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
or
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, 2016
Commission File No. 001-12257
____________________________ 
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
____________________________ 
California95-2211612
(State or other jurisdiction of
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) (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, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of "large accelerated filer," "accelerated filer," and "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 Smaller reporting company
Emerging growth company   
Non-accelerated filer¨(Do not check if a smaller reporting company)Smaller reporting company¨

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.

Indicate by check mark whether the Registrantregistrant 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, 20162019 was $1,444,361,346$1,704,918,875 (which represents 27,170,07827,278,702 shares of common equity held by non-affiliates multiplied by $53.16,$62.50, the closing sales price on the New York Stock Exchange for such date, as reported by the Wall Street Journal).

At February 3, 2017,6, 2020, the Registrantregistrant had issued and outstanding an aggregate of 55,289,07755,357,691 shares of its Common Stock.
____________________________ 

Documents Incorporated by Reference
Certain information from the Registrant’sregistrant’s definitive proxy statement for the 20172020 Annual Meeting of Shareholders is incorporated herein by reference into Part III hereof.
 






MERCURY GENERAL CORPORATION
INDEX TO FORM 10-K
 
 Page
 
   
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A
Item 1B1A
Item 1B
Item 2
Item 3
Item 4
  
 
   
Item 5
Item 6
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
  
 
   
Item 10
Item 11
Item 12
Item 13
Item 14
  
 
   
Item 15
  




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 breakdown,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, 20162019, 2015,2018 and 20142017 by state and line of insurance business were:


Year Ended December 31, 20162019
(Dollars in thousands)
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%$2,478,477
 $520,062
 $139,367
 $123,735
 $3,261,641
 86.4%
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%
Other states (1)
342,005
 78,478
 77,960
 14,506
 512,949
 13.6%
Total$2,452,703
 $436,897
 $166,066
 $116,231
 $3,171,897
 100.0%$2,820,482
 $598,540
 $217,327
 $138,241
 $3,774,590
 100.0%
77.3% 13.8% 5.2% 3.7% 100.0%  74.6% 15.9% 5.8% 3.7% 100.0%  


Year Ended December 31, 20152018
(Dollars in thousands)
Private
Passenger  Automobile
 Homeowners 
Commercial
Automobile
 Other Lines Total  
Private
Passenger  Automobile
 Homeowners 
Commercial
Automobile
 Other Lines Total  
California$1,946,922
 $333,397
 $78,735
 $96,791
 $2,455,845
 81.5%$2,346,403
 $458,065
 $120,234
 $114,838
 $3,039,540
 85.6%
Florida (1)
153,206
 9
 27,281
 738
 181,234
 6.0%126,756
 7
 14,149
 114
 141,026
 4.0%
Other states (2)(1)
245,645
 68,843
 47,495
 13,834
 375,817
 12.5%230,417
 66,838
 64,069
 9,027
 370,351
 10.4%
Total$2,345,773
 $402,249
 $153,511
 $111,363
 $3,012,896
 100.0%$2,703,576
 $524,910
 $198,452
 $123,979
 $3,550,917
 100.0%
77.9% 13.3% 5.1% 3.7% 100.0%  76.1% 14.8% 5.6% 3.5% 100.0%  


Year Ended December 31, 20142017
(Dollars in thousands)
Private
Passenger  Automobile
 Homeowners 
Commercial
Automobile
 Other Lines Total  
Private
Passenger  Automobile
 Homeowners 
Commercial
Automobile
 Other Lines Total  
California$1,852,291
 $302,493
 $69,129
 $84,374
 $2,308,287
 80.9%$2,117,882
 $404,645
 $102,204
 $109,779
 $2,734,510
 84.1%
Florida (1)
131,281
 7
 26,234
 4,676
 162,198
 5.7%140,288
 4
 17,089
 680
 158,061
 4.9%
Other states (2)(1)
239,501
 71,936
 40,565
 30,682
 382,684
 13.4%221,871
 65,269
 58,939
 10,282
 356,361
 11.0%
Total$2,223,073
 $374,436
 $135,928
 $119,732
 $2,853,169
 100.0%$2,480,041
 $469,918
 $178,232
 $120,741
 $3,248,932
 100.0%
77.9% 13.1% 4.8% 4.2% 100.0%  76.3% 14.5% 5.5% 3.7% 100.0%  
_____________
(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.


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.


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

The following table presents the Company's published maximum limits of liability, net of reinsurance:

coverage:
Insurance typePublished maximum limits of liabilitycoverage
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)
________
(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 obtains facultative reinsurance coverage above athe $5 million Company retention limit of up to $7 million.limit.
(3) The majority of the Company’s homeownerhomeowners policies have liability coverage limits of $300,000 or less, and 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 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 office buildings in Rancho Cucamonga and Folsom, California, which are used to support California operations and future expansion, and in Clearwater, Florida and in Oklahoma City, Oklahoma, which house Company employees and several third party tenants. The Company has approximately 4,2004,500 employees. The Company maintains branch offices in a number of locations in California; Clearwater, Florida; Bridgewater, New Jersey; Oklahoma City, Oklahoma; and Austin and San Antonio, Texas. 


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)
 1961 A+A CA, AZ, NV, NY, VA
Mercury Insurance Company ("MIC")(1)
 1972 A+A CA
California Automobile Insurance Company ("CAIC")(1)
 1975 A+A CA
California General Underwriters Insurance Company, Inc. ("CGU")(1)
 1985 Non-rated CA
Mercury Insurance Company of Illinois 1989 A+A IL PA
Mercury Insurance Company of Georgia 1989 A+A GA
Mercury Indemnity Company of Georgia 1991 A+A GA
Mercury National Insurance Company 1991 A+A IL MI
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+A FL PA
Mercury Indemnity Company of America 2001 A+A FL, NJ
Workmen’s Auto Insurance Company ("WAIC")(1)(2)
 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 LLC2018Insurance agency
_____________
(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."


Production and Servicing of Business
The Company sells its policies through a network of approximately 9,7009,500 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 2016,Approximately 1,870, 1,320, and no single independent agent accounted for more than 1% of the Company’s direct premiums written during the last three years. Approximately 1,9001,210 of the independent agents are located in California, Florida, and approximately 1,500 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 86% of the Company's direct premiums written in 2019 and no single independent agent or agency accounted for more than 1% 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 20162019 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,

create brand awareness, and remain competitive in the current insurance climate. In 2016,2019, the Company incurred approximately $40$42 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 98 states, and mechanical breakdownprotection insurance in most states.


In California, "good drivers," as defined by the California Insurance Code, accounted for approximately 82%86% of allthe Company's California voluntary private passenger automobile policies-in-force at December 31, 2016,2019, while higher risk categories accounted for approximately 18%14%. The Company's private passenger automobile renewal rate in California (the rate of acceptance of offers to renew) averagesaveraged approximately 96%. in 2019, 2018, and 2017.


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.
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,
2016 2015 20142019 2018 2017
(Amounts in thousands)(Amounts in thousands)
Gross reserves at January 1(1)
$1,146,688
 $1,091,797
 $1,038,984
$1,829,412
 $1,510,613
 $1,290,248
Less reinsurance recoverable(14,253) (14,192) (13,635)
Less reinsurance recoverables on unpaid losses(180,859) (64,001) (13,161)
Net reserves at January 1(1)
1,132,435
 1,077,605
 1,025,349
1,648,553
 1,446,612
 1,277,087
Acquisition of WAIC reserves
 18,677
 
Incurred losses and loss adjustment expenses related to:          
Current year2,269,769
 2,132,837
 1,989,315
2,696,230
 2,483,693
 2,390,453
Prior years85,369
 12,658
 (3,193)9,794
 93,096
 54,431
Total incurred losses and loss adjustment expenses2,355,138
 2,145,495
 1,986,122
2,706,024
 2,576,789
 2,444,884
Loss and loss adjustment expense payments related to:          
Current year1,508,362
 1,455,245
 1,347,967
1,651,550
 1,543,828
 1,550,789
Prior years702,124
 654,097
 585,899
857,872
 831,020
 724,570
Total payments2,210,486
 2,109,342
 1,933,866
2,509,422
 2,374,848
 2,275,359
Net reserves at December 31(1)
1,277,087
 1,132,435
 1,077,605
1,845,155
 1,648,553
 1,446,612
Reinsurance recoverable13,161
 14,253
 14,192
Reinsurance recoverables on unpaid losses76,100
 180,859
 64,001
Gross reserves at December 31(1)
$1,290,248
 $1,146,688
 $1,091,797
$1,921,255
 $1,829,412
 $1,510,613
_____________ 

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



The increase in the provision for insured events of prior years in 20162019 of approximately $85.4$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 Floridaloss 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 of business, which experienced loss severities in prior accident periods that were higher than previously estimated.


The increaseCompany recorded catastrophe losses net of reinsurance of approximately $53 million, $67 million, and $79 million in 2019, 2018, and 2017, respectively. Catastrophe losses due to 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 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 wasMidwest. These losses were partially offset by favorable development of approximately $4 million on prior years' catastrophe losses, primarily from reductions in the Company's retained portion of losses on the Camp and Woolsey Fires in California automobile lineunder the Company's catastrophe reinsurance treaty, after accounting for the assignment of business.

The decreasesubrogation rights that occurred in the provision for insured eventsfirst quarter of prior years in 20142019 and the re-estimation of reserves as part of normal reserving procedures. Catastrophe losses before reinsurance benefits totaled approximately $3.2 million primarily resulted from lower than expected loss severity on California personal automobile lines of insurance business partially offset by adverse development in other states.

The Company experienced estimated pre-tax catastrophe losses and loss adjustment expenses from severe weather events of $27 million, $19 million, and $11$289 million in 2016, 2015,2018, primarily resulting from wildfires in Northern and 2014, respectively. The losses in 2016 primarily resulted from severe storms outside ofSouthern California and rainstormsweather-related catastrophes across several states. Catastrophe losses before reinsurance benefits totaled approximately $168 million in California. The losses in 20152017, resulting primarily resulted from severe storms outside of California, and rainstorms and wildfires in California. The losses in 2014 were primarily related to winter freeze events on the East CoastNorthern and Southern California, severe rainstorms in California.California, and the impact of hurricanes in Texas, Florida and Georgia.


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%. 
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 22.7%25.3% of direct premiums written in 2016,2019; 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,
  2016 2015 2014 2013 2012
Loss ratio 75.3% 72.6% 71.0% 72.7% 76.1%
Expense ratio 25.7% 26.7% 27.7% 27.2% 26.7%
Combined ratio 101.0% 99.3% 98.8%
(2) 
99.9% 102.8%
Industry combined ratio (all writers)(1)
 N/A
 104.1% 101.9% 103.4% 101.3%
Industry combined ratio (excluding direct writers)(1)
 N/A
 100.2%  99.8% 100.7% 102.6%
  Year Ended December 31,
  2019 2018 2017 2016 2015
Loss ratio (Company-wide) 75.2% 76.6% 76.6% 75.3% 72.6%
Expense ratio (Company-wide) 24.5% 24.5% 25.3% 25.7% 26.7%
Combined ratio (Company-wide)(2)
 99.7% 101.0%
101.9% 101.0% 99.3%
Combined ratio (Company's private passenger automobile only) 98.2% 99.5% 99.3% 100.8% 99.3%
Industry combined ratio (all writers)(1)
 N/A
 97.3% 102.2% 106.0% 104.1%
Industry combined ratio (excluding direct writers)(1)
 N/A
 97.8%  99.9%  99.7% 100.2%
____________
(1) 
Source: A.M. Best, Aggregates & Averages (2012 (2015 through 2015)2018), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).
(2) 
Combined ratio for 20142018 does not sum due to rounding.


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,Year Ended December 31,
2016 2015 2014 2013 20122019 2018 2017 2016 2015
(Amounts in thousands, except ratios)(Amounts in thousands, except ratios)
Net premiums written$3,155,788
 $2,999,392
 $2,840,922
 $2,728,999
 $2,651,731
$3,731,723
 $3,495,633
 $3,215,910
 $3,155,788
 $2,999,392
Policyholders’ surplus$1,441,571
 $1,451,950
 $1,438,281
 $1,528,682
 $1,440,973
$1,539,998
 $1,471,547
 $1,589,226
 $1,441,571
 $1,451,950
Ratio2.2 to 1
 2.1 to 1
 2.0 to 1
 1.8 to 1
 1.8 to 1
2.4 to 1
 2.4 to 1
 2.0 to 1
 2.2 to 1
 2.1 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 including the impact of the alternative minimum tax ("AMT"), are important in portfolio management. Changes in loss experience, growth rates, and profitability produce significant changes in the Company’s exposure to AMT liability, requiring appropriate shifts in the investment asset mix among taxable bonds, tax-exempt bonds, equities, and other investments in order to maximize after-tax yield. The Company closely monitors the timing and recognition of capital gains and losses and the generation of ordinary income to maximize the realization of any deferred tax assets arising from capital losses or AMT credit carryforwards, respectively.losses. The Company had no capital loss carryforward at December 31, 2016.2019.



Investment Portfolio
The following table presents the composition of the Company’s total investment portfolio:
December 31,December 31,
2016 2015 20142019 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$373,335
 $375,495
 $426,905
 $414,396
 $350,343
 $350,705
$635,283
 $637,272
 $424,945
 $419,352
 $356,018
 $359,240
Tax-exempt state and municipal bonds2,422,075
 2,439,058
 2,377,370
 2,465,607
 2,153,151
 2,267,695
2,337,993
 2,456,003
 2,544,596
 2,565,809
 2,467,212
 2,533,537
Total fixed maturities2,795,410
 2,814,553
 2,804,275
 2,880,003
 2,503,494
 2,618,400
2,973,276
 3,093,275
 2,969,541
 2,985,161
 2,823,230
 2,892,777
Equity securities331,770
 357,327
 313,528
 315,362
 387,851
 412,880
648,282
 724,751
 544,082
 529,631
 474,197
 537,240
Short-term investments375,700
 375,680
 185,353
 185,277
 373,180
 372,542
494,060
 494,135
 254,518
 253,299
 302,693
 302,711
Total investments$3,502,880
 $3,547,560
 $3,303,156
 $3,380,642
 $3,264,525
 $3,403,822
$4,115,618
 $4,312,161
 $3,768,141
 $3,768,091
 $3,600,120
 $3,732,728
__________ 
(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,
2016 2015 2014 2013 20122019 2018 2017 2016 2015
  (Dollars in thousands)    (Dollars in thousands)  
Average invested assets at cost(1) (2)
$3,390,769
 $3,293,948
 $3,204,592
 $3,028,198
 $3,011,143
$4,008,601
 $3,740,497
 $3,582,122
 $3,390,769
 $3,293,948
Net investment income(3)
                  
Before income taxes$121,871
 $126,299
 $125,723
 $124,538
 $131,896
$141,263
 $135,838
 $124,930
 $121,871
 $126,299
After income taxes$107,140
 $110,382
 $111,456
 $109,506
 $115,359
$125,637
 $121,476
 $109,243
 $107,140
 $110,382
Average annual yield on investments(3)
                  
Before income taxes3.6% 3.8% 3.9% 4.1% 4.4%3.5% 3.6% 3.5% 3.6% 3.8%
After income taxes3.2% 3.4% 3.5% 3.6% 3.8%3.1% 3.3% 3.1% 3.2% 3.4%
Net realized investment (losses) gains after income taxes$(22,266) $(54,474) $52,770
 $(7,424) $43,147
Net realized investment gains (losses) after income taxes$176,006
 $(105,481) $54,373
 $(22,266) $(54,474)
 __________
(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, 2016,2019, fixed maturity securities with call features totaled $2.8$2.7 billion at fair value and $2.6 billion at amortized cost.
(3) 
During 2016,2019, net investment income before and after income taxes andincreased primarily due to higher average invested assets. Average annual yieldsyield 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 lowas a result of decreasing market interest rate environments.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.


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 2016,2018, the Company was the fourthsixth largest writer of private passenger automobile insurance in California and the fourteenthseventeenth 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 marketautomobile insurance industry is hardeningexiting a hard market with carriers generally raising rates at a slower pace than in 2017 and 2018, although this also depends on individual state profitability and the carriers’ growth appetite.


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 party to a Catastrophe Reinsurance Treaty ("Treaty") covering a wide range of perils that is effective through June 30, 2017. The2020. For the 12 months ending June 30, 2020, the Treaty provides for $115$600 million of coverage on a per occurrence basis after covered catastrophe losses exceed a $100the $40 million Company retention limit. The first $100 million of losses above the Company's $100 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. The treatyTreaty 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 excludes losses from wildfires on 89.5% of certain coverage layers of the Treaty.

Coverage on individual catastrophes provided for the 12 months ending June 30, 2020 under the Treaty is presented below in various layers:
 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 Coverage400
 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
__________ 
(1) Layer of Coverage represents multiple actual treaty layers that are grouped for presentation purposes.
(2) Additional $10 million in coverage was purchased and added to this layer effective January 1, 2020, which increased the coverage limit of this layer to $640 million from $630 million.

For the 12 months ended June 30, 2019, the Treaty provided $205 million of coverage on a per occurrence basis after covered catastrophe losses exceeded the $10 million Company retention limit. The Treaty specifically excluded coverage for any Florida business and for California earthquake losses on fixed property policies such as homeowners, but did cover losses from fires following an earthquake.







Coverage on individual catastrophes provided for the 12 months ended June 30, 2019 under the Treaty is presented below in various layers:
 Catastrophe Losses and LAE  
 In Excess of Up to Percentage of Coverage
      
 (Amounts in millions)  
Retained$
 $10
 %
Layer of Coverage (1)
10
 200
 100
Layer of Coverage200
 500
 5
__________ 
(1) Layer of Coverage represents multiple actual treaty layers that are grouped for presentation purposes.

The annual premium for the Treaty is approximately $38 million for the 12 months ending June 30, 2020, as compared to $22 million for the 12 months ended June 30, 2019. The increase in the annual premium is primarily due to an increase in reinsurance coverage and rates as well as growth in the covered book of business. The Treaty provides for one full reinstatement of coverage limits, and reinstatement premiums are based on the amount of reinsurance benefits used by the Company and at 100% of the annual premium rate with some minor exceptions, up to the maximum reinstatement premium of approximately $38 million and $22 million if the full amount of benefit is used for the 12 months ending June 30, 2020 and 2019, respectively. The total amount of reinstatement premiums is recorded as ceded reinstatement premiums written at the time of the catastrophe event based on the total amount of reinsurance benefits expected to be used for the event, and such reinstatement premiums are recognized ratably over the remaining term of the Treaty as ceded reinstatement premiums earned.

The table below presents the combined total reinsurance premiums under the Treaty (annual premiums and reinstatement premiums) for the 12 months ending June 30, 2020 and 2019, respectively:
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
__________ 
(1) The reinstatement premium and the total combined premium for the treaty period ending June 30, 2020 are projected amounts to be paid based on the assumption that there will be no reinstatements occurring during this treaty period. The reinstatement premium and the total combined premium for the treaty period ended June 30, 2019 are the actual amounts paid.

The catastrophe events that occurred in 2019 caused approximately $57 million in losses to the Company, including a series of wildfires in California during the fourth quarter of 2019. However, no reinsurance benefits were available to the Company under the Treaty for these catastrophe losses, as none of the 2019 catastrophe events resulted in losses in excess of the Company’s per-occurrence retention limit under the Treaty of $10 million for the 12 months ended June 30, 2019 and $40 million for the 12 months ended June 30, 2020.

Two major catastrophe events that occurred in the fourth quarter of 2018, the Camp Fire in Northern California and the Woolsey Fire in Southern California, caused approximately $144 million and $44 million as of December 31, 2019, respectively, in losses to the Company, before reinsurance benefits. The combined loss to the Company from these two events, net of reinsurance benefits, totaled approximately $31 million, after accounting for the sale of subrogation rights to a third party (See Note 12. Loss and Loss Adjustment Expense Reserves of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for more information on the sale), representing $20 million for the Company's initial reinsurance retention for the two catastrophe events, $10 million for each event, and approximately $11 million Company retention from the first layer of reinstated reinsurance limit previously used up. The Company recorded a total of approximately $15 million in ceded reinstatement premiums written and ceded reinstatement premiums earned for reinstatement of the reinsurance benefits used under the Treaty related to these two catastrophe events.

The Company incurred a total of approximately $22 million in losses as of December 31, 2019, before reinsurance benefits, resulting from the Carr Fire that occurred in Shasta County of Northern California in the third quarter of 2018. The loss to the Company, net of reinsurance benefits, was approximately $10 million, most of which is the Company's retention on the catastrophe event. The Company recorded approximately $3 million in ceded reinstatement premiums written and ceded reinstatement premiums earned for reinstatement of the reinsurance benefits used under the Treaty related to this catastrophe event.

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 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, and Arizona must only be filed with the respective DOI before they are implemented. Oklahoma and Florida have a modified version of prior approval 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 $307,000$122,000 and $21,000$120,000 to officeholders and candidates in 20162019 and 20152018, 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, 2016, 2015,2019, 2018 and 2014,2017, 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."


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 2016.2019. 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 2.0%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 CIGA assessments in 2016.2019.


The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowner policy directly with the CEA. The Company receives a small fee for placing business with the CEA, which is recorded as other revenue in the consolidated statements of operations. Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made after CEA capital has been expended and are based upon each company’s participation percentage multiplied by the amount of the total assessment. Based upon the most recent information provided by the CEA, the Company’s maximum total exposure to CEA assessments at April 1, 2016,3, 2019, the most recent date at which information was available, was $60.2$73.8 million. There was no assessment made in 2016.2019.


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 20162019 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 require advance notice and dividends defined to be "extraordinary" 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;arrangements, and modifications thereto; all guarantees that are not quantifiable;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, 20162019, the Insurance Companies are permitted to pay in 2017,2020, without obtaining DOI approval for extraordinary dividends, $144$151 million in dividends to Mercury General, of which $116$125 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 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 on 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 2016,2019, 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.



Information about the Company's Executive Officers of the Company
The following table presents certain information concerning the executive officers of the Company as of February 3, 2017:6, 2020:
Name Age Position
George Joseph 9598 Chairman of the Board
Gabriel Tirador 5255 President and Chief Executive Officer
Allan Lubitz58Senior Vice President and Chief Information Officer
Theodore R. Stalick 5356 Senior Vice President and Chief Financial Officer
Christopher Graves 5154 Vice President and Chief Investment Officer
Robert HoulihanAbby Hosseini 60 Vice President and Chief ProductInformation Officer
KennethVictor G. KitzmillerJoseph 7033 Vice President and Chief Underwriting Officer
Brandt N. Minnich 5053 Vice President and Chief Marketing Officer
Randall R. Petro 5356 Vice President and Chief Claims Officer
Jeffrey M. Schroeder43Vice President and Chief Product Officer
Heidi C. Sullivan 4851 Vice President and Chief Human Capital Officer
Erik Thompson51Vice President, Advertising and Public Relations
Charles Toney 5558 Vice President and Chief Actuary
Judy A. Walters 7073 Vice President—President, Corporate Affairs and Secretary


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 50 years’ experience in the property and casualty insurance business.


Mr. Tirador, President and Chief Executive Officer, served as the Company’s assistant controller from 1994 to 1996. In 1997 and 1998, he served as the Vice President and Controller of the Automobile Club of Southern California. He rejoined the Company in 1998 as Vice President and Chief Financial Officer. He was appointed President and Chief Operating Officer in October 2001 and Chief Executive Officer in 2007. Mr. Tirador has over 2025 years' experience in the property and casualty insurance industry and is an inactive Certified Public Accountant.

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


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 inactive Certified Public Accountant.


Mr. Graves, Vice President and Chief Investment Officer, has been employed by the Company in the investment department

since 1986. Mr. Graves was appointed Chief Investment Officer in 1998, and named Vice President in 2001.


Mr. Houlihan,Hosseini, Vice President and Chief ProductInformation Officer, joinedhas been employed by the Company since 2008. He served as the Company's Chief Technology Officer for nine years and was appointed Vice President and Chief Information Officer in his current position in 2007.May 2018. Prior to joining the Company,2008, he served as National Product Managerheld various leadership positions in information technology, including Senior Vice President, Chief Technology Officer and Chief Information Officer at Bristol West Insurance Group from 2005 to 2007Option One, Inc. and Product ManagerSenior Vice President and Chief Information Officer at Progressive Insurance Company from 1999 to 2005.PeopleSupport, Inc.


Mr. Kitzmiller,Victor Joseph, Vice President and Chief Underwriting Officer has been employed by the Company in the underwriting departmentvarious capacities since 1972. Mr. Kitzmiller2009, and was appointed Vice President in 1991, and named Chief Underwriting Officer in 2010.July 2017. Mr. Victor Joseph is Mr. George Joseph’s son.


Mr. Minnich, Vice President and Chief Marketing 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. 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. 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 WAIC. 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, 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—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—President, Corporate Affairs in 1998.


Item 1A.Risk Factors
The Company’s business involves various risks and uncertainties in addition to the normal risks of business, some of which are discussed in this section. It should be noted that the Company’s business and that of other insurers may be adversely affected by a downturn in general economic conditions and other forces beyond the Company’s control. In addition, other risks and uncertainties not presently known or that the Company currently believes to be immaterial may also adversely affect the Company’s business. 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, 20162019, the Company generated 82.0%approximately 86% 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;
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;
weather 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.


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)A (Excellent) or A- (Excellent). On June 15, 2016,January 28, 2020, A.M. Best Company affirmed allthe Financial Strength Rating ("FSR") of the Company’s ratings and revised the ratingsA (Excellent) with Stable outlook for the A+Company's A rated entities fromand A- (Excellent) with Stable to Negative, signaling the possibilityoutlook for a ratings downgrade in the future. The Company believes that any downgrade would be within the A rating range, which is considered Excellent, and would not have a significant impact on the Company's business. The Company is also working to remove the Negative outlook back to Stable in the next ratings cycle, which is expected to occur in 2017.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 A+.A and A2, respectively. If the Company were to seek financing through the capital markets in the future, it may need to apply for Standard and Poor’s or Moody’s ratings and there can be no assurance that the Company would obtain favorable ratings from either agency.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. In addition, changes in loss experience, growth rates and profitability of the Company's investment portfolio significantly impact the Company’s exposure to AMT liability. The Company seeks to manage its AMT liability and maximize after-tax yield through the appropriate investment asset mix between taxable bonds, tax-exempt bonds, and equities. Although the Company monitors the timing and recognition of capital gains and losses and the generation of ordinary income in an effort to maximize the realization of deferred tax assets arising from capital losses, or AMT credit carryforwards, no guaranty can be provided that such monitoring or the Company's tax strategies will be effective.


If interest rates rise, the Company’s debt service costs will increase.
Interest expense on the Company’s notes payable is directly tied to short-term LIBOR rates, which tend to move in conjunction with the short-term bank borrowing rates (the "Fed Funds Rate") established by the Federal Reserve Bank. The interest expense on the Company's notes payable will increase if short-term LIBOR rates experience increases. Higher interest expense could have an adverse impact on the Company's financial condition, results of operations and liquidity.

The Company’s valuation of financial instruments may include methodologies, 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.


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 method for determining London Interbank Offered Rate ("LIBOR") and the potential replacement of LIBOR may affect the Company's cost of capital, the value of its investment portfolio, and its net investment income.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis is not guaranteed after 2021, and LIBOR may be discontinued or modified by the end of 2021. The Federal Reserve Bank of New York began publishing the Secured Overnight Financing Rate (“SOFR”) in April 2018 as an alternative for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. A transition away from the widespread use of LIBOR to SOFR or another benchmark rate may occur over the course of the next few years.

