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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, 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)
 ________________________________
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: (323) 937-1060
 _______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockMCYNew York Stock Exchange
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 28, 2022, the registrant had issued and outstanding an aggregate of 55,371,127 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, 2022December 31, 2021
 (unaudited) 
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $3,995,864; $3,909,780)
$3,959,679 $4,031,523 
Equity securities (cost $769,934; $754,536)
946,015 970,939 
Short-term investments (cost $134,997; $141,206)
133,920 140,127 
Total investments5,039,614 5,142,589 
Cash295,764 335,557 
Receivables:
Premiums647,143 621,740 
       Allowance for credit losses on premiums receivable (6,000)(6,000)
             Premiums receivable, net of allowance for credit losses641,143 615,740 
Accrued investment income43,380 43,299 
Other7,490 7,600 
Total receivables692,013 666,639 
Reinsurance recoverables35,106 45,000 
Deferred policy acquisition costs265,921 258,259 
Fixed assets (net of accumulated depreciation $315,515; $308,997)
190,867 191,332 
Operating lease right-of-use assets29,098 31,967 
Current income taxes30,637 20,108 
Goodwill42,796 42,796 
Other intangible assets, net9,988 10,255 
Other assets35,312 27,970 
Total assets$6,667,116 $6,772,472 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and loss adjustment expense reserves$2,307,826 $2,226,430 
Unearned premiums1,568,186 1,519,799 
Notes payable373,031 372,931 
Accounts payable and accrued expenses175,406 169,125 
Operating lease liabilities31,991 34,577 
Deferred income taxes7,969 53,569 
Other liabilities294,500 255,760 
Total liabilities4,758,909 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 earnings1,809,260 2,041,338 
Total shareholders’ equity1,908,207 2,140,281 
Total liabilities and shareholders’ equity$6,667,116 $6,772,472 

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,
 20222021
Revenues:
Net premiums earned$962,550 $915,922 
Net investment income 35,351 32,279 
Net realized investment (losses) gains(195,086)41,691 
Other2,646 3,204 
Total revenues805,461 993,096 
Expenses:
Losses and loss adjustment expenses821,933 626,344 
Policy acquisition costs162,092 164,430 
Other operating expenses70,290 65,558 
Interest4,275 4,343 
Total expenses1,058,590 860,675 
(Loss) income before income taxes(253,129)132,421 
Income tax (benefit) expense(56,212)25,426 
Net (loss) income$(196,917)$106,995 
Net (loss) income per share:
Basic$(3.56)$1.93 
Diluted $(3.56)$1.93 
Weighted average shares outstanding:
Basic55,371 55,361 
Diluted55,371 55,372 






















 

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,
 20222021
Common stock, beginning of period$98,943 $98,970 
Proceeds from stock options exercised— 215 
Share-based compensation expense15 35 
Withholding tax on stock options exercised(11)(383)
Common stock, end of period98,947 98,837 
Retained earnings, beginning of period2,041,338 1,933,627 
Net (loss) income(196,917)106,995 
Dividends paid to shareholders(35,161)(35,022)
Retained earnings, end of period1,809,260 2,005,600 
Total shareholders’ equity, end of period$1,908,207 $2,104,437 


































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,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(196,917)$106,995 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization22,253 17,580 
Net realized investment losses (gains)195,086 (41,691)
Increase in premiums receivable(25,403)(26,941)
Decrease (increase) in reinsurance recoverables9,894 (5,824)
Changes in current and deferred income taxes(56,129)25,427 
(Increase) decrease in deferred policy acquisition costs(7,662)3,257 
Increase in loss and loss adjustment expense reserves81,396 49,796 
Increase in unearned premiums48,387 34,561 
Increase (decrease) in accounts payable and accrued expenses7,548 (2,423)
Share-based compensation15 35 
Other, net28,110 13,747 
Net cash provided by operating activities106,578 174,519 
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases(338,829)(230,038)
Sales147,088 41,041 
Calls or maturities89,399 103,010 
Equity securities available for sale in nature:
Purchases(273,186)(194,929)
Sales263,352 240,657 
Changes in securities payable and receivable3,162 43,436 
Decrease (increase) in short-term investments 5,372 (145,159)
Purchases of fixed assets(8,273)(7,929)
Other, net1,494 543 
Net cash used in investing activities(110,421)(149,368)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders(35,161)(35,022)
Proceeds from stock options exercised— 215 
Payments on finance lease obligations(789)(393)
Net cash used in financing activities(35,950)(35,200)
Net decrease in cash(39,793)(10,049)
Cash:
Beginning of the year335,557 348,479 
End of period$295,764 $338,430 
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid$8,288 $8,275 
Income taxes refunded, net$28 $— 






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, 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 March 31, 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 three months ended March 31, 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 per Share
For the three months ended March 31, 2022, the dilutive impact of incremental shares was excluded as the Company generated a net loss. There were no potentially dilutive securities with anti-dilutive effect for the three months ended March 31, 2021.
Dividends per Share
The Company declared and paid a dividend per share of $0.6350 and $0.6325 during the three months ended March 31, 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 $162.1 million and $164.4 million for the three months ended March 31, 2022 and 2021, respectively. The Company does not defer advertising expenditures but expenses them as incurred. The Company recorded net advertising expense of approximately $3.9 million and $9.7 million for the three months ended March 31, 2022 and 2021, respectively.

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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, 2022. The Treaty provides $792 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,
20222021
 (Amounts in thousands)
Premiums Written
Direct $1,011,385 $946,606 
Ceded(17,601)(15,643)
Assumed10,165 12,669 
     Net$1,003,949 $943,632 
Premiums Earned
Direct$970,163 $921,067 
Ceded(17,462)(15,543)
Assumed2,717 3,291 
     Net$955,418 $908,815 

The Company recognized ceded premiums earned of approximately $17 million and $16 million for the three months ended March 31, 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 $(7) million and $1 million for the three months ended March 31, 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 months ended March 31, 2022 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 100% owned insurance agencies, which amounted to approximately $4.5 million and $6.3 million, with related expenses of $2.8 million and $3.7 million, for the three months ended March 31, 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 March 31, 2022 and December 31, 2021, the Company had no contract assets and contract liabilities, and no
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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 total estimated allowance amount for credit losses at March 31, 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 three months ended March 31, 2021. However, the rising inflation rate had a negative impact on the allowance for credit losses for the three months ended March 31, 2022, mostly offsetting the positive impact 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 March 31,
 20222021
 (Amounts in thousands)
Beginning balance$6,000 $10,000 
     Provision during the period for expected credit losses 1,170 (2,141)
Write-off amounts during the period(1,319)(1,015)
Recoveries during the period of amounts previously written off 149 156 
Ending balance $6,000 $7,000 

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 months ended March 31, 2022 and 2021.

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 is discontinued. The Company does not expect any material impact on its consolidated financial statements and related disclosures resulting from applying this ASU.

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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, 2022December 31, 2021
 (Amounts in thousands)
Assets
Investments$5,039,614 $5,142,589 
Liabilities
Options sold569 301 
Notes payable384,743 413,378 
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 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, 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 March 31, 2022 and December 31, 2021, the Company had a maximum of approximately $28 million and $32 million, respectively, in unfunded commitments to these VIEs.
    
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.

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Notes Payable
The fair value of the Company’s publicly traded $375 million unsecured notes at March 31, 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 March 31,
 20222021
 (Amounts in thousands)
Fixed maturity securities$(157,929)$(8,057)
Equity securities(40,321)34,520 
Short-term investments2 68 
    Total investments$(198,248)$26,531 
Note receivable— (13)
       Total (losses) gains $(198,248)$26,518 

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.


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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 97.9% of its investment portfolio at fair value from an independent pricing service at March 31, 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 /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 $23.6 million and $25.2 million at fair value in commercial mortgage-backed securities at March 31, 2022 and December 31, 2021, 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.
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 March 31, 2022 and December 31, 2021, the Company did not have any financial
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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. The strategy of three of the four such funds with a fair value of approximately $103.9 million at March 31, 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 the other such fund with a fair value of approximately $0.6 million at March 31, 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. The Company had a maximum of approximately $28 million in unfunded commitments at March 31, 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 nine years from March 31, 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.
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, 2022
 Level 1Level 2Level 3Total
 (Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds $13,477 $— $— $13,477 
Municipal securities— 2,780,244 — 2,780,244 
Mortgage-backed securities — 151,840 — 151,840 
Corporate securities— 511,952 — 511,952 
Collateralized loan obligations— 314,193 — 314,193 
Other asset-backed securities— 187,973 — 187,973 
Total fixed maturity securities13,477 3,946,202 — 3,959,679 
Equity securities:
Common stock779,229 — — 779,229 
Non-redeemable preferred stock— 62,247 — 62,247 
Private equity funds measured at net asset value (1)
104,539 
Total equity securities779,229 62,247 — 946,015 
Short-term investments:
Short-term bonds1,447 18,877 — 20,324 
Money market instruments113,570 — — 113,570 
Other26 — — 26 
Total short-term investments115,043 18,877 — 133,920 
Total assets at fair value$907,749 $4,027,326 $— $5,039,614 
Liabilities
Other liabilities:
Options sold$569 $— $— $569 
Total liabilities at fair value$569 $— $— $569 
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 December 31, 2021
 Level 1Level 2Level 3Total
 (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 securities13,085 4,018,438 — 4,031,523 
Equity securities:
Common stock797,024 —— 797,024 
Non-redeemable preferred stock— 65,501 — 65,501 
Private equity funds measured at net asset value (1)
108,414 
Total equity securities797,024 65,501 — 970,939 
Short-term investments:
Short-term bonds1,453 15,748 — 17,201 
Money market instruments122,917 — — 122,917 
Other9 — — 9 
Total short-term investments124,379 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 three months ended March 31, 2022 and 2021.

At March 31, 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:
 March 31, 2022
 Carrying ValueFair ValueLevel 1Level 2Level 3
 (Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes$373,031 $384,743 $— $384,743 $— 
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 December 31, 2021
 Carrying ValueFair ValueLevel 1Level 2Level 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 March 31, 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
March 31, 2022December 31, 2021
 (Amount in thousands)
Options sold - Other liabilities$569 $301 
Total $569 $301 
 Gains Recognized in Net Income
 Three Months Ended March 31,
20222021
 (Amounts in thousands)
Options sold - Net realized investment (losses) gains$1,225 $460 
Total$1,225 $460 

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 months ended March 31, 2022 and 2021. No accumulated goodwill impairment losses existed at March 31, 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 months ended March 31, 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 March 31, 2022:
Customer relationships$54,862 $(53,172)$1,690 11
Trade names15,400 (8,502)6,898 24
Technology4,300 (4,300)— 10
Insurance license1,400 — 1,400 Indefinite
Total other intangible assets, net$75,962 $(65,974)$9,988 
As of December 31, 2021:
Customer relationships$54,862 $(53,065)$1,797 11
Trade names15,400 (8,342)7,058 24
Technology4,300 (4,300)— 10
Insurance license1,400 — 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 months ended March 31, 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 March 31, 2022 and 2021.

The following table presents the estimated future amortization expense related to other intangible assets as of March 31, 2022:
YearAmortization Expense
 (Amounts in thousands)
Remainder of 2022$777 
2023879 
2024851 
2025807 
2026807 
Thereafter4,467 
Total$8,588 

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 March 31, 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 March 31, 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 values.
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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 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 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 March 31, 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 three months ended March 31, 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 was no change to the total amount of unrecognized tax benefits related to tax uncertainties during the three months ended March 31, 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 2018 through 2020 for federal taxes, and 2011 through 2013 and 2020 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 the 2011 through 2013 tax years. 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 earnings in the period that includes the enactment date.

At March 31, 2022, 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
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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,
 20222021
 (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 period2,185,053 1,936,844 
Incurred losses and loss adjustment expenses related to:
Current year769,022 627,551 
Prior years52,911 (1,207)
Total incurred losses and loss adjustment expenses821,933 626,344 
Loss and loss adjustment expense payments related to:
Current year261,115 242,103 
Prior years471,258 334,867 
Total payments732,373 576,970 
Net reserves, end of period2,274,613 1,986,218 
Reinsurance recoverables on unpaid losses, end of period33,213 54,882 
Gross reserves, end of period$2,307,826 $2,041,100 

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 three months ended March 31, 2022 compared to the corresponding period in 2021. The increase in the provision for insured events of prior years during the three months ended March 31, 2022 of $52.9 million was primarily attributable to higher than estimated losses and loss adjustment expenses in the automobile and commercial property lines of insurance business, partially offset by favorable development in the homeowners line of insurance business. The inflationary pressures and the supply chain and labor shortage issues discussed above were major contributors to the adverse reserve development in the automobile line of insurance business for the first quarter of 2022. 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.

For the three months ended March 31, 2022 and 2021, the Company recorded catastrophe losses net of reinsurance of approximately $22 million and $35 million, respectively. Catastrophe losses due to the events that occurred during the three months ended March 31, 2022 totaled approximately $21 million, with no reinsurance benefits used for these losses, resulting primarily from winter storms in Texas and California. 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. In addition, the Company experienced unfavorable development of approximately $1 million and favorable development of approximately $4 million on prior years' catastrophe losses for the three months ended March 31, 2022 and 2021, respectively.





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11. Notes Payable

The following table presents information about the Company's notes payable:
LenderInterest RateMaturity DateMarch 31, 2022December 31, 2021
(Amounts in thousands)
Senior unsecured notes(1)
Publicly traded4.40%March 15, 2027$375,000 $375,000 
Unsecured credit facility(2)
Bank of America, Wells Fargo Bank, and U.S. Bank
LIBOR plus 112.5-150.0 basis points
March 31, 2026— — 
    Total principal amount375,000 375,000 
Less unamortized discount and debt issuance costs(3)
1,969 2,069 
Total debt$373,031 $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 16.4% at March 31, 2022, resulting in a 12.5 basis point commitment fee on the $75 million undrawn portion of the credit facility. As of April 28, 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 least obtain the agreement of the California DOI to remove the resolved items from the NNC before proceeding to a formal
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hearing process if a settlement is not reached. The Company cannot reasonably predict the outcome of the hearing if it occurs, 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.
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
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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 March 31,
20222021
 Property & CasualtyOtherTotalProperty & CasualtyOtherTotal
(Amounts in millions)
Net premiums earned$955.4 $7.2 $962.6 $908.8 $7.1 $915.9 
Less:
Losses and loss adjustment expenses818.3 3.6 821.9 622.9 3.4 626.3 
Underwriting expenses229.1 3.3 232.4 227.3 2.8 230.1 
Underwriting (loss) gain(92.0)0.3 (91.7)58.6 0.9 59.5 
Investment income35.4 32.3 
Net realized investment (losses) gains (195.1)41.7