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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 March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________    to ___________

Commission File No. 001-12257
 ______________________________
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
 ________________________________
California95-2211612
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4484 Wilshire Boulevard
Los Angeles, California90010
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (323937-1060
 _______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockMCYNew York Stock Exchange
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 filerý  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 April 29, 2021, the registrant had issued and outstanding an aggregate of 55,370,788 shares of its Common Stock.




MERCURY GENERAL CORPORATION
INDEX TO FORM 10-Q
 
  Page
Item 1
Item 2
Item 3
Item 4
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
2

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 2021December 31, 2020
 (unaudited) 
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $3,434,162; $3,388,418)
$3,587,496 $3,549,810 
Equity securities (cost $667,380; $695,150)
810,602 803,851 
Short-term investments (cost $548,975; $376,547)
548,104 375,609 
Total investments4,946,202 4,729,270 
Cash338,430 348,479 
Receivables:
Premiums623,011 599,070 
       Allowance for credit losses on premiums receivable (7,000)(10,000)
                    Premiums receivable, net of allowance for credit losses616,011 589,070 
Accrued investment income44,182 42,985 
Other6,675 10,730 
Total receivables666,868 642,785 
Reinsurance recoverables54,312 48,579 
Allowance for credit losses on reinsurance recoverables (91)
             Reinsurance recoverables, net of allowance for credit losses54,312 48,488 
Deferred policy acquisition costs243,736 246,994 
Fixed assets (net of accumulated depreciation $292,321; $286,023)
178,393 178,923 
Operating lease right-of-use assets38,889 40,554 
Goodwill42,796 42,796 
Other intangible assets, net11,055 11,322 
Other assets33,473 38,635 
Total assets$6,554,154 $6,328,246 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and loss adjustment expense reserves$2,041,100 $1,991,304 
Unearned premiums1,440,434 1,405,873 
Notes payable372,632 372,532 
Accounts payable and accrued expenses191,121 194,421 
Operating lease liabilities42,038 43,825 
Current income taxes34,238 10,426 
Deferred income taxes42,747 41,132 
Other liabilities285,407 236,136 
Total liabilities4,449,717 4,295,649 
Commitments and contingencies
Shareholders’ equity:
Common stock without par value or stated value:
       Authorized 70,000 shares; issued and outstanding 55,371; 55,358
98,837 98,970 
 Retained earnings2,005,600 1,933,627 
Total shareholders’ equity2,104,437 2,032,597 
Total liabilities and shareholders’ equity$6,554,154 $6,328,246 

See accompanying Notes to Consolidated Financial Statements.
3

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 Three Months Ended March 31,
 20212020
Revenues:
Net premiums earned$915,922 $922,574 
Net investment income 32,279 34,495 
Net realized investment gains (losses) 41,691 (251,320)
Other3,204 2,562 
Total revenues993,096 708,311 
Expenses:
Losses and loss adjustment expenses626,344 651,670 
Policy acquisition costs164,430 156,533 
Other operating expenses65,558 76,557 
Interest4,343 4,256 
Total expenses860,675 889,016 
Income (loss) before income taxes132,421 (180,705)
Income tax expense (benefit)25,426 (41,501)
Net income (loss)$106,995 $(139,204)
Net income (loss) per share:
Basic$1.93 $(2.51)
Diluted $1.93 $(2.51)
Weighted average shares outstanding:
Basic55,361 55,358 
Diluted55,372 55,358 






















 

See accompanying Notes to Consolidated Financial Statements.
4

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

 Three Months Ended March 31,
 20212020
Common stock, beginning of period$98,970 $98,828 
Proceeds from stock options exercised215  
Share-based compensation expense35 35 
Withholding tax on stock options exercised(383) 
Common stock, end of period98,837 98,863 
Retained earnings, beginning of period1,933,627 1,700,674 
       Cumulative effect of adopting ASU 2016-13 (Note1) (2,014)
Retained earnings, beginning of period, as adjusted1,933,627 1,698,660 
Net income (loss)106,995 (139,204)
Dividends paid to shareholders(35,022)(34,875)
Retained earnings, end of period2,005,600 1,524,581 
Total shareholders’ equity, end of period$2,104,437 $1,623,444 


































