Company Quick10K Filing
Quick10K
Mercury General
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$55.81 55 $3,090
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-29 Earnings, Exhibits
8-K 2019-05-08 Shareholder Vote
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-02-11 Earnings, Exhibits
8-K 2018-12-12 Officers
8-K 2018-11-27 Regulation FD, Exhibits
8-K 2018-10-29 Earnings, Officers, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-05-09 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-04-27 Officers
8-K 2018-03-02 Officers
8-K 2018-02-15 Other Events
8-K 2018-02-05 Earnings, Exhibits
JKHY Henry Jack & Associates 10,340
MIDD Middleby 7,530
TPX Tempur Sealy 3,390
NSTG Nanostring Technologies 947
GLAD Gladstone Capital 277
ALDX Aldeyra Therapeutics 221
ABDC Alcentra Capital 108
CVU CPI Aerostructures 78
VCBD Vitalibis 0
NMTC Neuroone Medical Technologies 0
MCY 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-15.1 mcy-2019630x10qxexhibit151.htm
EX-15.2 mcy-2019630x10qxexhibit152.htm
EX-31.1 mcy-2019630x10qxexhibit311.htm
EX-31.2 mcy-2019630x10qxexhibit312.htm
EX-32.1 mcy-2019630x10qxexhibit321.htm
EX-32.2 mcy-2019630x10qxexhibit322.htm

Mercury General Earnings 2019-06-30

MCY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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Table of Contents

 
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 June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from    to

Commission File No. 001-12257
 ______________________________
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
 ________________________________
California
95-2211612
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
4484 Wilshire Boulevard

Los Angeles,
California
90010
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (323937-1060
 _______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock
MCY
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
  
Accelerated filer
Non-accelerated filer
  
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in the Rule 12b-2 of the Exchange Act).    Yes     No  ý
At July 25, 2019, the registrant had issued and outstanding an aggregate of 55,354,691 shares of its Common Stock.
 


Table of Contents



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

Table of Contents

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
ASSETS
 
 
 
Investments, at fair value:
 
 
 
Fixed maturity securities (amortized cost $3,053,621; $2,969,541)
$
3,157,398

 
$
2,985,161

Equity securities (cost $594,810; $544,082)
645,407

 
529,631

Short-term investments (cost $362,191; $254,518)
362,197

 
253,299

Total investments
4,165,002

 
3,768,091

Cash
240,320

 
314,291

Receivables:
 
 
 
Premium
592,732

 
555,038

Accrued investment income
42,691

 
45,373

Other
5,252

 
6,132

Total receivables
640,675

 
606,543

Reinsurance recoverables
126,571

 
221,088

Deferred policy acquisition costs
227,167

 
215,131

Fixed assets (net of accumulated depreciation $369,817; $359,269)
162,650

 
153,023

Operating lease right-of-use assets
44,432

 

Current income taxes
18,210

 
38,885

Deferred income taxes

 
13,339

Goodwill
42,796

 
42,796

Other intangible assets, net
13,170

 
15,534

Other assets
35,525

 
45,008

Total assets
$
5,716,518

 
$
5,433,729

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Loss and loss adjustment expense reserves
$
1,783,924

 
$
1,829,412

Unearned premiums
1,314,995

 
1,236,181

Notes payable
371,934

 
371,734

Accounts payable and accrued expenses
147,424

 
115,071

Operating lease liabilities
47,091

 

Deferred income taxes
15,654

 

Other liabilities
267,534

 
263,647

Total liabilities
3,948,556

 
3,816,045

Commitments and contingencies


 


Shareholders’ equity:
 
 
 
Common stock without par value or stated value:
       Authorized 70,000 shares; issued and outstanding 55,355; 55,340
98,647

 
98,026

Retained earnings
1,669,315

 
1,519,658

Total shareholders’ equity
1,767,962

 
1,617,684

Total liabilities and shareholders’ equity
$
5,716,518

 
$
5,433,729

See accompanying Notes to Consolidated Financial Statements.

3

Table of Contents

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Net premiums earned
$
888,776

 
$
833,959

 
$
1,759,021

 
$
1,642,043

Net investment income
35,032

 
34,786

 
69,206

 
66,296

Net realized investment gains (losses)
53,329

 
14,290

 
164,403

 
(44,445
)
Other
2,350

 
2,356

 
4,600

 
4,681

Total revenues
979,487

 
885,391

 
1,997,230

 
1,668,575

Expenses:
 
 
 
 
 
 
 
Losses and loss adjustment expenses
656,577

 
605,547

 
1,286,993

 
1,237,781

Policy acquisition costs
148,629

 
141,520

 
297,042

 
282,504

Other operating expenses
68,420

 
60,822

 
135,909

 
126,221

Interest
4,266

 
4,256

 
8,522

 
8,522

Total expenses
877,892

 
812,145

 
1,728,466

 
1,655,028

Income before income taxes
101,595

 
73,246

 
268,764

 
13,547

Income tax expense (benefit)
18,345

 
13,066

 
49,647

 
(4,026
)
Net income
$
83,250

 
$
60,180

 
$
219,117

 
$
17,573

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.50

 
$
1.09

 
$
3.96

 
$
0.32

Diluted
$
1.50

 
$
1.09

 
$
3.96

 
$
0.32

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
55,353

 
55,332

 
55,347

 
55,332

Diluted
55,363

 
55,335

 
55,356

 
55,335

























 

See accompanying Notes to Consolidated Financial Statements.

4

Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Common stock, beginning of period
$
98,495

 
$
97,546

 
$
98,026

 
$
97,523

Proceeds from stock options exercised
138

 

 
591

 

Share-based compensation expense
36

 
40

 
52

 
63

  Withholding tax on stock options exercised
(22
)
 

 
(22
)
 

Common stock, end of period
98,647

 
97,586


98,647


97,586

Retained earnings, beginning of period
1,620,799

 
1,586,675

 
1,519,658

 
1,663,864

Net income
83,250

 
60,180

 
219,117

 
17,573

Dividends paid to shareholders
(34,734
)
 
(34,583
)
 
(69,460
)
 
(69,165
)
Retained earnings, end of period
1,669,315

 
1,612,272


1,669,315


1,612,272

Total shareholders’ equity, end of period
$
1,767,962

 
$
1,709,858


$
1,767,962


$
1,709,858





































See accompanying Notes to Consolidated Financial Statements.

5

Table of Contents

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

 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
219,117

 
$
17,573

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31,164

 
28,572

Net realized investment (gains) losses
(164,403
)
 
44,445

Increase in premiums receivable
(37,693
)
 
(53,220
)
Decrease in reinsurance recoverables
94,517

 
8,512

Changes in current and deferred income taxes
49,667

 
(4,723
)
Increase in deferred policy acquisition costs
(12,036
)
 
(11,124
)
(Decrease) increase in loss and loss adjustment expense reserves
(45,488
)
 
39,237

Increase in unearned premiums
78,814

 
88,839

Increase in accounts payable and accrued expenses
32,560

 
25,546

Share-based compensation
52

 
63

Other, net
19,352

 
355

Net cash provided by operating activities
265,623

 
184,075

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Fixed maturity securities available for sale in nature:
 
 
 
Purchases
(294,561
)
 
(393,898
)
Sales
53,969

 
118,477

Calls or maturities
138,846

 
155,614

Equity securities available for sale in nature:
 
 
 
Purchases
(554,130
)
 
(497,459
)
Sales
508,365

 
417,663

Changes in securities payable and receivable
2,450

 
12,263

(Increase) decrease in short-term investments
(108,370
)
 
31,789

Purchases of fixed assets
(20,874
)
 
(13,148
)
Other, net
3,580

 
6,127

Net cash used in investing activities
(270,725
)
 
(162,572
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Dividends paid to shareholders
(69,460
)
 
(69,165
)
Proceeds from stock options exercised
591

 

Net cash used in financing activities
(68,869
)
 
(69,165
)
Net decrease in cash
(73,971
)
 
(47,662
)
Cash:
 
 
 
Beginning of the year
314,291

 
291,413

End of period
$
240,320

 
$
243,751

SUPPLEMENTAL CASH FLOW DISCLOSURE
 
 
 
Interest paid
$
8,297

 
$
8,250

Income taxes (refunded) paid, net
$
(22
)
 
$
697












See accompanying Notes to Consolidated Financial Statements.

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. General

Consolidation and Basis of Presentation

The interim consolidated financial statements include the accounts of Mercury General Corporation and its subsidiaries (referred to herein collectively as the “Company”). For the list of the Company’s subsidiaries, see Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 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 June 30, 2019 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, 2018 for more complete descriptions and discussions. Operating results and cash flows for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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. 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, 2018.
Earnings per Share

There were no potentially dilutive securities with anti-dilutive effect for the three and six months ended June 30, 2019. Potentially dilutive securities representing approximately 85,000 and 71,000 shares of common stock were excluded from the computation of diluted earnings per common share for the three and six months ended June 30, 2018, respectively, because their effect would have been anti-dilutive.
Dividends per Share

The Company declared and paid a dividend per share of $0.6275 and $0.6250 during the three months ended June 30, 2019 and 2018, respectively, and dividends per share of $1.2550 and $1.2500 during the six months ended June 30, 2019 and 2018, respectively.
Deferred Policy Acquisition Costs

Deferred policy acquisition costs consist of commissions paid to outside agents, premium taxes, salaries, and certain other underwriting costs that are incremental or directly related to the successful acquisition of new and renewal insurance contracts and are amortized over the life of the related policy in proportion to premiums earned. Deferred policy acquisition costs are limited to the amount that will remain after deducting from unearned premiums and anticipated investment income, the estimated losses and loss adjustment expenses, and the servicing costs that will be incurred as premiums are earned. The Company’s deferred policy acquisition costs are further limited by excluding those costs not directly related to the successful acquisition of insurance contracts.

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Deferred policy acquisition cost amortization was $148.6 million and $141.5 million for the three months ended June 30, 2019 and 2018, respectively, and $297.0 million and $282.5 million for the six months ended June 30, 2019 and 2018, respectively. The Company does not defer advertising expenditures but expenses them as incurred. The Company recorded net advertising expense of approximately $10.0 million and $8.8 million for the three months ended June 30, 2019 and 2018, respectively, and $23.6 million and $22.5 million for the six months ended June 30, 2019 and 2018, 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 are stated net of deductions for ceded reinsurance.

The Company is party to a Catastrophe Reinsurance Treaty ("Treaty") covering a wide range of perils that is effective through June 30, 2020. The Treaty provides $590 million of coverage on a per occurrence basis after covered catastrophe losses exceed the $40 million Company retention limit. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies, such as homeowners, but does cover losses from fires following an earthquake. In addition, the Treaty provides for one full reinstatement of coverage limits and excludes losses from wildfires on certain coverage layers of the Treaty.

The Company recognized ceded premiums earned of approximately $16 million and $12 million for the three months ended June 30, 2019 and 2018, respectively, and $31 million and $25 million for the six months ended June 30, 2019 and 2018, 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 $6 million and $(2) million for the three months ended June 30, 2019 and 2018, respectively, and $(52) million and $(1) million for the six months ended June 30, 2019 and 2018, respectively, which are included in losses and loss adjustment expenses in its consolidated statements of operations. The large negative ceded losses and loss adjustment expenses for the six months ended June 30, 2019 resulted from the re-estimation of the catastrophe loss reserves, including estimated subrogation, on the 2018 Camp and Woolsey Fires and the 2017 Southern California wildfires, which have previously been ceded to reinsurers under the Treaty, in conjunction with the sale of the Company's subrogation rights during the first quarter of 2019. The re-estimation primarily benefited the Company's reinsurers. See Note 11. Loss and Loss Adjustment Expense Reserves for additional information.

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 $4.2 million and $4.0 million, with related expenses of $2.7 million and $2.6 million, for the three months ended June 30, 2019 and 2018, respectively, and $8.4 million and $8.3 million, with related expenses of $5.4 million and $5.4 million, for the six months ended June 30, 2019 and 2018, 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 14. Segment Information).
 
As of June 30, 2019 and December 31, 2018, the Company had no contract assets and contract liabilities, and no remaining performance obligations associated with unrecognized revenues.

2. Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software under Subtopic 350-40. This ASU also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and present such expense in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the

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capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. ASU 2018-15 will be effective for the Company beginning January 1, 2020 with early adoption permitted. The Company is in the process of evaluating the impact of ASU 2018-15 on its consolidated financial statements and related disclosures.
 
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU require certain existing disclosure requirements in Topic 820 to be modified or removed, and certain new disclosure requirements to be added to the Topic. In addition, this ASU allows entities to exercise more discretion when considering fair value measurement disclosures. ASU 2018-13 will be effective for the Company beginning January 1, 2020 with early adoption permitted. The Company is in the process of evaluating the impact of ASU 2018-13 on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment." ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step 2 of the goodwill impairment test and requires an entity to recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company beginning January 1, 2020 with early adoption permitted. The Company does not anticipate that ASU 2017-04 will have a material impact on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The amendments in this ASU replace the "incurred loss" methodology for recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of information including past events, current conditions and reasonable and supportable forecasts that affect the collectibility of reported amounts of financial assets that are not accounted for at fair value through net income, such as loans, certain debt securities, trade receivables, net investment in leases, off-balance sheet credit exposures and reinsurance receivables. Under the current GAAP incurred loss methodology, recognition of the full amount of credit losses is generally delayed until the loss is probable of occurring. Current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the probability threshold. Subsequently, the FASB has issued additional ASUs on Topic 326 that do not change the core principle of the guidance in ASU 2016-13 but clarify or address certain aspects of it. ASU 2016-13 and the additional ASUs on Topic 326 will be effective for the Company beginning January 1, 2020. While the Company is in the process of evaluating the impact of ASU 2016-13, it does not expect this ASU to have a material impact on its consolidated financial statements and related disclosures as most of its financial instruments with potential exposure to material credit losses are accounted for at fair value through net income.

3. Financial Instruments

Financial instruments recorded in the consolidated balance sheets include investments, note receivable, other receivables, options sold, total return swap, 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:
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
(Amounts in thousands)
Assets
 
 
 
Investments
$
4,165,002

 
$
3,768,091

Note receivable
5,635

 
5,557

Liabilities
 
 
 
Total return swap
$
1,722

 
$
4,851

Options sold
405

 
3

Unsecured notes
384,401

 
362,674


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

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and losses are included in net realized investment gains (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.

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 June 30, 2019 and December 31, 2018. The Company's financial or other support provided to these VIEs and its loss exposure are limited to its collateral and original investment.

The Company also invests directly in limited partnerships such as private equity funds. These investments are non-consolidated VIEs as the Company has determined it is not the primary beneficiary. The Company's maximum exposure to loss is limited to the total carrying value that is included in equity securities in the Company's consolidated balance sheets. At June 30, 2019 and December 31, 2018, the Company had no outstanding unfunded commitments to these VIEs whereby the Company may be called by the partnerships during the commitment period to fund the purchase of new investments and the expenses of the partnerships.
    
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 matures in August 2020. 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.
Total Return Swap
The fair value of the total return swap reflects the estimated amount that, upon termination of the contract, would be received for selling an asset or paid to transfer a liability in an orderly transaction.
Unsecured Notes
The fair value of the Company’s publicly traded $375 million unsecured notes at June 30, 2019 and December 31, 2018 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.


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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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Fixed maturity securities
$
38,382

 
$
224

 
$
88,157

 
$
(45,988
)
Equity securities
11,361

 
8,533

 
65,048

 
(3,354
)
Short-term investments
491

 
44

 
1,225

 
(347
)
    Total investments
$
50,234

 
$
8,801

 
$
154,430

 
$
(49,689
)
Note receivable
47

 
(8
)
 
78

 
(49
)
       Total gains (losses)
$
50,281

 
$
8,793

 
$
154,508

 
$
(49,738
)

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 1
Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2
Pricing inputs are other than quoted prices in active markets, which are based on the following:
 
•     Quoted prices for similar assets or liabilities in active markets;
 
•     Quoted prices for identical or similar assets or liabilities in non-active markets; or
 
•     Either directly or indirectly observable inputs as of the reporting date.
Level 3
Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.
In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could

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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 June 30, 2019. For a private equity fund that was classified as Level 3 and included in equity securities at June 30, 2019 and December 31, 2018, the Company obtained specific unadjusted broker quotes based on net fund value and, to a lesser extent, unobservable inputs from at least one knowledgeable outside security broker to determine the fair value. The fair value of the private equity fund was $1.2 million and $1.4 million at June 30, 2019 and December 31, 2018, respectively.
Level 1 measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio.
U.S. government bonds /Short-term bonds: Valued using unadjusted quoted market prices for identical assets in active markets.
Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.
Money market instruments: Valued based on unadjusted quoted prices for identical assets in active markets.
Options sold: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on 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 $17.6 million and $24.8 million at fair value in commercial mortgage-backed securities at June 30, 2019 and December 31, 2018, respectively.
Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets.
Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets.
Total return swap: Valued based on multi-dimensional models using inputs such as interest rate yield curves, underlying debt/credit instruments and the appropriate benchmark spread for similar assets in active markets, observable for substantially the full term of the contract.
Collateralized loan obligations ("CLOs"): Valued based on underlying debt instruments and the appropriate benchmark spread for similar assets in active markets.
Other asset-backed securities: Comprised of securities that are collateralized by non-mortgage assets, such as automobile loans, valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets.
Note receivable: Valued based on observable inputs, such as benchmark yields, and considering any premium or discount for the differential between the stated interest rate and market interest rates, based on quoted market prices of similar instruments.

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Level 3 measurements - Fair values of financial assets are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed trading level.
Private equity fund: Private equity fund, excluding a private equity fund measured at net asset value ("NAV"), is valued based on underlying investments of the fund or assets similar to such investments in active markets, taking into consideration specific unadjusted broker quotes based on net fund value and unobservable inputs from at least one knowledgeable outside security broker related to liquidity assumptions.
Fair value measurement using NAV practical expedient - The fair value of the Company's investment in private equity fund measured at net asset value is determined using NAV as advised by the external fund manager and the third party administrator. The NAV of the Company's limited partnership interest in this fund is based on the manager's and the administrator's valuation of the underlying holdings in accordance with the fund's governing documents and GAAP. In accordance with applicable accounting guidance, this investment, measured at fair value using the NAV practical expedient, is not classified in the fair value hierarchy. The strategy of the fund is to provide current income to investors by investing mainly in equity tranches and sub-investment grade rated debt tranches of CLO issuers in the new and secondary markets, and equity interests in vehicles established to purchase and warehouse loans in anticipation of a CLO closing or to satisfy regulatory risk retention requirements associated with certain CLOs. The Company has made all of its capital contributions in the fund and had no outstanding unfunded commitments at June 30, 2019 with respect to this fund. The underlying assets of the fund are expected to be liquidated over the period of approximately one to four years from June 30, 2019. The Company does not have the contractual option to redeem but will receive distributions based on the liquidation of the underlying assets and the interest proceeds from the underlying assets. In addition, the Company does not have the ability to withdraw from the fund, or to sell, assign, pledge or transfer its investment, without the consent from the general partner of the fund.
The Company’s financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment gains or losses in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.


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The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:
 
June 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government bonds
$
23,895

 
$

 
$

 
$
23,895

Municipal securities

 
2,713,171

 

 
2,713,171

Mortgage-backed securities

 
22,916

 

 
22,916

Corporate securities

 
181,943

 

 
181,943

Collateralized loan obligations

 
172,466

 

 
172,466

Other asset-backed securities

 
43,007

 

 
43,007

Total fixed maturity securities
23,895

 
3,133,503

 

 
3,157,398

Equity securities:
 
 
 
 
 
 
 
Common stock
543,735

 

 

 
543,735

Non-redeemable preferred stock

 
33,778

 

 
33,778

Private equity fund

 

 
1,206

 
1,206

Private equity fund measured at net asset value (1)
 
 
 
 
 
 
66,688

Total equity securities
543,735

 
33,778

 
1,206

 
645,407

Short-term investments:
 
 
 
 
 
 
 
Short-term bonds
32,801

 
39,627

 

 
72,428

Money market instruments
289,769

 

 

 
289,769

Total short-term investments
322,570

 
39,627

 

 
362,197

Other assets:
 
 
 
 
 
 
 
Note receivable

 
5,635

 

 
5,635

Total assets at fair value
$
890,200

 
$
3,212,543

 
$
1,206

 
$
4,170,637

Liabilities
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Total return swap
$

 
$
1,722

 
$

 
$
1,722

Options sold
405

 

 

 
405

Total liabilities at fair value
$
405


$
1,722


$


$
2,127


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December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government bonds
$
25,003

 
$

 
$

 
$
25,003

Municipal securities

 
2,620,132

 

 
2,620,132

Mortgage-backed securities

 
30,952

 

 
30,952

Corporate securities

 
105,524

 

 
105,524

Collateralized loan obligations

 
165,789

 

 
165,789

Other asset-backed securities

 
37,761

 

 
37,761

Total fixed maturity securities
25,003

 
2,960,158

 

 
2,985,161

Equity securities:
 
 
 
 
 
 
 
Common stock
430,973

 

 

 
430,973

Non-redeemable preferred stock

 
31,433

 

 
31,433

Private equity fund

 

 
1,445

 
1,445

Private equity fund measured at net asset value (1)
 
 
 
 
 
 
65,780

Total equity securities
430,973

 
31,433

 
1,445

 
529,631

Short-term investments:
 
 
 
 
 
 
 
Short-term bonds
31,472

 
16,784

 

 
48,256

Money market instruments
205,043

 

 

 
205,043

Total short-term investments
236,515

 
16,784

 

 
253,299

Other assets:
 
 
 
 
 
 


Note receivable

 
5,557

 

 
5,557

Total assets at fair value
$
692,491


$
3,013,932


$
1,445


$
3,773,648

Liabilities
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Total return swap
$

 
$
4,851

 
$

 
$
4,851

Options sold
3

 

 

 
3

Total liabilities at fair value
$
3

 
$
4,851

 
$

 
$
4,854


__________ 
(1) The fair value is measured using the NAV practical expedient; therefore, it is not categorized within the fair value hierarchy. The fair value amount is presented in this table to permit reconciliation of the fair value hierarchy to the amounts presented in the Company's consolidated balance sheets.

The following table presents a summary of changes in fair value of Level 3 financial assets and financial liabilities:
 
 
Private Equity Fund
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Beginning balance
 
$
1,213

 
$
1,450

 
$
1,445

 
$
1,481

     Realized (losses) gains included in earnings
 
(7
)
 

 
104

 
(31
)
Settlements
 

 

 
(343
)
 

Ending balance
 
$
1,206

 
$
1,450

 
$
1,206

 
$
1,450

The amount of total (losses) gains for the period included in earnings attributable to assets still held at June 30
 
$
(7
)
 
$

 
$
96

 
$
(31
)


There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the six months ended June 30, 2019 and 2018.

At June 30, 2019, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial

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Table of Contents

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:
 
June 30, 2019
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Liabilities
 
 
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
 
 
Unsecured notes
$
371,934

 
$
384,401

 
$

 
$
384,401

 
$

 
December 31, 2018
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)