The Company has exposure to LIBOR-based financial instruments, such as LIBOR-based securities held in its investment portfolio and its unsecured revolving credit facility. The discontinuance of LIBOR or changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities, the value of the Company's investment portfolio, and its net investment income. Additionally, if changes are made to the method of calculating LIBOR or LIBOR ceases to exist, the Company may need to renegotiate the terms of the credit agreement or agree upon a replacement index with the banks for its LIBOR-based unsecured revolving credit facility that expires on March 29, 2022.

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, 2016, 68.8%2019, approximately 57% of the Company’s total investment portfolio at fair value and 86.7%approximately 79% 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.


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 9,7009,500 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 deferred tax asset valuation allowance. For these reasons and becauseThe changes in thesethe estimates and assumptions used in such assessments and estimatesdecisions can materially affect the Company’s results of operations and financial condition, management has included the assessment of a deferred tax asset valuation allowance as a critical accounting estimate.condition.


The carrying value of the Company’s goodwill and other intangible assets could be subject to an impairment write-down.
At December 31, 2016,2019, the Company’s consolidated balance sheets reflected approximately $43 million of goodwill and $26$11 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 valuevalues of the Company’s goodwill and other intangible assets isare less than itstheir carrying valuevalues 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.


The Company relies on its information technology systems to manage many aspects of its business, and any failure of these systems to function properly or any interruption in their operation could result in a material adverse effect on the Company’s business, financial condition, and results of operations.
The Company depends on the accuracy, reliability, and proper functioning of its information technology systems. The Company relies on these information technology systems to effectively manage many aspects of its business, including underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, and to maintain its policyholder data. The Company has deployed, and continues to enhance, new information technology systems that are designed to manage many of these functions across all of the states in which it operates and all of the lines of insurance it offers. See "Overview—A. General—Technology" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations." The failure of hardware or software that supports the Company’s information technology systems, the loss of data contained in the systems, or any delay or failure in the full deployment of the Company’s 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 system failure, accident, or security breach could result in a material disruption to the Company’s business. In addition, substantial costs may be incurred to remedy the damages caused by these disruptions. Following implementation of information technology systems, the Company may from time to time install new or upgraded business management systems. To the extent that a critical system fails or is not properly implemented and the failure cannot be corrected in a timely manner, the Company may experience disruptions to the business that could have a material adverse effect on the Company’s results of operations.


Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of internal or policyholder systems and data could result in damages to the Companys 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. The regulatory environment, as well as the requirements imposed by the payment card industry and insurance regulators, governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable information security and privacy regulations may increase the Company’s

operating costs and adversely impact its ability to market products and services to its policyholders. Furthermore, a penetrated or compromised information technology system or the intentional, unauthorized, inadvertent or negligent release or disclosure of data could result in theft, loss, fraudulent or unlawful use of policyholder, employee or Company data which could harm the Company’s reputation or result in remedial and other expenses, fines or lawsuits. Although we seekthe 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, the applicability of coverage (including exclusions), compliance with provisions (including notice) and/or the insolvency of one or more of our insurers, may significantly affect the amount or timing of recovery.


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


The Company’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 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, while increasing interest expense on its LIBOR based debt.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.
77.3%Approximately 75% of the Company’s direct premiums written for the year ended December 31, 20162019 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-economic costs due to changes in the legal and regulatory environments. In addition, the advent of driverless cars and usage-based insurance could materially alter the way that automobile insurance is marketed, priced, and underwritten.


The Company cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on its business.
Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including,

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


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


The Company’s financial condition, results of operations, and liquidity are dependent in part on tax policy implemented at the federal and/or state level. For example, a significant portion of the Company’s investment portfolio consists of municipal securities that receive beneficial tax treatment under applicable federal tax law. The Company’s results are also subject to federal and state tax rules applicable to dividends received from its subsidiaries and its equity holdings. Additionally, changes in tax laws could have an adverse effect on deferred tax assets and liabilities included in the Company’s consolidated balance sheets and results of operations. The Company cannot predict whether any tax legislation will be enacted 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.market, or reduce risk by cancellation or non-renewal of individual policies. For example, these states may, for public policy reasons, limit a private passenger automobilean insurer’s ability to cancel and non-renew policiesprivate passenger automobile or theyhomeowners 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, thesethe 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.


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 16.18. 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 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. CertainFrom time to time, certain institutional investors also each own approximately between 5%2% and 10%7% 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
None.


Item 2.Properties
The Company owns the following buildings which are mostly occupied by the Company’s employees. Space not occupied by the Company may be leased to independent third party tenants.
Location Purpose 
Size in
Square Feet
 
Percent Occupied by
the Company at
December 31, 2016
 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 164,000
 62% Administrative 162,000
 51%
Oklahoma City, OK Administrative 100,000
 25% 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 6.3-acre and 5.9-acre parcels5.9 acres of land in Brea and Rancho Cucamonga, California, respectively.California.


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


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



In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see "Overview—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
Not applicable.


PART II
 
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.
2016High Low
1st Quarter$56.02
 $42.97
2nd Quarter55.95
 49.69
3rd Quarter56.14
 52.00
4th Quarter61.19
 50.32
2015High Low
1st Quarter$60.31
 $52.28
2nd Quarter59.25
 53.87
3rd Quarter57.19
 48.78
4th Quarter54.18
 45.12
The closing price of the Company’s common stock on February 3, 20176, 2020 was $62.41.$49.09.
Holders
As of February 3, 2017,6, 2020, there were approximately 113 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 2016 and 2015, the Company paid dividends on its common stock of $2.4825 and $2.4725 per share, respectively. On February 3, 2017 the Board of Directors declared a $0.6225 quarterly dividend payable on March 30, 2017 to shareholders of record on March 16, 2017.


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, 2016,2019, the Insurance Companies are permitted to pay in 2017,2020, without obtaining DOI approval for extraordinary dividends, $144$151 million in dividends to Mercury General, of which $116$125 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."


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, 20112014 in each of the Company’s Common Stock, the S&P 500 Index and the industry peer group and the reinvestment of all dividends.


 

chart-3046c993a87a52a5bd5.jpg
2011 2012 2013 2014 2015 20162014 2015 2016 2017 2018 2019
Mercury General$100.00
 $92.16
 $122.17
 $146.49
 $126.26
 $170.79
$100.00
 $86.19
 $116.59
 $108.16
 $109.98
 $108.63
Industry Peer Group100.00
 118.65
 157.68
 191.78
 184.37
 222.51
100.00
 94.97
 114.63
 139.07
 139.89
 165.38
S&P 500 Index100.00
 116.00
 153.57
 174.60
 177.01
 198.18
100.00
 101.38
 113.51
 138.29
 132.23
 173.86


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, 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. The Company’s Board of Directors authorized a $200 million stock repurchase on July 29, 2016, and the authorization will expire in July 2017. The Company may repurchase shares of its common stock under the program in open market transactions at the discretion of management. The Company may use its own funds, borrowings against a bank credit facility, and dividends received from the Insurance Companies to fund the share repurchases. No stock has been purchased since 2000.

None.

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."

Year Ended December 31,Year Ended December 31,
2016 2015 2014 2013 20122019 2018 2017 2016 2015
  (Amounts in thousands, except per share data)    (Amounts in thousands, except per share data)  
Income Data:                  
Net premiums earned$3,131,773
 $2,957,897
 $2,796,195
 $2,698,187
 $2,574,920
$3,599,418
 $3,368,411
 $3,195,437
 $3,131,773
 $2,957,897
Net investment income121,871
 126,299
 125,723
 124,538
 131,896
141,263
 135,838
 124,930
 121,871
 126,299
Net realized investment (losses) gains(34,255) (83,807) 81,184
 (11,422) 66,380
Net realized investment gains (losses)222,793
 (133,520) 83,650
 (34,255) (83,807)
Other8,294
 8,911
 8,671
 9,738
 10,174
9,044
 9,275
 11,945
 8,294
 8,911
Total revenues3,227,683
 3,009,300
 3,011,773
 2,821,041
 2,783,370
3,972,518
 3,380,004
 3,415,962
 3,227,683
 3,009,300
Losses and loss adjustment expenses2,355,138
 2,145,495
 1,986,122
 1,962,690
 1,961,448
2,706,024
 2,576,789
 2,444,884
 2,355,138
 2,145,495
Policy acquisition costs562,545
 539,231
 526,208
 505,517
 477,788
602,085
 572,164
 555,350
 562,545
 539,231
Other operating expenses235,314
 250,839
 249,381
 219,478
 207,281
269,305
 244,630
 233,475
 235,314
 250,839
Interest3,962
 3,168
 2,637
 1,260
 1,543
17,035
 17,036
 15,168
 3,962
 3,168
Total expenses3,156,959
 2,938,733
 2,764,348
 2,688,945
 2,648,060
3,594,449
 3,410,619
 3,248,877
 3,156,959
 2,938,733
Income before income taxes70,724
 70,567
 247,425
 132,096
 135,310
Income tax (benefit) expense(2,320) (3,912) 69,476
 19,953
 18,399
Net income$73,044
 $74,479
 $177,949
 $112,143
 $116,911
Income (loss) before income taxes378,069
 (30,615) 167,085
 70,724
 70,567
Income tax expense (benefit)57,982
 (24,887) 22,208
 (2,320) (3,912)
Net income (loss)$320,087
 $(5,728) $144,877
 $73,044
 $74,479
Per Share Data:                  
Basic earnings per share$1.32
 $1.35
 $3.23
 $2.04
 $2.13
Diluted earnings per share$1.32
 $1.35
 $3.23
 $2.04
 $2.13
Basic earnings (loss) per share$5.78
 $(0.10) $2.62
 $1.32
 $1.35
Diluted earnings (loss) per share$5.78
 $(0.10) $2.62
 $1.32
 $1.35
Dividends paid per share$2.4825
 $2.4725
 $2.4625
 $2.4525
 $2.4425
$2.5125
 $2.5025
 $2.4925
 $2.4825
 $2.4725
 
December 31,December 31,
2016 2015 2014 2013 20122019 2018 2017 2016 2015
  (Amounts in thousands, except per share data)    (Amounts in thousands, except per share data)  
Balance Sheet Data:                  
Total investments$3,547,560
 $3,380,642
 $3,403,822
 $3,158,312
 $3,180,095
$4,312,161
 $3,768,091
 $3,732,728
 $3,547,560
 $3,380,642
Total assets4,788,718
 4,628,645
 4,600,289
 4,315,181
 4,189,686
5,889,157
 5,433,729
 5,101,323
 4,788,718
 4,628,645
Loss and loss adjustment expense reserves1,290,248
 1,146,688
 1,091,797
 1,038,984
 1,036,123
1,921,255
 1,829,412
 1,510,613
 1,290,248
 1,146,688
Unearned premiums1,074,437
 1,049,314
 999,798
 953,527
 920,429
1,355,547
 1,236,181
 1,101,927
 1,074,437
 1,049,314
Notes payable320,000
 290,000
 290,000
 190,000
 140,000
372,133
 371,734
 371,335
 320,000
 290,000
Shareholders’ equity1,752,402
 1,820,885
 1,875,446
 1,822,486
 1,842,497
1,799,502
 1,617,684
 1,761,387
 1,752,402
 1,820,885
Book value per share31.70
 33.01
 34.02
 33.15
 33.55
32.51
 29.23
 31.83
 31.70
 33.01


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


CautionaryForward-looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. Certain statements contained in this Annual Reportreport are forward-looking statements based on Form 10-K or in other materialsthe 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 has filed or will file with the SEC (as well as information included in oral statements or other written statements made or to be madethose anticipated by the Company) contain orCompany. Actual results may contain "forward-looking statements" withindiffer from those projected in the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.forward-looking statements. These forward-looking statements may address, among other things,involve significant risks and uncertainties (some of which are beyond the Company’s strategy for growth, business development, regulatory approvals, market position, expenditures, financial results, and reserves. Forward-looking statements are not guaranteescontrol of performancethe Company) and are subject to importantchange based upon various factors, including but not limited to the following risks and events that could causeuncertainties: changes in the demand for the Company’s actual business, prospects, and results of operations to differ materially from the historical information contained in this Annual Report on Form 10-K and from those that may be expressed or implied by the forward-looking statements contained in this Annual Report on Form 10-K and in other reports or public statements made by the Company.

Factors that could cause or contribute to such differences include, among others: the competition in the automobile insurance markets in California and the other states in which the Company operates; the cyclical and generally competitive nature of the property and casualty insurance industryproducts, inflation and general uncertainties regarding loss reserves or other estimates;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 successloss reserves in managing its non-California business; the impact of potential third party "bad-faith" legislation, changes in laws, regulations or new interpretations of existing laws and regulations, tax position challenges by the California Franchise Tax Board ("FTB"), and decisions of courts, regulators and governmental bodies, particularly in California;general; the Company’s ability to obtain and the timing of required regulatory approvalsthe 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 reliance on independent agents to marketsuccess in managing its business in non-California states; the presence of competitors with greater financial resources and distribute its insurance policies; the investment yieldsimpact of competitive pricing and marketing efforts; the ability of the Company is able to obtain onsuccessfully manage its investments andclaims organization outside of California; the market risks associatedCompany's ability to successfully allocate the resources used in the states with the Company’s investment portfolio; the effect government policies may have on market interest rates; uncertainties relatedreduced or exited operations to assumptions and projections generally, inflation and changesits operations in economic conditions;other states; changes in driving patterns automobile technologiesand loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and automobileauto repair costs; adverse weather conditions or natural disasters, including those which may be related to climate change, in the markets served by the Company; the stability of the Company’s information technology systems and the ability of the Company to execute on its information technology initiatives; the Company’s ability to realize deferred tax assets or to hold certain securities with current loss positions to recovery or maturity;legal, cyber security, regulatory and other risks and uncertainties, including but not limited to those discussed in Part I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K or that are otherwise described or updated from time to time in the Company’s SEC filings, all of which are difficult to predict and many of which are beyond the Company’s control. GAAP prescribes when a company may reserve for particular risks including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain periods.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. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or, in the case of any document the Company incorporates by reference, any other report filed with the SEC or any other public statement made by the Company, the date of the document, report or statement. Investors should also understand that it is not possibleThe Company undertakes no obligation to predict or identify all factors and should not consider the risks set forth above to be a complete statement of all potential risks and uncertainties. If the expectations or assumptions underlying the Company’spublicly update any forward-looking statements, prove inaccuratewhether as a result of new information or if risksfuture events or uncertainties arise, actual results could differ materially from those predicted in any forward-looking statements. The factors identified above are believed to be some, but not all, of the important factors that could cause actual events and results to be significantly different from those that may be expressed or implied in any forward-looking statements.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 breakdown,protection, fire, and umbrella insurance. Private passenger automobile lines of insurance business accounted for 77.3%approximately 75% of the $3.2$3.8 billion of the Company’s direct premiums written in 2016,2019, and 84%approximately 88% 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 expects to complete the run-off of its Michigan and Pennsylvania operations in 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.


20162019 Financial Performance Summary
The Company’s net income for the year ended December 31, 2016 decreased to $73.02019 was $320.1 million, or $1.32$5.78 per diluted share, from $74.5compared to net (loss) of $(5.7) million, or $1.35$(0.10) per diluted share, for the same period in 2015.2018. Included in net income is $121.9(loss) was $141.3 million of pre-tax net investment income that was generated during 20162019 on a portfolio of $3.5$4.3 billion, at fair value, at December 31,

2019, compared to $135.8 million of pre-tax net investment income that was generated during 2018 on a portfolio of $3.8 billion, at fair value, at December 31, 2016, compared to $126.3 million of pre-tax investment income that was generated during 2015 on a portfolio of $3.4 billion at fair value at December 31, 2015.2018. Also included in net income are(loss) were pre-tax net realized investment lossesgains (losses) of $34.3$222.8 million and $83.8$(133.5) million in 20162019 and 2015,2018, respectively, and pre-tax catastrophe losses, net of reinsurance benefits and related reinstatement premiums earned, of approximately $65.3 million and $82.0 million in 2019 and 2018, respectively.


During 2016,2019, the Company continued its marketing efforts to enhance name recognition and lead generation. The Company believes that its marketing efforts, combined with its ability to maintain relatively low prices and a strong reputation, make the 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 $287$520 million and $190$383 million in 20162019 and 2015,2018, respectively. Cash flow from operations has been used to pay shareholder dividends and help support growth.


Economic and Industry Wide Factors
Regulatory Uncertainty—The insurance industry is subject to strict state regulation and oversight and is governed by the laws of each state in which each insurance company operates. State regulators generally have substantial power and authority over insurance companies including, in some states, approving rate changes and rating factors, and establishing minimum capital and surplus requirements. In many states, insurance commissioners may emphasize different agendas or interpret existing regulations differently than previous commissioners. There is no certainty that current or future regulations and the interpretation of those regulations by insurance commissioners and the courts will not have an adverse impact on the Company.
Cost Uncertainty
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—The Company’s financial condition, results of operations, and 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 not able to predict the timing and effect of these factors, or their duration and 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.
Underwriting Cycle and Competition—The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions. The Company has historically seen significant premium growth during hard market conditions. The Company believes that the automobile insurance industry is exiting a hard market with carriers generally raising rates at a slower pace than in 2017 and 2018, although this also depends on individual state profitability and the carriers’ growth appetite.

Technology
The Company started 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 actuariesplatform modernization initiative in 2010 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 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 unablemigrate 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.
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 a year or more after the respective fiscal period ends before sufficient claims have closed for the inflation rate to be known with a reasonable degree of certainty. Therefore, it can be difficult to establish reserves and set premium rates, particularly when actual inflation rates may be higher or lower than anticipated. The Company expects the labor costs to repair automobiles to increase at a higher rate in 2017 than in 2016.
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 frequency generally increased at a modest rate in 2016.
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 market is hardening with carriers generally raising rates, although this also depends on individual state profitability and the carriers’ growth appetite.

Technology
The Company implemented Guidewire’s InsuranceSuite in 2010, whichfor its lines of business and states. Guidewire InsuranceSuite is a widely adopted industryindustry-leading software leader. Byfor property and casualty insurance. The Company has completed the endmigration to InsuranceSuite for all of 2016, Guidewire's products have been deployed inits claims processing, and for most of the states and lines of business in which the Company operates. There have beenoperates for its underwriting processing. Throughout 2019, the Company has made numerous enhancements to make Guidewire's products easierits information technology platforms to further improve agent experience and to promote cross selling

using our more modern and intuitive AgentCenter Portal.  In addition, the Company implemented a new product offering for internallandlord insurance as well as new paperless eDelivery and external users.customer portal capabilities and leveraged robotic process automation and automated rules engine for straight-through processing in 2019. The Company also has ongoingintends to continue to invest in modernization of its technology platforms, technologies for cross selling and new product offerings, and technology initiatives to improve agent andenhance customer facing portals including mobile and web platforms. experience in 2020. 
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 2016,2019, the Company implemented rate changes in twelveeleven states. In California, the following rate increases were implemented or filedapproved by the California DOI for DOI approval:lines of business that exceeded 5% of the Company's total net premiums earned in 2019:

In February,May 2019, the California DOI approved a 5.0%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 50%54% of the Company's total Company's net premiums earned in 2016. This2019. The Company implemented this rate increase was implemented in March 2016.May 2019.
In April 2016,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 14%12% of the Company’sCompany's total net premiums earned in 2016. This rate increase was2019. The Company implemented in June 2016.
In July 2016, CAIC filed for an additional 6.9%this rate increase in its private passenger automobile line of business and is awaiting California DOI approval.March 2019.


In March 2006, 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”) 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. The California DOI sought to impose a fine for each policy on which the Company allegedly permitted an agent to charge a broker fee, to impose a penalty for each policy on which the Company allegedly used a misleading advertisement, and to suspend certificates of authority for a period of one year. In January 2012, the administrative law judge bifurcated the 2004 NNC between (a) the California DOI’s order to show cause (the “OSC”), in which the California DOI asserts the false advertising allegations and accusation, and (b) the California DOI’s notice of noncompliance (the “NNC”), in which the California DOI asserts the unlawful rate allegations. In February 2012, the administrative law judge (“ALJ”) submitted a proposed decision dismissing the NNC, but the Commissioner rejected the ALJ’s proposed decision. The Company challenged the rejection in Los Angeles Superior

Court in April 2012, and the Commissioner responded with a demurrer. Following a hearing, the Superior Court sustained the Commissioner’s demurrer, based on the Company’s failure to exhaust its administrative remedies, and the Company appealed. The Court of Appeal affirmed the Superior Court's ruling that the Company was required to exhaust its administrative remedies, but expressly preserved for later appeal the legal basis for the ALJ’s dismissal: violation of the Company’s due process rights. Following an evidentiary hearing in April 2013, post-hearing briefs, and an unsuccessful mediation, the ALJ closed the evidentiary record on April 30, 2014. Although a proposed decision was to be submitted to the Commissioner on or before June 30, 2014, after which the Commissioner would have 100 days to accept, reject or modify the proposed decision, the proposed decision was not submitted until December 8, 2014. On January 7, 2015, the Commissioner adopted the ALJ’s proposed decision, which became the Commissioner’s adopted order (the "Order"). The decision and Order found that from the period July 1, 1996, through 2006, the Company’s "brokers" were actually operating as "de facto agents" and that the charging of "broker fees" by these producers constituted the charging of "premium" in excess of the Company's approved rates, and assessed a civil penalty in the amount of $27.6 million against the Company. On February 9, 2015, the Company filed a Writ of Administrative Mandamus and Complaint for Declaratory Relief (the “Writ”) in the Orange County Superior Court seeking, among other things, to require the Commissioner to vacate the Order, to stay the Order while the Superior Court action is pending, and to judicially declare as invalid the Commissioner’s interpretation of certain provisions of the California Insurance Code. Subsequent to the filing of the Writ, a consumer group petitioned and was granted the right to intervene in the Superior Court action. The 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%. The Company has filed a motion with the ALJ to dismiss the false advertising OSC portion of the NNC based on the Superior Court's findings and legal reasoning. On January 12, 2017, the CommissionerCalifornia DOI filed a notice of appeal of the Superior Court's judgment entered on November 17, 2016. Sincejudgment. While the appeal was 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 hashad not been appealed,settled or otherwise finally resolved at the time, the Company did not recognize the $30.9 million as a gain in the consolidated statements of operations; instead, it recorded the $30.9 million plus interest earned 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. On May 7, 2019, the California Court of Appeal issued its decision reversing the Superior Court’s original judgment and directing the Superior Court to enter a new judgment in favor of the California DOI. The Company filed a petition for rehearing, which was denied, and subsequently filed a petition for review in the Supreme Court of California. Based on the decision of the California Court of Appeal, the Company accrued approximately $3 million in the second quarter of 2019, which represented an estimated amount of statutory interest the Company might be ordered to pay beyond the actual interest it had earned on the $30.9 million. The California Supreme Court denied the Company's petition for review on August 14, 2019, and the Commissioner's Order became final. On August 30, 2019, the Company paid approximately $35 million to the California DOI, which consisted of the $30.9 million received from the California DOI in June 2017 plus statutory interest.

On October 1, 2019, the Company and the California DOI entered into a settlement agreement resolving the case involving the 2004 NNC, along with the related false advertising action that had been stayed pending the outcome of that case. Pursuant to the settlement agreement, the Company paid an additional amount of approximately $6 million to the California DOI on October 2, 2019, bringing the total settlement amount to approximately $41.2 million, in full settlement of the entire case including the false advertising action. The Company has not yet recognizedadmitted to any allegations raised in the consolidated financial statements the vacationcase. As a result of the Commissioner’s Order or established a receivable forsettlement, the refundCompany recognized approximately $6 million of the $27.6 million penalty plus any related interest owed.
The Company has also accrued a liability for the estimated cost to continue to defend itselfincremental expense in its consolidated statements of operations in the false advertising OSC. Based upon its understandingthird quarter of 2019 relating to 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.settlement.

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


In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see Note 17.18. Commitments and Contingencies—Litigation of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."


C. Critical Accounting Policies and Estimates

Loss and Loss Adjustment Expense Reserves ("Loss Reserves")

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


The Company calculates a loss reserve point estimate rather than a range. There is inherent uncertainty with estimates and this is particularly true with loss reserve estimates. This uncertainty comes from many factors which may include changes in claims

reporting and settlement patterns, changes in the regulatory and legal environments, uncertainty over inflation rates, and uncertainty for unknown items. The Company does not make specific provisions for these uncertainties, rather it considers them in establishing its loss reserve by looking at historical patterns and trends and projecting these out to current loss reserves. The underlying factors and assumptions that serve as the basis for preparing the loss reserve estimate include paid and incurred loss development factors, expected average costs per claim, inflation trends, expected loss ratios, industry data, and other relevant information.
The Company also engages independent actuarial consultants to review the Company’s loss reserves and to provide the annual actuarial opinions required under state statutory accounting requirements. The Company analyzes loss reserves quarterly primarily using the incurred loss, paid loss, average severity coupled with the claim count development methods, and the generalized linear model ("GLM") described below. When deciding among methods to use, the Company evaluates the credibility of each method based on the maturity of the data available and the claims settlement practices for each particular line of insurance business or coverage within a line of insurance business. The Company may also evaluate qualitative factors such as known changes in laws or legal rulings that could affect claims handling or other external environmental factors or internal factors that could affect the settlement of claims. When establishing the loss reserve, the Company generally analyzes the results from all of the methods used rather than relying on a single method. While these methods are designed to determine the ultimate losses on claims under the Company’s policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes. The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.
The incurred loss method analyzes historical incurred case loss (case reserves plus paid losses) development to estimate ultimate losses. The Company applies development factors against current case incurred losses by accident period to calculate ultimate expected losses. The Company believes that the incurred loss method
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 PaidClaims Closed Dollars Paid
BI claims closed in the accident year reported40% 13%38% 12%
BI claims closed one year after the accident year reported80% 57%78% 52%
BI claims closed two years after the accident year reported95% 82%93% 77%
BI claims closed three years after the accident year reported98% 93%98% 90%


BI claims closed in the accident year reported are generally the smaller and less complex claims that settle for approximately $3,500$5,000 to $4,000,$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 $12,000.$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, 2016,2019, the accident years that are most likely to develop are the 20142017 through 20162019 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%, 5%8%, and 3%6% for 2016, 2015,2019, 2018, and 20142017 accident years, respectively. respectively; however, the variation could be more or less than these amounts.