See accompanying Notes to Consolidated Financial Statements.
5

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months Ended March 31,
 20212020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)$106,995 $(139,204)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization17,580 16,026 
Net realized investment (gains) losses(41,691)251,320 
Increase in premiums receivable(26,941)(20,312)
(Increase) decrease in reinsurance recoverables(5,824)8,397 
Changes in current and deferred income taxes25,427 (41,501)
Decrease (increase) in deferred policy acquisition costs3,257 (1,477)
Increase (decrease) in loss and loss adjustment expense reserves49,796 (23,310)
Increase in unearned premiums34,561 29,256 
(Decrease) increase in accounts payable and accrued expenses(2,423)9,640 
Share-based compensation35 35 
Other, net13,747 8,276 
Net cash provided by operating activities174,519 97,146 
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases(230,038)(334,517)
Sales41,041 23,503 
Calls or maturities103,010 41,643 
Equity securities available for sale in nature:
Purchases(194,929)(361,942)
Sales240,657 269,320 
Changes in securities payable and receivable43,436 8,864 
(Increase) decrease in short-term investments (145,159)254,811 
Purchases of fixed assets(7,929)(10,305)
Other, net543 4,790 
Net cash used in investing activities(149,368)(103,833)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders(35,022)(34,875)
Proceeds from stock options exercised215  
Payments on finance lease obligations(393) 
Net cash used in financing activities(35,200)(34,875)
Net decrease in cash(10,049)(41,562)
Cash:
Beginning of the year348,479 294,398 
End of period$338,430 $252,836 
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid$8,275 $8,269 
Income taxes paid, net$ $ 










See accompanying Notes to Consolidated Financial Statements.
6

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, 2020. 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 March 31, 2021 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, 2020 for more complete descriptions and discussions. Operating results and cash flows for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

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, 2020.
Earnings per Share

There were no potentially dilutive securities with anti-dilutive effect for the three months ended March 31, 2021. Potentially dilutive securities representing approximately 68,000 shares of common stock were excluded from the computation of diluted loss per common share for the three months ended March 31, 2020, because their effect would have been anti-dilutive.
Dividends per Share

The Company declared and paid a dividend per share of $0.6325 and $0.6300 during the three months ended March 31, 2021 and 2020, 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
7

acquisition of insurance contracts. Deferred policy acquisition cost amortization was $164.4 million and $156.5 million for the three months ended March 31, 2021 and 2020, respectively. The Company does not defer advertising expenditures but expenses them as incurred. The Company recorded net advertising expense of approximately $9.7 million and $11.7 million for the three months ended March 31, 2021 and 2020, 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, 2021. The Company reimburses up to $31 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 71%. 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, 2021. The Treaty provides $717 million of coverage on a per occurrence basis after covered catastrophe losses exceed the $40 million Company retention limit. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies, such as homeowners, but does cover losses from fires following an earthquake. The Treaty provides for one full reinstatement of coverage limits with a minor exception at the top coverage layer, and includes some additional minor territorial and coverage restrictions.

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

Three Months Ended March 31,
20212020
 (Amounts in thousands)
Premiums Written
Direct $946,606 $949,745 
Ceded(15,643)(11,358)
Assumed12,669 7,630 
     Net$943,632 $946,017 
Premiums Earned
Direct$921,067 $927,042 
Ceded(15,543)(13,744)
Assumed3,291 2,047 
     Net$908,815 $915,345 

The Company recognized ceded premiums earned of approximately $16 million and $14 million for the three months ended March 31, 2021 and 2020, 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 $1 million and $(1) million for the three months ended March 31, 2021 and 2020, respectively, which are included in losses and loss adjustment expenses in its consolidated statements of operations.

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 100% owned insurance agencies, which amounted to approximately $6.3 million and $4.7 million, with related expenses of $3.7 million and $3.0 million, for the three months ended March 31, 2021 and 2020, 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
8

Information).

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

Capitalized Implementation Costs for Cloud Computing Arrangements

The majority of the Company's cloud computing arrangements relate to service contracts with third parties that host the Company's data and computing infrastructure that are used in providing services to and supporting transactions with its existing or potential policyholders and insurance agents. The balance of capitalized implementation costs for cloud computing arrangements, net of accumulated amortization, was $5.0 million and $4.8 million at March 31, 2021 and December 31, 2020, respectively, which is included in other assets in the Company's consolidated balance sheets. The accumulated amortization was $2.7 million and $2.1 million at March 31, 2021 and December 31, 2020, respectively. The amortization expense related to the capitalized implementation costs was $0.6 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively, which is included in other operating expenses in the Company's consolidated statements of operations.

