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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________
Commission File No. 001-12257
______________________________
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
________________________________

California | 95-2211612
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
4484 Wilshire Boulevard |
Los Angeles, | California | 90010
(Address of principal executive offices) | (Zip Code)

Registrant’s telephone number, including area code: (323) 937-1060
_______________________________
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ý |  | Accelerated filer | ☐
Non-accelerated filer | ☐ |  | Smaller reporting company | ☐
Emerging growth 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. o
Indicate by check mark whether the registrant is a shell company (as defined in the Rule 12b-2 of the Exchange Act). Yes ☐ No ý
At October 27, 2022, the registrant had issued and outstanding an aggregate of 55,371,127 shares of its Common Stock.

Table of Contents
MERCURY GENERAL CORPORATION
INDEX TO FORM 10-Q

|  | Page
PART I - FINANCIAL INFORMATION |
Item 1 | Financial Statements | 3
| Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 | 3
| Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 | 4
| Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 | 5
| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 | 6
| Notes to Consolidated Financial Statements | 7
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24
Item 3 | Quantitative and Qualitative Disclosures about Market Risks | 42
Item 4 | Controls and Procedures | 44
PART II - OTHER INFORMATION |
Item 1 | Legal Proceedings | 44
Item 1A | Risk Factors | 45
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 45
Item 3 | Defaults upon Senior Securities | 45
Item 4 | Mine Safety Disclosures | 45
Item 5 | Other Information | 45
Item 6 | Exhibits | 46
SIGNATURES | 47

2

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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

| September 30, 2022 |  | December 31, 2021
| (unaudited) |  |
ASSETS |  |  |
Investments, at fair value: |  |  |
Fixed maturity securities (amortized cost $4,105,574; $3,909,780) | $ | 3,897,859 |  |  | $ | 4,031,523 |
Equity securities (cost $688,401; $754,536) | 684,335 |  |  | 970,939 |
Short-term investments (cost $101,548; $141,206) | 100,621 |  |  | 140,127 |
Total investments | 4,682,815 |  |  | 5,142,589 |
Cash | 335,886 |  |  | 335,557 |
Receivables: |  |  |
Premiums | 646,942 |  |  | 621,740 |
Allowance for credit losses on premiums receivable | (6,000) |  |  | (6,000) |
Premiums receivable, net of allowance for credit losses | 640,942 |  |  | 615,740 |
Accrued investment income | 48,894 |  |  | 43,299 |
Other | 7,871 |  |  | 7,600 |
Total receivables | 697,707 |  |  | 666,639 |
Reinsurance recoverables | 25,309 |  |  | 45,000 |
Deferred policy acquisition costs | 279,726 |  |  | 258,259 |
Fixed assets (net of accumulated depreciation $325,461; $308,997) | 189,753 |  |  | 191,332 |
Operating lease right-of-use assets | 23,610 |  |  | 31,967 |
Current income taxes | 48,429 |  |  | 20,108 |
Deferred income taxes | 65,705 |  |  | — |
Goodwill | 42,796 |  |  | 42,796 |
Other intangible assets, net | 9,455 |  |  | 10,255 |
Other assets | 53,470 |  |  | 27,970 |
Total assets | $ | 6,454,661 |  |  | $ | 6,772,472 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
Loss and loss adjustment expense reserves | $ | 2,432,734 |  |  | $ | 2,226,430 |
Unearned premiums | 1,635,459 |  |  | 1,519,799 |
Notes payable | 373,230 |  |  | 372,931 |
Accounts payable and accrued expenses | 155,441 |  |  | 169,125 |
Operating lease liabilities | 26,366 |  |  | 34,577 |
Deferred income taxes | — |  |  | 53,569 |
Other liabilities | 284,950 |  |  | 255,760 |
Total liabilities | 4,908,180 |  |  | 4,632,191 |
Commitments and contingencies |  |  |
Shareholders’ equity: |  |  |
Common stock without par value or stated value: Authorized 70,000 shares; issued and outstanding 55,371; 55,371 | 98,947 |  |  | 98,943 |
Retained earnings | 1,447,534 |  |  | 2,041,338 |
Total shareholders’ equity | 1,546,481 |  |  | 2,140,281 |
Total liabilities and shareholders’ equity | $ | 6,454,661 |  |  | $ | 6,772,472 |

See accompanying Notes to Consolidated Financial Statements.
3

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Revenues: |  |  |  |  |  |  |
Net premiums earned | $ | 996,939 |  |  | $ | 940,941 |  |  | $ | 2,947,000 |  |  | $ | 2,783,682 |
Net investment income | 44,563 |  |  | 32,334 |  |  | 118,469 |  |  | 95,566 |
Net realized investment (losses) gains | (144,213) |  |  | (43,543) |  |  | (581,237) |  |  | 56,953 |
Other | 2,998 |  |  | 2,481 |  |  | 7,141 |  |  | 7,883 |
Total revenues | 900,287 |  |  | 932,213 |  |  | 2,491,373 |  |  | 2,944,084 |
Expenses: |  |  |  |  |  |  |
Losses and loss adjustment expenses | 787,462 |  |  | 697,947 |  |  | 2,436,175 |  |  | 1,981,519 |
Policy acquisition costs | 168,870 |  |  | 153,142 |  |  | 487,444 |  |  | 468,556 |
Other operating expenses | 68,585 |  |  | 80,238 |  |  | 208,305 |  |  | 216,723 |
Interest | 4,273 |  |  | 4,267 |  |  | 12,822 |  |  | 12,845 |
Total expenses | 1,029,190 |  |  | 935,594 |  |  | 3,144,746 |  |  | 2,679,643 |
(Loss) income before income taxes | (128,903) |  |  | (3,381) |  |  | (653,373) |  |  | 264,441 |
Income tax (benefit) expense | (30,600) |  |  | (4,669) |  |  | (147,471) |  |  | 46,977 |
Net (loss) income | $ | (98,303) |  |  | $ | 1,288 |  |  | $ | (505,902) |  |  | $ | 217,464 |
Net (loss) income per share: |  |  |  |  |  |  |
Basic | $ | (1.78) |  |  | $ | 0.02 |  |  | $ | (9.14) |  |  | $ | 3.93 |
Diluted | $ | (1.78) |  |  | $ | 0.02 |  |  | $ | (9.14) |  |  | $ | 3.93 |
Weighted average shares outstanding: |  |  |  |  |  |  |
Basic | 55,371 |  |  | 55,371 |  |  | 55,371 |  |  | 55,367 |
Diluted | 55,371 |  |  | 55,375 |  |  | 55,371 |  |  | 55,375 |

See accompanying Notes to Consolidated Financial Statements.
4

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Common stock, beginning of period | $ | 98,947 |  |  | $ | 98,872 |  |  | $ | 98,943 |  |  | $ | 98,970 |
Proceeds from stock options exercised | — |  |  | — |  |  | — |  |  | 215 |
Share-based compensation expense | — |  |  | 36 |  |  | 15 |  |  | 106 |
Withholding tax on stock options exercised | — |  |  | — |  |  | (11) |  |  | (383) |
Common stock, end of period | 98,947 |  |  | 98,908 |  |  | 98,947 |  |  | 98,908 |
Retained earnings, beginning of period | 1,563,418 |  |  | 2,079,759 |  |  | 2,041,338 |  |  | 1,933,627 |
Net (loss) income | (98,303) |  |  | 1,288 |  |  | (505,902) |  |  | 217,464 |
Dividends paid to shareholders | (17,581) |  |  | (35,022) |  |  | (87,902) |  |  | (105,066) |
Retained earnings, end of period | 1,447,534 |  |  | 2,046,025 |  |  | 1,447,534 |  |  | 2,046,025 |
Total shareholders’ equity, end of period | $ | 1,546,481 |  |  | $ | 2,144,933 |  |  | $ | 1,546,481 |  |  | $ | 2,144,933 |

See accompanying Notes to Consolidated Financial Statements.
5

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

| Nine Months Ended September 30,
| 2022 |  | 2021
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |
Net (loss) income | $ | (505,902) |  |  | $ | 217,464 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation and amortization | 64,647 |  |  | 56,864 |
Net realized investment losses (gains) | 581,237 |  |  | (56,953) |
Increase in premiums receivable | (25,202) |  |  | (58,529) |
Decrease (increase) in reinsurance recoverables | 19,691 |  |  | (1,437) |
Changes in current and deferred income taxes | (147,595) |  |  | (22,454) |
Increase in deferred policy acquisition costs | (21,467) |  |  | (16,280) |
Increase in loss and loss adjustment expense reserves | 206,304 |  |  | 150,817 |
Increase in unearned premiums | 115,660 |  |  | 139,424 |
Decrease in accounts payable and accrued expenses | (11,708) |  |  | (12,958) |
Share-based compensation | 15 |  |  | 106 |
Other, net | 9,191 |  |  | 31,965 |
Net cash provided by operating activities | 284,871 |  |  | 428,029 |
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |
Fixed maturity securities available for sale in nature: |  |  |
Purchases | (1,299,431) |  |  | (1,044,819) |
Sales | 621,519 |  |  | 117,754 |
Calls or maturities | 388,421 |  |  | 397,524 |
Equity securities available for sale in nature: |  |  |
Purchases | (755,838) |  |  | (695,393) |
Sales | 843,283 |  |  | 689,484 |
Changes in securities payable and receivable | (11,303) |  |  | 20,267 |
Decrease in short-term investments | 39,634 |  |  | 213,553 |
Purchases of fixed assets | (25,589) |  |  | (29,498) |
Other, net | 3,811 |  |  | 1,842 |
Net cash used in investing activities | (195,493) |  |  | (329,286) |
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |
Dividends paid to shareholders | (87,902) |  |  | (105,066) |
Proceeds from stock options exercised | — |  |  | 215 |
Payments on finance lease obligations | (1,147) |  |  | (765) |
Net cash used in financing activities | (89,049) |  |  | (105,616) |
Net increase (decrease) in cash | 329 |  |  | (6,873) |
Cash: |  |  |
Beginning of the year | 335,557 |  |  | 348,479 |
End of period | $ | 335,886 |  |  | $ | 341,606 |
SUPPLEMENTAL CASH FLOW DISCLOSURE |  |  |
Interest paid | $ | 16,612 |  |  | $ | 16,584 |
Income taxes paid, net | $ | 179 |  |  | $ | 69,432 |

See accompanying Notes to Consolidated Financial Statements.
6

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
Consolidation and Basis of Presentation
The interim consolidated financial statements include the accounts of Mercury General Corporation and its subsidiaries (referred to herein collectively as the “Company”). For the list of the Company’s subsidiaries, see Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These interim 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. The financial data of the Company included herein are unaudited. In the opinion of management, all material adjustments of a normal recurring nature have been made to present fairly the Company’s financial position at September 30, 2022 and the results of operations and cash flows for the periods presented. All intercompany transactions and balances have been eliminated.
Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted from the accompanying interim consolidated financial statements and related notes. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more complete descriptions and discussions. Operating results and cash flows for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Certain prior period amounts have been reclassified to conform to the current period presentation.
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 revenues 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 the 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 ("LAE"). Actual results could differ from those estimates. See Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Earnings (Loss) per Share
Potentially dilutive securities representing approximately 18,000 shares of common stock were excluded from the computation of diluted loss per share for the three months ended September 30, 2022, because their effect would have been anti-dilutive. For the nine months ended September 30, 2022, 1,294 incremental shares were excluded from the computation of diluted loss per share as the Company generated a net loss. There were no potentially dilutive securities with anti-dilutive effect for the three and nine months ended September 30, 2021.
Dividends per Share
The Company declared and paid a dividend per share of $0.3175 and $0.6325 during the three months ended September 30, 2022 and 2021, respectively, and dividends per share of $1.5875 and $1.8975 during the nine months ended September 30, 2022 and 2021, 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 $168.9 million and $153.1 million for the three months ended September 30, 2022 and 2021, respectively, and $487.4 million and $468.6 million for the nine months
7

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ended September 30, 2022 and 2021, respectively. The Company does not defer advertising expenditures but expenses them as incurred. The Company recorded net advertising expense of approximately $2.3 million and $19.4 million for the three months ended September 30, 2022 and 2021, respectively, and $10.0 million and $40.7 million for the nine months ended September 30, 2022 and 2021, respectively.
Reinsurance
Unearned premiums and loss and loss adjustment expense reserves are stated in the accompanying consolidated financial statements before deductions for ceded reinsurance. Unearned premiums and loss and loss adjustment expense reserves that are ceded to reinsurers are carried in other assets and reinsurance recoverables, respectively, in the Company's consolidated balance sheets. Earned premiums and losses and loss adjustment expenses are stated net of deductions for ceded reinsurance.
The Company is the assuming reinsurer under a Catastrophe Participation Reinsurance Contract (the "Contract") effective through December 31, 2022. The Company reimburses up to $25 million in losses for a proportional share of a portfolio of catastrophe losses under the Contract, to the extent the actual loss ratio exceeds the threshold loss ratio of 73.5%. If the actual loss ratio is less than the threshold loss ratio, the Company is eligible to receive a certain portion of the underwriting profit.
The Company is party to a Catastrophe Reinsurance Treaty (the "Treaty") covering a wide range of perils that is effective through June 30, 2023. The Treaty provides $936 million of coverage on a per occurrence basis after covered catastrophe losses exceed the $60 million Company retention limit. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies, such as homeowners, but does cover losses from fires following an earthquake. The Treaty provides for one full reinstatement of coverage limits with a minor exception at certain upper layers of coverage, and includes some additional minor territorial and coverage restrictions.
The effect of reinsurance on property and casualty premiums written and earned was as follows:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
| (Amounts in thousands)
Premiums Written |  |  |  |  |  |  |
Direct | $ | 1,049,088 |  |  | $ | 1,024,753 |  |  | $ | 3,086,222 |  |  | $ | 2,934,777 |
Ceded | (22,805) |  |  | (17,322) |  |  | (57,776) |  |  | (48,750) |
Assumed | 138 |  |  | 161 |  |  | 10,582 |  |  | 13,048 |
Net | $ | 1,026,421 |  |  | $ | 1,007,592 |  |  | $ | 3,039,028 |  |  | $ | 2,899,075 |
Premiums Earned |  |  |  |  |  |  |
Direct | $ | 1,009,829 |  |  | $ | 947,458 |  |  | $ | 2,974,651 |  |  | $ | 2,800,357 |
Ceded | (22,825) |  |  | (17,175) |  |  | (57,383) |  |  | (48,335) |
Assumed | 2,684 |  |  | 3,322 |  |  | 8,142 |  |  | 9,912 |
Net | $ | 989,688 |  |  | $ | 933,605 |  |  | $ | 2,925,410 |  |  | $ | 2,761,934 |