During the years 20122015 through 2016,2019, 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 year1.4% (5.1)%
Second preceding accident year7.5% (3.1)%
Third preceding accident year5.2% (2.9)%













 High Low
Immediate preceding accident year7.0% (3.1)%
Second preceding accident year2.5% (1.3)%
Third preceding accident year1.5% 0.3%

The following table presents the effects on the California automobile BI loss reserves for the 20162019, 20152018, and 20142017 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 (1)
 
Actual
Recorded
Severity at
12/31/16 (1)
 
Implied
Inflation Rate
Recorded (2)
 
(A) Pro-forma
severity if actual
severity is lower by
10% for 2016,
5% for 2015, and
3% for 2014
 
(B) Pro-forma
severity if actual
severity is higher by
10% for 2016,
5% for 2015, and
3% for 2014
 
Favorable loss
development if
actual severity is
less than recorded
(Column A)
 
Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
2016 29,698
(3)$11,903
(3)16.5 %(3)$10,713
 $13,093
 $35,341,000
 $(35,341,000)
2015 32,216
 $10,216
 3.7 % $9,705
 $10,727
 $16,462,000
 $(16,462,000)
2014 32,197
 $9,855
 -1.0 % $9,559
 $10,151
 $9,530,000
 $(9,530,000)
2013 31,263
 $9,957
 
 $
 $
 $
 $
Total Loss Development— Favorable (Unfavorable)  $61,333,000
 $(61,333,000)
Accident
Year
 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 28,710
(2)$15,119
(2)9.5%(2)$13,909
 $16,329
 $34,739,000
 $(34,739,000)
2017 28,389
(2)$13,808
(2)10.2%(2)$12,980
 $14,636
 $23,506,000
 $(23,506,000)
2016 29,356
(2)$12,525
(2)
 
 
 
 
Total Loss Development—Favorable (Unfavorable)  $108,778,000
 $(108,778,000)
___________
(1) 
The number of claims expected and the actual recorded severity for the 2013 through 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 accident year.
(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. The Company believes that severity increases are caused by litigation, medical costs, inflation, and increased utilization of medical procedures.
(3)(2) 
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 through 2019 accident yearyears compared to prior accident years. Consequently, the 16.5% increase in actualimplied inflation rate recorded severity isfor these years are skewed upward due to this strategy change. Had, for example, the number of claims expected for the 2016 accident year of 29,698 been equal to the number of claims expected for the 2015 accident year of 32,216, the change in actual recorded severity for the 2016 accident year would have been 7.4%.
(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. For California automobile BI claims, the Company's experience indicates that approximately 4% to 7% additional claims would be reported in the year subsequent to an accident year. However, such late reported claims could be more or less than the Company’s expectations. Typically, almost every claim is reported within one year following the end of an accident year and at that point the Company has a high degree of certainty as to the ultimate claim count. 

There are many other potential 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.


At December 31, 2016,2019, there were 27,89627,955 California automobile BI claims reported for the 20162019 accident year and the Company estimates that these are expected to ultimately grow by approximately 6.5%6.0%. The Company believes that while actual development in recent years has ranged approximately from 4% to 7%, it is reasonable to expect that the range could be as great as between 0% and 10%. Actual development may be more or less than the expected range.








The following table presents the effects on loss development of different claim count within the broader possible range at December 31, 20162019:
California Automobile Bodily Injury Claim Count Reserve Sensitivity Analysis
2016 Accident YearClaims Reported 
Amount Recorded
at 12/31/16 at 6.5%
Claim Count
Development
 
Total Expected
Amount If Claim
Count Development is
0%
 
Total Expected
Amount If Claim
Count Development is
10%
2019 Accident YearClaims 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 count27,896
 29,698
 27,896
 30,686
27,955
 29,638
 27,955
 30,751
Approximate average cost per claimNot meaningful
 $11,903
 $11,903
 $11,903
Not meaningful
 $17,052
 $17,052
 $17,052
Total dollarsNot meaningful
 $353,495,000
 $332,046,000
 $365,255,000
Not meaningful
 $505,387,000
 $476,689,000
 $524,366,000
Total Loss Development—Favorable (Unfavorable)Total Loss Development—Favorable (Unfavorable)  $21,449,000
 $(11,760,000)Total Loss Development—Favorable (Unfavorable)  $28,698,000
 $(18,979,000)

(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 and

tend to be unquantifiable. Once known, the Company establishes a provision for the losses, but it is not possible to provide any meaningful sensitivity analysis as to the potential size of any unexpected losses. These losses can be caused by many factors, including unexpected legal interpretations of coverage, ineffective claims handling, regulations extending claims reporting periods, assumption of unexpected or unknown risks, adverse court decisions as well as many unknown factors. During 2016,2019, the Company incurreddid not incur any material unexpected losses totaling approximately $10 million on three separate largerelated to claims from accident periods prior to 2013. These were related to either adverse legal outcomes or provisions made for the likelihood of adverse legal outcomes.2016.


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 at Prior Period Loss Development

At December 31, 2016
At December 31, 20162019 and 20152018, the Company recorded its point estimate of approximately $1.29$1.92 billion and $1.15$1.83 billion ($1.85 billion and $1.65 billion, net of reinsurance), respectively, in loss and loss adjustment expense reserves, which includeincluded approximately $534.8$847 million and $440.7$823 million ($829 million and $751 million, 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, 20162019 and 2015,2018, 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 20162019, the Company reported unfavorable development of approximately $85$10 million on the 20152018 and prior accident years’ loss and loss adjustment expense reserves, which at December 31, 2015 totaled approximately $1.15 billion.reserves. The unfavorable development in 20162019 was primarily fromattributable to 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 Florida automobileloss adjustment expense reserves, including catastrophe losses, in certain of the Company's other lines of insurance business.


During 2016, theThe Company recorded catastrophe losses net of reinsurance of approximately $27$53 million resulting primarily from severe storms outside of California and rainstorms in California.

Investments
The Company’s fixed maturity and equity investments are classified as "trading" and carried at fair value as required when applying2019. Catastrophe losses due to the fair value option,catastrophe events that occurred during 2019 totaled approximately $57 million, with changes in fair value reflected in net realized investment gains or losses in the consolidated statements of operations.no reinsurance benefits used for these losses. The majority of equity holdings, including non-redeemable preferred stocks, are actively tradedthe 2019 catastrophe losses resulted 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 national exchanges or trading markets, and are valued atprior years' catastrophe losses, primarily from reductions in the last transaction priceCompany's retained portion of losses on the balance sheet dates.Camp and Woolsey Fires under the Company's catastrophe reinsurance treaty, after accounting for the assignment of subrogation rights that occurred in the first quarter of 2019 and the re-estimation of reserves as part of normal reserving procedures.



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. Fair Value of 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.99.7%97.9% of the fair value of these financial instruments held at December 31, 20162019 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’s fixed maturity and equity securities 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 losses 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.

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,Measurements, of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."


Income Taxes

At December 31, 2016,2019, the Company’s deferred income taxes were in a net assetliability position mainly due to deferred tax assetsliabilities generated by unearned premiums, AMT credit carryforwards, expense accrualsunrealized gains on securities held and loss reserve discounting.deferred acquisition costs. These deferred tax assetsliabilities were substantially offset by deferred tax liabilitiesassets resulting from deferred acquisition costsunearned premiums, loss reserve discounting, and unrealized gains on securities held.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 flowflows from operations and believes that its cash flowliquidity 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 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. The effective tax rate was (3.3)%15.3% for 2016,2019, compared to (5.5)%81.3% for 2015. The increase in2018. Tax-exempt investment income of approximately $82 million coupled with relatively large pre-tax income of approximately $378 million lowered the effective tax rate was mainly duefor 2019 to an increase in liability for uncertaina rate moderately below the statutory tax positions in 2016 combinedrate of 21%, while tax-exempt investment income of approximately $86 million coupled with a decrease in liability for uncertain tax positions in 2015. The Company’srelatively small pre-tax loss of approximately $31 million increased the effective tax rate for 2018 to a rate much higher than the statutory tax rate of 21%.

As a result of enactment of the Tax Cuts and Jobs Act (the "Act") on December 22, 2017 that was effective for tax years beginning January 1, 2018, the Company made certain tax adjustments. For the years ended December 31, 20162018 and 2015 was lower than2019, the statutoryCompany computed its current and deferred income taxes at the new corporate tax rate primarilyof 21%, compared to computing only deferred income taxes at 21% and current income taxes at the pre-enactment rate of 35% for the year ended December 31, 2017. The alternative minimum tax (“AMT”) credit, previously classified as deferred tax asset that was included in deferred income taxes in the Company’s consolidated balance sheets, was reclassified during 2017 to current income taxes receivable as a result of the Act. The Company expects to use the current income taxes receivable balance of approximately $24 million associated with the AMT credit as an offset against its federal tax obligations for tax year 2019.

The Company continues to assess other impacts that the Act may have on business and investment strategies as well as financial results in future years. 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 investment income earned.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 17.18. 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, 20162019 Compared to Year Ended December 31, 20152018

Revenues

Net premiums writtenearned and net premiums earnedwritten in 20162019 increased 5.2%6.9% and 5.9%6.8%, respectively, from 20152018. The increase in net premiums earned and net premiums written was primarily due to higher average premiums per policy arising from rate increases in the California private passenger automobile lineand homeowners lines of insurance business and growth in the number of homeowners and commercial automobile policies written in California.


The Company, which predominantly offers six-month personal automobile insurance policies, reintroduced twelve-month personal automobile policies for new business in MIC, its largest insurance subsidiary, in March 2018. Twelve-month policies are generally sold for twice the price of six-month policies. MIC's net premiums written from twelve-month policies in 2019 and 2018 was approximately $354 million and $205 million, respectively.

Net premiums earned included ceded premiums earned of $56.7 million and $48.9 million in 2019 and 2018, respectively. Net premiums written included ceded premiums written of $43.8 million and $56.0 million in 2019 and 2018, respectively. The increase in ceded premiums earned resulted mostly from an increase in reinsurance coverage and rates, growth in the covered book of business, and an increase in reinstatement premiums following the Camp and Woolsey Fires in the fourth quarter of 2018 that caused higher losses than the wildfires in the fourth quarter of 2017. The decrease in ceded premiums written resulted mostly from an increase in ceded reinstatement premiums in the second half of 2018 following the major wildfires in Northern and Southern California, coupled with reductions in ceded reinstatement premiums in the first quarter of 2019 as a result of a decrease in estimated total losses and reinsurance benefits for the Camp and Woolsey Fires, as described further in Note 12. Loss and Loss Adjustment Expense Reserves of the Notes to Consolidated Financial Statements, partially offset by an increase in ceded premiums written due to higher reinsurance coverage and rates as well as growth in the covered book of 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. Net premiums earned, the most directly comparable GAAP measure, represents the portion of net premiums written that is recognized as revenue in the financial statements for the period presented and earned on a pro-rata basis over the term of the policies. 



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


Year Ended December 31,Year Ended December 31,
2016 20152019 2018
(Amounts in thousands)(Amounts in thousands)
Net premiums earned$3,131,773
 $2,957,897
$3,599,418
 $3,368,411
Change in net unearned premiums24,015
 41,495
132,305
 127,222
Net premiums written$3,155,788
 $2,999,392
$3,731,723
 $3,495,633






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'Company's consolidated loss, expense, and combined ratios determined in accordance with GAAP:
Year Ended December 31,Year Ended December 31,
2016 20152019 2018
Loss ratio75.2% 72.5%75.2% 76.5%
Expense ratio25.5% 26.7%24.2% 24.2%
Combined ratio100.7% 99.2%99.4% 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 unfavorable development of approximately $85$10 million and $13$93 million on prior accident years’ loss and loss adjustment expense reserves for the years ended December 31, 20162019 and 2015,2018, respectively. The unfavorable development in 20162019 was primarily fromattributable to higher than estimated defense and cost containment expenses in the California and Florida automobile linesline of business. The unfavorable development in 2015 was primarily from the California homeowners and automobile lines ofinsurance business, outside of California, which was 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, while the unfavorable development in 2018 was primarily attributable to 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 personal automobile line of insurance business. The 20162019 loss ratio was also negatively impacted by a total of $27approximately $53 million of catastrophe losses, mostlynet of reinsurance benefits, primarily due to severewildfires and winter storms outside ofin California, a hurricane in Texas, and rainstormstornadoes and wind and hail storms in California.the Midwest. The 20152018 loss ratio was also negatively impacted by a total of $19approximately $67 million of catastrophe losses, mostlynet of reinsurance benefits, primarily due to severe storms outside ofwildfires in Northern and Southern California and rainstorms and wildfires in California.weather-related catastrophes across several states. Excluding the effect of estimated prior periods’ loss development and catastrophe losses, the loss ratio was 73.3% and 71.7% for the yearyears ended December 31, 2016 was 71.6%, which is comparable2019 and 2018, respectively. The increase in the loss ratio primarily resulted from increased losses in the private passenger automobile line of insurance business in the states outside of California, and increased non-catastrophe losses in the California homeowners line of insurance business due to 71.5% for the year ended December 31, 2015.winter storms.


Expense ratio is calculated by dividing the sum of policy acquisition costs plusand other operating expenses by net premiums earned. 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,2019 compared to the year ended December 31, 2015.2018 was affected by a decrease in average policy acquisition cost as a result of a decrease in average commission rate, which was offset by costs related to the NNC and other operating expenses in 2019. For a discussion of the NNC, see Note 18. Commitments and Contingencies of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."


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 benefitexpense (benefit) was $2.3$58.0 million and $3.9$(24.9) million for the years ended December 31, 20162019 and 2015,2018, respectively. The $1.6$82.9 million decreaseincrease in income tax benefitexpense was mainly due to ana significant increase in liability for uncertain tax positionspre-tax income of $408.7 million. Tax-exempt investment income, a component of total pre-tax income (loss), did not change significantly compared to the same period in 2016 combined with a decrease in liability for uncertain tax positions in 2015.2018.



Investments
The following table presents the investment results of the Company:
Year Ended December 31,Year Ended December 31,
2016 20152019 2018
(Amounts in thousands)(Amounts in thousands)
Average invested assets at cost (1)
$3,390,769
 $3,293,948
$4,008,601
 $3,740,497
Net investment income (2)
      
Before income taxes$121,871
 $126,299
$141,263
 $135,838
After income taxes$107,140
 $110,382
$125,637
 $121,476
Average annual yield on investments (2)
      
Before income taxes3.6% 3.8%3.5% 3.6%
After income taxes3.2% 3.4%3.1% 3.3%
Net realized investment losses$(34,255) $(83,807)
Net realized investment gains (losses)$222,793
 $(133,520)
__________ 
(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 andincreased primarily due to higher average invested assets. Average annual yieldsyield 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 lowas a result of decreasing market interest rate environments.rates.


The following tables present the components of net realized investment gains (losses) gains included in net income:
Year Ended December 31, 2016Year Ended December 31, 2019
(Losses) Gains Recognized in IncomeGains (Losses) Recognized in Income
Sales 
Changes in fair value 
 TotalSales 
Changes in fair value 
 Total
(Amounts in thousands)(Amounts in thousands)
Net realized investment (losses) gains:     
Net realized investment gains (losses):
     
Fixed maturity securities (1)(2)
$(15,806) $(56,584) $(72,390)$1,347
 $104,379
 $105,726
Equity securities (1)(3)
(499) 23,722
 23,223
19,322
 90,920
 110,242
Short-term investments (1)
(524) 57
 (467)(1,956) 1,295
 (661)
Note receivable (1)

 108
 108
Total return swaps107
 11,426
 11,533
1,039
 
 1,039
Options sold3,846
 
 3,846
6,329
 10
 6,339
Total$(12,876) $(21,379) $(34,255)$26,081
 $196,712
 $222,793
Year Ended December 31, 2015Year Ended December 31, 2018
(Losses) Gains Recognized in IncomeGains (Losses) Recognized in Income
Sales 
Changes in fair value 
 TotalSales 
Changes in fair value 
 Total
(Amounts in thousands)(Amounts in thousands)
Net realized investment (losses) gains:     
Net realized investment gains (losses):     
Fixed maturity securities (1)(2)
$136
 $(39,304) $(39,168)$(3,014) $(53,927) $(56,941)
Equity securities (1)(3)
(17,459) (22,988) (40,447)(2,187) (77,494) (79,681)
Short-term investments (1)
(1,396) 561
 (835)(2,368) (1,237) (3,605)
Note receivable (1)

 (8) (8)
Total return swaps1,062
 (7,500) (6,438)(132) (3,651) (3,783)
Options sold3,021
 60
 3,081
10,513
 (15) 10,498
Total$(14,636) $(69,171) $(83,807)$2,812
 $(136,332) $(133,520)

__________ 
(1) 
The changes in fair value of the investment portfolio resultand note receivable resulted from the application of the fair value option.
(2) 
The Company’s municipal bond holdings represent the majorityincreases in fair value of the fixed maturity portfolio.securities during 2019 were primarily due to decreases in market interest rates. The decreases in fair values in 2016 and 2015value of fixed maturity securities during 2018 were adversely affected by theprimarily due to increases in market interest rates.
(3) 
In 2016, theThe increases in the fair value of equity securities during 2019 were primarily due to anthe overall improvement in the equity markets. In 2015, theThe decreases in the fair value of equity securities during 2018 were primarily due to athe overall decline in the value of the Company's holdings in industrial stocks.equity markets.


Net Income

 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,
 2019 2018
 (Amounts in thousands, except per share data)
Net income (loss)$320,087
 $(5,728)
Basic average shares outstanding55,351
 55,335
Diluted average shares outstanding55,360
 55,335
Basic Per Share Data:   
Net income (loss)$5.78
 $(0.10)
Net realized investment gains (losses), net of tax$3.18
 $(1.90)
Diluted Per Share Data:   
Net income (loss)$5.78
 $(0.10)
Net realized investment gains (losses), net of tax$3.18
 $(1.90)




Year Ended December 31, 20152018 Compared to Year Ended December 31, 20142017
Revenues
Net premiums writtenSee "Item 7. Management's Discussion and net premiums earned in 2015 increased 5.6%Analysis of Financial Condition and 5.8%, respectively, from 2014. The increase in net premiums written was primarily due to higher average premiums per policy arising from rate increases inResults of Operations" of the California private passenger automobile line of insurance business and growth in the number of homeowner policies written in California and private passenger automobile policies written in several states outside of California.

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

 Year Ended December 31,
 2015 2014
 (Amounts in thousands)
Net premiums earned$2,957,897
 $2,796,195
Change in net unearned premiums41,495
 44,727
Net premiums written$2,999,392
 $2,840,922

Expenses
The following table presents the Company’s consolidated loss, expense, and combined ratios determined in accordance with GAAP:
 Year Ended December 31,
 2015 2014
Loss ratio72.5% 71.0%
Expense ratio26.7% 27.7%
Combined ratio (1)
99.2% 98.8%
__________
(1)
Combined ratio for 2014 does not sum due to rounding.

The Company’s loss ratio was affected by unfavorable development of approximately $13 million and favorable development of approximately $3 million on prior accident years’ loss and loss adjustment expense reservesCompany's Form 10-K for the yearsyear ended December 31, 2015 and 2014, respectively. The unfavorable development2018 for a discussion of changes in 2015 was primarilyits results of operations 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 favorable development in 2014 was primarily from California personal automobile lines of insurance business partially offset by adverse development in other states. The 2015 loss ratio was also negatively impacted by a total of $19 million of catastrophe losses mostly due to severe storms outside of California, and rainstorms and wildfires in California. The 2014 loss ratio was also negatively impacted by a total of $11 million of catastrophe losses mostly due to winter freeze events in the East Coast and homeowners losses in California from severe rainstorms. Excluding the effect of estimated prior periods’ loss development and catastrophe losses, the loss ratio was 71.5% and 70.7% for the yearsyear ended December 31, 2015 and 2014, respectively. The increase in the adjusted loss ratio was primarily due to higher loss frequency and severity.
Excluding the $27.6 million penalty assessed by the California DOI and accrued by the Company in 2014, the expense ratio would have been 26.8% in 2014 comparable2017 to the expense ratio in 2015. The 2015 expense ratio also included higher advertising expenses and lower average commissions paid to agents.
Income tax (benefit) expense was $(3.9) million and $69.5 million for the yearsyear ended December 31, 2015 and 2014, respectively. The $73.4 million decrease in income tax expense to an income tax benefit was primarily due to a $176.9 million reduction in total pre-tax income, while tax-exempt investment income, a component of total pre-tax income, remained relatively consistent compared to the same period in 2014. The decrease in pre-tax income was primarily due to a change in net realized investment gains of $81.2 million in 2014 to net realized investment losses of $83.8 million in 2015.2018.

Investments
The following table presents the investment results of the Company:
 Year Ended December 31,
 2015 2014
 (Amounts in thousands)
Average invested assets at cost (1)
$3,293,948
 $3,204,592
Net investment income (2)
   
Before income taxes$126,299
 $125,723
After income taxes$110,382
 $111,456
Average annual yield on investments (2)
   
Before income taxes3.8% 3.9%
After income taxes3.4% 3.5%
Net realized investment (losses) gains$(83,807) $81,184
__________ 
(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 income taxes increased slightly due to higher average invested asset balances. Net investment income and average annual yields on investments after income taxes decreased slightly primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments, and a higher effective tax rate on investment income due to a greater proportion of taxable investments in 2015 compared to 2014.

The following tables present the components of net realized investment (losses) gains included in net income:
 Year Ended December 31, 2015
 (Losses) Gains Recognized in Income
 Sales 
Changes in fair value 
 Total
 (Amounts in thousands)
Net realized investment (losses) gains:     
Fixed maturity securities (1)(2)
$136
 $(39,304) $(39,168)
Equity securities (1)(3)
(17,459) (22,988) (40,447)
Short-term investments (1)
(1,396) 561
 (835)
Total return swaps1,062
 (7,500) (6,438)
Options sold3,021
 60
 3,081
Total$(14,636) $(69,171) $(83,807)
 Year Ended December 31, 2014
 Gains (Losses) Recognized in Income
 Sales 
Changes in fair value 
 Total
 (Amounts in thousands)
Net realized investment gains (losses):     
Fixed maturity securities (1)(2)
$(2,719) $77,208
 $74,489
Equity securities (1)(3)
41,637
 (32,922) 8,715
Short-term investments (1)
(1,943) (527) (2,470)
Total return swap2,706
 (5,675) (2,969)
Options sold3,394
 25
 3,419
Total$43,075
 $38,109
 $81,184

__________ 
(1)
The changes in fair value of the investment portfolio result from the application of the fair value option.
(2)
The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio. The fair values in 2015 were adversely affected by the increase in market interest rates in 2015. The fair value increases in 2014 were primarily caused by the overall improvement in the municipal bond market.
(3)
In 2015, the decreases in the fair value of equity securities were primarily due to a decline in the value of the Company's holdings in industrial stocks. Prior to the fourth quarter of 2014, the Company realized gains by selling equity securities. During the fourth quarter of 2014, decreases in the fair value of equity securities were primarily due to a decline in the value of the Company's holdings in energy stocks.

Net Income
 Year Ended December 31,
 2015 2014
 (Amounts in thousands, except per share data)
Net income$74,479
 $177,949
Basic average shares outstanding55,157
 55,008
Diluted average shares outstanding55,209
 55,020
Basic Per Share Data:   
Net income$1.35
 $3.23
Net realized investment gains (losses), net of tax$(0.99) $0.95
Diluted Per Share Data:   
Net income$1.35
 $3.23
Net realized investment gains (losses), net of tax$(0.99) $0.95




LIQUIDITY AND CAPITAL RESOURCES
A. General
The Company is largely dependent upon dividends received from its insurance subsidiaries to pay debt service costs and to make distributions to its shareholders. Under current insurance law, the Insurance Companies are entitled to pay ordinary dividends of approximately $144$151 million in 20172020 to Mercury General. The Insurance Companies paid Mercury General ordinary dividends of $111$114 million during 2016.2019. As of December 31, 2016,2019, Mercury General had approximately $137$184 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, and1985. The Company does not attempt to match the duration and timing of asset maturities with those of liabilities. Rather, the Companyliabilities; 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 $596.0$788.5 million at December 31, 20162019 as well as $70 million of credit available on a $250$50 million revolving credit facility, the Company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments. Investment maturities are also available to meet the Company’s 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, 20162019 was $287.5$519.7 million, an increase of $97.2$136.2 million compared to the year ended December 31, 2015.2018. The increase was primarily due to an increase in premium collections, and decreases in income taxes and operating expenses paid, partially offset by higher paidan increase in payments for losses and loss adjustment expenses and

policy acquisition costs. Operating expenditures for the year ended December 31, 2015 included the payment of the $27.6 million penalty assessed by California DOI as discussed in "Regulatory and Legal Matters" above. operating expenses. The Company utilized the cash provided by operating activities during the year ended December 31, 20162019 primarily for the payment of dividends to its shareholders and net purchases of investment securities.


The following table presents the estimated fair value of fixed maturity securities at December 31, 20162019 by contractual maturity in the next five years.
Fixed Maturity SecuritiesFixed Maturity Securities
(Amounts in thousands)(Amounts in thousands)
Due in one year or less$381,189
$93,758
Due after one year through two years180,164
200,646
Due after two years through three years147,746
196,258
Due after three years through four years98,038
87,951
Due after four years through five years89,102
75,954
$896,239
$654,567


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


C. Invested Assets
Portfolio Composition
An important component of the Company’s financial results is the return on its investment portfolio. The Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total return framework. The investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a well-diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve return on capital and profitable growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and defaults. The Company continues to believebelieves 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, 20162019:
Cost(1)
 Fair Value
Cost(1)
 Fair Value
(Amounts in thousands)(Amounts in thousands)
Fixed maturity securities:      
U.S. government bonds and agencies$12,288
 $12,275
U.S. government bonds$22,502
 $22,637
Municipal securities2,432,181
 2,449,292
2,435,346
 2,554,208
Mortgage-backed securities39,082
 39,777
62,566
 63,003
Corporate securities189,780
 189,688
233,730
 235,565
Collateralized loan obligations85,429
 86,525
200,656
 199,218
Other asset-backed securities36,650
 36,996
18,476
 18,644
2,795,410
 2,814,553
2,973,276
 3,093,275
Equity securities:      
Common stock286,503
 316,450
498,514
 586,367
Non-redeemable preferred stock32,436
 31,809
49,442
 49,708
Private equity funds12,831
 9,068
Private equity fund1,137
 1,203
Private equity funds measured at net asset value (2)
99,189
 87,473
331,770
 357,327
648,282
 724,751
Short-term investments375,700
 375,680
494,060
 494,135
Total investments$3,502,880
 $3,547,560
$4,115,618
 $4,312,161
 __________

(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.


At December 31, 2016, 68.8%2019, 57.0% of the Company’s total investment portfolio at fair value and 86.7%79.4% 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, 2016, 75.9%2019, 93.3% 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 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, whichthat 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 maturitymaturities and durationdurations of the Company's fixed maturity securities portfolio:and short-term investments:
 December 31, 2016 December 31, 2015
 (in years)
Fixed Maturity Securities   
Nominal average maturities:   
excluding short-term instruments11.9 12.6
including short-term instruments10.5 12.2
Call-adjusted average maturities:   
excluding short-term instruments4.5 3.4
including short-term instruments4.0 3.3
Modified durations reflecting anticipated early calls:   
excluding short-term instruments4.1 3.2
including short-term instruments3.7 3.1
Collateralized Mortgage Obligations Modified Durations3.7 1.9
Short-term Instruments 
 December 31, 2019 December 31, 2018
 (in years)
Fixed Maturity Securities   
Nominal average maturity:   
excluding short-term investments13.9 14.2
including short-term investments12.0 13.1
Call-adjusted average maturities:   
excluding short-term investments4.6 4.9
including short-term investments4.0 4.5
Modified duration reflecting anticipated early calls:   
excluding short-term investments3.7 4.3
including short-term investments3.2 4.0
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, 2016,2019, consistent with the average rating at December 31, 2015.2018. The Company’s municipal bond holdings, of which 99.6%96.2% were tax exempt, represented 87.0%82.6% of its fixed maturity portfolio at December 31, 2016,2019, 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, 2016,2019, fixed maturity holdings rated below investment grade and non-rated bonds totaled $51.6$19.2 million and $86.6$37.8 million, respectively, at fair value, and represented 1.8%0.6% and 3.1%1.2%, 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, 2015,2018, fixed maturity holdings rated below investment

grade and non-rated bonds totaled $37.5$36.0 million and $6.2$76.4 million, respectively, at fair value, and represented 1.3%1.2% and 0.2%2.6%, respectively, of total fixed maturity securities.


Credit ratings for the Company's fixed maturity portfolio were stable in 2016,2019, with 84.1%80.5% of fixed maturity securities at fair value experiencing no change in their overall rating. 10.4%14.4% and 5.5%5.1% of fixed maturity securities at fair value experienced upgrades and downgrades, respectively, in 2016.2019. The majority of downgrades were slight and still within the investment grade portfolio in 2016.2019.



The following table presents the credit quality ratings of the Company’s fixed maturity portfoliosecurities by security type at fair value.value:
December 31, 2016
AAA 
AA(1)
 
A(1)
 
BBB(1)
 Non-Rated/Other Total
(Dollars in thousands) December 31, 2019
Security Type            
AAA(1)
 
AA(1)
 
A(1)
 
BBB(1)
 
Non-Rated/Other (1)
 
Total Fair Value(1)
U.S. government bonds and agencies:           
 (Dollars in thousands)
U.S. government bonds:            
Treasuries$12,275
 $
 $
 $
 $
 $12,275
 $22,637
 $
 $
 $
 $
 $22,637
Government agency
 
 
 
 
 
Total12,275
 
 
 
 
 12,275
 22,637
 
 
 
 
 22,637
100.0% 
 
 
 
 100.0% 100.0% % % % % 100.0%
Municipal securities:                       
Insured64,242
 229,807
 391,361
 28,007
 9,275
 722,692
 37,251
 148,960
 96,797
 57,951
 3,754
 344,713
Uninsured67,725
 628,482
 789,532
 159,648
 81,213
 1,726,600
 92,424
 647,895
 1,244,430
 187,214
 37,532
 2,209,495
Total131,967
 858,289
 1,180,893
 187,655
 90,488
 2,449,292
 129,675
 796,855
 1,341,227
 245,165
 41,286
 2,554,208
5.4% 35.0% 48.2% 7.6% 3.8% 100.0% 5.1% 31.2% 52.4% 9.6% 1.7% 100.0%
Mortgage-backed securities:                       
Commercial4,649
 11,828
 8,191
 3,883
 1,427
 29,978
 9,900
 3,958
 1,010
 4,068
 
 18,936
Agencies3,282
 
 
 
 
 3,282
 1,443
 
 
 
 
 1,443
Non-agencies:                       
Prime
 
 529
 94
 1,423
 2,046
 14,292
 25,030
 115
 76
 756
 40,269
Alt-A
 
 
 1,105
 3,366
 4,471
 
 815
 
 744
 796
 2,355
Total7,931
 11,828
 8,720
 5,082
 6,216
 39,777
 25,635
 29,803
 1,125
 4,888
 1,552
 63,003
19.9% 29.7% 21.9% 12.8% 15.6% 100.0% 40.6% 47.3% 1.8% 7.8% 2.5% 100.0%
Corporate securities:                       
Basic materials
 
 
 6,469
 2,450
 8,919
 
 
 
 571
 2,802
 3,373
Communications
 
 164
 5,814
 
 5,978
 
 
 183
 350
 
 533
Consumer—cyclical
 
 2,231
 14,211
 4,559
 21,001
Consumer—non-cyclical
 
 315
 4,707
 
 5,022
Consumer, cyclical 
 9,970
 
 10,792
 976
 21,738
Consumer, non-cyclical 
 10,602
 445
 10,458
 
 21,505
Energy
 
 6,411
 23,746
 31,306
 61,463
 
 
 2,401
 22,758
 4,405
 29,564
Financial
 840
 23,658
 32,160
 
 56,658
 
 33,253
 71,485
 26,046
 1,004
 131,788
Industrial
 
 167
 4,798
 
 4,965
 
 
 
 20,591
 
 20,591
Technology
 
 
 6,487
 3,437
 9,924
Utilities
 
 6,035
 9,723
 
 15,758
 
 
 6,473
 
 
 6,473
Total
 840
 38,981
 108,115
 41,752
 189,688
 
 53,825
 80,987
 91,566
 9,187
 235,565

 0.4% 20.6% 57.0% 22.0% 100.0% % 22.8% 34.4% 38.9% 3.9% 100.0%
Collateralized loan obligations:                       
Corporate5,864
 
 80,661
 
 
 86,525
 35,405
 24,988
 133,825
 
 5,000
 199,218
Total5,864
 
 80,661
 
 
 86,525
 35,405
 24,988
 133,825
 
 5,000
 199,218
6.8% 
 93.2% 
 
 100.0% 17.8% 12.5% 67.2%
%
2.5% 100.0%
            
Other asset-backed securities5,197
 7,951
 9,115
 14,733
 
 36,996
 5,111
 
 6,596
 6,937
 
 18,644
14.0% 21.5% 24.6% 39.8% 
 100.0% 27.4% % 35.4% 37.2% % 100.0%
Total$163,234
 $878,908
 $1,318,370
 $315,585
 $138,456
 $2,814,553
 $218,463
 $905,471
 $1,563,760
 $348,556
 $57,025
 $3,093,275
5.8% 31.2% 46.8% 11.2% 4.9% 100.0% 7.1% 29.3% 50.5% 11.3% 1.8% 100.0%
__________
(1) 
Intermediate ratings are included at each level (e.g., AA includes AA+, AA and AA-).



U.S. Government Bonds and Agencies
The Company had $15.6$22.6 million and $25.0 million, or 0.6%0.7% and 0.8% of its fixed maturity portfolio, at fair value, in U.S. government bonds and agencies and mortgage-backed securities (Agencies) at December 31, 2016. In February 2016,2019 and 2018, respectively. At December 31, 2019, Moody's and Fitch affirmed their Aaa and AAA ratings respectively, for U.S. government issued debt were Aaa and AAA, respectively, although a significant increase in government deficits and debt could lead to a downgrade. 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 1.0 years and 1.7 years at December 31, 2019 and 2018, respectively.
Municipal Securities
The Company had $2.45$2.55 billion and $2.62 billion, or 82.6% and 87.8% of its fixed maturity securities portfolio, at fair value, ($2.43 billion at amortized cost) in municipal bondssecurities at December 31, 2016,2019 and 2018, respectively, of which $722.7$344.7 million and $404.8 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, 2016.2019 and 2018.


60.6%At December 31, 2019 and 2018, respectively, 65.5% and 62.6% of the insured municipal securities, at fair value, most of which arewere investment grade, arewere 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, 2016,2019 and 2018, the average rating of the Company’s insured investment grade municipal securities was A+., which corresponds to the average rating of the investment grade bond insurers. The remaining 39.4%34.5% and 37.4% of insured municipal securities haveat December 31, 2019 and 2018, respectively, were insured by non-rated or below investment grade bond insurers that have credit ratings below or equal to the financial strength of the underlying issuers; therefore, the Company believes the insurance doesdid not provide a credit enhancement. The modified duration of the municipal securities portfolio reflecting anticipated early calls was 3.7 years and 4.4 years at December 31, 2019 and 2018, 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, 20162019 and 2015,2018, respectively, the mortgage-backed securities portfolio of $39.8$63.0 million and $49.8$31.0 million, or 2.0% and 1.0% of the Company's fixed maturity securities portfolio, at fair value, ($39.1 million and $49.6 million at amortized cost) was categorized as loans to "prime" borrowers, except for $4.5$2.4 million and $5.4 million ($4.5 million and $5.3$3.2 million, at amortized cost)fair value, 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. The Company had holdings of $30.0$18.9 million and $37.3 million ($29.6 million and $37.6$24.8 million, at amortized cost)fair value, in commercial mortgage-backed securities at December 31, 20162019 and 2015,2018, respectively.


The weighted-average rating of the Company’s Alt-A mortgage-backed securities was B-BBB- and BB at December 31, 2016 , compared to B at2019 and December 31, 2015.2018, respectively. The weighted-average rating of the entire mortgage backed securities portfolio was AAA at December 31, 20162019, compared to A-A+ at December 31, 2015.2018. The modified duration of the mortgage-backed securities portfolio reflecting anticipated early calls was 3.1 years and 4.0 years at December 31, 2019 and 2018, respectively.
Corporate Securities
Included inAt December 31, 2019 and 2018, respectively, the company had corporate securities of $235.6 million and $105.5 million, or 7.6% and 3.5% of its fixed maturity securities are $189.7 millionportfolio, at fair value. The weighted-average rating was A- and $243.3 million of corporate securities, which had durations of 2.4 and 2.8 years,BBB at December 31, 20162019 and 2015,2018, respectively. The modified duration reflecting anticipated early calls was 2.0 years and 2.4 years at December 31, 2019 and 2018, respectively.
Collateralized Loan Obligations

The Company had collateralized loan obligations of $199.2 million and $165.8 million, which represented 6.4% and 5.6% of its fixed maturity securities portfolio, at fair value, at December 31, 2019 and 2018, respectively. The weighted-average rating was BBB- and BBB as ofA+ at December 31, 20162019 and 2015,2018. The modified duration reflecting anticipated early calls was 5.2 years and 5.5 years at December 31, 2019 and 2018, respectively.
Collateralized Loan Obligations
Included in fixed maturitiesOther Asset-Backed Securities

The Company had other asset-backed securities are collateralized loan obligations of $86.5$18.6 million and $50.5$37.8 million, which represented 2.4%0.6% and 1.5%1.3% of the total investment

its fixed maturity securities portfolio, and had durations of 4.4 years and 5.7 yearsat fair value, at December 31, 20162019 and 2015,2018, respectively. The weighted-average rating was A and A+ at December 31, 2019 and 2018, respectively. The modified duration reflecting anticipated early calls was 1.8 years and 2.1 years at December 31, 2019 and 2018, respectively.
Equity Securities
Equity holdings of $357.3$724.8 million consistand $529.6 million, at fair value, as of December 31, 2019 and 2018, 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 in 2016(losses) due to changes in fair value of the Company’s equity portfolio were $23.7 million.$90.9 million and $(77.5) million in 2019 and 2018, respectively. The primary cause offor the increase in the fair value of the Company's equity securities was the overall increaseimprovement in the equity markets in 2016.2019.

The Company’s common stock allocation is intended to enhance the return of and provide diversification for the total portfolio. At December 31, 2016, 10.1%2019, 16.8% of the total investment portfolio, at fair value, was held in equity securities, compared to 9.3%14.1% at December 31, 20152018.


The following table presents the equity security portfolio by industry sector at December 31, 20162019 and 20152018:
December 31,December 31,
2016 20152019 2018
Cost Fair Value Cost Fair ValueCost Fair Value Cost Fair Value
  (Amounts in thousands)    (Amounts in thousands)  
Equity securities:              
Basic materials$10,834
 $12,895
 $17,094
 $16,027
$9,528
 $10,058
 $15,321
 $14,657
Communications15,596
 15,935
 22,226
 21,759
26,130
 29,516
 29,268
 29,646
Consumer—cyclical25,950
 28,481
 34,707
 38,378
Consumer—non-cyclical23,798
 22,125
 31,694
 32,480
Consumer, cyclical49,816
 52,470
 35,028
 32,722
Consumer, non-cyclical47,427
 55,526
 30,189
 31,672
Energy45,230
 52,654
 38,560
 34,895
57,459
 54,615
 56,397
 44,444
Financial56,167
 59,226
 40,730
 41,974
100,720
 121,642
 85,405
 86,362
Funds37,750
 34,840
 19,017
 16,676
141,405
 139,517
 110,177
 106,463
Industrial26,050
 29,665
 17,261
 17,110
45,132
 55,135
 40,730
 42,649
Technology19,409
 22,450
 19,105
 18,397
65,280
 89,681
 47,873
 45,677
Utilities70,986
 79,056
 73,134
 77,666
105,385
 116,591
 93,694
 95,339
$331,770
 $357,327
 $313,528
 $315,362
$648,282
 $724,751
 $544,082
 $529,631

D. Debt
Notes payable consistsconsist of the following:
        December 31,
  Lender Interest Rate Expiration 2016 2015
        (Amounts in thousands)
           
Secured credit facility Bank of America LIBOR plus 40 basis points 
December 3, 2018 (2)
 $120,000
 $120,000
Secured loan Union Bank LIBOR plus 40 basis points December 3, 2017 20,000
 20,000
Unsecured credit facility Bank of America and Union Bank (1) December 3, 2019 180,000
 150,000
Total       $320,000
 $290,000
        December 31,
  Lender Interest Rate Expiration 2019 2018
        (Amounts in thousands)
           
Senior unsecured notes(1)
 Publicly traded 4.40% March 15, 2027 $375,000
 $375,000
Unsecured credit facility(2)
 Bank of America and Wells Fargo Bank LIBOR plus 112.5-162.5 basis points March 29, 2022 
 
    Total principal amount       375,000
 375,000
Less unamortized discount and debt issuance costs(3)
       2,867
 3,266
Total       $372,133

$371,734
__________
(1) 
On July 2, 2013,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 29, 2017, the Company entered into an unsecured $200credit agreement that provides for revolving loans of up to $50 million five-year revolving credit facility, which was later expanded to a borrowing capacity of $250 million.and matures on March 29, 2022. The interest raterates on borrowings under the credit facility isare based on the Company’sCompany's debt to total capital ratio and rangesrange from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is abovegreater 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 abovegreater than or equal to 25%. DebtThe debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. In 2016, the interest rateThe Company's debt to total capital ratio was LIBOR plus 112.517.2% at December 31, 2019, resulting in a 15 basis pointspoint commitment fee on the $180$50 million of borrowings and 12.5 basis points on the undrawn portion of the credit facility. The interest rate was approximately 1.73% at December 31, 2016.As of February 6, 2020, there have been no borrowings under this facility.
(2)(3) 
Effective December 28, 2016,The unamortized discount and debt issuance costs are associated with the Company extendedpublicly traded $375 million senior unsecured notes. These are amortized to interest expense over the maturity datelife of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from December 3, 2017the carrying amount of the debt. The unamortized debt issuance cost of approximately $0.1 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 December 3, 2018.interest expense over the term of the credit facility.


The bank loan and credit facilities containCompany was in compliance with all of its financial covenants pertaining to minimum statutory surplus, debt to total capital ratio, and RBC ratio. The Company was in compliance with all of its loan covenantsratio under the unsecured credit facility at December 31, 2016.2019.


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. Capital Expenditures
In 2016,2019, the Company made capital expenditures, including capitalized software, of approximately $18.8$40.1 million primarily related to Information Technology.information technology.
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, 2016, 2015,2019, 2018 and 2014,2017, 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 375%400% of the authorized control level RBC as of December 31, 2016, 20152019, 2018 and 2014.2017. 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 $1.44$1.54 billion at December 31, 2016,2019 and net premiums written in 2019 of $3.2$3.7 billion, the ratio of premiums written to surplus was 2.192.42 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 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 2016.2019. 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 currentrecent examinations:
State Exam Type         Period Under Review Status
CA,FL,GA,IL,OK,TX Coordinated Multi-state Financial 20112014 to 20132017 AwaitingReceived final report.
CAMarket Conduct Claims2015Fieldwork is expected to begin in the 1st quarter of 2017.reports from all six states.
CA Rating and Underwriting 2014 Fieldwork began in July 2014.
VAMarket Conduct2014 to 2015Received draftfinal report.


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



OFF-BALANCE SHEET ARRANGEMENTS


As of December 31, 20162019, 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, 20162019 are summarized as follows:
Contractual Obligations (4)
  Payments Due By Period  Payments Due By Period
Total 2017 2018 2019 2020 2021 ThereafterTotal 2020 2021 2022 2023 2024 Thereafter
    (Amounts in thousands)        (Amounts in thousands)    
Debt (including interest)(1)
$330,754
 $23,693
 $124,028
 $183,033
 $
 $
 $
$498,750
 $16,500
 $16,500
 $16,500
 $16,500
 $16,500
 $416,250
Lease obligations(2)
27,098
 14,647
 6,784
 2,713
 1,945
 861
 148
51,343
 14,458
 12,259
 9,910
 6,439
 3,533
 4,744
Loss and loss adjustment expense reserves(3)
1,290,248
 851,692
 222,556
 109,147
 63,773
 28,858
 14,222
1,921,255
 1,224,272
 334,363
 165,174
 99,067
 49,484
 48,895
Total contractual obligations$1,648,100
 $890,032
 $353,368
 $294,893
 $65,718
 $29,719
 $14,370
$2,471,348
 $1,255,230
 $363,122
 $191,584
 $122,006
 $69,517
 $469,889
__________ 
(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, 20162019 because the debt amounts above include interest, calculated by usingat the average one-month LIBORstated 4.4% coupon rate, in 2016 plusand exclude the bank margin in effect.
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 2022.2028.
(3) 
Loss and loss adjustment expense reserves represents an estimate of amounts necessary to settle all outstanding claims, including IBNR as of December 31, 20162019. 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 loss and loss adjustment expense payments in 2016 related to prior years exceeded the payment amount disclosed on this table in our prior year filing by approximately 10%, largely due to increases in prior year loss reserve estimates and normal volatility in payment patterns. 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 $11.8$7.2 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 maturitiesmaturity 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 maturitiesmaturity securities portfolio. As of December 31, 20162019, the estimated weighted-average credit quality rating of the fixed maturitiesmaturity securities portfolio was A+, at fair value, consistent with the average rating at December 31, 2015.2018.
The following table presents municipal bond holdingssecurities by state in descending order of holdings at fair value at December 31, 20162019:
States Fair Value Average Rating Fair Value Average Rating
 (Amounts in thousands)  (Amounts in thousands) 
Texas $428,534
 AA- $379,269
 AA-
California 262,313
 A+
Florida 190,331
 A+ 246,104
 A+
Illinois 180,623
 A 212,290
 A
Washington 106,535
 AA-
Pennsylvania 151,084
 A+
New York 158,754
 A+
Other states 1,280,956
 A+ 1,406,707
 A+
Total $2,449,292
  $2,554,208
 
TheAt December 31, 2019, the municipal securities portfolio iswas broadly diversified among the states and the largest holdings arewere in populous states such as Texas and California.Florida. These holdings arewere 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 13.3%20.6% of the Company’s fixed maturity portfolio at December 31, 2016. 4.1%2019. 3.6% of the Company’s taxable fixed maturity securities were comprised of U.S. government bonds, and agencies and mortgage-backed securities (Agencies), which were rated AAA at December 31, 2016. 12.8%2019. 1.7% of the Company’s taxable fixed maturity securities, representing 1.7%0.3% of its total fixed maturity portfolio, were rated below investment grade.grade at December 31, 2019. 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, 20162019, the Company’s primary objective for common equity investments was current income. The fair value of the equity investments consisted of $316.5$586.4 million in common stocks, $31.8$49.7 million in non-redeemable preferred stocks,

and $9.1$88.7 million in private equity funds. Common stock equity assetsstocks are typically valued for future economic prospects as perceived by the market.

Common stocks represented 8.9%13.6% of total investments at fair value.value at December 31, 2019. 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, 20162019 and 2015:2018:
  December 31,
  2016 2015
  (Amounts in thousands, except Average Beta)
Average Beta 0.83
 0.89
Hypothetical reduction in the overall value of the stock market of 25% $70,410
 $62,359
Hypothetical reduction in the overall value of the stock market of 50% $140,820
 $124,717
  December 31,
  2019 2018
  (Amounts in thousands, except Average Beta)
Average Beta 0.83
 0.78
Hypothetical reduction of 25% in the overall value of the stock market $121,671
 $84,040
Hypothetical reduction of 50% in the overall value of the stock market $243,342
 $168,080


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 value of the fixed maturity portfolio at December 31, 2016,2019, which represented 79.3%71.7% of total investments at December 31, 2019, 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 expected cash flows generatedproduced by such assets.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 investmentssecurities 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. Bond investments madeFixed 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 bondfixed maturity securities portfolio reflecting anticipated early calls was 3.73.2 years at December 31, 2016 compared to 3.22019, and 4.0 years and 2.8 years at December 31, 20152018 and 2014, respectively. 2017. 
Given a hypothetical increase ofIf interest rates were to rise by 100 orand 200 basis points, in interest rates, the Company estimates that the fair value of its bondfixed maturity securities portfolio at December 31, 20162019 would decrease by $116.4$113.0 million or $232.9and $226.0 million, respectively. Conversely, if interest rates were to decrease, the fair value of the Company’s bondfixed maturity securities portfolio would rise, and it may cause a higher number of the Company’s bondsfixed maturity securities to be called away. The proceeds from the called bondsfixed maturity securities would likely be reinvested at lower yields, which would result in lower overall investment income for the Company.




Item 8.Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Page
  
Consolidated Financial Statements: 


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) as of December 31, 20162019 and 2015, and2018, 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, 2016. 2019 and the related notes and financial statement schedulesI, II, IV (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, 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), the Company’s internal control over financial reporting as of December 31, 2019, 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 12, 2020 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 Public Company Accounting Oversight Board (United States).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. An audit includesmisstatement, 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 supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.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 judgment. 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.
Assessment of the estimation of the loss and loss adjustment expense reserves
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company’s estimation of the loss and loss adjustment expense reserves (loss reserves) is based on generally accepted actuarial methods (methods). 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, 2019, the loss and loss adjustment expense reserve balance was $1.92 billion.
We identified the assessment of the estimation of loss reserves as a critical audit matter. Specialized actuarial skills and knowledge were needed to evaluate the Company’s estimate of future claims payment and reporting patterns based on observed historical patterns. Subjective auditor judgment was required to assess the Company’s selection of the methods and assumptions, such as paid and incurred loss development factors, used to estimate loss reserves.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s loss reserve process, including controls over the selection of methods and assumptions used in the estimate of loss reserves. We also involved actuarial professionals with specialized skills and knowledge who assisted in:

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

actuarial methods;
Evaluating the Company’s estimates for certain lines of business by performing independent analyses of loss reserves using the Company’s underlying historical claims data;
Evaluating the 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.


/s/    KPMG LLP

We have served as the Company’s auditor since 1963.
Los Angeles, California
February 12, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Mercury General Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Mercury General Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly,Company maintained, in all material respects, theeffective internal control over financial position of Mercury General Corporation and subsidiariesreporting as of December 31, 2016 and 2015, and2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the resultsCommittee of their operations and their cash flows for eachSponsoring Organizations of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Mercury General Corporation’s internal control over financial reportingthe consolidated balance sheets of the Company as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by2019 and 2018, the Committeerelated consolidated statements of Sponsoring Organizationsoperations, shareholders’ equity, and cash flows for each of the Treadway Commission (COSO)years in the three-year period ended December 31, 2019, and the related notes and financial statement schedules I, II, and IV (collectively, the consolidated financial statements), and our report dated February 9, 201712, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control overthose consolidated financial reporting.statements.
/s/    KPMG LLP
Los Angeles, California
February 9, 2017

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBasis for Opinion
The Board of Directors and Shareholders
Mercury General Corporation:
We have audited Mercury General Corporation’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mercury General Corporation’sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We 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 Public Company Accounting Oversight Board (United States).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.
In our opinion, Mercury General Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February 9, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/    KPMG LLP
Los Angeles, California
February 9, 201712, 2020



MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,December 31,
2016 20152019 2018
ASSETS      
Investments, at fair value:      
Fixed maturity securities (amortized cost $2,795,410; $2,804,275)
$2,814,553
 $2,880,003
Equity securities (cost $331,770; $313,528)357,327
 315,362
Short-term investments (cost $375,700; $185,353)
375,680
 185,277
Fixed maturity securities (amortized cost $2,973,276; $2,969,541)$3,093,275
 $2,985,161
Equity securities (cost $648,282; $544,082)724,751
 529,631
Short-term investments (cost $494,060; $254,518)494,135
 253,299
Total investments3,547,560
 3,380,642
4,312,161
 3,768,091
Cash220,318
 264,221
294,398
 314,291
Receivables:      
Premiums459,152
 436,621
604,871
 555,038
Accrued investment income41,205
 42,747
40,107
 45,373
Other24,635
 21,925
6,464
 6,132
Total receivables524,992
 501,293
651,442
 606,543
Reinsurance recoverables78,774
 221,088
Deferred policy acquisition costs200,826
 201,762
233,166
 215,131
Fixed assets, net155,910
 157,131
168,986
 153,023
Operating lease right-of-use assets44,909
 
Current income taxes
 9,041
7,642
 38,885
Deferred income taxes45,277
 23,231

 13,339
Goodwill42,796
 42,796
42,796
 42,796
Other intangible assets, net25,625
 31,702
10,636
 15,534
Other assets25,414
 16,826
44,247
 45,008
Total assets$4,788,718
 $4,628,645
$5,889,157
 $5,433,729
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Loss and loss adjustment expense reserves$1,290,248
 $1,146,688
$1,921,255
 $1,829,412
Unearned premiums1,074,437
 1,049,314
1,355,547
 1,236,181
Notes payable320,000
 290,000
372,133
 371,734
Accounts payable and accrued expenses112,334
 122,571
143,318
 115,071
Current income taxes9,962
 
Operating lease liabilities47,996
 
Deferred income taxes27,964
 
Other liabilities229,335
 199,187
221,442
 263,647
Total liabilities3,036,316
 2,807,760
4,089,655
 3,816,045
Commitments and contingencies

 



 


Shareholders’ equity:      
Common stock without par value or stated value:      
Authorized 70,000 shares; issued and outstanding 55,289; 55,16495,529
 90,985
Additional paid-in capital
 8,870
Authorized 70,000 shares; issued and outstanding 55,358; 55,34098,828
 98,026
Retained earnings1,656,873
 1,721,030
1,700,674
 1,519,658
Total shareholders’ equity1,752,402
 1,820,885
1,799,502
 1,617,684
Total liabilities and shareholders’ equity$4,788,718
 $4,628,645
$5,889,157
 $5,433,729


MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,Year Ended December 31,
2016 2015 20142019 2018 2017
Revenues:          
Net premiums earned$3,131,773
 $2,957,897
 $2,796,195
$3,599,418
 $3,368,411
 $3,195,437
Net investment income121,871
 126,299
 125,723
141,263
 135,838
 124,930
Net realized investment (losses) gains(34,255) (83,807) 81,184
Net realized investment gains (losses)222,793
 (133,520) 83,650
Other8,294
 8,911
 8,671
9,044
 9,275
 11,945
Total revenues3,227,683
 3,009,300
 3,011,773
3,972,518
 3,380,004
 3,415,962
Expenses:          
Losses and loss adjustment expenses2,355,138
 2,145,495
 1,986,122
2,706,024
 2,576,789
 2,444,884
Policy acquisition costs562,545
 539,231
 526,208
602,085
 572,164
 555,350
Other operating expenses235,314
 250,839
 249,381
269,305
 244,630
 233,475
Interest3,962
 3,168
 2,637
17,035
 17,036
 15,168
Total expenses3,156,959
 2,938,733
 2,764,348
3,594,449
 3,410,619
 3,248,877
Income before income taxes70,724
 70,567
 247,425
Income tax (benefit) expense(2,320) (3,912) 69,476
Net income$73,044
 $74,479
 $177,949
Net income per share:     
Income (loss) before income taxes378,069
 (30,615) 167,085
Income tax expense (benefit)57,982
 (24,887) 22,208
Net income (loss)$320,087
 $(5,728) $144,877
Net income (loss) per share:     
Basic$1.32
 $1.35
 $3.23
$5.78
 $(0.10) $2.62
Diluted$1.32
 $1.35
 $3.23
$5.78
 $(0.10) $2.62








MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Year Ended December 31,Year Ended December 31,
2016 2015 20142019 2018 2017
Common stock, beginning of year$90,985
 $88,705
 $81,591
$98,026
 $97,523
 $95,529
Proceeds of stock options exercised1,818
 2,111
 6,824
701
 358
 2,102
Payment for vested restricted stock units and related taxes1,671
 
 
Reclassification of restricted stock units from equity to liability award
 
 (168)
Share-based compensation expense142
 142
 142
123
 145
 60
Excess tax benefits related to share-based compensation913
 27
 148
Withholding tax on stock options exercised(22) 
 
Common stock, end of year95,529
 90,985
 88,705
98,828
 98,026
 97,523
Additional paid in capital, beginning of year8,870
 3,804
 411
Share-based compensation expense
 5,066
 3,970
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) 
 (577)
Additional paid in capital, end of year
 8,870
 3,804
Retained earnings, beginning of year1,721,030
 1,782,937
 1,740,484
1,519,658
 1,663,864
 1,656,873
Net income73,044
 74,479
 177,949
Net income (loss)320,087
 (5,728) 144,877
Dividends paid to shareholders(137,201) (136,386) (135,496)(139,071) (138,478) (137,886)
Retained earnings, end of year1,656,873
 1,721,030
 1,782,937
1,700,674
 1,519,658
 1,663,864
Total shareholders’ equity$1,752,402
 $1,820,885
 $1,875,446
$1,799,502
 $1,617,684
 $1,761,387


MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,Year Ended December 31,
2016 2015 20142019 2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income$73,044
 $74,479
 $177,949
Net income (loss)$320,087
 $(5,728) $144,877
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization26,385
 26,478
 28,054
64,730
 58,791
 55,343
Net realized investment losses (gains)34,255
 83,807
 (81,184)
Bond amortization, net26,873
 21,360
 18,918
Excess tax benefits related to share-based compensation(913) (27) (148)
Net realized investment (gains) losses(222,793) 133,520
 (83,650)
Increase in premiums receivable(22,531) (41,512) (23,934)(49,832) (80,979) (14,908)
Decrease (increase) in reinsurance recoverables142,314
 (164,739) (43,043)
Gain on sale of fixed assets
 
 (3,078)
Changes in current and deferred income taxes(2,130) (35,287) 8,343
72,545
 (13,898) (3,010)
Decrease (increase) in deferred policy acquisition costs936
 (4,560) (2,736)
Increase in unpaid losses and loss adjustment expenses143,560
 36,214
 52,813
(Increase) decrease in deferred policy acquisition costs(18,035) (16,980) 2,675
Increase in loss and loss adjustment expense reserves91,843
 318,799
 220,365
Increase in unearned premiums25,124
 42,552
 46,271
119,366
 134,254
 27,490
(Decrease) increase in accounts payable and accrued expenses(10,586) (35,086) 31,019
Increase (decrease) in accounts payable and accrued expenses26,493
 6,586
 (4,178)
Share-based compensation142
 5,208
 4,112
123
 145
 60
(Decrease) increase in other payables(2,627) 18,114
 (10,988)
Other, net(4,059) (1,496) (1,954)(27,163) 13,663
 42,462
Net cash provided by operating activities287,473
 190,244
 246,535
519,678
 383,434
 341,405
CASH FLOWS FROM INVESTING ACTIVITIES          
Fixed maturity securities available for sale in nature:          
Purchases(1,077,638) (965,701) (542,494)(491,795) (706,224) (734,397)
Sales396,766
 260,946
 209,680
136,560
 189,306
 100,709
Calls or maturities647,059
 386,644
 330,637
316,860
 334,626
 575,735
Equity securities available for sale in nature:          
Purchases(714,113) (748,217) (868,383)(1,174,759) (1,026,827) (831,310)
Sales696,138
 805,417
 745,058
1,088,701
 954,755
 679,571
Calls
 2,851
 1,044

 
 7,100
Changes in securities payable and receivable29,958
 (1,387) 9,294
(2,536) 4,035
 (44,740)
Net (increase) decrease in short-term investments and purchased options(191,530) 187,492
 (56,530)
(Increase) decrease in short-term investments(240,391) 45,747
 73,005
Purchase of fixed assets(16,979) (20,112) (26,037)(40,088) (27,959) (19,443)
Sale of fixed assets14
 141
 224

 
 6,239
Business acquisition, net of cash acquired
 7,771
 
Other, net3,605
 2,473
 3,472
6,247
 10,105
 1,934
Net cash used in investing activities(226,720) (81,682) (194,035)(401,201) (222,436) (185,597)
CASH FLOWS FROM FINANCING ACTIVITIES          
Dividends paid to shareholders(137,201) (136,386) (135,496)(139,071) (138,478) (137,886)
Excess tax benefits related to share-based compensation913
 27
 148
Proceeds from stock options exercised1,632
 2,111
 6,247
701
 358
 2,162
Proceeds from bank loan30,000
 
 100,000
Net proceeds from issuance of senior notes
 
 371,011
Payoff of principal on loan and credit facilities
 
 (320,000)
Net cash used in financing activities(104,656) (134,248) (29,101)(138,370) (138,120) (84,713)
Net (decrease) increase in cash(43,903) (25,686) 23,399
(19,893) 22,878
 71,095
Cash:          
Beginning of year264,221
 289,907
 266,508
314,291
 291,413
 220,318
End of year$220,318
 $264,221
 $289,907
$294,398
 $314,291
 $291,413
SUPPLEMENTAL CASH FLOW DISCLOSURE          
Interest paid$3,531
 $2,989
 $2,543
$16,586
 $16,586
 $9,863
Income taxes (refunded) paid$(183) $31,390
 $61,139
Income taxes (refunded) paid, net$(14,564) $(10,989) $25,218


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 14 Insurance Companies in 11 states, principally California. The Company also writes homeowners, commercial automobile, commercial property, mechanical breakdown,protection, fire, and umbrella insurance. The private passenger automobile line of insurance business was more than 77%74% of the Company’s direct premiums written in 20162019, 20152018, and 2014, of which approximately 84%, 83%2017, and 83%approximately 88%, 87%, and 85% of the private passenger automobile premiums were written in California during 2016in 2019, 20152018, and 20142017, respectively. Premiums written represents the premiums charged on policies issued during a fiscal period, which is a statutory measure designed to determine production levels.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Mercury General Corporation and its subsidiaries:
Insurance Companies  
  
Mercury Casualty Company ("MCC") Mercury National Insurance Company
Mercury Insurance Company ("MIC") American Mercury Insurance Company
California Automobile Insurance Company ("CAIC") 
American Mercury Lloyds Insurance Company(1)
California General Underwriters Insurance Company, Inc. 
Mercury County Mutual Insurance Company(2)
Mercury Insurance Company of Illinois Mercury Insurance Company of Florida
Mercury Insurance Company of Georgia Mercury Indemnity Company of America
Mercury Indemnity Company of Georgia 
Workmen's Auto Insurance Company ("WAIC")(4)
  
Non-Insurance Companies  
  
Mercury Select Management Company, Inc. AIS Management LLC
Mercury Insurance Services LLC Auto Insurance Specialists LLC
Animas Funding LLC ("AFL")(3)
 PoliSeek AIS Insurance Solutions, Inc.
Fannette Funding LLC ("FFL")(3)
 Mercury Plus Insurance Services LLC
 __________
(1) 
American Mercury Lloyds Insurance Company is not owned but is controlled by the Company through its attorney-in-fact, Mercury Select Management Company, Inc.
(2) 
Mercury County Mutual Insurance Company is not owned but is controlled by the Company through a management contract.
(3) 
Special purpose investment vehicle.
(4)
California domiciled insurance company acquired in 2015. See Note 20. Acquisition.


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 2016, 20152019, 2018 and 2014.2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates require the Company to apply complex assumptions and judgments, and often the Company must make estimates about effects of matters that are inherently uncertain and will likely change in subsequent periods. The most significant assumptions in the preparation of these

consolidated financial statements relate to reserves for losses and loss adjustment expenses. Actual results could differ from those estimates.

Investments


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. Fair Value of 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) gains 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.


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 an interest in private equity funds.


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

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

The Company forms special purpose investment vehicles to facilitate its investment activities involving derivative instruments such as total return swaps, or limited partnerships or limited liability companies 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, 2019 and 2018. 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 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. The Company's maximum exposure to loss is limited to the total carrying value that is included in equity securities in the Company's consolidated balance sheets. At December 31, 2019 and 2018, the Company had no outstanding unfunded commitments to these VIEs whereby the Company may be called by the VIEs during the commitment period to fund the purchase of new investments and the expenses of the 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 with fair values totaling $19$16 million and $21$15 million at December 31, 20162019 and 2015,2018, 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. Deferred policy acquisition cost amortization was $562.5 million, $539.2 million, and $526.2 million during the years ended December 31, 2016, 2015, and 2014, respectively. The Company does not defer advertising expenditures but expenses them as incurred.

The Company recordedtable below presents a summary of deferred policy acquisition cost amortization and net advertising expense of approximately $40 million, $44 million, and $23 million during the years ended December 31, 2016, 2015, and 2014, respectively.expense:
 Year Ended December 31,
 2019 2018 2017
 (Amounts in millions)
Deferred policy acquisition cost amortization$602.1
 $572.2
 $555.4
Net advertising expense42.2
 40.9
 37.4

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



The Company periodically assesses long-lived assets or asset groups including building and equipment, for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the Company identifies an indicator of impairment, the Company assesses recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. There were no impairment charges during 2016, 2015,2019, 2018, and 2014.2017.
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, 20162019 and 20152018, goodwill and other intangible impairment assessments indicated that there was no0 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 $3.16$3.73 billion, $3.00$3.50 billion, and $2.84$3.22 billion in 20162019, 20152018, and 20142017, 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. The amountrecoveries, and gross of reinsurance recoverable is included in other receivables.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)("BI") coverages. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date. However, since the provisions for loss reserves are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.


The Company analyzes loss reserves quarterly primarily using the incurred loss, paid loss, average severity coupled with the claim count development methods, and the generalized linear model ("GLM") described below. When deciding among methods to use, the Company evaluates the credibility of each method based on the maturity of the data available and the claims settlement practices for each particular line of insurance business or coverage within a line of insurance business. The Company may also evaluate qualitative factors such as known changes in laws or legal ruling that could affect claims handling or other external environmental factors or internal factors that could affect the settlement of claims. When establishing the loss reserve, the Company will generally analyze the results from all of the methods used rather than relying on a single method. While these methods are

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

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, 20162019 and 2015,2018, potential dilutive securities consisted of outstanding stock options and restricted stock units ("RSUs") granted from the Company's 2014 Long Term Incentive Plan.options. See Note 16.17. Earnings Per Share, for the required disclosures relating to the calculation of basic and diluted earnings per share.
Income Taxes

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


At December 31, 2016,2019, the Company’s deferred income taxes were in a net assetliability position, which included a combination of ordinary and capital deferred tax benefits.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. TheUnpaid losses and unearned premiums that are ceded amounts are immaterial andto reinsurers are carried in reinsurance recoverables and other receivables.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, 2020. The Treaty provides $600 million of coverage on a per occurrence basis after covered catastrophe losses exceed the $40 million Company retention limit. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies, such as homeowners, but does cover losses from fires following an earthquake. 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 2017, 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 2017, 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 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 ("RSU") grant wasis determined based on the market price on the grant date for awards classified as equity and on each reporting date for awards classified as a liability. Compensation cost is recognized based on management’s best estimate of the performance goals that will be achieved.achieved at the end of the performance period, taking into account expected forfeitures. If suchthe 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

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 $16.3 million and $16.0 million representing approximately 0.4% and 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 for each of the years ended December 31, 2019 and 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 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. The primary performance obligation of AIS and Poliseek in return for the commission income from the insurers is to complete the sale of the policy and deliver the control of the policy to the insurer prior to the policy effective date. The total revenue from the sale of a policy is recognized when the sale is complete and the policy is effective as all the material aspects of the performance obligation are satisfied and the insurer is deemed to obtain control of the insurance policy at that time. The commission income is constrained such that the revenue is recognized only to the extent that the commission income received is not likely to be returned to the insurers due to policy cancellations. Any commission income not received when the sale is complete is recognized as commission income receivable, which is included in other receivables in the Company's consolidated balance sheets. Commission income receivable at December 31, 2019 and 2018 was approximately $1.2 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, using the expected value method based on all relevant information, including historical data. The refund liability at December 31, 2019 and 2018 was approximately $0.7 million, which was included in other liabilities in the Company's consolidated balance sheets.

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

Recently Issued Accounting Standards


In October 2016,August 2018, the FASBFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-16,2018-15, "Income Taxes (Topic 740)Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Intra-Entity Transfers of Assets Other Than Inventory.Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2016-162018-15 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 entities an entity

to recognizeexpense 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 tax consequencesas the fees associated with the hosting element (service) of an intra-entity transferthe arrangement and classify payments for capitalized implementation costs in the statement of an asset other than inventory whencash flows in the transfer occurs. Current GAAP prohibitssame manner as payments made for fees associated with the recognitionhosting element. The entity is also required to present the capitalized implementation costs in the statement of current and deferred income taxesfinancial position in the same line item that a prepayment for an intra-entity asset transfer until the asset has been sold to an outside party.fees of the associated hosting arrangement would be presented. ASU 2016-16 will be2018-15 became effective for the Company beginningon January 1, 2018. The Company is evaluating the2020 and did not have any material impact that ASU 2016-16 will have on its consolidated financial statements and related disclosures.


In August 2016,2018, the FASB issued ASU 2016-15,2018-13, "Classification of Certain Cash Receipts and Cash PaymentsFair Value Measurement (Topic 230)820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU require certain existing disclosure requirements in Topic 820 to be modified or removed, and certain new guidance is intendeddisclosure requirements to reduce diversity in how certain transactions are classified inbe added to the consolidated statement of cash flows.Topic. In addition, this ASU 2016-15 will beallows entities to exercise more discretion when considering fair value measurement disclosures. ASU 2018-13 became effective for the Company beginningon January 1, 2018. The Company is evaluating the2020 and did not have any material impact that ASU 2016-15 will have 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 became effective for the Company on January 1, 2020 and did not have any 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 incurring.occurring. Current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the probability threshold. ASU 2016-13 becomes effective for the Company beginning with the first quarter ending March 31, 2020. The Company is evaluating the impact that ASU 2016-13 will have on its consolidated financial statements and related disclosures.

In March 2016,Subsequently, the FASB has 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. ASU 2016-09 is effective for the Company with the quarter ending March 31, 2017. The Company is evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

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 becomes 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 using a modified retrospective approach. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

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 2015, the FASB issued ASU 2015-09, "Financial Services -Insurance (Topic 944), Disclosures About Short-Duration Contracts." ASU 2015-09 requires insurance entities to provide additional disclosures related to claims liabilities. The additional disclosure requirements for the annual reports include: (1) claims development information by accident year, on a net of reinsurance basis, for the number of years for which claims incurred remain outstanding but not to exceed the most recent 10 years, and for the most recent reporting period presented, an insurer also needs to disclose the amount of total net outstanding claims for all accident years included in the claims development tables; (2) a reconciliation of claims development information and the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses; and (3) information about the claims frequency and the amount of the incurred-but-not-reported liabilities for each accident year presented. In addition, a description of the methodology used to determine the amounts disclosed is required. The roll forward of the liability for unpaid claims and claims adjustment expenses, currently required only for annual periods, will also be required for interim periods. ASU 2015-09 became effective for the Company beginning with the annual period ended December 31, 2016, and quarter periods beginning with the first quarter of 2017. Although the adoption of this standard did not have a material impact on its consolidated financial statements, the Company expanded the nature and extent of its insurance contracts disclosures.

In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810), Amendments to the Consolidation Analysis" affecting the consolidation evaluation of limited partnerships and similar entities, fees paid to a decision maker or a service provider as a variable interest, and variable interests in a variable interest entity held by related parties of the reporting entities. The amendments became effective for the Company on January 1, 2016. As in previous GAAP, consolidation analysis under ASU 2015-02 contains two primary consolidation models: the voting control model and the variable interest ("VIE") model. An entity being evaluated for consolidation is required to first be subjected to the requirements of the VIE model. Only if the entity fails to meet the requirements to be consolidated under the VIE model, would the voting control consolidation model apply. The adoption of ASU 2015-02 did not have an impact on the Company's 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. Through the first half of 2016, the FASB issued additional ASUs on Topic 606326 that do not change the core principle of the guidance in ASU 2014-092016-13 but merely clarify or certain aspects of it. TheASU 2016-13 and the additional ASUs also becomeon Topic 326 became effective for the Company beginningon January 1, 2018. As2020. The Company adopted this ASU using a modified retrospective transition method by recognizing the accounting for insurance contracts is outsidecumulative-effect adjustment of approximately $2 million to retained earnings at January 1, 2020. The cumulative-effect adjustment primarily resulted from reestimating credit losses on the outstanding balances of the scope of ASU 2014-09, the Company does not expectCompany's reinsurance recoverables and premiums receivables at the adoption date of this ASU to have a material impact onthe new standard. The Company will make the required disclosures under Topic 326, starting with its consolidated financial position, results of operations, or cash flows.statements that include the initial adoption date.


2.Fair Value of Financial Instruments
The financialFinancial 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 onin the consolidated balance sheets.

The following table presents estimatedthe fair values of financial instruments:
 December 31,
 2019 2018
 (Amounts in thousands)
Assets   
Investments$4,312,161
 $3,768,091
Note receivable5,665
 5,557
Liabilities   
Total return swaps
 4,851
Options sold77
 3
Unsecured notes394,279
 362,674

 December 31,
 2016 2015
 (Amounts in thousands)
Assets   
Investments$3,547,560
 $3,380,642
Total return swaps667
 
Liabilities   
Total return swaps$765
 $11,525
Options sold20
 260
Secured notes140,000
 140,000
Unsecured note180,000
 150,000

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 gains and losses are included in net realized investment gains (losses) gains 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 on the expiration date as realized gains from investments.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 $0.02 million and $0.26 million wereare included in other liabilities at December 31, 2016 and 2015, respectively.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, 2016 and 2015 based on models using inputs, such as interest rate yield curves and credit spreads, observable for substantially the full term of the contract.


SecuredUnsecured Notes Payable

The fair value of the Company's $120 million secured note and $20 million secured note, classified as Level 2 in the fair value hierarchy described in Note 4. Fair Value Measurement, is estimated based on assumptions and inputs, such as the market value of underlying collateral and reset rates, for similarly termed notes that are observable in the market. The fair values of the secured notes approximated their carrying values.

Unsecured Note Payable
The fair value of the Company's $180Company’s publicly traded $375 million unsecured note, classified as Level 2 in the fair value hierarchy described in Note 4. Fair Value Measurement, is based on the unadjusted quoted price for similar notes in active markets. The fair value of the unsecured note approximated its carrying value.at December 31, 2019 and 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 Measurement.Measurements.



3. Investments


The following table presents gains (losses) gains 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 securities90,920
 (77,494) 37,486
Short-term investments1,295
 (1,237) 38
       Total gains (losses)$196,594
 $(132,658) $87,927

 Year Ended December 31,
 2016 2015 2014
 (Amounts in thousands)
Fixed maturity securities$(56,584) $(39,304) $77,208
Equity securities23,722
 (22,988) (32,922)
Short-term investments57
 561
 (527)
Total$(32,805) $(61,731) $43,759


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 securities47,411
 (28,089) 19,322
 43,420
 (45,607) (2,187) 20,835
 (23,048) (2,213)
Short-term investments177
 (2,133) (1,956) 61
 (2,429) (2,368) 21
 (20) 1
 Year Ended December 31,
 2016 2015 2014
 (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$3,327
 $(19,133) $(15,806) $631
 $(495) $136
 $7,015
 $(9,734) $(2,719)
Equity securities29,446
 (29,945) (499) 41,305
 (58,764) (17,459) 59,342
 (17,705) 41,637
Short-term investments6
 (529) (523) 
 (1,396) (1,396) 
 (1,943) (1,943)

Contractual Maturity
At December 31, 20162019, fixed maturity holdings rated below investment grade and non-rated comprised 3.9%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, 20162019 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 years548,638
Due after five years through ten years287,005
Due after ten years2,151,703
Total$3,093,275

 Estimated Fair Value
 (Amounts in thousands)
Fixed maturity securities: 
Due in one year or less$381,189
Due after one year through five years515,049
Due after five years through ten years316,173
Due after ten years1,602,142
Total$2,814,553



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 securities32,233
 30,496
 18,554
Short-term investments12,381
 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,
 2016 2015 2014
 (Amounts in thousands)
Fixed maturity securities$104,111
 $108,122
 $104,946
Equity securities14,629
 14,630
 17,313
Short-term investments8,936
 9,033
 8,561
Total investment income$127,676
 $131,785
 $130,820
Less: investment expense(5,805) (5,486) (5,097)
Net investment income$121,871
 $126,299
 $125,723


4. Fair Value MeasurementMeasurements
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:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in non-active markets; or
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; orc. 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 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 99.7%97.9% of its investment portfolio from an independent pricing service. For 0.3% of its portfolio,a private equity fund that was classified as Level 3 and included in equity securities at December 31, 2019 and 2018, the Company obtained specific unadjusted broker quotes based on net fund value and, to a lesser extent, unobservable inputs from at least one1 knowledgeable outside security broker to determine the fair value. The fair value as of the private equity fund was $1.2 million and $1.4 million at December 31, 2016. At December 31, 20162019 and 2015, $9.1 million and $10.4 million, respectively, of equity securities were valued based on broker quotes for underlying debt and credit instruments and an estimated benchmark spread for similar assets in active markets.2018, respectively.


Level 1 Measurementsmeasurements—Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio.
U.S. government bonds and agencies/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/Purchased optionssold: 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 Measurementsmeasurements—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 $30.0$18.9 million and $37.3$24.8 million in commercial mortgage-backed securities at December 31, 20162019 and 20152018, respectively, in commercial mortgage-backed securities.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.

Secured notes payableNote receivable: Valued based on underlying collateralobservable inputs, such as benchmark yields, and resetconsidering any premium or discount for the differential between the stated interest rate and market interest rates, for similarly termed notes that are observable in the market.

Unsecured notes payable: Valued based on the unadjusted quoted price formarket prices of similar notes in active markets.instruments.

Level 3 Measurementsmeasurements—Fair values of financial assets are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed trading level.
Collateralized debt obligations/Private equity fundsfund: ValuedPrivate equity fund that is not measured at net asset value ("NAV") is valued based on underlying debt/credit instruments andinvestments of the appropriate benchmark spread forfund or assets similar assetsto such investments in active markets, taking into consideration specific unadjusted broker quotes based on net fund value and unobservable inputs from at least 1 knowledgeable outside security broker related to liquidity assumptions.

Fair value measurement using NAV practical expedient - The fair values of private equity funds measured at net asset value are determined using NAV as advised by the external fund managers and the third party administrators. The NAV of the Company's limited partnership or limited liability company interest in 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, private equity funds measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy. The strategy of these funds is to provide current income to investors by investing mainly in secured loans, CLOs or CLO issuers, and equity interests in vehicles established to purchase and warehouse loans. The Company has made all of its capital contributions in such funds and had no outstanding unfunded commitments at December 31, 2019 with respect to the funds. The underlying assets of the funds are expected to be liquidated over the period of approximately one to 10 years from December 31, 2019. In addition, the Company does not have the 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.

The Company’s financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment (losses) gains 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, 2016December 31, 2019
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(Amounts in thousands)(Amounts in thousands)
Assets              
Fixed maturity securities:              
U.S. government bonds and agencies$12,275
 $
 $
 $12,275
U.S. government bonds$22,637
 $
 $
 $22,637
Municipal securities
 2,449,292
 
 2,449,292

 2,554,208
 
 2,554,208
Mortgage-backed securities
 39,777
 
 39,777

 63,003
 
 63,003
Corporate securities
 189,688
 
 189,688

 235,565
 
 235,565
Collateralized loan obligations
 86,525
 
 86,525

 199,217
 
 199,217
Other asset-backed securities
 36,996
 
 36,996

 18,645
 
 18,645
Total fixed maturity securities22,637

3,070,638



3,093,275
Equity securities:              
Common stock316,450
 
 
 316,450
586,367
 
 
 586,367
Non-redeemable preferred stock
 31,809
 
 31,809

 49,708
 
 49,708
Private equity funds
 
 9,068
 9,068
Private equity fund
 
 1,203
 1,203
Private equity funds measured at net asset value (1)
      87,473
Total equity securities586,367

49,708

1,203

724,751
Short-term investments:              
Short-term bonds70,393
 20,233
 
 90,626
2,822
 30,080
 
 32,902
Money market instruments285,054
 
 
 285,054
461,233
 
 
 461,233
Total short-term investments464,055

30,080



494,135
Other assets:              
Total return swaps
 667
 
 667
Note receivable
 5,665
 
 5,665
Total assets at fair value$684,172
 $2,854,987
 $9,068
 $3,548,227
$1,073,059

$3,156,091

$1,203

$4,317,826
Liabilities              
Notes payable:       
Secured notes$
 $140,000
 $
 $140,000
Unsecured notes
 180,000
 
 180,000
Other liabilities:              
Total return swaps
 765
 
 765
Options sold20
 
 
 20
77
 
 
 77
Total liabilities at fair value$20
 $320,765
 $
 $320,785
$77
 $
 $
 $77



December 31, 2015December 31, 2018
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(Amounts in thousands)(Amounts in thousands)
Assets              
Fixed maturity securities:              
U.S. government bonds and agencies$22,507
 $
 $
 $22,507
U.S. government bonds$25,003
 $
 $
 $25,003
Municipal securities
 2,505,040
 
 2,505,040

 2,620,132
 
 2,620,132
Mortgage-backed securities
 49,838
 
 49,838

 30,952
 
 30,952
Corporate securities
 243,372
 
 243,372

 105,524
 
 105,524
Collateralized debt obligations
 50,548
 
 50,548

 165,789
 
 165,789
Other asset-backed securities
 8,698
 
 8,698

 37,761
 
 37,761
Total fixed maturity securities25,003

2,960,158



2,985,161
Equity securities:              
Common stock280,263
 
 
 280,263
430,973
 
 
 430,973
Non-redeemable preferred stock
 24,668
 
 24,668

 31,433
 
 31,433
Private equity funds
 
 10,431
 10,431
Private equity fund
 
 1,445
 1,445
Private equity fund measured at net asset value (1)
      65,780
Total equity securities430,973

31,433

1,445

529,631
Short-term investments:              
Short-term bonds69,991
 9,850
 
 79,841
31,472
 16,784
 
 48,256
Money market instruments105,436
 
 
 105,436
205,043
 
 
 205,043
Total short-term investments236,515

16,784



253,299
Other assets:      

Note receivable
 5,557
 
 5,557
Total assets at fair value$478,197
 $2,892,014
 $10,431
 $3,380,642
$692,491

$3,013,932

$1,445

$3,773,648
Liabilities              
Notes payable:       
Secured notes$
 $140,000
 $
 $140,000
Unsecured notes
 150,000
 
 150,000
Other liabilities:              
Total return swaps
 11,525
 
 11,525
$
 $4,851
 $
 $4,851
Options sold260
 
 
 260
3
 
 
 3
Total liabilities at fair value$260
 $301,525
 $
 $301,785
$3
 $4,851
 $
 $4,854

__________ 
(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.

The following table presents a summary of changes in fair value of Level 3 financial assets:
  Private Equity Fund
  Year Ended December 31,
  2019 2018
  (Amounts in thousands)
Beginning balance $1,445
 $1,481
Net realized gains (losses) included in earnings 101
 (36)
Settlements (343) 
Ending balance $1,203
 $1,445
The amount of total gains (losses) for the period included in earnings attributable to assets still held at December 31 $93
 $(36)
  Private Equity Funds
  Year Ended December 31,
  2016 2015
  (Amounts in thousands)
Beginning balance $10,431
 $11,719
Realized losses included in earnings (1,363) (4,175)
Reclassification from other assets 
 2,911
Sales 
 
Settlements 
 (24)
Ending balance $9,068
 $10,431
The amount of total losses for the period included in earnings attributable to assets still held at December 31 $(1,363) $(5,385)

 
There were no transfers between Levels 1, 2, and 3 of of the fair value hierarchy in 20162019 and 2015.2018.


At December 31, 20162019 and 2015,2018, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.

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, 2019
 Carrying Value Fair Value Level 1 Level 2 Level 3
          
 (Amounts in thousands)
Liabilities         
Notes payable:         
Unsecured notes$372,133
 $394,279
 $
 $394,279
 $
 December 31, 2018
 Carrying Value Fair Value Level 1 Level 2 Level 3
          
 (Amounts in thousands)
Liabilities         
Notes payable:         
Unsecured notes$371,734
 $362,674
 $
 $362,674
 $

Unsecured Notes
The fair value of the Company’s publicly traded $375 million unsecured notes at December 31, 2019 and 2018 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.

5. Fixed Assets
The following table presents the components of fixed assets:

 December 31,
 2019 2018
 (Amounts in thousands)
Land$18,152
 $18,144
Buildings and improvements140,567
 138,238
Furniture and equipment70,355
 123,021
Capitalized software244,425
 222,903
Leasehold improvements7,547
 9,986
 481,046
 512,292
Less: accumulated depreciation and amortization(312,060) (359,269)
Fixed assets, net$168,986
 $153,023


 December 31,
 2016 2015
 (Amounts in thousands)
Land$26,770
 $26,770
Buildings and improvements134,952
 132,529
Furniture and equipment114,156
 109,802
Capitalized software190,092
 178,113
Leasehold improvements9,369
 9,109
 475,339
 456,323
Less accumulated depreciation and amortization(319,429) (299,192)
Fixed assets, net$155,910
 $157,131

Depreciation expense, including amortization of leasehold improvements, was $20.2$23.2 million, $20.5$19.9 million, and $22.1$21.2 million during 2016for 2019, 20152018, and 20142017, respectively.


In August 2017, the Company completed the sale of approximately 6 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, and its fair value is included in other assets in the Company's consolidated balance sheets. Only the cash portion of the total sale price of the Property, excluding the Note, is reported 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. The Company recognized a gain of approximately $3.3 million on the sale transaction, which is included in other revenues in its consolidated statements of operations.



6. Deferred Policy Acquisition Costs
Deferred policy acquisition costs were as follows:
 December 31,
 2019 2018 2017
 (Amounts in thousands)
Balance, beginning of year$215,131
 $198,151
 $200,826
Policy acquisition costs deferred620,120
 589,144
 552,675
Amortization(602,085) (572,164) (555,350)
Balance, end of year$233,166
 $215,131
 $198,151

 December 31,
 2016 2015 2014
 (Amounts in thousands)
Balance, beginning of year$201,762
 $197,202
 $194,466
Policy acquisition costs deferred561,610
 543,791
 528,944
Amortization(562,546) (539,231) (526,208)
Balance, end of year$200,826
 $201,762
 $197,202


7. Notes PayableLeases
Notes payable consists
The Company adopted ASU 2016-02, "Leases (Topic 842)," which supersedes the guidance in Accounting Standards Codification ("ASC") 840, "Leases," on January 1, 2019, using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the following:effective date (the "effective date method"). Under the effective date method, financial results reported in periods prior to 2019 are unchanged. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company not to reassess (a) whether arrangements contain leases, (b) lease classification and (c) initial direct costs. 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 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. As of December 31, 2019, the Company's leases had remaining terms ranging from less than 1 year to approximately 8 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. Operating leases are included in operating lease ROU assets and operating lease liabilities in the Company's consolidated balance sheets. 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. Operating lease ROU 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 office space and office equipment leases, 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 all of its leases. Lease expense for scheduled lease payments is recognized on a straight-line basis over the lease term.









The components of lease expense were as follows:
     December 31,
 LenderInterest RateExpiration 2016 2015
     (Amounts in thousands)
Secured credit facilityBank of AmericaLIBOR plus 40 basis points
December 3, 2018 (2)
 $120,000
 $120,000
Secured loanUnion BankLIBOR plus 40 basis pointsDecember 3, 2017 20,000
 20,000
Unsecured credit facilityBank of America and Union Bank(1)December 3, 2019 180,000
 150,000
Total    $320,000
 $290,000
    Year Ended
Lease Cost Classification December 31, 2019
    (Amounts in thousands)
Operating lease cost (1)
 Other operating expenses $15,146
Variable lease cost (1)
 Other operating expenses 2,196
Total lease cost  
$17,342
__________ 
(1) Includes short-term leases, which are immaterial.

Supplemental balance sheet information related to leases was as follows:
  December 31, 2019
  (Amounts in thousands)
Operating lease ROU assets $44,909
Operating lease liabilities 47,996


Weighted-average lease term and discount rate were as follows:
December 31, 2019
Weighted-average remaining lease term (in years):
      Operating leases4.4
Weighted-average discount rate:
      Operating leases3.02%

Supplemental cash flow and other information related to leases was as follows:
  Year Ended
  December 31, 2019
  (Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:  
      Operating cash flows from operating leases $14,289
   
ROU assets obtained in exchange for lease liabilities:  
      Operating leases 15,372


Maturities of lease liabilities as of December 31, 2019 were as follows:
Year Operating Leases
  (Amounts in thousands)
2020 14,458
2021 12,259
2022 9,910
2023 6,439
2024 3,533
2025 and thereafter $4,744
          Total lease payments $51,343
Less: Imputed interest 3,347
          Total lease obligations $47,996


As of December 31, 2019, the Company had additional operating lease commitments that have not yet commenced of

approximately $2 million with each lease term ranging from approximately 1 year to 3 years. These operating leases will commence in 2020.

Disclosures related to periods prior to adoption of ASC Topic 842

Total rent expense recognized under the Company's various lease agreements was $14.9 million and $14.8 million for 2018 and 2017, respectively. The following table presents future minimum commitments for operating leases as of December 31, 2018:
Year Ending December 31, Operating Leases
  (Amounts in thousands)
2019 $12,812
2020 11,547
2021 8,732
2022 6,972
2023 3,659
Thereafter 1,966


8. Notes Payable

The following table presents information about the Company's notes payable:
        December 31,
  Lender Interest Rate Expiration 2019 2018
        (Amounts in thousands)
Senior unsecured notes(1)
 Publicly traded 4.40% March 15, 2027 $375,000
 $375,000
Unsecured credit facility(2)
 Bank of America and Wells Fargo Bank LIBOR plus 112.5-162.5 basis points March 29, 2022 
 
    Total principal amount       375,000
 375,000
Less unamortized discount and debt issuance costs(3)
       2,867
 3,266
Total       $372,133
 $371,734

__________
(1) 
On July 2, 2013,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 29, 2017, the Company entered into an unsecured $200credit agreement that provides for revolving loans of up to $50 million five-year revolving credit facility, which later was expanded to a borrowing capacity of $250 million.and matures on March 29, 2022. The interest raterates on borrowings under the credit facility isare based on the Company's debt to total capital ratio and rangesrange from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is abovegreater 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 abovegreater than or equal to 25%. DebtThe debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. In 2016, the interest rateThe Company's debt to total capital ratio was LIBOR plus 112.517.2% at December 31, 2019, resulting in a 15 basis pointspoint commitment fee on the $180$50 million of borrowings and 12.5 basis points on the undrawn portion of the credit facility. The interest rate was approximately 1.73% at December 31, 2016.As of February 6, 2020, there have been no borrowings under this facility.
(2)(3) 
Effective December 28, 2016,The unamortized discount and debt issuance costs are associated with the Company extendedpublicly traded $375 million senior unsecured notes. These are amortized to interest expense over the maturity datelife of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from December 3, 2017the carrying amount of the debt. The unamortized debt issuance costs of approximately $0.1 million associated with the $50 million five-year unsecured revolving credit facility maturing on March 29, 2022 are included in other assets in the Company's consolidated balance sheets and amortized to December 3, 2018.interest expense over the term of the credit facility.
The $120 million credit facility is secured by municipal bonds held as collateral. The collateral requirement is calculated as the fair market value of the municipal bonds held as collateral multiplied by the advance rates, which vary based on the credit quality and duration of the assets held and range between 75% and 100% of the fair value of each bond.

The $20 million bank loan has collateral requirements similar to those of the $120 million credit facility.

The bank loan and credit facilities containCompany was in compliance with all of its financial covenants pertaining to minimum statutory surplus, debt to total capital ratio, and risk-basedrisk based capital ("RBC") ratio. The Company was in compliance with all of its loan covenantsratio under the unsecured credit facility at December 31, 2016.2019.


The aggregatedDebt maturities for each of notes payablethe next five years and thereafter as of December 31, 2019 are as follows:
Maturity (Amounts in thousands)
2017 $20,000
2018 120,000
2019 180,000
Maturity Amounts
  (in thousands)
2020 $
2021 
2022 
2023 
2024 
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 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. UnderThe agreement had an initial term of one year, subject to periodic renewal. In July 2018, the agreement was renewed through January 24, 2020. During the fourth quarter of 2019, the underlying obligations were liquidated and the total return swap agreement between FFL receivesand Citibank was terminated. Under the agreement, FFL received the income equivalent on underlying obligations due to Citibank and payspaid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap iswas secured by approximately $30$31 million of U.S. Treasuries as collateral, which arewere included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 145128 basis points prior to the renewal of the agreement in January 2018, LIBOR plus 120 basis points subsequent to the January 2018 renewal through July 2018, and LIBOR plus105 basis points subsequent to the July 2018 renewal until December 2019, on approximately $108 million and $95$100 million of underlying obligations as of December 31, 2016 and 2015, respectively. The agreement had an initial term of one year, subject to annual renewal. In January 2017, the agreement was renewed for an additional year expiring February 17, 2018, and the interest rate was changed to LIBOR plus 128 basis points.2018.


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 beenwas renewed for an additional one-year term through February 17, 2018. UnderDuring June and July 2017, the underlying obligations were liquidated and the total return swap agreement between AFL receivesand Citibank was terminated on. Under the agreement, AFL received the income equivalent on underlying obligations due to Citibank and payspaid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap iswas secured by approximately $40 million of U.S. Treasuries as collateral, which arewere included in short-term investments on the consolidated balance sheets. The Company paid interest 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 until July 2017, on approximately $152 million and $124 million of underlying obligations as of December 31, 2016 and 2015, respectively. The agreement was amended in January 2017 and the interest rate was changed to LIBOR plus 128 basis points.2016.


The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains (losses)or losses in the consolidated statements of operations:
 Liability Derivatives
 December 31, 2019 December 31, 2018
 (Amounts in thousands)
Options sold - Other liabilities$77
 $3
Total return swaps - Other liabilities
 4,851
Total derivatives$77
 $4,854
 Asset Derivatives Liability Derivatives
 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
 (Amounts in thousands)
Total return swaps - Other assets$667
 $
 $
 $
Options sold - Other liabilities
 
 20
 260
Total return swaps - Other liabilities
 
 765
 11,525
Total derivatives$667
 $
 $785
 $11,785

 

 Gains (Losses)Recognized in IncomeGains (Losses) Recognized in Income
Year Ended December 31,Year Ended December 31,
2016 2015 20142019 2018 2017
(Amounts in thousands)(Amounts in thousands)
Total return swaps - Net realized investment gains (losses)$11,533
 $(6,438) $(2,969)$1,039
 $(3,783) $(2,137)
Options sold - Net realized investment gains3,846
 3,081
 3,419
Options sold - Net realized investment gains (losses)6,339
 10,498
 2,291
Total$15,379
 $(3,357) $450
$7,378
 $6,715
 $154



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 Measurement.Measurements for additional disclosures regarding options sold.


9.10. Goodwill and Other Intangible Assets


Goodwill
There were no changes in the carrying amount of goodwill during the periods presented.2019 and 2018. Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during 2019 and 2018. All of the periods presented.Company's goodwill is associated with the Property and Casualty business segment (See Note 20. 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, 2019       
Customer relationships$53,213
 $(52,319) $894
 11
Trade names15,400
 (7,058) 8,342
 24
Technology4,300
 (4,300) 
 10
Insurance license1,400
 
 1,400
 Indefinite
Total intangible assets, net$74,313
 $(63,677) $10,636
  
        
As of December 31, 2018       
Customer relationships$53,048
 $(47,897) $5,151
 11
Trade names15,400
 (6,417) 8,983
 24
Technology4,300
 (4,300) 
 10
Insurance license1,400
 
 1,400
 Indefinite
Total intangible assets, net$74,148
 $(58,614) $15,534
  

 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 Useful Lives
 (Amounts in thousands) (in years)
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
  
        
As of December 31, 2015:       
Customer relationships$52,430
 $(34,327) $18,103
 11
Trade names15,400
 (4,491) 10,909
 24
Technology4,300
 (3,010) 1,290
 10
Insurance license1,400
 
 1,400
 Indefinite
Total intangible assets, net$73,530
 $(41,828) $31,702
  

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 any of the periods presented.2019 and 2018.


Other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Other intangible assets amortization expense was $6.1$5.1 million, $6.0$5.5 million, and $6.0$5.4 million infor the years ended December 31, 2016, 20152019, 2018, and 20142017, 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, 20162019:
Year Ending December 31,Amortization Expense
 (Amounts in thousands)
2020$922
2021902
2022878
2023714
2024686
Thereafter5,134
Total$9,236

Year Ending December 31,Amortization Expense
 (Amounts in thousands)
2017$5,349
20185,335
20194,906
2020758
2021738
Thereafter7,139
Total$24,225


10.11. Income Taxes
Income tax provision
The Company and its subsidiaries file a consolidated federal income tax return. The income tax expense (benefit) expense consisted of the following components:
 Year Ended December 31,
 2019 2018 2017
 (Amounts in thousands)
Federal     
Current$18,109
 $14,190
 $10,898
Deferred40,413
 (39,244) 10,934
 $58,522
 $(25,054) $21,832
State     
Current$(1,430) $1,982
 $955
Deferred890
 (1,815) (579)
 $(540) $167
 $376
Total     
Current$16,679
 $16,172
 $11,853
Deferred41,303
 (41,059) 10,355
Total$57,982
 $(24,887) $22,208
 Year Ended December 31,
 2016 2015 2014
 (Amounts in thousands)
Federal     
Current$17,444
 $21,942
 $44,469
Deferred(21,947) (25,594) 20,444
 $(4,503) $(3,652) $64,913
State     
Current$2,239
 $943
 $4,421
Deferred(56) (1,203) 142
 $2,183
 $(260) $4,563
Total     
Current$19,683
 $22,885
 $48,890
Deferred(22,003) (26,797) 20,586
Total$(2,320) $(3,912) $69,476

 
As a result of the Tax Cuts and Jobs Act of 2017 (the "Act"), the Company’s deferred tax assets and liabilities were measured using the new corporate tax rate of 21% at December 31, 2019, 2018 and 2017. For the years ended December 31, 2019 and 2018, the Company measured its current income taxes using the new corporate tax rate of 21%, rather than the pre-enactment corporate tax rate of 35%. Additionally in 2018, as a result of a determination made by the Office of Management and Budget, the Company reversed the previously recorded provisional 6.6% sequestration reduction to its alternative minimum tax (“AMT”) credit that originally resulted from repeal of the corporate AMT and reclassification of AMT credit carryforwards to current taxes receivable as a refundable credit.

In computing taxable income, property and casualty insurers reduce underwriting income by losses and loss adjustment expenses incurred. The incomeamount 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 Act changes the prescribed interest rates to rates based on corporate bond yield curves and extends the applicable time periods for the loss payment pattern. These changes are effective for tax years beginning after 2017 and are subject 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 Company recorded a total deferred tax liability adjustment of approximately $8.6 million at December 31, 2018 related to the changes in discounting of unpaid losses included in the Act based on the guidance published in 2018 by the Internal Revenue Service. As of December 31, 2019, the balance of the deferred tax liability related to changes in discounting of unpaid losses was $6.7 million.


The following table presents a reconciliation of the tax expense (benefit) based on the statutory rate to the Company's actual tax expense reflected(benefit) in the consolidated statements of operations is reconciled to the federal income tax (benefit) expense on income before income taxes based on a statutory rate of 35% as shown in the table below:operations:
 Year Ended December 31,
 2019 2018 2017
 (Amounts in thousands)
Computed tax expense (benefit) at 21% for 2019 and 2018 and 35% for 2017$79,394
 $(6,429) $58,480
Tax-exempt interest income(12,909) (13,507) (26,038)
Dividends received deduction(1,276) (1,082) (2,296)
State tax (benefit) expense(869) 439
 158
Nondeductible expenses526
 390
 348
Change in federal tax contingency reserve(2,588) 
 
Cumulative impact from change in federal tax rate
 
 (11,449)
(Reversal in 2018) reduction of AMT credit carryforward due to sequestration in 2017
 (4,088) 4,088
Other, net(4,296) (610) (1,083)
Income tax expense (benefit)$57,982
 $(24,887) $22,208
 Year Ended December 31,
 2016 2015 2014
 (Amounts in thousands)
Computed tax expense at 35%$24,753
 $24,699
 $86,598
Tax-exempt interest income(26,197) (26,993) (27,839)
Dividends received deduction(2,303) (1,613) (2,027)
State tax expense1,907
 (287) 3,872
Nondeductible expenses303
 575
 9,900
Other, net(783) (293) (1,028)
Income tax (benefit) expense$(2,320) $(3,912) $69,476

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-planingtax-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.







The following table presents the significant components of the Company’s net deferred tax assets and liabilities:
 December 31,
 2019 2018
 (Amounts in thousands)
Deferred tax assets:   
20% of net unearned premiums$58,448
 $52,644
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes12,769
 9,245
Write-down of impaired investments314
 356
Expense accruals8,099
 7,019
Tax asset on net unrealized loss on securities carried at fair value
 1,055
Other deferred tax assets3,348
 3,257
Total gross deferred tax assets82,978
 73,576
    
Deferred tax liabilities:   
Deferred policy acquisition costs(48,964) (45,178)
Tax liability on net unrealized gain on securities carried at fair value(41,273) 
Tax depreciation in excess of book depreciation(8,105) (4,594)
Undistributed earnings of insurance subsidiaries(2,855) (3,017)
Tax amortization in excess of book amortization(3,264) (2,729)
Other deferred tax liabilities(6,481) (4,719)
Total gross deferred tax liabilities(110,942) (60,237)
    
Net deferred tax (liabilities) assets$(27,964) $13,339

 December 31,
 2016 2015
 (Amounts in thousands)
Deferred tax assets:   
20% of net unearned premiums$77,104
 $75,406
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes9,864
 9,518
Write-down of impaired investments726
 857
Tax credit carryforward47,238
 36,349
Expense accruals11,090
 11,264
Other deferred tax assets8,828
 9,596
Total gross deferred tax assets154,850
 142,990
    
Deferred tax liabilities:   
Deferred policy acquisition costs(70,289) (70,617)
Tax liability on net unrealized gain on securities carried at fair value(15,612) (23,095)
Tax depreciation in excess of book depreciation(10,446) (10,742)
Undistributed earnings of insurance subsidiaries(3,985) (4,022)
Tax amortization in excess of book amortization(3,030) (2,514)
Other deferred tax liabilities(6,211) (8,769)
Total gross deferred tax liabilities(109,573) (119,759)
    
Net deferred tax assets$45,277
 $23,231


The Company had an alternative minimum tax credit carryforward balance of $47.2 million and $36.3 million at December 31, 2016 and 2015, respectively, which is not subject to expiration.
Uncertainty in Income Taxes
The Company recognizes tax benefits related to positions taken, or expected to be taken, on aits tax returnreturns, 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 $0.8$4.6 million increasedecrease to the total amount of unrecognized tax benefits related to tax uncertainties during 2016.2019. The increasedecrease was mainly due tothe result of tax positions taken regarding research and development federal tax credits and state tax apportionment issues based on management’s best judgment given the facts, circumstances and latest information available at the reporting date.available. The Company does not expect any changes in such unrecognized tax benefits to have a significantmaterial impact on its consolidated financial statements within the next 12 months.

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 20132016 through 20152018 for federal taxes and 20032011 through 20152018 for California state taxes. For tax years 2003 through 2010, the Company achieved a resolution with the California 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 settlement agreement was approved by the California attorney general in 2018. The Company believes that resolution of 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 examination by the California Franchise Tax Board ("FTB")FTB for tax years 20032011 through 2013. The2016. For tax years 2011 through 2013, the FTB issued Notices of Proposed Assessments ("NPAs") to the Company, for tax years 2003 through 2010, which the Company formally protested. The proposed adjustments for tax years 2003 through 2006 were affirmed following an administrativesubmitted a formal protest process with the FTB examination. The Company is in settlement discussions with the FTB and believes a reasonable settlement could be reached during 2017 with regards to tax years 2003 through 2010.2018. If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with the State BoardFTB, an appeal with the California Office of EqualizationTax Appeals, or litigation in superior court. ManagementSuperior Court. For tax years 2014 through 2016, the Company received Audit Issue Presentation Sheets (“AIPS”) related to the Company’s California apportionment factor. The Company accepted the proposed adjustments in December 2019.
The Company believes that the resolution of these examinations and assessments will not have a material impact on the consolidated financial statements.



The following table presents a reconciliation of the beginning and ending balances of unrecognized tax benefits:
 December 31,
 2019 2018
 (Amounts in thousands)
Balance at January 1$10,615
 $9,674
Additions (reductions) based on tax positions related to:   
     Current year
 662
     Prior years(4,564) 279
Balance at December 31$6,051
 $10,615

 December 31,
 2016 2015
 (Amounts in thousands)
Balance at January 1$12,165
 $12,612
Additions (reductions) based on tax positions related to:   
     Current year688
 932
     Prior years101
 (1,379)
Additions (reductions) as a result of lapse of the applicable statute of limitations
 
Balance at December 31$12,954
 $12,165


As presented above, the balances ofIf unrecognized tax benefits were $13.0recognized, $7.2 million and $12.2$11.5 million, at December 31, 2016including accrued interest, penalties and 2015, respectively. Of these totals, $11.8 million and $10.9 million at December 31, 2016 and 2015, respectively, represent unrecognized tax benefits, net of federal tax benefit and accrued interest expense which, if recognized,related to unrecognized tax benefits, would impact the Company’s effective tax rate.rate at December 31, 2019 and 2018, respectively.

Management does not expect the Company's total amount of unrecognized tax benefits to materially increase within the next twelve months.


The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income taxes. DuringThe Company recognized an accrued net expense (benefit) related to interest and penalty of approximately $(0.1) million, $0.5 million, and $(1.1) million for the years ended December 31, 2016, 2015,2019, 2018 and 2014,2017, respectively. The net benefit for the Company recognized netyears ended 2019 and 2017 is largely due to reversal of accrued interest and penalty expense, excluding refunds, of $606,000, $112,000,following the recent updates from the FTB for tax years 2014 through 2016, and $739,000,the settlement with the FTB for tax years 2003 through 2010, respectively. The Company carried an accrued interest and penalty balance of $3,521,000approximately $2.8 million and $2,915,000$2.9 million at December 31, 20162019 and 2015,2018, 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,
 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 11,648,553
 1,446,612
 1,277,087
Incurred losses and loss adjustment expenses related to:     
Current year2,696,230
 2,483,693
 2,390,453
Prior years9,794
 93,096
 54,431
Total incurred losses and loss adjustment expenses2,706,024
 2,576,789
 2,444,884
Loss and loss adjustment expense payments related to:     
Current year1,651,550
 1,543,828
 1,550,789
Prior years857,872
 831,020
 724,570
Total payments2,509,422
 2,374,848
 2,275,359
Net reserves at December 311,845,155
 1,648,553
 1,446,612
Reinsurance recoverables on unpaid losses76,100
 180,859
 64,001
Gross reserves at December 31$1,921,255
 $1,829,412
 $1,510,613

 Year Ended December 31,
 2016 2015 2014
 (Amounts in thousands)
Gross reserves at January 1$1,146,688
 $1,091,797
 $1,038,984
Less reinsurance recoverable(14,253) (14,192) (13,635)
Net reserves at January 11,132,435
 1,077,605
 1,025,349
Acquisition of WAIC reserves
 18,677
 
Incurred losses and loss adjustment expenses related to:     
Current year2,269,769
 2,132,837
 1,989,315
Prior years85,369
 12,658
 (3,193)
Total incurred losses and loss adjustment expenses2,355,138
 2,145,495
 1,986,122
Loss and loss adjustment expense payments related to:     
Current year1,508,362
 1,455,245
 1,347,967
Prior years702,124
 654,097
 585,899
Total payments2,210,486
 2,109,342
 1,933,866
Net reserves at December 311,277,087
 1,132,435
 1,077,605
Reinsurance recoverable13,161
 14,253
 14,192
Gross reserves at December 31$1,290,248
 $1,146,688
 $1,091,797


The increase in the provision for insured events of prior years in 20162019 of approximately $85.4$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 Florida automobileloss adjustment expense reserves, including catastrophe losses, in certain of the Company's other lines of business which experienced higher loss severity on liability coverages including Bodily Injury, Combined Single Limits and Property Damage than was originally estimated.insurance business.


The increase in the provision for insured events of prior years in 20152018 of approximately $12.7$93.1 million primarily resulted from thehigher than estimated California homeownersautomobile losses resulting from severity in excess of expectations for bodily injury claims as well as higher than estimated defense and automobile lines of business outside of California, which was partially offset by favorable developmentcost containment expenses in the California automobile line of insurance business.


The decreaseincrease in the provision for insured events of prior years in 20142017 of approximately $3.2$54.4 million primarily resulted from lowerhigher than expectedestimated 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 previously estimated.

The Company recorded catastrophe losses net of reinsurance of approximately $53 million, $67 million, and $79 million in 2019, 2018, and 2017, respectively. 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, personal automobile lines of insurance businessa hurricane in Texas, and tornadoes and wind and hail storms in the Midwest. These losses were partially offset by adversefavorable development in other states.

The Company experienced pre-taxof approximately $4 million on prior years' catastrophe losses, primarily from reductions in the Company's retained portion of losses on the Camp and loss adjustment expenses from severe weather events of $27 million, $19 million, and $11Woolsey Fires, as described further below. Catastrophe losses before reinsurance benefits totaled approximately $289 million in 2016, 2015,2018, primarily resulting from wildfires in Northern and 2014, respectively. The losses in 2016 were primarily due to severe storms outside ofSouthern California and rainstormsweather-related catastrophes across several states. Catastrophe losses before reinsurance benefits totaled approximately $168 million in California. The losses in 2015 were2017, resulting primarily due to severe storms outside of California, and rainstorms andfrom wildfires in California. The losses in 2014 were primarily related to winter freeze events on the East CoastNorthern and Southern California, severe rainstorms in California.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 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 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 the associated claims as a result of normal reserving procedures, reductions in the Company's retained portion of losses on the Camp and Woolsey Fires, and reduced reinstatement premiums recognized.

The following is information about incurred and paid claims development as of December 31, 2016,2019, 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, 20072010 to 20152018 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, 2016Incurred 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, 
2007(1)
 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 2016 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)
2007 $1,591,217
 $1,610,874
 $1,614,648
 $1,624,875
 $1,633,606
 $1,633,169
 $1,634,127
 $1,635,529
 $1,636,379
 $1,636,065
 $52
230
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
 82
 199
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
 166
 186
2010       1,367,547
 1,357,750
 1,364,307
 1,374,638
 1,379,336
 1,381,056
 1,386,105
 390
 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
 4,069
 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
 4,531
 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
 10,873
 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
 32,532
 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
 90,010
 169           1,551,105
 1,588,443
 1,610,839
 1,634,435
 1,645,950
 9,132
 170
2016                   1,672,853
 303,353
 145             1,672,853
 1,669,642
 1,713,696
 1,731,997
 22,097
 154
2017               1,703,857
 1,727,277
 1,741,825
 58,648
 149
2018                 1,781,817
 1,773,502
 139,022
 146
2019                   1,916,269
 438,858
 140
                 Total $14,879,081
                    Total $16,007,752
   
__________ 
(1) The information for the years 20072010 to 20152018 is presented as unaudited supplemental information.




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,
Accident Year
2007(1)
 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 2016 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 
2016(1)
 
2017(1)
 
2018(1)
 2019
(Amounts in thousands) (Amounts in thousands)
2007$1,040,933
 $1,365,854
 $1,496,543
 $1,581,001
 $1,615,964
 $1,628,413
 $1,633,178
 $1,634,888
 $1,635,631
 $1,636,204
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
2009    913,340
 1,137,807
 1,260,424
 1,326,439
 1,355,210
 1,363,526
 1,370,564
 1,371,956
2010      908,954
 1,143,984
 1,268,142
 1,335,871
 1,365,464
 1,375,799
 1,384,333
 $908,954
 $1,143,984
 $1,268,142
 $1,335,871
 $1,365,464
 $1,375,799
 $1,384,333
 $1,387,835
 $1,388,140
 $1,388,322
2011        926,983
 1,152,459
 1,277,808
 1,347,082
 1,378,920
 1,391,101
   926,983
 1,152,459
 1,277,808
 1,347,082
 1,378,920
 1,391,101
 1,394,684
 1,400,441
 1,400,958
2012          955,647
 1,194,648
 1,304,511
 1,372,828
 1,409,911
     955,647
 1,194,648
 1,304,511
 1,372,828
 1,409,911
 1,422,705
 1,434,956
 1,438,686
2013            974,445
 1,217,906
 1,340,724
 1,413,999
       974,445
 1,217,906
 1,340,724
 1,413,999
 1,447,004
 1,460,352
 1,464,277
2014              967,481
 1,231,413
 1,358,472
         967,481
 1,231,413
 1,358,472
 1,432,472
 1,476,944
 1,490,366
2015                1,040,253
 1,336,223
           1,040,253
 1,336,223
 1,466,368
 1,560,480
 1,614,188
2016                  1,094,006
             1,094,006
 1,395,199
 1,554,217
 1,656,192
2017               1,076,079
 1,399,202
 1,561,850
2018                 1,082,127
 1,417,637
2019                   1,134,859
                Total $13,862,037
                 Total $14,567,335
      All outstanding liabilities before 2007, net of reinsurance  (212)       All outstanding liabilities before 2010, net of reinsurance  (557)
      Loss and allocated loss adjustment expense reserves, net of reinsurance  $1,016,832
       Loss and allocated loss adjustment expense reserves, net of reinsurance  $1,439,861
__________ 

(1) The information for the years 20072010 to 20152018 is presented as unaudited supplemental information.


Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners' Insurance)Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners' Insurance) As of December 31, 2016Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners' 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, 
2007(1)
 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 2016 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)
2007 $119,505
 $116,950
 $112,042
 $111,378
 $109,836
 $110,052
 $110,092
 $110,161
 $110,142
 $110,204
 $42
14
2008   146,486
 139,549
 138,605
 139,142
 138,190
 138,803
 139,149
 139,156
 139,216
 5
 16
2009     135,889
 135,000
 131,680
 133,087
 133,121
 134,718
 134,597
 134,478
 (3) 17
2010       165,727
 157,566
 160,983
 160,472
 160,206
 160,015
 159,608
 (17) 21 $165,727
 $157,566
 $160,983
 $160,472
 $160,206
 $160,015
 $159,608
 $159,662
 $159,720
 $159,652
 $1
 21
2011         167,414
 170,623
 170,052
 169,600
 169,390
 169,621
 325
 23   167,414
 170,623
 170,052
 169,600
 169,390
 169,621
 170,126
 170,334
 170,174
 75
 23
2012           196,063
 188,010
 190,376
 191,548
 192,057
 585
 25     196,063
 188,010
 190,376
 191,548
 192,057
 191,804
 192,905
 192,790
 6
 25
2013             191,903
 188,915
 188,026
 186,795
 775
 23       191,903
 188,915
 188,026
 186,795
 187,165
 188,014
 187,147
 42
 23
2014               199,298
 202,621
 203,218
 2,993
 25         199,298
 202,621
 203,218
 202,513
 204,986
 208,003
 3,259
 25
2015                 234,800
 234,881
 9,431
 24           234,800
 234,881
 233,501
 236,855
 238,652
 1,978
 24
2016                   250,440
 36,538
 23             250,691
 259,489
 259,497
 259,708
 2,092
 24
2017               309,491
 295,163
 288,322
 4,310
 30
2018                 311,798
 308,361
 15,686
 25
2019                   359,643
 64,136
 28
                 Total $1,780,518
                    Total $2,372,452
   
__________ 
(1) The information for the years 20072010 to 20152018 is presented as unaudited supplemental information.



Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance (Homeowners' Insurance)
For the Years Ended December 31, For the Years Ended December 31,
Accident Year
2007(1)
 
2008(1)
 
2009(1)
 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 2016 
2010(1)
 
2011(1)
 
2012(1)
 
2013(1)
 
2014(1)
 
2015(1)
 
2016(1)
 
2017(1)
 
2018(1)
 2019
(Amounts in thousands) (Amounts in thousands)
2007$71,165
 $100,774
 $104,340
 $108,404
 $109,305
 $109,874
 $109,932
 $109,949
 $110,064
 $110,075
2008  86,954
 122,239
 129,821
 135,500
 137,284
 138,137
 138,680
 138,809
 138,922
2009    86,034
 119,306
 126,591
 130,928
 132,180
 134,381
 134,378
 134,301
2010      95,057
 137,628
 149,084
 155,191
 156,853
 158,053
 158,943
 $95,057
 $137,628
 $149,084
 $155,191
 $156,853
 $158,053
 $158,943
 $159,268
 $159,435
 $159,491
2011        111,909
 153,845
 162,870
 166,375
 167,806
 168,621
   111,909
 153,845
 162,870
 166,375
 167,806
 168,621
 168,914
 169,757
 169,899
2012          128,618
 175,029
 182,756
 188,121
 190,373
     128,618
 175,029
 182,756
 188,121
 190,373
 190,649
 191,660
 192,362
2013            133,528
 174,295
 180,858
 183,860
       133,528
 174,295
 180,858
 183,860
 185,168
 186,132
 186,494
2014              139,615
 186,996
 194,605
         139,615
 186,996
 194,605
 198,758
 202,193
 203,333
2015                163,196
 213,994
           163,196
 213,994
 224,178
 230,480
 234,683
2016                  173,435
             173,537
 234,215
 245,878
 253,919
2017               217,900
 269,254
 278,341
2018                 213,038
 271,534
2019                   240,240
                Total $1,667,129
                 Total $2,190,296
      All outstanding liabilities before 2007, net of reinsurance  2,661
       All outstanding liabilities before 2010, net of reinsurance  576
      Loss and allocated loss adjustment expense reserves, net of reinsurance  $116,050
       Loss and allocated loss adjustment expense reserves, net of reinsurance  $182,731
__________ 
(1) The information for the years 20072010 to 20152018 is presented as unaudited supplemental information.



The following is unaudited supplementary information about average historical claims duration as of December 31, 2016.2019.
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 63.6% 17.4% 8.6% 5.2% 2.6% 0.9% 0.5% 0.3% 0.9% %

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 67.6% 22.4% 4.4% 2.6% 1.2% 0.5% 0.4% 0.4% 0.5% %

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
 
Years1 2 3 4 5 6 7 8 9 10
Automobile insurance66.0% 17.1% 8.5% 4.9% 2.2% 0.7% 0.4% 0.1% 0.1% 

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
 
Years1 2 3 4 5 6 7 8 9 10
Homeowners insurance66.1% 24.3% 4.6% 3.0% 1.0% 0.7% 0.2%  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, 2019
  (Amounts in thousands)
Net outstanding liabilities  
Automobile insurance $1,439,861
Homeowners' insurance 182,731
WAIC automobile insurance 16,576
Other short-duration insurance lines 106,002
Loss and loss adjustment expense reserves, net of reinsurance recoverables on unpaid losses 1,745,170
Reinsurance recoverables on unpaid losses  
Automobile insurance 22,060
Homeowners' insurance 52,317
Other short-duration insurance lines 1,723
Total reinsurance recoverables on unpaid losses 76,100
Insurance lines other than short-duration 629
Unallocated claims adjustment expenses 99,356
  99,985
Total gross loss and loss adjustment expense reserves $1,921,255

  December 31, 2016
  (Amounts in thousands)
Net outstanding liabilities  
Automobile insurance $1,016,832
Homeowners' insurance 116,050
WAIC automobile insurance 12,232
Other short-duration insurance lines 51,320
Loss and loss adjustment expense reserves, net of reinsurance 1,196,434
Reinsurance recoverable on unpaid claims  
Automobile insurance 12,601
Homeowners' insurance 199
Other short-duration insurance lines 360
Total reinsurance recoverable on unpaid claims 13,160
Insurance lines other than short-duration 1,480
Unallocated claims adjustment expenses 79,174
  80,654
Total gross loss and loss adjustment expense reserves $1,290,248


12.13. Dividends
The following table presents shareholder dividends paid:
 Year Ended December 31,
 2019 2018 2017
 (Amounts in thousands, except per share data)
Total paid$139,071
 $138,478
 $137,886
Per share paid$2.5125
 $2.5025
 $2.4925

 Year Ended December 31,
 2016 2015 2014
 (Amounts in thousands, except per share data)
Total paid$137,201
 $136,386
 $135,496
Per share paid$2.4825
 $2.4725
 $2.4625


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, 2016,2019, the insurance subsidiaries of the Company are permitted to pay approximately $144$151 million in dividends in 20172020 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 2016, 2015,2019, 2018, and 2014,2017, the Insurance Companies paid Mercury General ordinary dividends of $111$114 million, $133$135 million, and $225$109 million, respectively.


On February 3, 2017,7, 2020, the Board of Directors declared a $0.6225$0.6300 quarterly dividend payable on March 30, 201731, 2020 to shareholders of record on March 16, 2017.17, 2020.


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

(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, 20162019, there were no material permitted statutory accounting practices utilized by the Insurance Companies.


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

Year Ended December 31,Year Ended December 31,
2016 2015 20142019 2018 2017
(Amounts in thousands)(Amounts in thousands)
Statutory net income(1)
$82,359
 $123,984
 $155,654
$135,670
 $81,935
 $117,376
Statutory capital and surplus$1,441,571
 $1,451,950
 $1,438,281
$1,539,998
 $1,471,547
 $1,589,226
 __________
(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.


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, 2016, 2015,2019, 2018 and 2014,2017, 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 375%400% of the authorized control level RBC as of December 31, 2016, 20152019, 2018 and 2014.2017. 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 matching contributions, at a rate set by the Board of Directors, totaled $8.2$9.9 million, $8.5$9.0 million, and $8.0$8.6 million for 2016, 2015,2019, 2018, and 2014,2017, 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 were based on the Company's premium growth and combined ratio. The Company paiddid 0t pay any company-wide annual cash bonuses of $16.8 million, $20.7 million,to all eligible employees in 2019, 2018, and $19.1 million in 2016, 2015, and 2014, respectively.2017.


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. As of December 31, 2016, only2019, the Company had 70,000 stock options granted and restrictedoutstanding and 4,830,000 shares of common stock unit awards have been grantedavailable for future grant under these plans.the 2015 Plan.


The following table presents a summary of cash received, compensation costs recognized and excess tax expense (benefit), related to the Company's share-based awards:
 Year Ended December 31, Year Ended December 31,
 2016 2015 2014 2019 2018 2017
 (Amounts in thousands) (Amounts in thousands)
Cash received from stock option exercises $1,505
 $2,111
 $6,247
 $701
 $358
 $2,162
Compensation cost, all share-based awards 142
 5,208
 4,112
 123
 145
 60
Excess tax benefit, all share-based awards 913
 27
 148
Excess tax (benefit) expense, all share-based awards (7) 4
 8





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 2016, 2015, and 2014to 4 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). No stock options were awarded in 2019 and 2017 under the 2015 Plan.

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:
Weighted-average grant-date fair value$8.09
Expected volatility33.18%
Risk-free interest rate2.62%
Expected dividend yield5.40%
Expected term in months72

2013
Weighted-average grant-date fair value$7.11
Expected volatility33.16% - 33.18%
Weighted-average expected volatility33.17%
Risk-free interest rate0.88% - 1.60%
Expected dividend yield5.40% - 5.76%
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, 20162019:
 Shares 
Weighted-Average
Exercise Price
 
Weighted-Average
Remaining Contractual Term
(Years)
 
Aggregate
Intrinsic Value
(in 000’s)
Outstanding at January 1, 201999,500
 $42.77
    
Exercised(22,000) $41.92
    
Canceled or expired(10,000) $43.01
    
Outstanding at December 31, 201967,500
 $43.01
 8.1 $376
Exercisable at December 31, 201915,000
 $43.01
 8.1 $84

 Shares 
Weighted-Average
Exercise Price
 
Weighted-Average
Remaining Contractual Term
(Years)
 
Aggregate
Intrinsic Value
(in 000’s)
Outstanding at January 1, 2016168,000
 $48.14
    
Granted
 
    
Exercised(62,500)
 $46.12
    
Canceled or expired(20,000)
 $57.10
    
Outstanding at December 31, 201685,500
 $47.52
 3.1 $1,085
Exercisable at December 31, 201665,500
 $48.73
 2.1 $752


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, 2016.2019. The aggregate intrinsic values of stock options exercised were $591,000, $303,000,$217,064, $42,000, and $1,160,000 during 2016, 2015,$371,000 for 2019, 2018, and 2014,2017, respectively. The total fair value of stock options vested during each of 2016, 2015,2019, 2018, and 20142017 was $142,000.$141,584, $0, and $142,000, respectively.






The following table presents information regarding stock options outstanding at December 31, 20162019:
 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
$43.0167,500 8.1 $43.01
 15,000 $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-$45.3041,000 5.7 $42.44
 21,000 $41.40
$47.61-$50.3515,000 1.3 $48.52
 15,000 $48.52
$51.51-$54.9329,500 0.4 $54.06
 29,500 $54.06



As of December 31, 2016, $60,0002019, the Company had $0.3 million of total unrecognized compensation costexpense related to non-vested stock options is expected toawarded under the 2015 Plan, which will be recognized ratably over a weighted-averagethe remaining contractual lifevesting period of 0.5.approximately 2.1 years.


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 unitRSU awards to the Company’s senior management and key employees.employees prior to 2017. NaN RSUs were awarded in 2019, 2018, and 2017 under the 2015 Plan.

The following table presents the restricted stock unit grants summary at December 31, 2016:
 Grant Year
 2016 2015 2014
Three-year performance period ending December 31,2018
 2017
 2016
Vesting shares, target (net of forfeited)93,250
 95,750
 82,000
Vesting shares, maximum (net of forfeited)174,844
 179,531
 153,750


The following table presents a summary of restricted stock unitRSU awards activity, based on target vesting, during the years indicated:
 Year Ended December 31,
 2019 2018 2017
 Shares 
Weighted-
Average Fair
Value per Share
 Shares 
Weighted-
Average  Fair
Value per Share
 Shares 
Weighted-
Average  Fair
Value per Share
Outstanding at January 175,250
 $53.49
 169,000
 $53.66
 271,000
 $51.09
Vested
 $
 
 $
 (82,000) $45.17
Forfeited/Canceled(6,000) $53.49
 (8,000) $53.49
 (20,000) $53.62
Expired(69,250) $53.49
 (85,750) $53.80
 
 $
Outstanding at December 31
 $
 75,250
 $53.49
 169,000
 $53.66

 Year Ended December 31,
 2016 2015 2014
 Shares 
Weighted-
Average Fair
Value per Share
 Shares 
Weighted-
Average  Fair
Value per Share
 Shares 
Weighted-
Average  Fair
Value per Share
Outstanding at January 1263,250
 $45.94
 167,000
 $41.15
 170,500
 $39.64
Granted95,750
 $53.49
 100,250
 $53.80
 93,500
 $45.17
Vested(78,500) $36.82
 
 
 
 
Forfeited/Canceled(9,500)
 $50.46
 (4,000)
 $43.10
 (16,500)
 $43.99
Expired
 
 
 
 (80,500)
 $44.01
Outstanding at December 31271,000
 $51.09
 263,250
 $45.94
 167,000
 $41.15


The restricted stock units vestRSU awards vested 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 achievesachieved the threshold established by the Compensation Committee of the Company’s Board of Directors. For 2014, 2015 and 2016 grants, vesting isPerformance thresholds were based on the Company’s cumulative underwriting income, annual underwriting income, and net earned premium growth. As of December 31, 2016, 2,500, 3,500, and 3,500 target restricted stock units granted in 2016, 2015 and 2014, respectively, have beenShares were forfeited because the recipientsor canceled when employees were no longer employed by the Company. Expired shares represent shares that did not meet the vesting requirements.


The fair value of each restricted stock unitRSU 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 thatof the performance goals that will be achieved. If suchthe minimum performance goals are not met, no compensation cost will be recognized and any recognized compensation cost would be reversed.


In February 2019, based on certification by the Compensation Committee of the Company's Board of Directors of the results of the three-year performance period ended December 31, 2018, all of the outstanding RSUs granted in 2016 88,074 sharesexpired unvested because the Company did not meet the minimum three-year performance threshold.

In March 2018, based on certification by the Compensation Committee of common stock, netthe Company's Board of 58,822 shares withheld for payroll taxes, were issuedDirectors of the results of the three-year performance period ended December 31, 2017, all of the outstanding RSUs granted in 2015 expired unvested because the Company did not meet the minimum three-year performance threshold.

In March 2017, a total of approximately $3.6 million was paid upon the vesting of 146,89661,445 RSUs awarded in 20132014 resulting from the attainment of performance goals above the target threshold during the three-year performance period from 2013 to 2015.ended December 31, 2016.


At December 31, 2016, the Company determined that it iswas probable that the Company's Board of Directors willwould 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 to the vesting date.



16.17. Earnings Per Share
The following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations:
 Year Ended December 31,
 2019 2018 2017
 
Income
(Numerator)
 
Weighted
Shares
(Denominator)
 
Per-Share
Amount
 
Loss
(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 (loss) available to common stockholders$320,087
 55,351
 $5.78
 $(5,728) 55,335
 $(0.10) $144,877
 55,316
 $2.62
Effect of dilutive securities:                 
Options
 9
   
 
   
 11
  
Diluted EPS                 
Income (loss) available to common stockholders after assumed conversions$320,087
 55,360
 $5.78
 $(5,728) 55,335
 $(0.10) $144,877
 55,327
 $2.62

 Year Ended December 31,
 2016 2015 2014
 
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$73,044
 55,249
 $1.32
 $74,479
 55,157
 $1.35
 $177,949
 55,008
 $3.23
Effect of dilutive securities:                 
Options
 11
   
 15
   
 12
  
RSUs
 42
   
 37
   
 
  
Diluted EPS                 
Income available to common stockholders after assumed conversions$73,044
 55,302
 $1.32
 $74,479
 55,209
 $1.35
 $177,949
 55,020
 $3.23


Potentially dilutive securities representing approximately 27,600, 67,000,0, 78,500, and 252,0000 shares of common stock for 20162019, 20152018, and 20142017, respectively, were excluded from the computation of diluted earnings (loss) per common share because their effect would have been anti-dilutive. For the year ended December 31, 2018, the dilutive impact of incremental shares was excluded as the Company generated a net loss.


17.18. Commitments and Contingencies

Operating Leases
The Company is obligated under various non-cancellable lease agreements providing for office space, automobiles, and office equipment that expire at various dates through the year 2022. For2028. See Note 7. Leases for additional information on leases that contain predetermined escalationsand future lease payments for operating leases 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 $2.4 million and $3.6 million at December 31, 2016 and 2015, respectively. Total rent expense under these lease agreements was $19.7 million, $16.0 million, and $14.6 million for 2016, 2015, and 2014, respectively.

The following table presents future minimum commitments for operating leases as of December 31, 2016:
Year Ending December 31,Operating Leases
 (Amounts in thousands)
2017$14,647
20186,784
20192,713
20201,945
2021861
Thereafter148
2019.
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 1, 2016,3, 2019, the most recent date at which information was available, was approximately $60.2$73.8 million. There was no assessment made in 2016.2019.
Regulatory Matters


In March 2006, 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”) 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. The California DOI sought to impose a fine for each policy on which the Company allegedly permitted an agent to charge a broker fee, to impose a penalty for each policy on which the Company allegedly used a misleading advertisement, and to suspend certificates of authority for a period of one year. In January 2012, the administrative law judge bifurcated the 2004 NNC between (a) the California DOI’s order to show cause (the “OSC”), in which the California DOI asserts the false advertising allegations

and accusation, and (b) the California DOI’s notice of noncompliance (the “NNC”), in which the California DOI asserts the unlawful rate allegations. In February 2012, the administrative law judge (“ALJ”) submitted a proposed decision dismissing the NNC, but the Commissioner rejected the ALJ’s proposed decision. The Company challenged the rejection in Los Angeles Superior Court in April 2012, and the Commissioner responded with a demurrer. Following a hearing, the Superior Court sustained the Commissioner’s demurrer, based on the Company’s failure to exhaust its administrative remedies, and the Company appealed. The Court of Appeal affirmed the Superior Court's ruling that the Company was required to exhaust its administrative remedies, but expressly preserved for later appeal the legal basis for the ALJ’s dismissal: violation of the Company’s due process rights. Following an evidentiary hearing in April 2013, post-hearing briefs, and an unsuccessful mediation, the ALJ closed the evidentiary record on April 30, 2014. Although a proposed decision was to be submitted to the Commissioner on or before June 30, 2014, after which the Commissioner would have 100 days to accept, reject or modify the proposed decision, the proposed decision was not submitted until December 8, 2014. On January 7, 2015, the Commissioner adopted the ALJ’s proposed decision, which became the Commissioner’s adopted order (the "Order"). The decision and Order found that from the period July 1, 1996, through 2006, the Company’s "brokers" were actually operating as "de facto agents" and that the charging of "broker fees" by these producers constituted the charging of "premium" in excess of the Company's approved rates, and assessed a civil penalty in the amount of $27.6 million against the Company. On February 9, 2015, the Company filed a Writ of Administrative Mandamus and Complaint for Declaratory Relief (the “Writ”) in the Orange County Superior Court seeking, among other things, to require the Commissioner to vacate the Order, to stay the Order while the Superior Court action is pending, and to judicially declare as invalid the Commissioner’s interpretation of certain provisions of the California Insurance Code. Subsequent to the filing of the Writ, a consumer group petitioned and was granted the right to intervene in the Superior Court action. The 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%. The Company has filed a motion with the ALJ to dismiss the false advertising OSC portion of the NNC based on the Superior Court's findings and legal reasoning. On January 12, 2017, the CommissionerCalifornia DOI filed a notice of appeal of the Superior Court's judgment entered on November 17, 2016. Sincejudgment. While the appeal was 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 hashad not been appealed,settled or otherwise finally resolved at the time, the Company did not recognize the $30.9 million as a gain in the consolidated statements of operations; instead, it recorded the $30.9 million plus interest earned 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. On May 7, 2019, the California Court of Appeal issued its decision reversing the Superior Court’s original judgment and directing the Superior Court to enter a new judgment in favor of the California DOI. The Company filed a petition for rehearing, which was denied, and subsequently filed a petition for review in the Supreme Court of California. Based on the decision of the California Court of Appeal, the Company accrued approximately $3 million in the second quarter of 2019, which represented an estimated amount of statutory interest the Company might be ordered to pay beyond the actual interest it had earned on the $30.9 million. The California Supreme Court denied the Company's petition for review on August 14, 2019, and the Commissioner's Order became final. On August 30, 2019, the Company paid approximately $35 million to the California DOI, which consisted of the $30.9 million received from the California DOI in June 2017 plus statutory interest.

On October 1, 2019, the Company and the California DOI entered into a settlement agreement resolving the case involving the 2004 NNC, along with the related false advertising action that had been stayed pending the outcome of that case. Pursuant to the settlement agreement, the Company paid an additional amount of approximately $6 million to the California DOI on October 2, 2019, bringing the total settlement amount to approximately $41.2 million, in full settlement of the entire case including the false advertising action; the Company has not yet recognizedadmitted to any allegations raised in the consolidated financial statements the vacationcase. As a result of the Commissioner’s Order or established a receivable forsettlement, the refundCompany recognized approximately $6 million of the $27.6 million penalty plus any related interest owed.

The Company has also accrued a liability for the estimated cost to continue to defend itselfincremental expense in its consolidated statements of operations in the false advertising OSC. Based upon its understandingthird quarter of 2019 relating to 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.settlement.
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 reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be

reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company’s pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition results of operations, or cash flows.


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


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 20162019 and 20152018:
 Quarter Ended  Quarter Ended
 March 31 June 30 September 30 December 31  March 31 June 30 September 30 December 31
 (Amounts in thousands, except per share data)  (Amounts in thousands, except per share data)
2016         
2019        
Net premiums earned $767,085
 $779,321
 $790,850
  $794,517
  $870,245
 $888,776
 $915,012
  $925,384
Change in fair value of investments
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
 
         
2015     
   
Net premiums earned $720,737
 $731,546
 $745,520
  $760,094
 
Change in fair value of investments
pursuant to the fair value option
 (4,884) (40,783) (18,538) 2,474
 
Change in fair value of financial instruments pursuant to the fair value option 104,227
 50,281
 24,021
 18,173
Income before income taxes 29,859
 4,511
 12,267
 23,930
  167,169
 101,595
 80,840
 28,465
Net income 26,165
 9,639
 15,270
 23,405
  135,867
 83,250
 69,282
 31,688
Basic earnings per share (1)
 0.47
 0.17
 0.28
 0.42
  2.46
 1.50
 1.25
 0.57
Diluted earnings per share (1)
 0.47
 0.17
 0.28
 0.42
  2.45
 1.50
 1.25
 0.57
Dividends paid per share 0.6175
 0.6175
 0.6175
  0.6200
  0.6275
 0.6275
 0.6275
  0.6300
        
2018     
  
Net premiums earned $808,084
 $833,959
 $858,135
  $868,233
Change in fair value of financial instruments pursuant to the fair value option (58,532) 8,793
 (12,907) (70,020)
(Loss) income before income taxes (59,699) 73,246
 70,286
 (114,448)
Net (loss) income (42,607) 60,180
 58,578
 (81,879)
Basic (loss) earnings per share (0.77) 1.09
 1.06
 (1.48)
Diluted (loss) earnings per share
 (0.77) 1.09
 1.06
 (1.48)
Dividends paid per share 0.6250
 0.6250
 0.6250
  0.6275
 __________
(1)
The basic and diluted earnings per share do not sum due to rounding.