Allowance for Credit Losses

On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) along with certain additional ASUs on Topic 326 using a modified retrospective transition method, and recognized the cumulative-effect adjustment of approximately $2 million to the beginning retained earnings of 2020. The cumulative-effect adjustment primarily resulted from re-estimating credit losses on the outstanding balances of the Company's premiums receivable and reinsurance recoverables at the adoption date. Topic 326 replaces the "incurred loss" methodology for recognizing credit losses with a methodology that reflects expected credit losses for financial assets that are not accounted for at fair value through net income. The Company's investment portfolio, not including accrued investment income, was not affected by Topic 326 as it applies the fair value option to all of its investments (see Note 4. Fair Value Option).

Premiums Receivable

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

Evaluating the current trends or economic conditions that impact the Company's ability to collect premiums receivable and projecting those into the remaining life of premiums receivable in order to develop a reasonable and supportable forecast of the ultimate collectibility involve significant judgment and assumptions about future economic conditions. The Company believes that the sustained high unemployment rate resulting from the outbreak of a novel strain of coronavirus (“COVID-19”) will lead to high uncollectible amounts over the life of the premiums receivable balances outstanding at March 31, 2021. In addition, the Company offered payment grace periods upon request from customers in 2020 following the outbreak of the pandemic, which added an element of uncertainty to the collectibility. The Company did not offer such payment grace periods in 2021, which contributed to the reduction in allowance for credit losses in the first quarter of 2021. Actual uncollectible amounts could be considerably more or less than the estimate. The Company monitors the overall credit risk of premiums receivable by regularly reviewing macroeconomic indicators such as unemployment and interest rates, regulatory developments such as restrictions on cancellation of policies for nonpayment of premiums, and insurance policy specific indicators such as trends in policy cancellations.





9

The following table presents a summary of changes in allowance for credit losses on premiums receivable:
 Three Months Ended March 31,
 20212020
 (Amounts in thousands)
Beginning balance$10,000 $1,445 
     Cumulative effect of adopting ASU 2016-13 for premiums receivable
 1,855 
Beginning balance, as adjusted 10,000 3,300 
     Provision during the period for expected credit losses (2,141)8,169 
Write-off amounts during the period(1,015)(1,658)
Recoveries during the period of amounts previously written off 156 189 
Ending balance $7,000 $10,000 

Reinsurance Recoverables

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

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

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












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The following table presents a summary of changes in allowance for credit losses on reinsurance recoverables:
 Three Months Ended March 31,
 20212020
 (Amounts in thousands)
Beginning balance$91 $ 
     Cumulative effect of adopting ASU 2016-13 for reinsurance recoverables 159 
Beginning balance, as adjusted 91 159 
     Provision during the period for expected credit losses (91)(11)
Write-off amounts during the period  
Recoveries during the period of amounts previously written off   
Ending balance$ $148 

Accrued Interest Receivables

The Company made certain accounting policy elections for its accrued interest receivables on the adoption date of Topic 326 as allowed: a) an election to present accrued interest receivable balances separately from the associated financial assets on the balance sheet, and b) an election not to measure an allowance for credit losses on accrued interest receivable amounts and instead write off uncollectible accrued interest amounts in a timely manner by reversing interest income. The Company did not have any cumulative-effect adjustment as a result of adopting Topic 326 for its accrued interest receivables. The Company's accrued interest receivable balances are included in accrued investment income receivables in its consolidated balance sheets. There were no accrued interest receivable amounts considered uncollectible or written off during the three months ended March 31, 2021 and 2020.

2. Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or other interbank offered rates expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company expects to apply the 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 expires. 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:
March 31, 2021December 31, 2020
 (Amounts in thousands)
Assets
Investments$4,946,202 $4,729,270 
Note receivable5,712 5,725 
Liabilities
Options sold81  
Unsecured notes422,936 415,253 

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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 in 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 March 31, 2021 and December 31, 2020. The Company's financial or other support provided to these VIEs and its loss exposure are limited to its collateral and original investment.

The Company 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 March 31, 2021 and December 31, 2020, the Company had no outstanding unfunded commitments to these VIEs whereby the Company may be called by the VIEs during the commitment period to fund the purchase of new investments and the expenses of the VIEs.
    