The Company recognized ceded premiums earned of approximately $23 million and $17 million for the three months ended September 30, 2022 and 2021, respectively, and $57 million and $48 million for the nine months ended September 30, 2022 and 2021, respectively, which are included in net premiums earned in its consolidated statements of operations. The Company recognized ceded losses and loss adjustment expenses of approximately $(2) million and $(1) million for the three months ended September 30, 2022 and 2021, respectively, and $(15) million and $(4) million for the nine months ended September 30, 2022 and 2021, respectively, which are included in losses and loss adjustment expenses in its consolidated statements of operations. The negative ceded losses and loss adjustment expenses for the three and nine months ended September 30, 2022 and 2021 were primarily the result of favorable development on prior years' catastrophe losses that had been ceded to the Company's reinsurers.
The Company's insurance subsidiaries, as primary insurers, are required to pay losses to the extent reinsurers are unable to discharge their obligations under the reinsurance agreements.
Revenue from Contracts with Customers (Topic 606)
The Company's revenue from contracts with customers is commission income earned from third-party insurers by its
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100% owned insurance agencies, which amounted to approximately $4.5 million and $4.6 million, with related expenses of $2.5 million and $3.0 million, for the three months ended September 30, 2022 and 2021, respectively, and $13.5 million and $15.9 million, with related expenses of $8.0 million and $9.9 million, for the nine months ended September 30, 2022 and 2021, respectively. All of 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 (see Note 13. Segment Information).
As of September 30, 2022 and December 31, 2021, the Company had no contract assets and contract liabilities, and no remaining performance obligations associated with unrecognized revenues.
Allowance for Credit Losses
Financial Instruments - Credit Losses (Topic 326) uses the "expected loss" methodology for recognizing credit losses for financial assets that are not accounted for at fair value through net income. The Company's investment portfolio, which does not include accrued investment income, is not subject to Topic 326 as it applies the fair value option to all of its investments (see Note 4. Fair Value Option). The estimated allowance amounts for credit losses at September 30, 2022 and December 31, 2021 related to premiums receivable.
Premiums Receivable
The majority of the Company's premiums receivable are short-term in nature and are due within a year, consistent with the policy term of its insurance policies sold. Generally, premiums are collected prior to providing risk coverage, minimizing the Company's exposure to credit risk. In estimating an allowance for uncollectible premiums receivable, the Company assesses customer balances and write-offs by state, line of business, and the year the premiums were written. The estimated allowance is based on historical write-off percentages adjusted for the effects of current trends and reasonable and supportable forecasts, as well as expected recoveries of amounts written off.
The improving economy and declining unemployment rate contributed to the reduction in allowance for credit losses for the nine months ended September 30, 2021. However, the rising inflation and interest rates had negative impacts on the allowance for credit losses for the nine months ended September 30, 2022, mostly offsetting the positive impacts of some improvements in the economy.
The following table presents a summary of changes in allowance for credit losses on premiums receivable:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2022 |  | 2021 |  | 2022 |  | 2021
|  | (Amounts in thousands)
Beginning balance |  | $ | 6,000 |  |  | $ | 6,000 |  |  | $ | 6,000 |  |  | $ | 10,000 |
Provision during the period for expected credit losses |  | 1,153 |  |  | 694 |  |  | 3,330 |  |  | (1,837) |
Write-off amounts during the period |  | (1,311) |  |  | (838) |  |  | (3,798) |  |  | (2,610) |
Recoveries during the period of amounts previously written off |  | 158 |  |  | 144 |  |  | 468 |  |  | 447 |
Ending balance |  | $ | 6,000 |  |  | $ | 6,000 |  |  | $ | 6,000 |  |  | $ | 6,000 |

Accrued Interest Receivables
The Company made certain accounting policy elections for its accrued interest receivables allowed under Topic 326: a) an election to present accrued interest receivable balances separately from the associated financial assets on the balance sheet, and b) an election not to measure an allowance for credit losses on accrued interest receivable amounts and instead write off uncollectible accrued interest amounts in a timely manner by reversing interest income. The Company's accrued interest receivable balances are included in accrued investment income receivable in its consolidated balance sheets. There were no accrued interest receivable amounts considered uncollectible or written off during the three and nine months ended September 30, 2022 and 2021.
2. Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform
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(Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or other interbank offered rates expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company expects to apply the optional expedients in this ASU to its unsecured credit facility that references LIBOR (see Note 11), when the facility is modified with a replacement rate before LIBOR is discontinued. The Company does not expect any material impact on its consolidated financial statements and related disclosures resulting from applying this ASU.
3. Financial Instruments
Financial instruments recorded in the consolidated balance sheets include investments, note receivable, other receivables, options sold, accounts payable, and unsecured notes payable. Due to their short-term maturities, the carrying values of other receivables and accounts payable approximate their fair values. All investments are carried at fair value in the consolidated balance sheets.
The following table presents the fair values of financial instruments:

| September 30, 2022 |  | December 31, 2021
| (Amounts in thousands)
Assets |  |  |
Investments | $ | 4,682,815 |  |  | $ | 5,142,589 |
Liabilities |  |  |
Options sold | 169 |  |  | 301 |
Notes payable | 349,643 |  |  | 413,378 |

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 or losses i n the Company's consolidated statements of operations. See Note 4. Fair Value Option for additional information.
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.
From time to time, the Company forms special purpose investment vehicles to facilitate its investment activities involving derivative instruments such as total return swaps, or limited partnerships such as private equity funds. These special purpose investment vehicles are consolidated VIEs as the Company has determined it is the primary beneficiary of such VIEs. Creditors have no recourse against the Company in the event of default by these VIEs. The Company had no implied or unfunded commitments to these VIEs at September 30, 2022 and December 31, 2021. 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 of such VIEs. The Company's maximum exposure to loss with respect to these VIEs is limited to the total carrying value that is included in equity securities in the Company's consolidated balance sheets. At September 30, 2022 and December 31, 2021, the Company had approximately $10 million and $32 million, respectively, in unfunded commitments to these VIEs.
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Options Sold
The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Company as realized gains from investments on the expiration date. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Liabilities for covered call options are included in other liabilities in the Company's consolidated balance sheets.
Notes Payable
The fair value of the Company’s publicly traded $375 million unsecured notes at September 30, 2022 and December 31, 2021 was obtained from a third party pricing service.
For additional disclosures regarding methods and assumptions used in estimating fair values, see Note 5. Fair Value Measurements.
4. Fair Value Option
The Company applies the fair value option to all fixed maturity and equity investment securities and short-term investments at the time an eligible item is first recognized. In addition, the Company elected to apply the fair value option to the note receivable recognized as part of the sale of land in August 2017. The Company received the full principal amount due on the note receivable in November 2021. 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 FASB for accounting for financial instruments.
Gains or losses due to changes in fair value of financial instruments measured at fair value pursuant to application of the fair value option are included in net realized investment gains or losses in the Company’s consolidated statements of operations. Interest and dividend income on investment holdings are recognized on an accrual basis at each measurement date and are included in net investment income in the Company’s consolidated statements of operations, while interest earned on the note receivable was included in other revenues in the Company’s consolidated statements of operations.
The following table presents gains or losses recognized due to changes in fair value of financial instruments pursuant to application of the fair value option:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
| (Amounts in thousands)
Fixed maturity securities | $ | (83,257) |  |  | $ | (26,120) |  |  | $ | (329,458) |  |  | $ | (21,729) |
Equity securities | (45,779) |  |  | (19,884) |  |  | (220,469) |  |  | 47,057 |
Short-term investments | 1,817 |  |  | (170) |  |  | 152 |  |  | (161) |
Total investments | $ | (127,219) |  |  | $ | (46,174) |  |  | $ | (549,775) |  |  | $ | 25,167 |
Note receivable | — |  |  | 43 |  |  | — |  |  | 15 |
Total (losses) gains | $ | (127,219) |  |  | $ | (46,131) |  |  | $ | (549,775) |  |  | $ | 25,182 |

5. Fair Value Measurements
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data are not readily available, the Company’s own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date.
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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 values and the level of market price observability, as follows:

Level 1 | Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 | Pricing inputs are other than quoted prices in active markets, which are based on the following: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in non-active markets; or • Either directly or indirectly observable inputs as of the reporting date.
Level 3 | Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.

In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.
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 97.8% of its investment portfolio at fair value from an independent pricing service at September 30, 2022.
Level 1 measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio.
U.S. government bonds and agencies /Short-term bonds: Valued using unadjusted quoted market prices for identical assets in active markets.
Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.
Money market instruments: Valued based on unadjusted quoted prices for identical assets in active markets.
Options sold: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on unadjusted quoted prices for identical instruments in active markets.
Level 2 measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the investment portfolio.
Municipal securities: Valued based on models or matrices using inputs such as quoted prices for identical or similar assets in active markets.
Mortgage-backed securities: Comprised of securities that are collateralized by residential and commercial mortgage loans 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 $27.8 million and $25.2 million at fair value in commercial mortgage-backed securities at September 30, 2022 and December 31, 2021, respectively.
Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as
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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.
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.
Level 3 measurements - Fair values of financial assets and financial liabilities 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 are deemed to be of a distressed trading level. At September 30, 2022 and December 31, 2021, the Company did not have any financial assets or financial liabilities based on Level 3 measurements.
Fair value measurement using NAV practical expedient - The fair value of the Company's investment in private equity funds measured at net asset value ("NAV") is 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. At September 30, 2022, the Company had invested or committed capital in five such funds: the strategy of three such funds with a combined fair value of approximately $92.1 million at September 30, 2022 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 strategy of another such fund with a fair value of approximately $0.6 million at September 30, 2022 is to achieve favorable long-term financial returns and measurable positive social and environmental returns by investing in privately held technology, healthcare, specialty consumer goods and service companies; and the strategy of the other such fund with a fair value of approximately $0.1 million at September 30, 2022 is to achieve long-term capital appreciation through privately-negotiated venture capital investments in seed- and early-stage portfolio companies with technology-enabled business models. The Company had approximately $10 million in unfunded commitments at September 30, 2022 with respect to the private equity funds measured at NAV. The underlying assets of the funds are expected to be liquidated over the period of approximately one year to ten years from September 30, 2022. 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 gains or losses in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.
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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:

| September 30, 2022
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (Amounts in thousands)
Assets |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
U.S. government bonds and agencies | $ | 59,327 |  |  | $ | 10,036 |  |  | $ | — |  |  | $ | 69,363 |
Municipal securities | — |  |  | 2,688,727 |  |  | — |  |  | 2,688,727 |
Mortgage-backed securities | — |  |  | 165,208 |  |  | — |  |  | 165,208 |
Corporate securities | — |  |  | 510,811 |  |  | — |  |  | 510,811 |
Collateralized loan obligations | — |  |  | 285,360 |  |  | — |  |  | 285,360 |
Other asset-backed securities | — |  |  | 178,390 |  |  | — |  |  | 178,390 |
Total fixed maturity securities | 59,327 |  |  | 3,838,532 |  |  | — |  |  | 3,897,859 |
Equity securities: |  |  |  |  |  |  |
Common stock | 537,455 |  |  | — |  |  | — |  |  | 537,455 |
Non-redeemable preferred stock | — |  |  | 54,042 |  |  | — |  |  | 54,042 |
Private equity funds measured at net asset value (1) |  |  |  |  |  |  | 92,838 |
Total equity securities | 537,455 |  |  | 54,042 |  |  | — |  |  | 684,335 |
Short-term investments: |  |  |  |  |  |  |
Short-term bonds | 15,488 |  |  | — |  |  | — |  |  | 15,488 |
Money market instruments | 85,094 |  |  | — |  |  | — |  |  | 85,094 |
Other | 39 |  |  | — |  |  | — |  |  | 39 |
Total short-term investments | 100,621 |  |  | — |  |  | — |  |  | 100,621 |
Total assets at fair value | $ | 697,403 |  |  | $ | 3,892,574 |  |  | $ | — |  |  | $ | 4,682,815 |
Liabilities |  |  |  |  |  |  |
Other liabilities: |  |  |  |  |  |  |
Options sold | $ | 169 |  |  | $ | — |  |  | $ | — |  |  | $ | 169 |
Total liabilities at fair value | $ | 169 |  |  | $ | — |  |  | $ | — |  |  | $ | 169 |

