 to 1		2.4 to 1		2.4 to 1		2.0 to 1		2.2 to 1		2.1 to 1


	December 31,												December 31,
	2018				2017				2016				2019				2018				2017
	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	$	424,945	$	419,352	$	356,018	$	359,240	$	373,335	$	375,495	$	635,283	$	637,272	$	424,945	$	419,352	$	356,018	$	359,240
Tax-exempt state and municipal bonds	2,544,596		2,565,809		2,467,212		2,533,537		2,422,075		2,439,058		2,337,993		2,456,003		2,544,596		2,565,809		2,467,212		2,533,537
Total fixed maturities	2,969,541		2,985,161		2,823,230		2,892,777		2,795,410		2,814,553		2,973,276		3,093,275		2,969,541		2,985,161		2,823,230		2,892,777
Equity securities	544,082		529,631		474,197		537,240		331,770		357,327		648,282		724,751		544,082		529,631		474,197		537,240
Short-term investments	254,518		253,299		302,693		302,711		375,700		375,680		494,060		494,135		254,518		253,299		302,693		302,711
Total investments	$	3,768,141	$	3,768,091	$	3,600,120	$	3,732,728	$	3,502,880	$	3,547,560	$	4,115,618	$	4,312,161	$	3,768,141	$	3,768,091	$	3,600,120	$	3,732,728



Name	Age	Position
George Joseph	9798	Chairman of the Board
Gabriel Tirador	5455	President and Chief Executive Officer
Theodore R. Stalick	5556	Senior Vice President and Chief Financial Officer
Christopher Graves	5354	Vice President and Chief Investment Officer
Abby Hosseini	5960	Vice President and Chief Information Officer
Victor G. Joseph	3233	Vice President and Chief Underwriting Officer
Brandt N. Minnich	5253	Vice President and Chief Marketing Officer
Randall R. Petro	5556	Vice President and Chief Claims Officer
Jeffrey M. Schroeder	43	Vice President and Chief Product Officer
Heidi C. Sullivan	5051	Vice President and Chief Human Capital Officer
Erik Thompson	5051	Vice President, Advertising and Public Relations
Charles Toney	5758	Vice President and Chief Actuary
Judy A. Walters	7273	Vice President, Corporate Affairs and Secretary


Item 1A.	Risk Factors


Location	Purpose	Size in Square Feet	Percent Occupied by the Company at December 31, 2018		Purpose	Size in Square Feet	Percent Occupied by the Company at December 31, 2019
Brea, CA	Home office and I.T. facilities (2 buildings)	236,000	100	%	Home office and I.T. facilities (2 buildings)	236,000	100	%
Folsom, CA	Administrative and Data Center	88,000	100	%	Administrative and Data Center	88,000	100	%
Los Angeles, CA	Executive offices	41,000	95	%	Executive offices	41,000	95	%
Rancho Cucamonga, CA	Administrative	127,000	100	%	Administrative	127,000	100	%
Clearwater, FL	Administrative	162,000	51	%	Administrative	162,000	51	%
Oklahoma City, OK	Administrative	100,000	25	%	Administrative	100,000	25	%


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


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


•	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.


▪	In May 2019, the California DOI approved a 6.99% rate increase on the California homeowners line of insurance business, which represented approximately 12% of the Company's total net premiums earned in 2019. The Company implemented this rate increase in August 2019.


▪	In March 2019, the California DOI approved a 6.90% rate increase on MIC's private passenger automobile line of insurance business, which represented approximately 54% of the Company's total net premiums earned in 2019. The Company implemented this rate increase in May 2019.


▪	In January 2019, the California DOI approved a ~~6.9%~~6.90% rate increase on CAIC's private passenger automobile line of insurance business, which represented approximately ~~13%~~12% of the Company's total net premiums earned in ~~2018.~~2019. The Company ~~expects to implement~~implemented this rate increase in March 2019.


▪	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 53% of the Company's total net premiums earned in 2018. This rate increase became effective in March 2018.


⁽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.


2018 Accident Year	Claims Reported	Amount Recorded at 12/31/2018 at Approximately 7.8% Claim Count Development		Total Expected Amount If Claim Count Development is 0%		Total Expected Amount If Claim Count Development is 10%
2019 Accident Year									Claims Reported	Amount Recorded at 12/31/2019 at Approximately 6.0% Claim Count Development		Total Expected Amount If Claim Count Development is 0%		Total Expected Amount If Claim Count Development is 10%
Claim count	26,978	29,073		26,978		29,676			27,955	29,638		27,955		30,751
Approximate average cost per claim	Not meaningful	$	15,571	$	15,571	$	15,571		Not meaningful	$	17,052	$	17,052	$	17,052
Total dollars	Not meaningful	$	452,696,000	$	420,074,000	$	462,085,000		Not meaningful	$	505,387,000	$	476,689,000	$	524,366,000
Total Loss Development—Favorable (Unfavorable)	Total Loss Development—Favorable (Unfavorable)			$	32,622,000	$	(9,389,000	)	Total Loss Development—Favorable (Unfavorable)			$	28,698,000	$	(18,979,000	)


	Year Ended December 31, 2018									Year Ended December 31, 2019
	Gains (Losses) Recognized in Income									Gains (Losses) Recognized in Income
	Sales			Changes in fair value			Total			Sales			Changes in fair value		Total
	(Amounts in thousands)									(Amounts in thousands)
Net realized investment gains (losses):
Fixed maturity securities ⁽¹⁾⁽²⁾	$	(3,014	)	$	(53,927	)	$	(56,941	)	$	1,347		$	104,379	$	105,726
Equity securities ⁽¹⁾⁽³⁾	(2,187		)	(77,494		)	(79,681		)	19,322			90,920		110,242
Short-term investments ⁽¹⁾	(2,368		)	(1,237		)	(3,605		)	(1,956		)	1,295		(661		)
Note receivable ⁽¹⁾	—			(8		)	(8		)	—			108		108
Total return swaps	(132		)	(3,651		)	(3,783		)	1,039			—		1,039
Options sold	10,513			(15		)	10,498			6,329			10		6,339
Total	$	2,812		$	(136,332	)	$	(133,520	)	$	26,081		$	196,712	$	222,793


	Year Ended December 31, 2017									Year Ended December 31, 2018
	Gains (Losses) Recognized in Income									Gains (Losses) Recognized in Income
	Sales			Changes in fair value			Total			Sales			Changes in fair value			Total
	(Amounts in thousands)									(Amounts in thousands)
Net realized investment gains (losses):
Fixed maturity securities ⁽¹⁾⁽²⁾	$	(2,097	)	$	50,403		$	48,306		$	(3,014	)	$	(53,927	)	$	(56,941	)
Equity securities ⁽¹⁾⁽³⁾	(2,213		)	37,486			35,273			(2,187		)	(77,494		)	(79,681		)
Short-term investments ⁽¹⁾	1			38			39			(2,368		)	(1,237		)	(3,605		)
Note receivable ⁽¹⁾	—			(122		)	(122		)	—			(8		)	(8		)
Total return swaps	(1,035		)	(1,102		)	(2,137		)	(132		)	(3,651		)	(3,783		)
Options sold	2,294			(3		)	2,291			10,513			(15		)	10,498
Total	$	(3,050	)	$	86,700		$	83,650		$	2,812		$	(136,332	)	$	(133,520	)


⁽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 2019 were primarily due to decreases in market interest rates. The decreases in fair value of fixed maturity securities during 2018 were primarily due to increases in market interest rates.


⁽³⁾	The increases in fair value ~~in 2017~~of equity securities during 2019 were primarily due to the overall improvement in ~~the market conditions affecting fixed maturity securities.~~


⁽³⁾	equity markets. The decreases in fair value of equity securities during 2018 were primarily due to the overall decline in ~~the equity markets. The increases in fair value of equity securities during 2017 were primarily due to the overall improvement in the~~ equity markets.


⁽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.



	Year Ended December 31, 2016
	Gains (Losses) Recognized in Income
	Sales			Changes in fair value			Total
	(Amounts in thousands)
Net realized investment gains (losses):
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 swap	107			11,426			11,533
Options sold	3,846			—			3,846
Total	$	(12,876	)	$	(21,379	)	$	(34,255	)


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


⁽³⁾	~~The increases in fair value of equity securities during 2017 and 2016 were primarily due to the overall improvement in the equity markets.~~