Note Receivable
In August 2017, the Company completed the sale of approximately six acres of land located in Brea, California (the "Property"), for a total sale price of approximately $12.2 million. Approximately $5.7 million of the total sale price was received in the form of a promissory note (the "Note") and the remainder in cash. The Note is secured by a first trust deed and an assignment of rents on the Property, and bears interest at an annual rate of 3.5%, payable in monthly installments. The Note was originally set to mature on August 31, 2020. Effective August 1, 2020, the maturity date was extended to August 31, 2021, with no change in the annual interest rate. Interest earned on the Note is recognized in other revenues in the Company's consolidated statements of operations. The Company elected to apply the fair value option to the Note at the time it was first recognized. The fair value of note receivable is included in other assets in the Company's consolidated balance sheets, while the changes in fair value of note receivable are included in net realized investment gains or losses in the Company's consolidated statements of operations.

Options Sold
The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Company as realized gains from investments on the expiration date. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security 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.
Unsecured Notes
The fair value of the Company’s publicly traded $375 million unsecured notes at March 31, 2021 and December 31, 2020 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
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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 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 is included in other revenues in the Company’s consolidated statements of operations.

The following table presents gains (losses) due to changes in fair value of investments and the note receivable that are measured at fair value pursuant to application of the fair value option:
 Three Months Ended March 31,
 20212020
 (Amounts in thousands)
Fixed maturity securities$(8,057)$(50,013)
Equity securities34,520 (186,373)
Short-term investments68 (4,637)
    Total investments$26,531 $(241,023)
Note receivable(13)33 
       Total gains (losses) $26,518 $(240,990)

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.

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

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This
13

condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities
The Company’s fair value measurements are based on the market approach, which utilizes market transaction data for the same or similar instruments. The Company obtained unadjusted fair values on 98.4% of its investment portfolio at fair value from an independent pricing service at March 31, 2021.

Level 1 measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio.
U.S. government bonds /Short-term bonds: Valued using unadjusted quoted market prices for identical assets in active markets.
Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.
Money market instruments: Valued based on unadjusted quoted prices for identical assets in active markets.
Options sold: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on 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 $17.8 million and $17.6 million at fair value in commercial mortgage-backed securities at March 31, 2021 and December 31, 2020, respectively.

Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets.
Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets.
Collateralized loan obligations ("CLOs"): Valued based on underlying debt instruments and the appropriate benchmark spread for similar assets in active markets.
Other asset-backed securities: Comprised of securities that are collateralized by non-mortgage assets, such as automobile loans, valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets.
Note receivable: Valued based on observable inputs, such as benchmark yields, and considering any premium or discount for the differential between the stated interest rate and market interest rates, based on quoted market prices of similar instruments.
Level 3 measurements - Fair values of financial assets are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere are deemed to be of a distressed trading level.
Private equity fund: The single private equity fund that was not measured at net asset value ("NAV") was valued based on underlying investments of the fund or assets similar to such investments in active markets, taking into consideration specific unadjusted broker quotes based on net fund value and unobservable inputs from at least one knowledgeable outside security broker related to liquidity assumptions. This private equity fund was reclassified from Level 3 to private equity funds measured at net asset value at March 31, 2020, due to the use of the NAV practical expedient in measuring the fair value of the fund.
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Fair value measurement using NAV practical expedient - The fair value of the Company's investment in private equity funds measured at net asset value 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. The strategy of two of the three such funds with a fair value of approximately $76.9 million at March 31, 2021 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 the other such fund with a fair value of approximately $1.2 million at March 31, 2021 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. The Company has made all of its capital contributions in these funds and had no outstanding unfunded commitments at March 31, 2021 with respect to the funds. The underlying assets of the funds are expected to be liquidated over the period of approximately one year to nine years from March 31, 2021. 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.
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:
 March 31, 2021
 Level 1Level 2Level 3Total
 (Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds $13,792 $ $ $13,792 
Municipal securities 2,825,589  2,825,589 
Mortgage-backed securities  82,878  82,878 
Corporate securities 226,376  226,376 
Collateralized loan obligations 267,569  267,569 
Other asset-backed securities 171,292  171,292 
Total fixed maturity securities13,792 3,573,704  3,587,496 
Equity securities:
Common stock700,168   700,168 
Non-redeemable preferred stock 32,326  32,326 
Private equity funds measured at net asset value (1)
78,108 
Total equity securities700,168 32,326  810,602 
Short-term investments:
Short-term bonds 27,335  27,335 
Money market instruments520,760   520,760 
Other9   9 
Total short-term investments520,769 27,335  548,104 
Other assets:
Note receivable
 5,712  5,712 
Total assets at fair value$1,234,729 $3,639,077 $ $4,951,914 
Liabilities
Other liabilities:
Options sold$81 $ $ $81 
Total liabilities at fair value$81 $ $ $81 
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 December 31, 2020
 Level 1Level 2Level 3Total
 (Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds$13,816 $ $ $13,816 
Municipal securities 2,791,212  2,791,212 
Mortgage-backed securities  93,264  93,264 
Corporate securities 241,366  241,366 
Collateralized loan obligations 256,891  256,891 
Other asset-backed securities 153,261  153,261 
Total fixed maturity securities13,816 3,535,994  3,549,810 
Equity securities:
Common stock691,782  691,782 
Non-redeemable preferred stock 32,660  32,660 
Private equity funds measured at net asset value (1)
79,409 
Total equity securities691,782 32,660  803,851 
Short-term investments:
Short-term bonds21,999 4,929  26,928 
Money market instruments348,676   348,676 
Other5   5 
Total short-term investments370,680 4,929  375,609 
Other assets:
Note receivable 5,725  5,725 
Total assets at fair value$1,076,278 $3,579,308 $ $4,734,995 
__________ 
(1) The fair value is measured using the NAV practical expedient; therefore, it is not categorized within the fair value hierarchy. The fair value amount is presented in this table to permit reconciliation of the fair value hierarchy to the amounts presented in the Company's consolidated balance sheets.