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

__________
(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.
There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the nine months ended September 30, 2022 and 2021.
At September 30, 2022, 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:

| September 30, 2022
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
| (Amounts in thousands)
Liabilities |  |  |  |  |  |  |  |  |
Notes payable: |  |  |  |  |  |  |  |  |
Unsecured notes | $ | 373,230 |  |  | $ | 349,643 |  |  | $ | — |  |  | $ | 349,643 |  |  | $ | — |

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| December 31, 2021
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
| (Amounts in thousands)
Liabilities |  |  |  |  |  |  |  |  |
Notes payable: |  |  |  |  |  |  |  |  |
Unsecured notes | $ | 372,931 |  |  | $ | 413,378 |  |  | $ | — |  |  | $ | 413,378 |  |  | $ | — |

Unsecured Notes
The fair value of the Company’s publicly traded $375 million unsecured notes at September 30, 2022 and December 31, 2021 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 11. Notes Payable for additional information on unsecured notes.
6. Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is equity price 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. From time to time, the Company also enters into derivative contracts to enhance returns on its investment portfolio.
The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains or losses in the consolidated statements of operations:

| Derivatives
| September 30, 2022 |  | December 31, 2021
| (Amount in thousands)
Options sold - Other liabilities | $ | 169 |  |  | $ | 301 |
Total | $ | 169 |  |  | $ | 301 |

| Gains Recognized in Net Income
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
| (Amounts in thousands)
Options sold - Net realized investment (losses) gains | $ | 1,311 |  |  | $ | 557 |  |  | $ | 3,939 |  |  | $ | 1,340 |
Total | $ | 1,311 |  |  | $ | 557 |  |  | $ | 3,939 |  |  | $ | 1,340 |

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. See Note 5. Fair Value Measurements for additional disclosures regarding options sold.
7. Goodwill and Other Intangible Assets
Goodwill
There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2022 and 2021. No accumulated goodwill impairment losses existed at September 30, 2022 and December 31, 2021. Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during the three and nine months ended September 30, 2022 and 2021. All of the Company's goodwill is associated with the Property and Casualty business segment (See Note 13. Segment Information for additional information on the reportable business segment).
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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 September 30, 2022: |  |  |  |  |  |  |
Customer relationships | $ | 54,862 |  |  | $ | (53,385) |  |  | $ | 1,477 |  |  | 11
Trade names | 15,400 |  |  | (8,822) |  |  | 6,578 |  |  | 24
Technology | 4,300 |  |  | (4,300) |  |  | — |  |  | 10
Insurance license | 1,400 |  |  | — |  |  | 1,400 |  |  | Indefinite
Total other intangible assets, net | $ | 75,962 |  |  | $ | (66,507) |  |  | $ | 9,455 |  |  |
As of December 31, 2021: |  |  |  |  |  |  |
Customer relationships | $ | 54,862 |  |  | $ | (53,065) |  |  | $ | 1,797 |  |  | 11
Trade names | 15,400 |  |  | (8,342) |  |  | 7,058 |  |  | 24
Technology | 4,300 |  |  | (4,300) |  |  | — |  |  | 10
Insurance license | 1,400 |  |  | — |  |  | 1,400 |  |  | Indefinite
Total other intangible assets, net | $ | 75,962 |  |  | $ | (65,707) |  |  | $ | 10,255 |  |  |

Other intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during the three and nine months ended September 30, 2022 and 2021.
Other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Amortization expense for other intangible assets was $0.3 million for each of the three months ended September 30, 2022 and 2021, and $0.8 million for each of the nine months ended September 30, 2022 and 2021.
The following table presents the estimated future amortization expense related to other intangible assets as of September 30, 2022:

Year |  | Amortization Expense
|  | (Amounts in thousands)
Remainder of 2022 |  | $ | 243 |
2023 |  | 879 |
2024 |  | 851 |
2025 |  | 807 |
2026 |  | 807 |
Thereafter |  | 4,468 |
Total |  | $ | 8,055 |

8. Share-Based Compensation
In February 2015, the Company's Board of Directors adopted the 2015 Incentive Award Plan (the "2015 Plan"), replacing the 2005 Equity Incentive 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 are authorized for issuance under the 2015 Plan upon exercise of stock options, stock appreciation rights and other awards, or upon vesting of restricted stock unit ("RSU") or deferred stock awards. The Company granted 80,000 stock options, 10,000 of which were forfeited, with 4,830,000 shares of common stock available for future grant under the 2015 Plan as of September 30, 2022.
Share-based compensation expenses for all stock options granted or modified are based on their estimated grant-date fair values. These compensation costs are recognized on a straight-line basis over the requisite service period of the award. The Company estimates forfeitures expected to occur in determining the amount of compensation cost to be recognized in each period. As of September 30, 2022, all outstanding stock options have a term of ten years from the date of grant and become exercisable in four equal installments on the first through fourth anniversaries of the grant date. 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
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values.
In February 2018, the Compensation Committee of the Company's Board of Directors awarded a total of 80,000 stock options to four senior executives under the 2015 Plan, which vested over the four-year requisite service period, except for 10,000 of these stock options that were forfeited in February 2019 following the departure of a senior executive. The fair values of these stock options were estimated on the date of grant using a closed-form option valuation model (Black-Scholes).
The following table provides the assumptions used in the calculation of grant-date fair values of these stock options based on the Black-Scholes option pricing model:

Weighted-average grant-date fair value | $ | 8.09 |
Expected volatility | 33.18 | %
Risk-free interest rate | 2.62 | %
Expected dividend yield | 5.40 | %
Expected term in months | 72

Expected volatilities are based on historical volatility of the Company’s stock over the term of the stock options. The expected term of stock options represents the period of time that stock options granted are expected to be outstanding, and is estimated based on 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.
As of September 30, 2022, the Company had no unrecognized compensation expense related to stock options awarded under the 2015 Plan.
No share-based compensation awards were granted during the nine months ended September 30, 2022.
9. Income Taxes
For financial statement purposes, the Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return 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 consolidated financial statements.
There were no changes to the total amount of unrecognized tax benefits related to tax uncertainties during the nine months ended September 30, 2022.
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 2019 through 2021 for federal taxes, and 2011 through 2013 and 2020 through 2021 for California state taxes. For tax years 2011 through 2013, the Company received Notices of Proposed Assessments (“NPAs”) and submitted a formal protest to the FTB in 2018. During the fourth quarter of 2021, the FTB issued the protest determination letter for tax years 2011 through 2013. During the second quarter of 2022, the FTB issued the principal schedules detailing the tax assessments for tax years 2011 through 2013. The Company is currently reviewing the results of the principal schedules. Tax years 2014 through 2019 have been resolved with no outstanding issues.
If a reasonable settlement is not reached for tax years 2011 through 2013 for California state taxes, the Company intends to pursue other options, including a formal hearing with the FTB, an appeal with the California Office of Tax Appeals, or litigation in Superior Court. The Company believes that the resolution of these examinations and assessments will not have a material impact on the financial position of the Company.
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 net income (loss) in the period that includes the enactment date.
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At September 30, 2022, the Company’s deferred income taxes were in a net asset position, which included a combination of ordinary and capital deferred tax expenses or benefits. 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.
10. Loss and Loss Adjustment Expense Reserves
The following table presents the activity in loss and loss adjustment expense reserves:

| Nine Months Ended September 30,
| 2022 |  | 2021
| (Amounts in thousands)
Gross reserves, beginning of period | $ | 2,226,430 |  |  | $ | 1,991,304 |
Reinsurance recoverables on unpaid losses, beginning of period | (41,377) |  |  | (54,460) |
Net reserves, beginning of period | 2,185,053 |  |  | 1,936,844 |
Incurred losses and loss adjustment expenses related to: |  |  |
Current year | 2,386,233 |  |  | 2,005,233 |
Prior years | 49,942 |  |  | (23,714) |
Total incurred losses and loss adjustment expenses | 2,436,175 |  |  | 1,981,519 |
Loss and loss adjustment expense payments related to: |  |  |
Current year | 1,267,535 |  |  | 1,088,285 |
Prior years | 945,371 |  |  | 739,385 |
Total payments | 2,212,906 |  |  | 1,827,670 |
Net reserves, end of period | 2,408,322 |  |  | 2,090,693 |
Reinsurance recoverables on unpaid losses, end of period | 24,412 |  |  | 51,428 |
Gross reserves, end of period | $ | 2,432,734 |  |  | $ | 2,142,121 |

During the nine months ended September 30, 2022, inflationary trends have accelerated to their highest level in decades, which has had a significant impact on the cost of auto parts and labor as well as medical expenses for bodily injuries, and supply chain and labor shortage issues have lengthened the time to repair vehicles. Bodily injury costs are also under pressure from social inflation. These factors have increased losses and loss adjustment expenses for the insured events of the current accident year for the nine months ended September 30, 2022 compared to the corresponding period in 2021. The increase in the provision for insured events of prior years during the nine months ended September 30, 2022 of $49.9 million was primarily attributable to higher than estimated losses and loss adjustment expenses in the private passenger automobile line of insurance business. The inflationary pressures and the supply chain and labor shortage issues discussed above were major contributors to the adverse reserve development in the private passenger automobile line of insurance business for the first nine months of 2022. The decrease in the provision for insured events of prior years during the nine months ended September 30, 2021 of $23.7 million was primarily attributable to lower than estimated losses and loss adjustment expenses in the private passenger automobile and homeowners lines of insurance business.
For the nine months ended September 30, 2022 and 2021, the Company recorded catastrophe losses net of reinsurance of approximately $62 million and $85 million, respectively. Catastrophe losses due to the events that occurred during the nine months ended September 30, 2022 totaled approximately $58 million, with no reinsurance benefits used for these losses, resulting primarily from winter storms, rainstorms and hail in Texas and Oklahoma, the impact of Hurricane Ian in Florida which caused $11 million in losses, and winter storms in California. Catastrophe losses due to the events that occurred during the nine months ended September 30, 2021 totaled approximately $91 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze and other extreme weather events in Texas and Oklahoma, wildfires and winter storms in California, and the impact of Hurricane Ida in New Jersey and New York. In addition, the Company experienced unfavorable development of approximately $4 million and favorable development of approximately $6 million on prior years' catastrophe losses for the nine months ended September 30, 2022 and 2021, respectively.
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11. Notes Payable
The following table presents information about the Company's notes payable:

|  | Lender |  | Interest Rate |  | Maturity Date |  | September 30, 2022 |  | December 31, 2021
|  |  |  |  |  |  |  | (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, Wells Fargo Bank, and U.S. Bank |  | LIBOR plus 112.5-150.0 basis points |  | March 31, 2026 |  | — |  |  | — |
Total principal amount |  |  |  |  |  |  |  | 375,000 |  |  | 375,000 |
Less unamortized discount and debt issuance costs(3) |  |  |  |  |  |  |  | 1,770 |  |  | 2,069 |
Total debt |  |  |  |  |  |  |  | $ | 373,230 |  |  | $ | 372,931 |