Net income during 2016for 2019 was primarily affectedattributable to net premiums earned, net realized investment gains, partially offset by an increase inoperating expenses and losses and loss adjustment expenses, partially offset by an increase in net premiums earned,including catastrophe losses and unfavorable development on prior accident years' loss and loss adjustment expense reserves, severe storms outsidereserves. The primary causes of Californiathe net income for the fourth quarter of 2019 were the increases in the fair values of the Company’s fixed maturity and rainstormsequity securities due to decreases in California,market interest rates and the overall improvement in equity markets.

Net income for 2018 was primarily attributable to net premiums earned, net investment income and income tax benefit on pre-tax loss, partially offset by net realized investment losses.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 causecauses of the net loss for the fourth quarter of 2016 was2018 were the declinesdecreases in the fair valuevalues of the Company’s fixed maturity and equity securities due to the rising market interest rates.rates and the overall decline in equity markets.

Net income for 2015 was primarily affected by net realized investment losses, and an increase in losses and loss adjustment expenses partially offset by an increase in net premiums earned. Net income for the fourth quarter of 2015 was affected by net realized investment losses of $8.2 million.


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 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.

21.20. Segment Information


The Company is primarily engaged in writing personal automobile insurance and provides related property and casualty insurance products to its customers through 14 subsidiaries in 11 states, principally in California.
The Company has one1 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 breakdownprotection warranties which are primarily sold through automobile dealerships and credit unions.

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

 Year Ended December 31,
 2019 2018 2017
 Property & Casualty Other Total Property & Casualty Other Total Property & Casualty Other Total
 (Amounts in millions)
Net premiums earned$3,571.0
 $28.4
 $3,599.4
 $3,337.9
 $30.5
 $3,368.4
 $3,160.9
 $34.5
 $3,195.4
Less:                 
Losses and loss adjustment expenses2,692.7
 13.3
 2,706.0
 2,562.0
 14.8
 2,576.8
 2,427.8
 17.1
 2,444.9
Underwriting expenses857.3
 14.1
 871.4
 802.7
 14.1
 816.8
 773.1
 15.6
 788.7
Underwriting gain (loss)21.0
 1.0
 22.0
 (26.8) 1.6
 (25.2) (40.0) 1.8
 (38.2)
Investment income    141.3
     135.8
     124.9
Net realized investment gains (losses)    222.8
     (133.5)     83.7
Other income    9.0
     9.3
     11.9
Interest expense    (17.0)     (17.0)     (15.2)
Pre-tax income (loss)    $378.1
     $(30.6)     $167.1
Net income (loss)

 

 $320.1
     $(5.7)     $144.9

 December 31, 2016 December 31, 2015 December 31, 2014
 Property & Casualty Lines Other Total Property & Casualty Lines Other Total Property & Casualty Lines Other Total
(Amounts in millions)
            
Net premiums earned$3,089.9
 $41.9
 $3,131.8
 $2,906.6
 $51.3
 $2,957.9
 $2,737.3
 $58.9
 $2,796.2
Less:                 
Losses and loss adjustment expenses2,333.2
 21.9
 2,355.1
 2,117.3
 28.2
 2,145.5
 1,951.4
 34.7
 1,986.1
Underwriting expenses780.4
 17.5
 797.9
 770.0
 20.0
 790.0
 749.7
 25.9
 775.6
Underwriting (loss) gain
(23.7) 2.5
 (21.2) 19.3
 3.1
 22.4
 36.2
 (1.7) 34.5
Investment income    121.9
     126.3
     125.7
Net realized investment (losses) gains
    (34.3)     (83.8)     81.2
Other income    8.3
     8.9
     8.7
Interest expense    (4.0)     (3.2)     (2.6)
Pre-tax income    $70.7
     $70.6
     $247.4
Net income

 

 $73.0
     $74.5
     $177.9

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,
 2019 2018 2017
 Property & Casualty Other Total Property & Casualty Other Total Property & Casualty Other Total
 (Amounts in millions)
Private passenger automobile$2,756.5
 $
 $2,756.5
 $2,602.1
 $
 $2,602.1
 $2,473.8
 $
 $2,473.8
Homeowners514.8
 
 514.8
 459.4
 
 459.4
 431.6
 
 431.6
Commercial automobile208.7
 
 208.7
 190.1
 
 190.1
 171.9
 
 171.9
Other91.0
 28.4
 119.4
 86.3
 30.5
 116.8
 83.6
 34.5
 118.1
Net premiums earned$3,571.0
 $28.4
 $3,599.4
 $3,337.9
 $30.5
 $3,368.4
 $3,160.9
 $34.5
 $3,195.4
                  
Private passenger automobile$2,820.5
 $
 $2,820.5
 $2,703.6
 $
 $2,703.6
 $2,480.0
 $
 $2,480.0
Homeowners598.5
 
 598.5
 524.9
 
 524.9
 469.9
 
 469.9
Commercial automobile217.3
 
 217.3
 198.5
 
 198.5
 178.2
 
 178.2
Other106.3
 32.0
 138.3
 97.2
 26.7
 123.9
 92.9
 27.9
 120.8
Direct premiums written$3,742.6
 $32.0
 $3,774.6
 $3,524.2
 $26.7
 $3,550.9
 $3,221.0
 $27.9
 $3,248.9

 December 31, 2016 December 31, 2015 December 31, 2014
 Property & Casualty Lines Other Total Property & Casualty Lines Other Total Property & Casualty Lines Other Total
(Amounts in millions)             
Private passenger automobile$2,435.7
 $
 $2,435.7
 $2,308.6
 $
 $2,308.6
 $2,203.0
 $
 $2,203.0
Homeowners414.0
 
 414.0
 379.7
 
 379.7
 347.9
 
 347.9
Commercial automobile161.3
 
 161.3
 144.4
 
 144.4
 121.8
 
 121.8
Other78.9
 41.9
 120.8
 73.9
 51.3
 125.2
 64.6
 58.9
 123.5
Net premiums earned$3,089.9
 $41.9
 $3,131.8
 $2,906.6
 $51.3
 2,957.9
 $2,737.3
 $58.9
 $2,796.2
                  
Private passenger automobile$2,452.7
 $
 $2,452.7
 $2,345.8
 $
 $2,345.8
 $2,223.1
 $
 $2,223.1
Homeowners436.9
 
 436.9
 402.2
 
 402.2
 374.5
 
 374.5
Commercial automobile166.1
 
 166.1
 153.5
 
 153.5
 135.9
 
 135.9
Other89.0
 27.3
 116.3
 81.6
 29.8
 111.4
 75.4
 44.3
 119.7
Direct premiums written$3,144.7
 $27.3
 $3,172.0
 $2,983.1
 $29.8
 $3,012.9
 $2,808.9
 $44.3
 $2,853.2



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


Item 9A.Controls and Procedures

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

controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.


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


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


The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 20162019. 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, 20162019, 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 20162019 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, 20162019, which is included herein.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.



Item 9B.Other Information
None


PART III
 
Item 10.Directors, Executive Officers, and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
Information regarding executive officers of the Company is included in Part I. For other information called for by Items 10, 11, 12, 13 and 14, reference is made to the Company’s definitive proxy statement for its Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after December 31, 20162019 and which is incorporated herein by reference.


PART IV
 
Item 15.Exhibits and Financial Statement Schedules


The following documents are filed as a part of this report:
1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, 20162019 are contained herein as listed in the Index to Consolidated Financial Statements on page 53.52.
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
3.5
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).
4.2Form
4.3
4.4Filed herewith.

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*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*

10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*

10.26*
10.2710.27*
10.28*
10.29
10.2810.30
10.2910.31
10.3010.32
10.3110.33
10.3210.34
10.3310.35
10.3410.36

10.35*Director Compensation Arrangements.This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2013, and is incorporated herein by this reference.
10.36*10.37*
10.37*10.38*
10.38*10.39*
10.39*10.40*
10.4010.41*Credit Agreement, dated as of January 2, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by this reference.
10.41Amendment 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.

10.42Second 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.
10.43Third 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.
10.44Fourth 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.
10.45Fifth 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.
10.4710.42*Credit Agreement, dated as of July 2, 2013, by and among Mercury General Corporation, Bank of America, as Administrative Agent, and the Lenders party thereto.This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended June 30, 2013, and is incorporated herein by this reference.
10.48First 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*
10.50*10.43*
10.51*10.44*
10.52*10.45*
21.110.46
10.47*
21.1
Filed herewith.
23.1Filed herewith.
31.1Filed herewith.
31.2

Filed herewith.
32.1Filed herewith.

32.2Filed 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 Document 
101.CALXBRL Taxonomy Extension Calculation Linkbase Document 
101.DEFXBRL Taxonomy Extension Definition Linkbase Document 
101.LABXBRL Taxonomy Extension Label Linkbase Document 
101.PREXBRL Taxonomy Extension Presentation Linkbase Document 
   
*Denotes management contract or compensatory plan or arrangement. 




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 9, 201712, 2020


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 Signature Title Date
     
 
/S/    GEORGE JOSEPH  
George Joseph
 Chairman of the Board February 9, 201712, 2020
     
 
/S/    GABRIEL TIRADOR
Gabriel Tirador
 President and Chief Executive Officer and Director (Principal Executive Officer) February 9, 201712, 2020
     
 
/S/    THEODORE R. STALICK 
Theodore R. Stalick
 Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 9, 201712, 2020
     
 
/S/    MICHAEL D. CURTIUSGEORGE G. BRAUNEGG  
Michael D. CurtiusGeorge G. Braunegg
 Director February 9, 201712, 2020
/S/    RAMONA L. CAPPELLO  
Ramona L. Cappello
DirectorFebruary 12, 2020
     
 
/S/    JAMES G. ELLIS
James G. Ellis
 Director February 9, 201712, 2020
     
 
/S/    JOSHUA E. LITTLE
Joshua E. Little
 Director February 9, 201712, 2020
      
 
/S/    MARTHA E. MARCON
Martha E. Marcon
 Director February 9, 201712, 2020
     
 
/S/    JOHN G. NACKEL
John G. Nackel
DirectorFebruary 9, 2017
/S/    GLENN S. SCHAFER   
Glenn S. Schafer
DirectorFebruary 9, 2017
/S/    DONALD R. SPUEHLER
Donald R. Spuehler
DirectorFebruary 9, 2017
     

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Mercury General Corporation:
Under date of February 9, 2017, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, as contained in the 2016 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules in the accompanying index. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/    KPMG LLP
Los Angeles, California
February 9, 2017


SCHEDULE I
 
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2016
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2019
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2019
Type of InvestmentCost Fair Value 
Amounts in the
Balance Sheet
Cost Fair Value 
Amounts in the
Balance Sheet
(Amounts in thousands)(Amounts in thousands)
Fixed maturity securities:          
U.S. government bonds and agencies$12,288
 $12,275
 $12,275
U.S. government bonds$22,502
 $22,637
 $22,637
Municipal securities2,432,181
 2,449,292
 2,449,292
2,435,346
 2,554,208
 2,554,208
Mortgage-backed securities39,082
 39,777
 39,778
62,566
 63,003
 63,003
Corporate securities189,780
 189,688
 189,688
233,730
 235,565
 235,565
Collateralized loan obligations85,429
 86,525
 86,525
200,656
 199,218
 199,217
Other asset-backed securities36,650
 36,996
 36,996
18,476
 18,644
 18,645
Total fixed maturity securities2,795,410
 2,814,553
 2,814,554
2,973,276
 3,093,275
 3,093,275
Equity securities:          
Common stock286,503
 316,450
 316,449
498,514
 586,367
 586,367
Non-redeemable preferred stock32,436
 31,809
 31,809
49,442
 49,708
 49,708
Private equity funds12,831
 9,068
 9,068
Private equity fund1,137
 1,203
 1,203
Private equity funds measured at net asset value (1)
99,189
 87,473
 87,473
Total equity securities331,770
 357,327
 357,326
648,282
 724,751
 724,751
Short-term investments375,700
 375,680
 375,680
494,060
 494,135
 494,135
Total investments$3,502,880
 $3,547,560
 $3,547,560
$4,115,618
 $4,312,161
 $4,312,161

__________ 
(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.



SCHEDULE I, Continued


MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2015
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2018
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2018
Type of InvestmentCost Fair Value 
Amounts in the
Balance Sheet
Cost Fair Value 
Amounts in the
Balance Sheet
(Amounts in thousands)(Amounts in thousands)
Fixed maturity securities:          
U.S. government bonds and agencies$22,542
 $22,507
 $22,507
U.S. government bonds$25,131
 $25,003
 $25,003
Municipal securities2,417,046
 2,505,039
 2,505,039
2,599,056
 2,620,132
 2,620,132
Mortgage-backed securities49,639
 49,839
 49,839
30,640
 30,952
 30,952
Corporate securities255,606
 243,372
 243,372
107,479
 105,524
 105,524
Collateralized loan obligations50,710
 50,548
 50,548
169,626
 165,789
 165,789
Other asset-backed securities8,732
 8,698
 8,698
37,609
 37,761
 37,761
Total fixed maturity securities2,804,275
 2,880,003
 2,880,003
2,969,541
 2,985,161
 2,985,161
Equity securities:
 
 

 
 
Common stock275,479
 280,263
 280,263
438,504
 430,973
 430,973
Non-redeemable preferred stock25,161
 24,668
 24,668
34,429
 31,433
 31,433
Private equity funds12,888
 10,431
 10,431
Private equity fund1,481
 1,445
 1,445
Private equity fund measured at net asset value (1)
69,668
 65,780
 65,780
Total equity securities313,528
 315,362
 315,362
544,082
 529,631
 529,631
Short-term investments185,353
 185,277
 185,277
254,518
 253,299
 253,299
Total investments$3,303,156
 $3,380,642
 $3,380,642
$3,768,141
 $3,768,091
 $3,768,091
__________ 
(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.



SCHEDULE II


MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS

 December 31,
 2019 2018
 (Amounts in thousands)
ASSETS   
Investments, at fair value:   
Equity securities (cost $81,802; $110,279)$114,668
 $119,037
Short-term investments (cost $29,356; $3,166)29,356
 3,166
Investment in subsidiaries2,008,163
 1,850,582
Total investments2,152,187
 1,972,785
Cash39,766
 24,140
Accrued investment income90
 161
Amounts receivable from affiliates244
 1,172
Current income taxes
 
Income tax receivable from affiliates9,192
 19,225
Other assets312
 446
Total assets$2,201,791
 $2,017,929
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Notes payable$372,133
 $371,734
Accounts payable and accrued expenses17
 25
Amounts payable to affiliates22
 3,082
Income tax payable to affiliates4,106
 580
Current income taxes14,052
 17,773
Deferred income taxes7,059
 1,691
Other liabilities4,900
 5,360
Total liabilities402,289
 400,245
Commitments and contingencies   
Shareholders’ equity:   
Common stock98,828
 98,026
Retained earnings1,700,674
 1,519,658
Total shareholders’ equity1,799,502
 1,617,684
Total liabilities and shareholders’ equity$2,201,791
 $2,017,929
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS

 December 31,
 2016 2015
 (Amounts in thousands)
ASSETS   
Investments, at fair value:   
Fixed maturity securities (amortized cost $1,609; $557)$1,605
 $571
Equity securities (cost $113,943; $131,217)122,717
 127,572
Short-term investments (cost $629; $1,144)629
 1,144
Investment in subsidiaries1,810,663
 1,819,426
Total investments1,935,614
 1,948,713
Cash11,786
 20,139
Accrued investment income189
 208
Amounts receivable from affiliates226
 220
Current income taxes
 8,894
Deferred income taxes2,702
 10,524
Income tax receivable from affiliates35,237
 5,917
Other assets414
 2,981
Total assets$1,986,168
 $1,997,596
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Notes payable$180,000
 $150,000
Accounts payable and accrued expenses348
 
Amounts payable to affiliates36
 25
Income tax payable to affiliates39,539
 26,439
Current income taxes10,200
 
Other liabilities3,643
 247
Total liabilities233,766
 176,711
Commitments and contingencies   
Shareholders’ equity:   
Common stock95,529
 90,985
Additional paid-in capital
 8,870
Retained earnings1,656,873
 1,721,030
Total shareholders’ equity1,752,402
 1,820,885
Total liabilities and shareholders’ equity$1,986,168
 $1,997,596

 






























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,
 2019 2018 2017
 (Amounts in thousands)
Revenues:     
Net investment income$3,735
 $4,661
 $4,090
Net realized investment gains (losses)31,682
 (10,797) 19,279
Other5
 2
 
Total revenues35,422

(6,134)
23,369
Expenses:     
Other operating expenses2,592
 2,343
 1,918
Interest17,036
 17,036
 14,856
Total expenses19,628
 19,379
 16,774
Income (loss) before income taxes and equity in net income of subsidiaries15,794
 (25,513) 6,595
Income tax expense (benefit)2,816
 (5,144) 1,572
Income (loss) before equity in net income of subsidiaries12,978
 (20,369) 5,023
Equity in net income of subsidiaries307,109
 14,641
 139,854
Net income (loss)$320,087
 $(5,728) $144,877























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,
 2019 2018 2017
 (Amounts in thousands)
Cash flows from operating activities:     
Net cash used in operating activities$(5,392) $(16,108) $(14,503)
Cash flows from investing activities:     
Capital contribution to subsidiaries(125) (541) (140,125)
Capital distribution from subsidiaries30,069
 
 
Distributions received from special purpose entities5,153
 5,998
 5,243
Dividends received from subsidiaries114,431
 135,000
 109,000
Fixed maturity securities available for sale in nature:     
Sales
 
 1,614
Equity securities available for sale in nature     
Purchases(39,966) (22,286) (22,406)
Sales74,663
 33,052
 18,876
Calls
 
 4,000
(Increase) decrease in short-term investments(25,213) 18,065
 (20,607)
Other, net376
 605
 310
Net cash provided by (used in) investing activities159,388
 169,893
 (44,095)
Cash flows from financing activities:     
Dividends paid to shareholders(139,071) (138,478) (137,886)
Proceeds from stock options exercised701
 358
 2,162
Net proceeds from issuance of senior notes
 
 371,011
Payoff of principal on loan and credit facilities
 
 (180,000)
Net cash (used in) provided by financing activities(138,370) (138,120) 55,287
Net increase (decrease) in cash15,626
 15,665
 (3,311)
Cash:     
Beginning of year24,140
 8,475
 11,786
End of year$39,766
 $24,140
 $8,475
SUPPLEMENTAL CASH FLOW DISCLOSURE     
Interest paid$16,586
 $16,586
 $9,435
Income taxes (refunded) paid, net$(12,391) $4,296
 $346


MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS

 Year Ended December 31,
 2016 2015 2014
 (Amounts in thousands)
Revenues:     
Net investment income$4,032
 $4,314
 $4,478
Net realized investment gains (losses)6,062
 (7,026) (9,428)
Other17
 
 
Total revenues10,111

(2,712)
(4,950)
Expenses:     
Other operating expenses2,673
 7,526
 5,971
Interest2,690
 2,127
 1,746
Total expenses5,363
 9,653
 7,717
Income (loss) before income taxes and equity in net income of subsidiaries4,748
 (12,365) (12,667)
Income tax expense (benefit)8,514
 (4,708) (100)
Loss before equity in net income of subsidiaries(3,766) (7,657) (12,567)
Equity in net income of subsidiaries73,864
 82,136
 190,516
Net income$70,098
 $74,479
 $177,949


























See accompanying notes to condensed financial information.
See accompanying Report of Independent Registered Public Accounting Firm
S-5



SCHEDULE II, Continued

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

 Year Ended December 31,
 2016 2015 2014
 (Amounts in thousands)
Cash flows from operating activities:     
Net cash provided by (used in) operating activities$526
 $548
 $(3,434)
Cash flows from investing activities:     
Capital contribution to subsidiaries(30,125) (90,125) (30,125)
Distributions received from special purpose entities4,898
 8,883
 6,756
Dividends received from subsidiaries110,800
 133,000
 225,000
Purchases of fixed maturity securities available for sale in nature(1,060) (571) 
Equity securities available for sale in nature     
Purchases(64,807) (146,236) (254,572)
Sales73,942
 192,005
 90,422
(Decrease) in payable for securities, net
 
 (2,489)
Net decrease in short-term investments515
 8,612
 1,346
Business acquisition
 (6,000)  
Other, net1,614
 1,945
 2,191
Net cash provided by investing activities95,777
 101,513
 38,529
Cash flows from financing activities:     
Dividends paid to shareholders(137,201) (136,386) (135,496)
Excess tax benefit from exercise of stock options913
 27
 148
Proceeds from stock options exercised1,632
 2,111
 6,247
Proceeds from bank loan30,000
 
 100,000
Net cash used in financing activities(104,656) (134,248) (29,101)
Net (decrease) increase in cash(8,353) (32,187) 5,994
Cash:     
Beginning of year20,139
 52,326
 46,332
End of year$11,786
 $20,139
 $52,326
SUPPLEMENTAL CASH FLOW DISCLOSURE     
Interest paid$2,397
 $2,153
 $1,757
Income taxes (refunded) paid$(339) $1,807
 $2,112




See accompanying notes to condensed financial information.
See accompanying Report of Independent Registered Public Accounting Firm
S-6





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


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


On February 13, 2014, Fannette Funding LLC ("FFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into a total return swap agreement with Citibank. UnderThe agreement had an initial term of one year, subject to periodic renewal. In July 2018, the agreement was renewed through January 24, 2020. During the fourth quarter of 2019, the underlying obligations were liquidated and the total return swap agreement between FFL receivesand Citibank was terminated. Under the agreement, FFL received the income equivalent on underlying obligations due to Citibank and payspaid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap iswas secured by approximately $30$31 million of U.S. Treasuries as collateral, which arewere included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 145128 basis points prior to the renewal of the agreement in January 2018, LIBOR plus 120 basis points subsequent to the January 2018 renewal through July 2018, and LIBOR plus105 basis points subsequent to the July 2018 renewal until December 2019, on approximately $108 million and $95$100 million of underlying obligations as of December 31, 2016 and 2015, respectively. The agreement had an initial term of one year, subject to annual renewal. In January 2017, the agreement was renewed for an additional year expiring February 17, 2018, and the interest rate was changed to LIBOR plus 128 basis points.2018.


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 beenwas renewed for an additional one-year term through February 17, 2018. UnderDuring June and July 2017, the underlying obligations were liquidated and the total return swap agreement between AFL receivesand Citibank was terminated on. Under the agreement, AFL received the income equivalent on underlying obligations due to Citibank and payspaid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap iswas secured by approximately $40 million of U.S. Treasuries as collateral, which arewere included in short-term investments on the consolidated balance sheets. The Company paid interest 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 until July 2017, on approximately $152 million and $124 million of underlying obligations as of December 31, 2016 and 2015, respectively. The agreement was amended in January 2017 and the interest rate was changed to LIBOR plus 128 basis points.2016.

Distributions of $4.9$5.2 million and $8.9$6.0 million were received in 20162019 and 2015,2018, respectively, from these special purpose entities.
Dividends received from Subsidiaries


Dividends of $110,800,000, $133,000,000$114,431,433, $135,000,000 and $225,000,000$109,000,000 were received by Mercury General from its 100% owned insurance subsidiaries in 2016, 20152019, 2018 and 2014,2017, respectively, and are recorded as a reduction to investment in subsidiaries.
Capitalization of Insurance Subsidiaries


Mercury General made capital contributions to its insurance subsidiaries of $30,125,000, $90,125,000$125,000, $540,619 and $30,125,000$140,125,000 in 2016, 20152019, 2018 and 2014,2017, respectively.
Business Acquisition
Pursuant to an October 22, 2014 Stock Purchase Agreement, In addition, Mercury General purchased all the issued and outstanding sharesreceived a capital distribution from one of Workmen’s Auto Insurance Company ("WAIC"), a California domiciled property and casualtyits insurance company, on January 2, 2015.
WAIC is a Los Angeles-based non-standard, private passenger automobile insurance company that operates predominantlysubsidiaries of $30,068,567 in California. Mercury General intends to use the WAIC non-standard automobile product to complement its preferred and standard product offerings.
The Company 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.


2019.
Notes Payable


On July 2, 2013,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 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. 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

On March 29, 2017, Mercury General entered into an unsecured $200credit agreement that provides for revolving loans of up to $50 million five-year revolving credit facility. Effective December 3, 2014, the Company expanded the borrowing capacity from $200 million to $250 million. Totaland matures on March 29, 2022. The interest rates on borrowings were $180 million 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 December 31, 2016.(a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The interest rateCompany's debt to total capital ratio was approximately1.73%17.2% at December 31, 2016.
Commitments and Contingencies

The2019, resulting in a 15 basis point commitment fee on the $50 million undrawn portion of the credit facility. As of February 6, 2020, there have been no borrowings by MCC, a subsidiary, under the $120 million credit facility and $20 million bank loan are secured by approximately $175 million of municipal bonds owned by MCC, at fair value, held as collateral. The total borrowings of $140 million are guaranteed by Mercury General.this facility.
Federal Income Taxes


The Company files a consolidated federal income tax return for the following entities:
Mercury Casualty Company Mercury County Mutual Insurance Company
Mercury Insurance Company Mercury Insurance Company of Florida
California Automobile Insurance Company Mercury Indemnity Company of America
California General Underwriters Insurance Company, Inc. Mercury Select Management Company, Inc.
Mercury Insurance Company of Illinois Mercury Insurance Services LLC
Mercury Insurance Company of Georgia AIS Management LLC
Mercury Indemnity Company of Georgia Auto Insurance Specialists LLC
Mercury National Insurance Company PoliSeek AIS Insurance Solutions, Inc.
American Mercury Insurance Company Animas Funding LLC
American Mercury Lloyds Insurance Company Fannette Funding LLC
Workmen's Auto Insurance Company Mercury Plus Insurance Services LLC


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.




















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

 2019 2018 2017
 (Amounts in thousands)
Direct amounts$3,655,233
 $3,416,687
 $3,221,493
Ceded to other companies(56,725) (48,941) (26,881)
Assumed910
 665
 825
Net amounts$3,599,418
 $3,368,411
 $3,195,437
SCHEDULE IV
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
REINSURANCE
THREE YEARS ENDED DECEMBER 31,
Property and Liability Insurance Earned Premiums

 2016 2015 2014
 (Amounts in thousands)
Direct amounts$3,146,864
 $2,970,424
 $2,806,889
Ceded to other companies(15,846) (12,964) (11,185)
Assumed755
 437
 491
Net amounts$3,131,773
 $2,957,897
 $2,796,195

 


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