The following table presents a summary of changes in fair value of Level 3 financial assets and financial liabilities:
Private Equity Fund
 Three Months Ended March 31,
 20212020
 (Amounts in thousands)
Beginning balance$ $1,203 
     Realized losses included in earnings (1)
Settlements  
Transfer out (1)
 (1,202)
Ending balance$ $ 
The amount of total gains or losses for the period included in earnings attributable to assets still held at March 31$ $ 
__________ 
(1) The private equity fund was reclassified from Level 3 to private equity funds measured at net asset value at March 31, 2020, due to the use of the NAV practical expedient in measuring the fair value of the fund.

There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three months ended March 31, 2021 and 2020. A private equity fund was reclassified from Level 3 to private equity funds measured at net asset value at March 31, 2020, as described above.

At March 31, 2021, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or
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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:
 March 31, 2021
 Carrying ValueFair ValueLevel 1Level 2Level 3
 (Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes$372,632 $422,936 $ $422,936 $ 
 December 31, 2020
 Carrying ValueFair ValueLevel 1Level 2Level 3
 (Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes$372,532 $415,253 $ $415,253 $ 

Unsecured Notes
The fair value of the Company’s publicly traded $375 million unsecured notes at March 31, 2021 and December 31, 2020 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
March 31, 2021December 31, 2020
 (Amount in thousands)
Options sold - Other liabilities$81 $ 
Total $81 $ 
 Gains Recognized in Net Income (Loss)
 Three Months Ended March 31,
20212020
 (Amounts in thousands)
Options sold - Net realized investment gains (losses)$460 $1,712 
Total$460 $1,712 

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.
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7. Goodwill and Other Intangible Assets
Goodwill
There were no changes in the carrying amount of goodwill during the three months ended March 31, 2021 and 2020. No accumulated goodwill impairment losses existed at March 31, 2021 and December 31, 2020. Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during the three months ended March 31, 2021 and 2020. 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).
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 March 31, 2021:
Customer relationships$54,862 $(52,747)$2,115 11
Trade names15,400 (7,860)7,540 24
Technology4,300 (4,300) 10
Insurance license1,400 — 1,400 Indefinite
Total other intangible assets, net$75,962 $(64,907)$11,055 
As of December 31, 2020:
Customer relationships$54,862 $(52,640)$2,222 11
Trade names15,400 (7,700)7,700 24
Technology4,300 (4,300) 10
Insurance license1,400 — 1,400 Indefinite
Total other intangible assets, net$75,962 $(64,640)$11,322 

Other intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during the three months ended March 31, 2021 and 2020.

Other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Other intangible assets amortization expense was $0.3 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively.