__________
(1)On March 8, 2017, the Company completed a public debt offering issuing $375 million of senior notes. The notes are unsecured, senior obligations of the Company with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off amounts outstanding under the existing loan and credit facilities and for general corporate purposes. The Company incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate including debt issuance costs of approximately 4.45%.
(2)On March 29, 2017, the Company entered into an unsecured credit agreement (the "2017 Credit Agreement") that provided for revolving loans of up to $50 million and was set to mature on March 29, 2022. On March 31, 2021, the Company entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement") that amended and restated the 2017 Credit Agreement. The Amended and Restated Credit Agreement, among other things, extended the maturity date of the loan that was the subject of the 2017 Credit Agreement to March 31, 2026, added U.S. Bank as an additional lender, and increased the aggregate commitments by all the lenders to $75 million from $50 million under the 2017 Credit Agreement. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 20% to LIBOR plus 150.0 basis points when the ratio is greater than or equal to 30%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 20% to 22.5 basis points when the ratio is greater than or equal to 30%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 19.5% at September 30, 2022, resulting in a 12.5 basis point commitment fee on the $75 million undrawn portion of the credit facility. As of October 27, 2022, there have been no borrowings under this facility.
(3)The unamortized discount and debt issuance costs are associated with the publicly traded $375 million senior unsecured notes. These are amortized to interest expense over the life of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from the carrying amount of the debt. The unamortized debt issuance cost of approximately $0.2 million associated with the $75 million unsecured credit facility maturing on March 31, 2026 is included in other assets in the Company's consolidated balance sheets and amortized to interest expense over the term of the credit facility.
12. Contingencies
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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
On September 10, 2021, the California Department of Insurance ("DOI") served the Company a Notice of Non-Compliance ("NNC"), alleging violations in connection with its 2014 Rating & Underwriting Examination Report, which was adopted by the California DOI in 2019. The NNC itemizes alleged violations, many of which management believes were corrected or otherwise resolved during the course of the examination, and seeks penalties. The Company has participated in lengthy and detailed discussions with the California DOI since the adoption of the examination report, in an attempt to address the issues deemed unresolved by the California DOI, and has taken several additional corrective actions approved by the California DOI. The Company is continuing discussions with the California DOI in order to resolve the outstanding issues, or at
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least obtain the agreement of the California DOI to remove the resolved items from the NNC before proceeding to a formal hearing process if a settlement is not reached. On August 1, 2022, the California DOI publicly announced its intention to pursue an administrative action against the Company with respect to certain outstanding issues. The Company filed a written response to the NNC on September 29, 2022. The response, consisting of a notice of defense, a motion to strike, and a motion to dismiss, challenges the NNC on procedural and substantive grounds. The Company cannot reasonably predict the likelihood, timing or outcome of any hearing process or administrative action, nor can it reasonably estimate the amount of penalties, if any.
On October 5, 2021, the Company received a letter from the California DOI requesting additional information on the amount of premium refunds or credits that the Company has provided or plans to further provide to its private passenger automobile policyholders, and the methodology used in determining such refunds or credits for the time period of March 2020 through at least March 2021, due to reduced driving during the pandemic. On October 6, 2021, the California DOI issued a press release alleging that the Company and two other insurers have not provided enough premium relief to the policyholders through premium refunds or credits for lower frequency resulting from reduced driving during the pandemic. Two private actions against the Company were also filed during the first quarter of 2022, asserting substantially the same arguments on behalf of an alleged class of similarly situated policyholders, and seeking restitution of the allegedly excessive premiums charged during the pandemic. The Company believes that the amounts returned to-date, including the mileage reductions on individual policies, have provided appropriate and material relief to its policyholders and that there is no legal basis for the California DOI or the courts to require the Company to issue additional refunds. The total amount of premiums returned to the Company's policyholders through refunds or credits is approximately $128 million, which reduced its net premiums earned for 2020. The Company has also worked with its agents and policyholders to reclassify exposures on an individual policy basis, including reducing mileage on a large number of vehicles since the pandemic began. Management believes the mileage reductions have significantly reduced premiums on those individual policies in a manner consistent with the Company’s filed and approved rates. However, the Company cannot predict whether or not the California DOI or private plaintiffs will take further actions against the Company related to the premium refunds and credits, which may include inducing the Company to provide additional premium refunds to its policyholders, nor can it reasonably estimate the amount of such additional refunds or other losses, if any, due to any potential actions by the California DOI or the courts and the Company's responses to such actions.
The Company establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. In addition, the Company accrues for anticipated legal defense costs associated with such lawsuits and regulatory actions. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company's pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition or cash flows.
In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of any additional regulatory or legal matters, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
13. Segment Information
The Company is primarily engaged in writing personal automobile insurance and provides related property and casualty insurance products to its customers through 13 subsidiaries in 11 states, principally in California.
The Company has one reportable business segment - the Property and Casualty business segment.
The Company’s Chief Operating Decision Maker evaluates operating results based on pre-tax underwriting results which is calculated as net premiums earned less (a) losses and loss adjustment expenses 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 or losses, other income, and interest expense are excluded in evaluating pretax underwriting profit. The Company does not allocate its assets, including investments, or income taxes in evaluating pre-tax underwriting profit.
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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 related insurance products are primarily sold to the Company’s individual customers and small business customers, which increases retention of the Company’s private passenger automobile client base. The insurance products comprising the Property and Casualty business segment are sold through the same distribution channels, mainly through independent and 100% owned insurance agents, and go through a similar underwriting process.
Other Lines
The Other business segment represents net premiums written and earned from an operating segment that does not meet the quantitative thresholds required to be considered a reportable segment. This operating segment offers automobile mechanical protection warranties which are primarily sold through automobile dealerships and credit unions.
The following tables present the Company's operating results by reportable segment:

| Three Months Ended September 30,
| 2022 |  | 2021
| Property & Casualty |  | Other |  | Total |  | Property & Casualty |  | Other |  | Total
| (Amounts in millions)
Net premiums earned | $ | 989.7 |  |  | $ | 7.2 |  |  | $ | 996.9 |  |  | $ | 933.6 |  |  | $ | 7.3 |  |  | $ | 940.9 |
Less: |  |  |  |  |  |  |  |  |  |  |
Losses and loss adjustment expenses | 783.8 |  |  | 3.7 |  |  | 787.5 |  |  | 694.2 |  |  | 3.7 |  |  | 697.9 |
Underwriting expenses | 233.6 |  |  | 3.8 |  |  | 237.4 |  |  | 229.7 |  |  | 3.7 |  |  | 233.4 |
Underwriting (loss) gain | (27.7) |  |  | (0.3) |  |  | (28.0) |  |  | 9.7 |  |  | (0.1) |  |  | 9.6 |
Investment income |  |  |  |  | 44.6 |  |  |  |  |  |  | 32.3 |
Net realized investment losses |  |  |  |  | (144.2) |  |  |  |  |  |  | (43.5) |
Other income |  |  |  |  | 3.0 |  |  |  |  |  |  | 2.5 |
Interest expense |  |  |  |  | (4.3) |  |  |  |  |  |  | (4.3) |
Pre-tax loss |  |  |  |  | $ | (128.9) |  |  |  |  |  |  | $ | (3.4) |
Net (loss) income |  |  |  |  | $ | (98.3) |  |  |  |  |  |  | $ | 1.3 |

| Nine Months Ended September 30,
| 2022 |  | 2021
| Property & Casualty |  | Other |  | Total |  | Property & Casualty |  | Other |  | Total
| (Amounts in millions)
Net premiums earned | $ | 2,925.4 |  |  | $ | 21.6 |  |  | $ | 2,947.0 |  |  | $ | 2,761.9 |  |  | $ | 21.8 |  |  | $ | 2,783.7 |
Less: |  |  |  |  |  |  |  |  |  |  |
Losses and loss adjustment expenses | 2,425.1 |  |  | 11.1 |  |  | 2,436.2 |  |  | 1,970.8 |  |  | 10.7 |  |  | 1,981.5 |
Underwriting expenses | 687.3 |  |  | 8.5 |  |  | 695.8 |  |  | 675.1 |  |  | 10.4 |  |  | 685.5 |
Underwriting (loss) gain | (187.0) |  |  | 2.0 |  |  | (185.0) |  |  | 116.0 |  |  | 0.7 |  |  | 116.7 |
Investment income |  |  |  |  | 118.5 |  |  |  |  |  |  | 95.6 |
Net realized investment (losses) gains |  |  |  |  | (581.2) |  |  |  |  |  |  | 57.0 |
Other income |  |  |  |  | 7.1 |  |  |  |  |  |  | 7.9 |
Interest expense |  |  |  |  | (12.8) |  |  |  |  |  |  | (12.8) |
Pre-tax (loss) income |  |  |  |  | $ | (653.4) |  |  |  |  |  |  | $ | 264.4 |
Net (loss) income |  |  |  |  | $ | (505.9) |  |  |  |  |  |  | $ | 217.5 |

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The following tables present the Company’s net premiums earned and direct premiums written by reportable segment and line of insurance business:

| Three Months Ended September 30,
| 2022 |  | 2021
| Property & Casualty |  | Other |  | Total |  | Property & Casualty |  | Other |  | Total
| (Amounts in millions)
Private passenger automobile | $ | 665.6 |  |  | $ | — |  |  | $ | 665.6 |  |  | $ | 652.0 |  |  | $ | — |  |  | $ | 652.0 |
Homeowners | 213.0 |  |  | — |  |  | 213.0 |  |  | 178.9 |  |  | — |  |  | 178.9 |
Commercial automobile | 68.0 |  |  | — |  |  | 68.0 |  |  | 65.6 |  |  | — |  |  | 65.6 |
Other | 43.1 |  |  | 7.2 |  |  | 50.3 |  |  | 37.1 |  |  | 7.3 |  |  | 44.4 |
Net premiums earned | $ | 989.7 |  |  | $ | 7.2 |  |  | $ | 996.9 |  |  | $ | 933.6 |  |  | $ | 7.3 |  |  | $ | 940.9 |
Private passenger automobile | $ | 680.6 |  |  | $ | — |  |  | $ | 680.6 |  |  | $ | 693.9 |  |  | $ | — |  |  | $ | 693.9 |
Homeowners | 251.8 |  |  | — |  |  | 251.8 |  |  | 222.6 |  |  | — |  |  | 222.6 |
Commercial automobile | 66.5 |  |  | — |  |  | 66.5 |  |  | 62.3 |  |  | — |  |  | 62.3 |
Other | 50.2 |  |  | 8.0 |  |  | 58.2 |  |  | 46.0 |  |  | 7.3 |  |  | 53.3 |
Direct premiums written | $ | 1,049.1 |  |  | $ | 8.0 |  |  | $ | 1,057.1 |  |  | $ | 1,024.8 |  |  | $ | 7.3 |  |  | $ | 1,032.1 |

| Nine Months Ended September 30,
| 2022 |  | 2021
| Property & Casualty |  | Other |  | Total |  | Property & Casualty |  | Other |  | Total
| (Amounts in millions)
Private passenger automobile | $ | 1,990.9 |  |  | $ | — |  |  | $ | 1,990.9 |  |  | $ | 1,956.6 |  |  | $ | — |  |  | $ | 1,956.6 |
Homeowners | 610.9 |  |  | — |  |  | 610.9 |  |  | 509.1 |  |  | — |  |  | 509.1 |
Commercial automobile | 198.6 |  |  | — |  |  | 198.6 |  |  | 192.8 |  |  | — |  |  | 192.8 |
Other | 125.0 |  |  | 21.6 |  |  | 146.6 |  |  | 103.4 |  |  | 21.8 |  |  | 125.2 |
Net premiums earned | $ | 2,925.4 |  |  | $ | 21.6 |  |  | $ | 2,947.0 |  |  | $ | 2,761.9 |  |  | $ | 21.8 |  |  | $ | 2,783.7 |
Private passenger automobile | $ | 2,015.6 |  |  | $ | — |  |  | $ | 2,015.6 |  |  | $ | 2,006.4 |  |  | $ | — |  |  | $ | 2,006.4 |
Homeowners | 713.9 |  |  | — |  |  | 713.9 |  |  | 600.7 |  |  | — |  |  | 600.7 |
Commercial automobile | 207.9 |  |  | — |  |  | 207.9 |  |  | 197.4 |  |  | — |  |  | 197.4 |
Other | 148.8 |  |  | 23.3 |  |  | 172.1 |  |  | 130.3 |  |  | 23.6 |  |  | 153.9 |
Direct premiums written | $ | 3,086.2 |  |  | $ | 23.3 |  |  | $ | 3,109.5 |  |  | $ | 2,934.8 |  |  | $ | 23.6 |  |  | $ | 2,958.4 |

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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. Certain statements contained in this report are forward-looking statements based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the demand for the Company’s insurance products, inflation and general economic conditions, including general market risks associated with the Company’s investment portfolio; the accuracy and adequacy of the Company’s pricing methodologies; catastrophes in the markets served by the Company; uncertainties related to estimates, assumptions and projections generally; the possibility that actual loss experience may vary adversely from the actuarial estimates made to determine the Company’s loss reserves in general; the Company’s ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in the states where it operates; legislation adverse to the automobile insurance industry or business generally that may be enacted in the states where the Company operates; the Company’s success in managing its business in non-California states; the presence of competitors with greater financial resources and the impact of competitive pricing and marketing efforts; the Company's ability to successfully manage its claims organization outside of California; the Company's ability to successfully allocate the resources used in the states with reduced or exited operations to its operations in other states; changes in driving patterns and loss trends; acts of war and terrorist activities; pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases; court decisions and trends in litigation and health care and auto repair costs; and legal, cybersecurity, regulatory and litigation risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 15, 2022.
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.
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 Quarterly Report on Form 10-Q.
Note on General Business and Economic Conditions
The outbreak of COVID-19 has had a notable impact on general economic conditions, including, but not limited to, the temporary closures of many businesses and reduced consumer spending. The Company has taken and continues to take a number of precautionary steps to safeguard its customers, business and employees from COVID-19. Most of the Company's employees have been working remotely, with only certain operationally critical employees working on site at various locations. In November 2021, the Company extended its "work-from-home" policy indefinitely under the new "Mercury's My Workplace" policy, allowing most of its employees to work from anywhere in the U.S. beginning January 2022.
The Company's automobile line of insurance business experienced a rapid drop in loss frequency in the second quarter of 2020 due to reduced driving following the outbreak of the pandemic. Since then, loss frequency has increased and is now near pre-pandemic levels. Inflationary trends have accelerated to their highest level since the 1980s in 2022, with the most recent consumer price index increase of 8.2%. Excessive inflation has led to significant increases in loss severities related to vehicle repairs and bodily injuries. The COVID-19 pandemic also created more uncertainty, and the total effect on losses occurring
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during the COVID-19 era will not be known for several years. The Company expects more late reported claims and a prolonged settlement period. The sustained high loss severity, combined with loss frequency at near pre-pandemic levels, have negatively impacted the Company's results of operations, and the Company has submitted private passenger automobile rate filings in many states requesting rate increases. In addition, the Company is taking various non-rate actions to improve profitability.
The Federal Open Market Committee started raising the federal funds rate in March 2022 as a response to inflationary pressures. The ensuing increases in market interest rates, combined with the high inflation, the supply chain and labor issues, and the Russia-Ukraine war, have placed significant strain on financial markets leading to market volatility and turmoil. The fair values of the Company's equity securities have reflected such market volatility and the fair values of its fixed maturity securities have decreased significantly as a result of increases in market interest rates during the first nine months of 2022. The Company believes that it will continue to have sufficient liquidity to support its business operations without the forced sale of investments, based on its existing cash and short-term investments, future cash flows from operations, and $75 million of undrawn credit in its unsecured credit facility.
The Company will continue to monitor the effects of COVID-19 and its variants, the high inflation and interest rates, the supply chain and labor issues, the Russia-Ukraine war, and the legislative relief programs, including the Inflation Reduction Act of 2022 signed into law in August 2022. The extent of these effects on the Company's business and financial results will depend largely on future developments, including the duration of the high inflation and interest rates and the war, most of which are highly uncertain and cannot be predicted.
In October 2022, the Company reduced its workforce by approximately 40 employees, and a one-time cost of approximately $3 million associated with the workforce reduction will be recorded as an expense for the fourth quarter of 2022. The Company anticipates this reduction will result in ongoing annual cost savings of approximately $6 million.
B. Business
The Company is primarily engaged in writing personal automobile insurance through 13 insurance subsidiaries (“Insurance Companies”) in 11 states, principally California. The Company also writes homeowners, commercial automobile, commercial property, mechanical protection, and umbrella insurance. The Company's insurance policies are mostly sold through independent agents who receive a commission for selling policies. The Company believes that it has thorough underwriting and claims handling processes that, together with its agent relationships, provide the Company with competitive advantages.
The following tables present direct premiums written, by state and line of insurance business, for the nine months ended September 30, 2022 and 2021:

| Nine Months Ended September 30, 2022
| (Dollars in thousands)
| Private Passenger Automobile |  | Homeowners |  | Commercial Automobile |  | Other Lines (2) |  | Total |  |
California | $ | 1,672,123 |  |  | $ | 544,374 |  |  | $ | 143,991 |  |  | $ | 159,404 |  |  | $ | 2,519,892 |  |  | 81.1 | %
Texas | 73,022 |  |  | 81,129 |  |  | 34,555 |  |  | 4,998 |  |  | 193,704 |  |  | 6.2 | %
Other states (1) | 270,407 |  |  | 88,396 |  |  | 29,391 |  |  | 7,672 |  |  | 395,866 |  |  | 12.7 | %
Total | $ | 2,015,552 |  |  | $ | 713,899 |  |  | $ | 207,937 |  |  | $ | 172,074 |  |  | $ | 3,109,462 |  |  | 100.0 | %
| 64.8 | % |  | 23.0 | % |  | 6.7 | % |  | 5.5 | % |  | 100.0 | % |  |

| Nine Months Ended September 30, 2021
| (Dollars in thousands)
| Private Passenger Automobile |  | Homeowners |  | Commercial Automobile |  | Other Lines (2) |  | Total |  |
California | $ | 1,752,380 |  |  | $ | 484,264 |  |  | $ | 136,938 |  |  | $ | 140,700 |  |  | $ | 2,514,282 |  |  | 85.0 | %
Other states (1) | 254,005 |  |  | 116,399 |  |  | 60,424 |  |  | 13,283 |  |  | 444,111 |  |  | 15.0 | %
Total | $ | 2,006,385 |  |  | $ | 600,663 |  |  | $ | 197,362 |  |  | $ | 153,983 |  |  | $ | 2,958,393 |  |  | 100.0 | %
| 67.8 | % |  | 20.3 | % |  | 6.7 | % |  | 5.2 | % |  | 100.0 | % |  |

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(1) No individual state accounted for more than 5% of total direct premiums written.
(2) No individual line of insurance business accounted for more than 5% of total direct premiums written.
C. Regulatory and Legal Matters
The Department of Insurance (“DOI”) in each state in which the Company operates is responsible for conducting periodic financial, market conduct, and rating and underwriting examinations of the Insurance Companies in their states. Market conduct examinations typically review compliance with insurance statutes and regulations with respect to rating, underwriting, claims handling, billing, and other practices.
The following table presents a summary of recent and upcoming examinations:

State |  | Exam Type |  | Exam Period Covered |  | Status
CA, FL, GA, IL, OK, TX |  | Coordinated Multi-state Financial |  | 2018-2021 |  | Examination began in the second quarter of 2022.
CA |  | Premium Tax |  | 2018-2021 |  | Examination was completed in the third quarter of 2022.

During the course of and at the conclusion of the examinations, the examining DOI generally reports findings to the Company.
The California DOI has not approved a private passenger automobile rate filing from any major insurer since the beginning of the pandemic. The California DOI recently requested information from insurers to determine if, in its view, pandemic-related premium refunds were adequate. The California DOI is reviewing the information provided by insurers in conjunction with their rate filings. Although California courts have ruled that the California DOI lacks the authority to order such refunds, the California DOI is not approving rate increases until it has gone through this review process. While delays in obtaining indicated rates can adversely impact results of operations in any environment, that impact is especially severe in the current inflationary environment. The Company and other insurers have expressed, in private discussions and in written arguments submitted by trade groups, that the California DOI has a statutory duty to review and approve rate filings. It is not reasonably possible to predict if, or when, the California DOI will approve the Company's pending rate filings.
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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The Company establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. In addition, the Company accrues for anticipated legal defense costs associated with such lawsuits and regulatory actions. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company's pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition or cash flows.
In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of any additional regulatory or legal matters, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and Note 12. Contingencies of the Notes to Consolidated Financial Statements of this Quarterly Report.
D. Critical Accounting 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
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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.
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 reviewing 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 under statutory accounting principles as required by state regulation. 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 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 provide meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing loss reserves. The claim count development method analyzes historical claim count development to estimate future incurred claim count 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.
At September 30, 2022 and December 31, 2021, the Company recorded its point estimate of approximately $2.43 billion and $2.23 billion ($2.41 billion and $2.19 billion, net of reinsurance), respectively, in loss reserves, which included approximately $1.18 billion and $1.03 billion ($1.18 billion and $1.02 billion, net of reinsurance), respectively, of incurred but not reported loss reserves (“IBNR”). IBNR includes estimates, based upon past experience, of ultimate developed costs, which may differ from case estimates, unreported claims that occurred on or prior to September 30, 2022 and December 31, 2021, and estimated future payments for reopened claims. Management believes that the liability for loss reserves is adequate to cover the
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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 a further discussion of the Company’s reserving methods, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Revenues
Net premiums earned and net premiums written for the three months ended September 30, 2022 increased 6.0% and 1.9%, respectively, from the corresponding period in 2021. The increase in net premiums earned was primarily due to increases in the number of policies written outside of California, and rate increases in the California homeowners line of insurance business and in certain lines of insurance business in some states outside of California, partially offset by a decrease in the number of private passenger automobile policies written in California. The increase in net premiums written was primarily due to increases in the number of policies written outside of California and rate increases in certain lines of insurance business in some states outside of California, partially offset by a decrease in the number of private passenger automobile policies written in California.
Net premiums earned included ceded premiums earned of $22.8 million and $17.2 million for the three months ended September 30, 2022 and 2021, respectively. Net premiums written included ceded premiums written of $22.8 million and $17.3 million for the three months ended September 30, 2022 and 2021, respectively. The increases in ceded premiums earned and ceded premiums written resulted mostly from higher reinsurance coverage and rates and 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, net of any applicable reinsurance. Net premiums written is a statutory measure designed to determine production levels.
The following is a reconciliation of net premiums earned to net premiums written:

| Three Months Ended September 30,
| 2022 |  | 2021
| (Amounts in thousands)
Net premiums earned | $ | 996,939 |  |  | $ | 940,941 |
Change in net unearned premiums | 37,537 |  |  | 74,026 |
Net premiums written | $ | 1,034,476 |  |  | $ | 1,014,967 |

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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’ loss, expense, and combined ratios determined in accordance with GAAP:

| Three Months Ended September 30,
| 2022 |  | 2021
Loss ratio | 79.0 | % |  | 74.2 | %
Expense ratio | 23.8 | % |  | 24.8 | %
Combined ratio | 102.8 | % |  | 99.0 | %

Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The loss ratio for the third quarter of 2022 and 2021 was affected by favorable development of approximately $1 million and $8 million, respectively, on prior accident years' loss and loss adjustment expense reserves. The favorable development for the third quarter of 2022 was primarily attributable to lower than estimated losses and loss adjustment expenses in the commercial property and umbrella lines of insurance business. The favorable development for the third quarter of 2021 was primarily attributable to lower than estimated losses and loss adjustment expenses in the homeowners and private passenger automobile lines of insurance business.
The 2022 loss ratio was negatively impacted by approximately $18 million of catastrophe losses, excluding unfavorable development of approximately $1 million on prior years' catastrophe losses, primarily due to the impact of Hurricane Ian in Florida which caused $11 million in losses, and rainstorms in Texas and Oklahoma. The 2021 loss ratio was negatively impacted by approximately $27 million of catastrophe losses, excluding favorable development of approximately $2 million on prior years' catastrophe losses, primarily due to wildfires in California and the impact of Hurricane Ida in New Jersey and New York.
Excluding the effects of estimated prior periods’ loss development and catastrophe losses, the loss ratio was 77.3% and 72.2% for the third quarter of 2022 and 2021, respectively. The increase in the loss ratio was primarily due to an increase in loss severity in the automobile line of insurance business. Inflationary trends have accelerated to their highest level in decades in 2022, which has had a significant impact on the cost of auto parts and labor as well as medical expenses for bodily injuries, and supply chain and labor shortage issues have lengthened the time to repair vehicles. Bodily injury costs are also under pressure from social inflation. These inflationary pressures and the supply chain and labor shortage issues have led to a significant increase in automobile loss severity and increased losses and loss adjustment expenses for the insured events of the current accident year for the three months ended September 30, 2022 compared to the corresponding period in 2021. The Company has filed for rate increases in many states and is taking various non-rate actions to improve profitability.
Expense ratio is calculated by dividing the sum of policy acquisition costs and other operating expenses by net premiums earned. The expense ratio for the three months ended September 30, 2022 decreased compared to the corresponding period in 2021, primarily due to lower advertising and other expenses.
Combined ratio is equal to loss ratio plus expense ratio and is the key measure of underwriting performance traditionally used in the property and casualty insurance industry. A combined ratio under 100% generally reflects profitable underwriting results, and a combined ratio over 100% generally reflects unprofitable underwriting results.
Income tax benefit was $30.6 million and $4.7 million for the three months ended September 30, 2022 and 2021, respectively. The increase in income tax benefit was primarily due to a $125.5 million increase in total pre-tax loss. Tax-exempt investment income, a component of total pre-tax loss, remained relatively steady with the corresponding period in 2021.
The Company’s effective income tax rate can be affected by several factors. These generally relate to large changes in the composition of fully taxable income, including net realized investment gains or losses, tax-exempt investment income, non-deductible expenses, and periodically, non-routine tax items such as adjustments to unrecognized tax benefits related to tax uncertainties. Tax-exempt investment income of approximately $19 million coupled with pre-tax loss of approximately $129 million resulted in an effective tax rate of 23.7%, above the statutory tax rate of 21%, for the three months ended September 30, 2022, and tax-exempt investment income of approximately $18 million coupled with pre-tax loss of approximately $3 million resulted in an effective tax rate of 138.1% for the corresponding period in 2021.
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Investments
The following table presents the investment results of the Company:

| Three Months Ended September 30,
| 2022 |  | 2021
| (Dollars in thousands)
Average invested assets at cost (1) | $ | 4,912,521 |  |  | $ | 4,751,171 |
Net investment income (2) |  |  |
Before income taxes | $ | 44,563 |  |  | $ | 32,334 |
After income taxes | $ | 38,653 |  |  | $ | 28,708 |
Average annual yield on investments |  |  |
Before income taxes | 3.6 | % |  | 2.7 | %
After income taxes | 3.2 | % |  | 2.4 | %
Net realized investment losses | $ | (144,213) |  |  | $ | (43,543) |

__________
(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) Higher net investment income before and after income taxes for the three months ended September 30, 2022 compared to the corresponding period in 2021 resulted largely from higher average yield combined with higher average invested assets. Average annual yield on investments before and after income taxes for the three months ended September 30, 2022 increased compared to the corresponding period in 2021, primarily due to the maturity and replacement of lower yielding investments purchased when market interest rates were lower with higher yielding investments, as a result of increasing market interest rates.
The following tables present the components of net realized investment gains or losses included in net income:

| Three Months Ended September 30, 2022
| Gains (Losses) Recognized in Net Income
| Sales |  | Changes in fair value |  | Total
| (Amounts in thousands)
Net realized investment gains (losses) |  |  |  |  |
Fixed maturity securities (1)(2) | $ | (30,841) |  |  | $ | (83,257) |  |  | $ | (114,098) |
Equity securities (1)(3) | 14,017 |  |  | (45,779) |  |  | (31,762) |
Short-term investments (1) | (1,481) |  |  | 1,817 |  |  | 336 |
Options sold | 1,216 |  |  | 95 |  |  | 1,311 |
Total | $ | (17,089) |  |  | $ | (127,124) |  |  | $ | (144,213) |

| Three Months Ended September 30, 2021
| Gains (Losses) Recognized in Net Income
| Sales |  | Changes in fair value |  | Total
| (Amounts in thousands)
Net realized investment gains (losses) |  |  |  |  |
Fixed maturity securities (1)(2) | $ | (122) |  |  | $ | (26,120) |  |  | $ | (26,242) |
Equity securities (1)(3) | 2,153 |  |  | (19,884) |  |  | (17,731) |
Short-term investments (1) | — |  |  | (170) |  |  | (170) |
Note receivable (1) | — |  |  | 43 |  |  | 43 |
Options sold | 718 |  |  | (161) |  |  | 557 |
Total | $ | 2,749 |  |  | $ | (46,292) |  |  | $ | (43,543) |

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(1)The changes in fair value of the investment portfolio and note receivable resulted from application of the fair value option.
(2)The decreases in fair value of fixed maturity securities for the third quarters of 2022 and 2021 primarily resulted from increases in market interest rates.
(3)The primary cause for the decreases in fair value of equity securities for the third quarters of 2022 and 2021 was the overall decline in equity markets.
Net (Loss) Income

| Three Months Ended September 30,
| 2022 |  | 2021
| (Amounts in thousands, except per share data)
Net (loss) income | $ | (98,303) |  |  | $ | 1,288 |
Basic average shares outstanding | 55,371 |  |  | 55,371 |
Diluted average shares outstanding | 55,371 |  |  | 55,375 |
Basic Per Share Data: |  |  |
Net (loss) income | $ | (1.78) |  |  | $ | 0.02 |
Net realized investment losses, net of tax | $ | (2.06) |  |  | $ | (0.62) |
Diluted Per Share Data: |  |  |
Net (loss) income | $ | (1.78) |  |  | $ | 0.02 |
Net realized investment losses, net of tax | $ | (2.06) |  |  | $ | (0.62) |

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Revenues
Net premiums earned and net premiums written for the nine months ended September 30, 2022 increased 5.9% and 4.8%, respectively, from the corresponding period in 2021. The increases in net premiums earned and net premiums written were primarily due to increases in the number of policies written outside of California, and rate increases in the California homeowners line of insurance business and in certain lines of insurance business in some states outside of California, partially offset by a decrease in the number of private passenger automobile policies written in California.
Net premiums earned included ceded premiums earned of $57.4 million and $48.3 million for the nine months ended September 30, 2022 and 2021, respectively. Net premiums written included ceded premiums written of $57.8 million and $48.8 million for the nine months ended September 30, 2022 and 2021, respectively. The increases in ceded premiums earned and ceded premiums written resulted mostly from higher reinsurance coverage and rates and growth in the covered book of business.
The following is a reconciliation of net premiums earned to net premiums written:

| Nine Months Ended September 30,
| 2022 |  | 2021
| (Amounts in thousands)
Net premiums earned | $ | 2,947,000 |  |  | $ | 2,783,682 |
Change in net unearned premiums | 115,267 |  |  | 139,009 |
Net premiums written | $ | 3,062,267 |  |  | $ | 2,922,691 |

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Expenses
The following table presents the Insurance Companies’ loss, expense, and combined ratios determined in accordance with GAAP:

| Nine Months Ended September 30,
| 2022 |  | 2021
Loss ratio | 82.7 | % |  | 71.2 | %
Expense ratio | 23.6 | % |  | 24.6 | %
Combined ratio | 106.3 | % |  | 95.8 | %

The loss ratio for the nine months of 2022 and 2021 was affected by unfavorable development of approximately $50 million and favorable development of approximately $24 million, respectively, on prior accident years' loss and loss adjustment expense reserves. The unfavorable development for the nine months of 2022 was primarily attributable to higher than estimated losses and loss adjustment expenses in the private passenger automobile line of insurance business. Inflationary trends have accelerated to their highest level in decades in 2022, which has had a significant impact on the cost of auto parts and labor as well as medical expenses for bodily injuries, and supply chain and labor shortage issues have lengthened the time to repair vehicles. Bodily injury costs are also under pressure from social inflation. These factors were major contributors to the adverse reserve development in the private passenger automobile line of insurance business. The favorable development for the nine months of 2021 was primarily attributable to lower than estimated losses and loss adjustment expenses in the private passenger automobile and homeowners lines of insurance business.
The 2022 loss ratio was negatively impacted by approximately $58 million of catastrophe losses, excluding unfavorable development of approximately $4 million on prior years' catastrophe losses, primarily due to winter storms, rainstorms and hail in Texas and Oklahoma, the impact of Hurricane Ian in Florida which caused $11 million in losses, and winter storms in California. The 2021 loss ratio was negatively impacted by approximately $91 million of catastrophe losses, excluding favorable development of approximately $6 million on prior years' catastrophe losses, primarily due to the deep freeze and other extreme weather events in Texas and Oklahoma, wildfires and winter storms in California, and the impact of Hurricane Ida in New Jersey and New York.
Excluding the effects of estimated prior periods’ loss development and catastrophe losses, the loss ratio was 79.0% and 68.8% for the nine months of 2022 and 2021, respectively. The increase in the loss ratio was primarily due to increases in loss severity and frequency in the automobile line of insurance business. The inflationary pressures and the supply chain and labor shortage issues discussed above have led to a significant increase in automobile loss severity and increased losses and loss adjustment expenses for the insured events of the current accident year for the nine months ended September 30, 2022 compared to the corresponding period in 2021. After bottoming out in the second quarter of 2020, automobile loss frequency has mostly been increasing and is near pre-pandemic levels. The Company has filed for rate increases in many states and is taking various non-rate actions to improve profitability.
The expense ratio for the nine months ended September 30, 2022 decreased compared to the corresponding period in 2021, primarily due to lower advertising and other expenses.
Income tax (benefit) expense was $(147.5) million and $47.0 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease in income tax expense was primarily due to a $917.8 million decrease in total pre-tax income. Tax-exempt investment income, a component of total pre-tax (loss) income, remained relatively steady with the corresponding period in 2021.
Tax-exempt investment income of approximately $54 million coupled with pre-tax loss of approximately $653 million resulted in an effective tax rate of 22.6%, above the statutory tax rate of 21%, for the nine months ended September 30, 2022, while tax-exempt investment income of approximately $56 million coupled with pre-tax income of approximately $264 million resulted in an effective tax rate of 17.8%, below the statutory rate, for the corresponding period in 2021.
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Investments
The following table presents the investment results of the Company:

| Nine Months Ended September 30,
| 2022 |  | 2021
| (Dollars in thousands)
Average invested assets at cost (1) | $ | 4,889,050 |  |  | $ | 4,643,916 |
Net investment income (2) |  |  |
Before income taxes | $ | 118,469 |  |  | $ | 95,566 |
After income taxes | $ | 103,091 |  |  | $ | 85,168 |
Average annual yield on investments |  |  |
Before income taxes | 3.2 | % |  | 2.7 | %
After income taxes | 2.8 | % |  | 2.5 | %
Net realized investment (losses) gains | $ | (581,237) |  |  | $ | 56,953 |

__________
(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) Higher net investment income before and after income taxes for the nine months ended September 30, 2022 compared to the corresponding period in 2021 resulted largely from higher average yield combined with higher average invested assets. Average annual yield on investments before and after income taxes for the nine months ended September 30, 2022 increased compared to the corresponding period in 2021, primarily due to the maturity and replacement of lower yielding investments purchased when market interest rates were lower with higher yielding investments, as a result of increasing market interest rates.
The following tables present the components of net realized investment gains or losses included in net income:

| Nine Months Ended September 30, 2022
| Gains (Losses) Recognized in Net Income
| Sales |  | Changes in fair value |  | Total
| (Amounts in thousands)
Net realized investment gains (losses) |  |  |  |  |
Fixed maturity securities (1)(2) | $ | (53,224) |  |  | $ | (329,458) |  |  | $ | (382,682) |
Equity securities (1)(3) | 20,311 |  |  | (220,469) |  |  | (200,158) |
Short-term investments (1) | (2,488) |  |  | 152 |  |  | (2,336) |
Options sold | 3,915 |  |  | 24 |  |  | 3,939 |
Total | $ | (31,486) |  |  | $ | (549,751) |  |  | $ | (581,237) |

| Nine Months Ended September 30, 2021
| Gains (Losses) Recognized in Net Income
| Sales |  | Changes in fair value |  | Total
| (Amounts in thousands)
Net realized investment gains (losses) |  |  |  |  |
Fixed maturity securities (1)(2) | $ | (3,607) |  |  | $ | (21,729) |  |  | $ | (25,336) |
Equity securities (1)(3) | 33,802 |  |  | 47,057 |  |  | 80,859 |
Short-term investments (1) | 236 |  |  | (161) |  |  | 75 |
Note receivable (1) | — |  |  | 15 |  |  | 15 |
Options sold | 1,579 |  |  | (239) |  |  | 1,340 |
Total | $ | 32,010 |  |  | $ | 24,943 |  |  | $ | 56,953 |

__________
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(1)The changes in fair value of the investment portfolio and note receivable resulted from application of the fair value option.
(2)The decreases in fair value of fixed maturity securities for the nine months of 2022 and 2021 primarily resulted from increases in market interest rates.
(3)The primary cause for the decrease in fair value of equity securities for the nine months of 2022 was the overall decline in equity markets. The primary cause for the increase in fair value of equity securities for the nine months of 2021 was the overall improvement in equity markets.
Net (Loss) Income

| Nine Months Ended September 30,
| 2022 |  | 2021
| (Amounts in thousands, except per share data)
Net (loss) income | $ | (505,902) |  |  | $ | 217,464 |
Basic average shares outstanding | 55,371 |  |  | 55,367 |
Diluted average shares outstanding | 55,371 |  |  | 55,375 |
Basic Per Share Data: |  |  |
Net (loss) income | $ | (9.14) |  |  | $ | 3.93 |
Net realized investment (losses) gains, net of tax | $ | (8.29) |  |  | $ | 0.82 |
Diluted Per Share Data: |  |  |
Net (loss) income | $ | (9.14) |  |  | $ | 3.93 |
Net realized investment (losses) gains, net of tax | $ | (8.29) |  |  | $ | 0.82 |

LIQUIDITY AND CAPITAL RESOURCES
A. Cash Flows
The Company has generated positive cash flow from operations since the public offering of its common stock in November 1985. The Company does not attempt to match the duration and timing of asset maturities with those of liabilities; rather, it manages its portfolio with a view towards maximizing total return with an emphasis on after-tax income. With combined cash and short-term investments of $436.5 million at September 30, 2022 as well as $75 million of credit available on the unsecured credit facility, the Company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments. Investment maturities are also available to meet the Company’s liquidity needs. However, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that the Company’s sources of funds will be sufficient to meet its liquidity needs or that the Company will not be required to raise additional funds to meet those needs or for future business expansion, through the sale of equity or debt securities or from credit facilities with lending institutions.
Net cash provided by operating activities for the nine months ended September 30, 2022 was $284.9 million, a decrease of $143.2 million compared to the corresponding period in 2021. The decrease was primarily due to increases in payments for losses and loss adjustment expenses and policy acquisition costs, partially offset by an increase in premium collections, a decrease in payments for income taxes, and an increase in net investment income received. The Company utilized the cash provided by operating activities during the nine months ended September 30, 2022 primarily for the net purchases of investment securities and payment of dividends to its shareholders.
On July 29, 2022, the Board did not extend its authorization of the repurchase of up to $200 million of the Company’s Common Stock and allowed its authorization to expire on that date, which the Board originally authorized on July 31, 2020. The Company has not repurchased any of the Company’s Common Stock under this authorization.
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The following table presents the estimated fair value of fixed maturity securities at September 30, 2022 by contractual maturity in the next five years:

| Fixed Maturity Securities
| (Amounts in thousands)
Due in one year or less | $ | 243,303 |
Due after one year through two years | 198,306 |
Due after two years through three years | 136,983 |
Due after three years through four years | 206,455 |
Due after four years through five years | 349,909 |
Total due within five years | $ | 1,134,956 |

B. 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.
The Company is the assuming reinsurer under a Catastrophe Participation Reinsurance Contract (the "Contract") effective for the 12 months ending December 31, 2022. The Company reimburses a group of affiliates of a ceding company for a proportional share of a portfolio of catastrophe losses based on the premiums ceded to the Company under the Contract, to the extent the actual loss ratio exceeds the threshold loss ratio of 73.5% and 71.0% for the 12 months ending December 31, 2022 and 2021, respectively. The total assumed premium under the Contract is $10.0 million and $12.5 million for the 12 months ending December 31, 2022 and 2021, respectively. The total possible amount of losses for the Company under the Contract is $25.0 million and $31.3 million for the 12 months ending December 31, 2022 and 2021, respectively. The Company recognized $2.5 million and $3.1 million in earned premiums and $2.2 million and $5.5 million in incurred losses under the Contract for the three months ended September 30, 2022 and 2021, respectively, and $7.5 million and $9.4 million in earned premiums and $6.3 million and $13.4 million in incurred losses for the nine months ended September 30, 2022 and 2021, respectively.
The Company is the ceding party to a Catastrophe Reinsurance Treaty (the "Treaty") covering a wide range of perils that is effective through June 30, 2023. For the 12 months ending June 30, 2023 and 2022, the Treaty provides approximately $936 million and $792 million of coverage, respectively, on a per occurrence basis after covered catastrophe losses exceed the Company retention limit of $60 million and $40 million, respectively. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies such as homeowners, but does cover losses from fires following an earthquake. The Treaty includes additional restrictions as noted in the tables below.
Coverage on individual catastrophes provided for the 12 months ending June 30, 2023 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 | $ | — |  |  | $ | 60 |  |  | — | %
Layer of Coverage | 60 |  |  | 100 |  |  | 19.5 |
Layer of Coverage | 100 |  |  | 200 |  |  | 98.8 |
Layer of Coverage (1) | 200 |  |  | 530 |  |  | 98.6 |
Layer of Coverage (2) (3) (4) | 530 |  |  | 930 |  |  | 100.0 |
Layer of Coverage | 930 |  |  | 1,035 |  |  | 98.9 |

__________
(1) 5% of this layer covers California, Arizona and Nevada only.
(2) 33% of this layer covers California, Arizona and Nevada only.
(3) Layer of Coverage represents multiple actual treaty layers that are grouped for presentation purposes.
(4) 6.3% of this layer covers only California wildfires and fires following an earthquake in California, and is not subject to reinstatement.
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Coverage on individual catastrophes provided for the 12 months ended June 30, 2022 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 | 40 |  |  | 100 |  |  | 70 |
Layer of Coverage (1) (2) | 100 |  |  | 450 |  |  | 100 |
Layer of Coverage (1) (3) (4) (5) | 450 |  |  | 850 |  |  | 100 |

__________
(1) Layer of Coverage represents multiple actual treaty layers that are grouped for presentation purposes.
(2) 4.1% of this layer excludes Texas.
(3) 11.9% of this layer excludes Texas.
(4) 15.0% of this layer covers California, Arizona and Nevada only.
(5) 12.7% of this layer covers only California wildfires and fires following an earthquake in California, and is not subject to reinstatement.
The table below presents the combined total reinsurance premiums under the Treaty (annual premiums and reinstatement premiums) for the 12 months ending June 30, 2023 and 2022, respectively:

Treaty |  | Annual Premium (1) |  | Reinstatement Premium (2) |  | Total Combined Premium (2)
|  | (Amounts in millions)
For the 12 months ending June 30, 2023 |  | $ | 74 |  |  | $ | — |  |  | $ | 74 |
For the 12 months ended June 30, 2022 |  | $ | 55 |  |  | $ | — |  |  | $ | 55 |

__________
(1) The increase in the annual premium is primarily due to an increase in reinsurance coverage and rates and growth in the covered book of business.
(2) The reinstatement premium and the total combined premium for the treaty period ending June 30, 2023 are projected amounts to be paid based on the assumption that there will be no reinstatements occurring during this treaty period. The reinstatement premium for the treaty period ended June 30, 2022 is zero, as there were no actual reinstatement premiums paid.
The Treaty ending June 30, 2023 and 2022 each provides for one full reinstatement of coverage limits. Reinstatement premiums are based on the amount of reinsurance benefits used by the Company at 100% of the annual premium rate, with the exception of the reinstatement restrictions noted in the tables above, up to the maximum reinstatement premium of approximately $72 million and $51 million if the full amount of benefit is used for the 12 months ending June 30, 2023 and 2022, 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 catastrophe events that occurred in 2022 caused approximately $58 million in losses to the Company, resulting primarily from winter storms, rainstorms and hail in Texas and Oklahoma, the impact of Hurricane Ian in Florida which caused $11 million in losses, and winter storms in California. No reinsurance benefits were available under the Treaty for these losses as none of the 2022 catastrophe events individually resulted in losses in excess of the Company’s per-occurrence retention limit of $60 million and $40 million under the Treaty for the 12 months ending June 30, 2023 and 2022, respectively.
The catastrophe events that occurred in 2021 caused approximately $113 million in losses to the Company as of September 30, 2022, resulting primarily from the deep freeze and other extreme weather events in Texas and Oklahoma, rainstorms, wildfires and winter storms in California, and the impact of Hurricane Ida in New Jersey and New York. No reinsurance benefits were available under the Treaty for these losses as none of the 2021 catastrophe events individually resulted in losses in excess of the Company’s per-occurrence retention limit of $40 million under the Treaty for each of the 12 months ending June 30, 2022 and 2021.
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The Company carries a commercial umbrella reinsurance treaty and a per-risk property reinsurance treaty, and seeks facultative arrangements for large property risks. In addition, the Company has other reinsurance in force that is not material to the consolidated financial statements. If any reinsurers are unable to perform their obligations under a reinsurance treaty, the Company will be required, as primary insurer, to discharge all obligations to its policyholders in their entirety.
C. Invested Assets
Portfolio Composition
An important component of the Company’s financial results is the return on its investment portfolio. The Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total return framework. The investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a well-diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve return on capital and profitable growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and defaults. The Company believes that this strategy enables the optimal investment performance necessary to sustain investment income over time. The Company’s portfolio management approach utilizes a market risk and consistent asset allocation strategy as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for determining overall below investment grade exposure and diversification requirements. Within the ranges set by the asset allocation strategy, tactical investment decisions are made in consideration of prevailing market conditions.
The following table presents the composition of the total investment portfolio of the Company at September 30, 2022:

| Cost (1) |  | Fair Value
| (Amounts in thousands)
Fixed maturity securities: |  |  |
U.S. government bonds and agencies | $ | 69,806 |  |  | $ | 69,363 |
Municipal securities | 2,797,095 |  |  | 2,688,727 |
Mortgage-backed securities | 181,850 |  |  | 165,208 |
Corporate securities | 560,699 |  |  | 510,811 |
Collateralized loan obligations | 307,457 |  |  | 285,360 |
Other asset-backed securities | 188,667 |  |  | 178,390 |
| 4,105,574 |  |  | 3,897,859 |
Equity securities: |  |  |
Common stock | 485,603 |  |  | 537,455 |
Non-redeemable preferred stock | 64,429 |  |  | 54,042 |
Private equity funds measured at net asset value (2) | 138,369 |  |  | 92,838 |
| 688,401 |  |  | 684,335 |
Short-term investments | 101,548 |  |  | 100,621 |
Total investments | $ | 4,895,523 |  |  | $ | 4,682,815 |

______________
(1) Fixed maturities and short-term bonds at amortized cost; equities and other short-term investments at cost.
(2) The fair value is measured using the NAV practical expedient. See Note 5. Fair Value Measurements of the Notes to Consolidated Financial Statements for additional information.
At September 30, 2022, 50.6% of the Company’s total investment portfolio at fair value and 60.8% of its total fixed maturity securities 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 50% corporate dividend received deduction, and private equity funds. At September 30, 2022, 84.6% of short-term investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis.
Fixed Maturity Securities and Short-Term Investments
Fixed maturity securities include debt securities, which are mostly long-term bonds and other debt with maturities of at least one year from purchase, and 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
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rates, anticipated prepayments, risk/reward characteristics, liquidity needs, tax planning considerations, or other economic factors. Short-term instruments 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 that are heavily weighted with high coupon issues, are expected to be called prior to maturity. Modified duration measures the length of time it takes, on average, to receive the present value of all the cash flows produced by a bond, including reinvestment of interest. As it measures four factors (maturity, coupon rate, yield and call terms) which determine sensitivity to changes in interest rates, modified duration is considered a better indicator of price volatility than simple maturity alone.
The following table presents the maturities and durations of the Company's fixed maturity securities and short-term investments:

| September 30, 2022 |  | December 31, 2021
| (in years)
Fixed Maturity Securities |  |  |
Nominal average maturity: |  |  |
excluding short-term investments | 12.2 |  | 10.8
including short-term investments | 11.9 |  | 10.4
Call-adjusted average maturity: |  |  |
excluding short-term investments | 6.7 |  | 4.6
including short-term investments | 6.5 |  | 4.5
Modified duration reflecting anticipated early calls: |  |  |
excluding short-term investments | 3.9 |  | 3.5
including short-term investments | 3.8 |  | 3.4
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 value, at September 30, 2022, consistent with the average rating at December 31, 2021. The Company's municipal bond holdings, of which 88.1% were tax exempt, represented 60.8% of its fixed maturity securities portfolio at September 30, 2022, at fair value, and are broadly diversified geographically. See Part I-Item 3. Quantitative and Qualitative Disclosures About Market Risks for a breakdown of municipal bond holdings by state.
To calculate the weighted-average credit quality ratings disclosed throughout this Quarterly Report on Form 10-Q, individual securities were weighted based on fair value and credit quality ratings assigned by nationally recognized securities rating organizations.
Taxable holdings consist principally of investment grade issues. At September 30, 2022, fixed maturity securities holdings rated below investment grade and non-rated bonds totaled $5.8 million and $13.8 million, respectively, at fair value, and represented 0.1% and 0.4%, 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, 2021, fixed maturity securities holdings rated below investment grade and non-rated bonds totaled $7.1 million and $17.3 million, respectively, at fair value, and represented 0.2% and 0.4%, respectively, of total fixed maturity securities.
The overall credit ratings for the Company’s fixed maturity securities portfolio were relatively stable during the nine months ended September 30, 2022, with 95.8% of fixed maturity securities at fair value experiencing no change in their overall rating. 3.7% and 0.5% of fixed maturity securities at fair value experienced upgrades and downgrades, respectively, during the nine months ended September 30, 2022.
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The following table presents the credit quality ratings of the Company’s fixed maturity securities by security type at fair value:

|  | September 30, 2022
|  | (Dollars in thousands)
Security Type |  | AAA(1) |  | AA(1) |  | A(1) |  | BBB(1) |  | Non-Rated/Other(1) |  | Total Fair Value(1)
U.S. government bonds and agencies: |  |  |  |  |  |  |  |  |  |  |  |
Agencies |  | $ | 10,036 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 10,036 |
Treasuries |  | 59,327 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 59,327 |
Total |  | 69,363 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 69,363 |
|  | 100.0 | % |  | — | % |  | — | % |  | — | % |  | — | % |  | 100.0 | %
Municipal securities: |  |  |  |  |  |  |  |  |  |  |  |
Insured |  | 33,543 |  |  | 241,428 |  |  | 71,978 |  |  | 33,593 |  |  | 2,417 |  |  | 382,959 |
Uninsured |  | 75,283 |  |  | 590,747 |  |  | 1,406,811 |  |  | 215,091 |  |  | 17,836 |  |  | 2,305,768 |
Total |  | 108,826 |  |  | 832,175 |  |  | 1,478,789 |  |  | 248,684 |  |  | 20,253 |  |  | 2,688,727 |
|  | 4.0 | % |  | 31.0 | % |  | 55.0 | % |  | 9.2 | % |  | 0.8 | % |  | 100.0 | %
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 17,252 |  |  | 5,819 |  |  | 4,760 |  |  | — |  |  | — |  |  | 27,831 |
Agencies |  | 555 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 555 |
Non-agencies: |  |  |  |  |  |  |  |  |  |  |  |
Prime |  | 17,405 |  |  | 99,219 |  |  | 18,491 |  |  | — |  |  | 404 |  |  | 135,519 |
Alt-A |  | — |  |  | 450 |  |  | — |  |  | 146 |  |  | 707 |  |  | 1,303 |
Total |  | 35,212 |  |  | 105,488 |  |  | 23,251 |  |  | 146 |  |  | 1,111 |  |  | 165,208 |
|  | 21.3 | % |  | 63.8 | % |  | 14.1 | % |  | 0.1 | % |  | 0.7 | % |  | 100.0 | %
Corporate securities: |  |  |  |  |  |  |  |  |  |  |  |
Communications |  | — |  |  | 167 |  |  | — |  |  | 6,334 |  |  | — |  |  | 6,501 |
Consumer, cyclical |  | — |  |  | 1,825 |  |  | — |  |  | 52,997 |  |  | — |  |  | 54,822 |
Consumer, non-cyclical |  | — |  |  | — |  |  | 21,790 |  |  | 9,065 |  |  | — |  |  | 30,855 |
Energy |  | — |  |  | 6,685 |  |  | 3,456 |  |  | 35,855 |  |  | — |  |  | 45,996 |
Financial |  | — |  |  | 19,785 |  |  | 150,688 |  |  | 58,079 |  |  | 5,622 |  |  | 234,174 |
Industrial |  | — |  |  | 15,000 |  |  | 53,367 |  |  | 48,119 |  |  | — |  |  | 116,486 |
Technology |  | — |  |  | — |  |  | — |  |  | 692 |  |  | — |  |  | 692 |
Utilities |  | — |  |  | — |  |  | 9,040 |  |  | 12,245 |  |  | — |  |  | 21,285 |
Total |  | — |  |  | 43,462 |  |  | 238,341 |  |  | 223,386 |  |  | 5,622 |  |  | 510,811 |
|  | — | % |  | 8.5 | % |  | 46.7 | % |  | 43.7 | % |  | 1.1 | % |  | 100.0 | %
Collateralized loan obligations: |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 9,706 |  |  | 77,251 |  |  | 198,403 |  |  | — |  |  | — |  |  | 285,360 |
Total |  | 9,706 |  |  | 77,251 |  |  | 198,403 |  |  | — |  |  | — |  |  | 285,360 |
|  | 3.4 | % |  | 27.1 | % |  | 69.5 | % |  | — | % |  | — | % |  | 100.0 | %
Other asset-backed securities |  | 4,196 |  |  | 76,994 |  |  | 62,742 |  |  | 34,458 |  |  | — |  |  | 178,390 |
|  | 2.4 | % |  | 43.1 | % |  | 35.2 | % |  | 19.3 | % |  | — | % |  | 100.0 | %
Total |  | $ | 227,303 |  |  | $ | 1,135,370 |  |  | $ | 2,001,526 |  |  | $ | 506,674 |  |  | $ | 26,986 |  |  | $ | 3,897,859 |
|  | 5.8 | % |  | 29.1 | % |  | 51.4 | % |  | 13.0 | % |  | 0.7 | % |  | 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 $69.4 million and $13.1 million, or 1.8% and 0.3% of its fixed maturity securities portfolio, at fair
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value, in U.S. government bonds and agencies at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022, Moody's and Fitch ratings 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 and agencies portfolio reflecting anticipated early calls was 1.6 years and 0.9 years at September 30, 2022 and December 31, 2021, respectively.
Municipal Securities
The Company had $2.69 billion and $2.84 billion, or 69.0% and 70.5% of its fixed maturity securities portfolio, at fair value, in municipal securities, $383.0 million and $424.1 million of which were insured, at September 30, 2022 and December 31, 2021, respectively. 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 securities ratings and the underlying credit ratings as of September 30, 2022 and December 31, 2021.
At September 30, 2022 and December 31, 2021, 64.5% and 56.8%, respectively, of the insured municipal securities, at fair value, most of which were investment grade, were insured by bond insurers that provide credit enhancement and ratings reflecting the credit of the underlying issuers. At September 30, 2022 and December 31, 2021, the average rating of the Company’s insured municipal securities was A+, which corresponded to the average rating of the investment grade bond insurers. The remaining 35.5% and 43.2% of insured municipal securities at September 30, 2022 and December 31, 2021, respectively, were non-rated or below investment grade, and were insured by bond insurers that the Company believes did not provide credit enhancement. The modified duration of the municipal securities portfolio reflecting anticipated early calls was 3.8 years and 3.1 years at September 30, 2022 and December 31, 2021, 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 future downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair value of municipal bonds.
Mortgage-Backed Securities
At September 30, 2022 and December 31, 2021, substantially all of the mortgage-backed securities portfolio of $165.2 million and $137.0 million, or 4.2% and 3.4%, respectively, of the Company's fixed maturity securities portfolio, at fair value, was categorized as loans to “prime” residential and commercial real estate borrowers. The Company had holdings of $27.8 million and $25.2 million at fair value ($29.0 million and $25.1 million at amortized cost) in commercial mortgage-backed securities at September 30, 2022 and December 31, 2021, respectively.
The weighted-average rating of the entire mortgage-backed securities portfolio was AA at each of September 30, 2022 and December 31, 2021. The modified duration of the mortgage-backed securities portfolio reflecting anticipated early calls was 5.1 years and 7.9 years at September 30, 2022 and December 31, 2021, respectively.
Corporate Securities
Corporate securities included in fixed maturity securities were as follows:

| September 30, 2022 |  | December 31, 2021
| (Dollars in thousands)
Corporate securities at fair value | $ | 510,811 |  |  | $ | 523,853 |
Percentage of total fixed maturity securities portfolio | 13.1 | % |  | 13.0 | %
Modified duration | 3.4 years |  | 3.8 years
Weighted-average rating | A- |  | BBB+

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Collateralized Loan Obligations
Collateralized loan obligations included in fixed maturity securities were as follows:

| September 30, 2022 |  | December 31, 2021
| (Dollars in thousands)
Collateralized loan obligations at fair value | $ | 285,360 |  |  | $ | 314,153 |
Percentage of total fixed maturity securities portfolio | 7.3 | % |  | 7.8 | %
Modified duration | 5.0 years |  | 6.3 years
Weighted-average rating | A+ |  | AA-

Other Asset-Backed Securities
Other asset-backed securities included in fixed maturity securities were as follows:

| September 30, 2022 |  | December 31, 2021
| (Dollars in thousands)
Other asset-backed securities at fair value | $ | 178,390 |  |  | $ | 200,209 |
Percentage of total fixed maturity securities portfolio | 4.6 | % |  | 5.0 | %
Modified duration | 3.5 years |  | 2.6 years
Weighted-average rating | A+ |  | AA-

Equity Securities
Equity holdings of $684.3 million and $970.9 million at fair value, as of September 30, 2022 and December 31, 2021, respectively, consisted of non-redeemable preferred stocks, common stocks on which dividend income is partially tax-sheltered by the 50% corporate dividend received deduction, and private equity funds. The Company had a net (loss) gain of $(220.5) million and $47.1 million due to changes in fair value of the Company’s equity securities portfolio for the nine months ended September 30, 2022 and 2021, respectively. The primary cause for the decrease in fair value of the Company’s equity securities portfolio for the nine months ended September 30, 2022 was the overall decline in equity markets. The primary cause for the increase in fair value of the Company’s equity securities portfolio for the nine months ended September 30, 2021 was the overall improvement in equity markets.
The Company’s common stock allocation is intended to enhance the return of and provide diversification for the total portfolio. At September 30, 2022, 14.6% of the total investment portfolio at fair value was held in equity securities, compared to 18.9% at December 31, 2021 .
D. Debt
On March 8, 2017, the Company completed a public debt offering issuing $375 million of senior notes. The notes are unsecured senior obligations of the Company with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. The notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off amounts outstanding under the existing loan and credit facilities and for general corporate purposes. The Company incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate including debt issuance costs of approximately 4.45%.
On March 29, 2017, the Company entered into the 2017 Credit Agreement that provided for revolving loans of up to $50 million and was set to mature on March 29, 2022. On March 31, 2021, the Company entered into the Amended and Restated Credit Agreement that amended and restated the 2017 Credit Agreement. The Amended and Restated Credit Agreement, among other things, extended the maturity date of the loan that was the subject of the 2017 Credit Agreement to March 31, 2026, added U.S. Bank as an additional lender, and increased the aggregate commitments by all the lenders to $75 million from $50 million under the 2017 Credit Agreement. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 20% to LIBOR plus 150.0 basis points when the ratio is greater than or equal to 30%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 20% to 22.5 basis points when the ratio is greater than or equal to 30%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 19.5% at September 30, 2022, resulting in a 12.5 basis point commitment
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fee on the $75 million undrawn portion of the credit facility. As of October 27, 2022, there have been no borrowings under this facility.
The Company was in compliance with all of the financial covenants pertaining to minimum statutory surplus, debt to total capital ratio, and risk based capital ratio under the unsecured credit facility at September 30, 2022.
For additional information on debt, see Note 11. Notes Payable of the Notes to Consolidated Financial Statements.
E. Regulatory Capital Requirements
Among other considerations, industry and regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to statutory policyholders’ surplus should not exceed 3.0 to 1. Based on the combined surplus of all the Insurance Companies of $1.59 billion at September 30, 2022, and net premiums written of $3.99 billion for the twelve months ended on that date, the ratio of net premiums written to surplus was 2.51 to 1 at September 30, 2022.
Item 3. 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 subsidiaries. Executive oversight of investment activities is conducted primarily through the Company’s investment committee. The Company’s investment committee focuses on strategies to enhance after-tax yields, mitigate market risks, and optimize capital to improve profitability and returns.
The Company manages exposures to market risk through the use of asset allocation, duration, and credit ratings. Asset allocation limits place restrictions on the total amount of funds that may be invested within an asset class. Duration limits on the fixed maturity securities portfolio place restrictions on the amount of interest rate risk that may be taken. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by investment policies.
Credit Risk
Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of September 30, 2022, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with the average rating at December 31, 2021.
The following table presents fixed maturity municipal securities by state in descending order of holdings at fair value at September 30, 2022:

States | Fair Value |  | Average Rating
| (Amounts in thousands) |  |
Florida | $ | 315,092 |  |  | A
Texas | 270,118 |  |  | AA-
Illinois | 195,703 |  |  | A+
California | 176,050 |  |  | A+
New York | 169,942 |  |  | A+
Other states | 1,561,822 |  |  | A+
Total | $ | 2,688,727 |  |  |

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At September 30, 2022, the fixed maturity municipal securities portfolio was broadly diversified among the states and the largest holdings were in populous states such as Florida and Texas. These holdings were further diversified primarily among cities, counties, schools, public works, hospitals, and state general obligations. The Company seeks to minimize overall credit risk and ensure diversification by limiting exposure to any particular issuer.
Taxable fixed maturity securities represented 39.2% of the Company’s total fixed maturity securities portfolio at fair value at September 30, 2022. 4.5% of the Company’s taxable fixed maturity securities at fair value were comprised of U.S. government bonds and agencies, which were rated AAA at September 30, 2022. 0.2% of the Company’s taxable fixed maturity securities at fair value, representing 0.1% of its total fixed maturity securities portfolio at fair value, were rated below investment grade at September 30, 2022. 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 equity markets.
At September 30, 2022, the Company’s primary objective for common equity investments was current income. The fair value of the equity investments consisted of $537.5 million in common stocks, $54.0 million in non-redeemable preferred stocks, and $92.8 million in private equity funds. Common stocks are typically valued for future economic prospects as perceived by the market.
Common stocks represented 11.5% of total investments at fair value at September 30, 2022. Beta is a measure of a security’s systematic (non-diversifiable) risk, which is measured by 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 September 30, 2022 and December 31, 2021:

|  | September 30, 2022 |  | December 31, 2021
|  | (Amounts in thousands, except average Beta)
Average Beta |  | 0.87 |  |  | 1.14 |
Hypothetical reduction of 25% in the overall value of the stock market |  | $ | 116,896 |  |  | $ | 227,152 |
Hypothetical reduction of 50% in the overall value of the stock market |  | $ | 233,793 |  |  | $ | 454,304 |

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 holds interest sensitive liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key benchmarks, as well as changes in interest rates resulting from widening credit spreads and credit exposure to collateralized securities.
The fixed maturity securities portfolio, which represented 83.2% of total investments at September 30, 2022 at fair value, is subject to interest rate risk. The change in market interest rates is inversely related to the change in the fair value of the fixed maturity securities portfolio. A common measure of the interest sensitivity of fixed maturity securities is modified duration, a calculation that utilizes maturity, coupon rate, yield and call terms to calculate an average age to receive the present value of all the cash flows produced by such assets, including reinvestment of interest. The longer the duration, the more sensitive the asset is to market interest rate fluctuations.
The Company has historically invested in fixed maturity securities with a goal of maximizing after-tax yields and holding assets to the maturity or call date. Since assets with longer maturities tend to produce higher current yields, the Company’s historical investment philosophy resulted in a portfolio with a moderate duration. Fixed maturity securities purchased by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline. The modified duration of the overall fixed maturity securities portfolio reflecting anticipated early calls was 3.8 years and 3.4 years at September 30, 2022 and December 31, 2021, respectively.
If interest rates were to rise by 100 and 200 basis points, the Company estimates that the fair value of its fixed maturity securities portfolio at September 30, 2022 would decrease by $150.3 million and $300.7 million, respectively. Conversely, if
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interest rates were to decrease, the fair value of the Company’s fixed maturity securities portfolio would rise, and it may cause a higher number of the Company's fixed maturity securities to be called away. The proceeds from the called fixed maturity securities would likely be reinvested at lower yields, which would result in lower overall investment income for the Company.
Item 4. 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 SEC 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 the Company’s 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 quarter covered by this Quarterly Report on Form 10-Q. 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.
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.
The Company has not experienced any material impact to its internal controls over financial reporting due to the COVID-19 pandemic. The Company will continually monitor and assess the COVID-19 situation with respect to its internal controls to minimize the impact of the pandemic on their design and operating effectiveness.
PART II - OTHER INFORMATION
Item 1. 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The Company establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. In addition, the Company accrues for anticipated legal defense costs associated with such lawsuits and regulatory actions. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company's pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition or cash flows.
In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of any additional legal matters, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. See also “Overview-C. Regulatory and Legal Matters” in Part I-Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.
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There are no environmental proceedings arising under federal, state, or local laws or regulations to be discussed.
Item 1A. Risk Factors
The Company’s business, results of operations, and financial condition are subject to various risks. These risks are described elsewhere in this Quarterly Report on Form 10-Q and in the Company’s other filings with the United States Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Except as set forth below, the risk factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 have not changed in any material respect.
High inflation levels could have adverse consequences for the Company, the insurance industry and the U.S. economy generally.
The U.S. economy is currently experiencing increasing levels of inflation, which creates a heightened level of risk for the Company, the insurance industry and the U.S. economy generally. Rising inflation may impact the reliability of the Company's loss reserve estimates and its ability to accurately price insurance products, and may create additional volatility in the fair value of its investments. Additionally, regulatory agencies, such as various state Departments of Insurance, the U.S. government and Federal Reserve may be slow to approve rate changes or adopt measures to attempt to control inflation, which could affect the Company's ability to generate profits and cash flow. There can be no assurance that inflation rates will not continue to escalate in the future or that measures adopted or that may be adopted by the U.S. government or the Federal Reserve to control inflation will be effective or successful. Continuing significant inflation could have a prolonged effect on the U.S. economy and could in turn increase the Company's operating and loss costs due to higher labor and materials costs, and may negatively affect its business, financial condition and results of operations.
The Company's business, financial condition and results of operations could be adversely affected by the ongoing conflict between Russia and Ukraine and related disruptions in the global economy.
The global economy has been negatively impacted by the military conflict between Russia and Ukraine. While the Company has no operations in Russia or Ukraine and writes business only in the United States, the escalation of geopolitical tensions related to this conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, heightened cybersecurity threats, prolonged supply chain disruptions, protracted or increased inflation, lower consumer demand, fluctuations in interest rates, and increased volatility in financial markets, which could adversely affect the Company's business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits

15.1 | Report of Independent Registered Public Accounting Firm.
15.2 | Awareness Letter of Independent Registered Public Accounting Firm.
31.1 | Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 | Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 | Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
32.2 | Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
101.INS | XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH | XBRL Taxonomy Extension Schema Document.
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB | XBRL Taxonomy Extension Label Linkbase Document.
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES
Pursuant to the requirements 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
Date: November 1, 2022 |  | By: | /s/ Gabriel Tirador
|  |  | Gabriel Tirador
|  |  | President and Chief Executive Officer
Date: November 1, 2022 |  | By: | /s/ Theodore R. Stalick
|  |  | Theodore R. Stalick
|  |  | Senior Vice President and Chief Financial Officer

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