The following table presents the estimated future amortization expense related to other intangible assets as of March 31, 2021:
YearAmortization Expense
 (Amounts in thousands)
Remainder of 2021$800 
20221,043 
2023879 
2024851 
2025807 
Thereafter5,275 
Total$9,655 

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")
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or deferred stock awards. As of March 31, 2021, the Company had 70,000 stock options granted that were exercised or outstanding, and 4,830,000 shares of common stock available for future grant under the 2015 Plan.

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 March 31, 2021, 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 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 will vest over the four-year requisite service period. 10,000 of these stock options were forfeited in February 2019 following the departure of a senior executive. The fair values of these stock options 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 volatility33.18 %
Risk-free interest rate2.62 %
Expected dividend yield5.40 %
Expected term in months72

Expected volatilities are based on historical volatility of the Company’s stock over the term of the stock options. The Company estimated the expected term of stock options, which represents the period of time that stock options granted are expected to be outstanding, by using historical exercise patterns and post-vesting termination behavior. The risk-free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.
As of March 31, 2021, the Company had $0.1 million of unrecognized compensation expense related to stock options awarded under the 2015 Plan, which will be recognized ratably over the remaining vesting period of approximately 0.9 years.
No share-based compensation awards were granted during the three months ended March 31, 2021.
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 three months ended March 31, 2021.

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 2017 through 2019 for federal taxes, and 2011 through 2013 and 2017 through 2019 for California state taxes. For tax years 2014 through 2016, the Company received Notices of Proposed Assessments (“NPAs”) related to the Company’s California apportionment factor and paid the total assessment with interest to the California Franchise Tax Board ("FTB") in the third quarter of 2020. For tax years 2011 through 2013, the Company received NPAs and submitted a formal protest to the FTB in 2018. For tax years 2017 through 2019, the FTB initiated its examination in the fourth quarter of 2020.

If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with the FTB, an appeal with the California Office of Tax Appeals, or litigation in Superior Court. 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
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of utilizing net operating loss, capital loss, and tax-credit carryforwards. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in earnings in the period that includes the enactment date.

At March 31, 2021, the Company’s deferred income taxes were in a net liability 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:
 Three Months Ended March 31,
 20212020
 (Amounts in thousands)
Gross reserves, beginning of period$1,991,304 $1,921,255 
Reinsurance recoverables on unpaid losses, beginning of period
(54,460)(76,100)
              Cumulative effect of adopting ASU 2016-13 for reinsurance recoverables on unpaid losses (1)
 149 
Reinsurance recoverables on unpaid losses, beginning of period, as adjusted
(54,460)(75,951)
Net reserves, beginning of period, as adjusted1,936,844 1,845,304 
Incurred losses and loss adjustment expenses related to:
Current year627,551 636,566 
Prior years(1,207)15,104 
Total incurred losses and loss adjustment expenses626,344 651,670 
Loss and loss adjustment expense payments related to:
Current year242,103 264,658 
Prior years334,867 403,436 
Total payments576,970 668,094 
Net reserves, end of period1,986,218 1,828,880 
Reinsurance recoverables on unpaid losses, end of period54,882 69,065 
Gross reserves, end of period$2,041,100 $1,897,945 
__________ 
(1) See Note 1 for additional information on adoption of ASU 2016-13.

The decrease in the provision for insured events of prior years during the three months ended March 31, 2021 of $1.2 million was primarily attributable to lower than estimated losses and loss adjustment expenses in the commercial property and private passenger automobile lines of insurance business, mostly offset by unfavorable development in the commercial automobile line of insurance business. The increase in the provision for insured events of prior years during the three months ended March 31, 2020 of $15.1 million was primarily attributable to higher than estimated losses and loss adjustment expenses in the homeowners and commercial automobile lines of insurance business.

For the three months ended March 31, 2021 and 2020, the Company recorded catastrophe losses net of reinsurance of approximately $35 million and $2 million, respectively. Catastrophe losses due to the events that occurred during the three months ended March 31, 2021 totaled approximately $39 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze in Texas and Oklahoma and winter storms in California. These losses were partially offset by favorable development of approximately $4 million on prior years' catastrophe losses. Catastrophe losses due to the events that
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occurred during the three months ended March 31, 2020 totaled approximately $4 million, with no reinsurance benefits used for these losses, resulting primarily from windstorms in California and Oklahoma. These losses were partially offset by favorable development of approximately $2 million on prior years' catastrophe losses.

11. Notes Payable

The following table presents information about the Company's notes payable: