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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________    to ___________

Commission File No. 001-12257
 ______________________________
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
 ________________________________
California95-2211612
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4484 Wilshire Boulevard
Los Angeles, California90010
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (323937-1060
 _______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockMCYNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filerý  Accelerated filer
Non-accelerated filer  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in the Rule 12b-2 of the Exchange Act).    Yes     No  ý
At October 27, 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)

September 30, 2022December 31, 2021
 (unaudited) 
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $4,105,574; $3,909,780)
$3,897,859 $4,031,523 
Equity securities (cost $688,401; $754,536)
684,335 970,939 
Short-term investments (cost $101,548; $141,206)
100,621 140,127 
Total investments4,682,815 5,142,589 
Cash335,886 335,557 
Receivables:
Premiums646,942 621,740 
       Allowance for credit losses on premiums receivable (6,000)(6,000)
             Premiums receivable, net of allowance for credit losses640,942 615,740 
Accrued investment income48,894 43,299 
Other7,871 7,600 
Total receivables697,707 666,639 
Reinsurance recoverables25,309 45,000 
Deferred policy acquisition costs279,726 258,259 
Fixed assets (net of accumulated depreciation $325,461; $308,997)
189,753 191,332 
Operating lease right-of-use assets23,610 31,967 
Current income taxes48,429 20,108 
Deferred income taxes65,705  
Goodwill42,796 42,796 
Other intangible assets, net9,455 10,255 
Other assets53,470 27,970 
Total assets$6,454,661 $6,772,472 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and loss adjustment expense reserves$2,432,734 $2,226,430 
Unearned premiums1,635,459 1,519,799 
Notes payable373,230 372,931 
Accounts payable and accrued expenses155,441 169,125 
Operating lease liabilities26,366 34,577 
Deferred income taxes 53,569 
Other liabilities284,950 255,760 
Total liabilities4,908,180 4,632,191 
Commitments and contingencies
Shareholders’ equity:
Common stock without par value or stated value:
       Authorized 70,000 shares; issued and outstanding 55,371; 55,371
98,947 98,943 
 Retained earnings1,447,534 2,041,338 
Total shareholders’ equity1,546,481 2,140,281 
Total liabilities and shareholders’ equity$6,454,661 $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 September 30,Nine Months Ended September 30,
 2022202120222021
Revenues:
Net premiums earned$996,939 $940,941 $2,947,000 $2,783,682 
Net investment income 44,563 32,334 118,469 95,566 
Net realized investment (losses) gains(144,213)(43,543)(581,237)56,953 
Other2,998 2,481 7,141 7,883 
Total revenues900,287 932,213 2,491,373 2,944,084 
Expenses:
Losses and loss adjustment expenses787,462 697,947 2,436,175 1,981,519 
Policy acquisition costs168,870 153,142 487,444 468,556 
Other operating expenses68,585 80,238 208,305 216,723 
Interest4,273 4,267 12,822 12,845 
Total expenses1,029,190 935,594 3,144,746 2,679,643 
(Loss) income before income taxes(128,903)(3,381)(653,373)264,441 
Income tax (benefit) expense(30,600)(4,669)(147,471)46,977 
Net (loss) income$(98,303)$1,288 $(505,902)$217,464 
Net (loss) income per share:
Basic$(1.78)$0.02 $(9.14)$3.93 
Diluted $(1.78)$0.02 $(9.14)$3.93 
Weighted average shares outstanding:
Basic55,371 55,371 55,371 55,367 
Diluted55,371 55,375 55,371 55,375 






















 

See accompanying Notes to Consolidated Financial Statements.
4

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

 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Common stock, beginning of period$98,947 $98,872 $98,943 $98,970 
Proceeds from stock options exercised   215 
Share-based compensation expense 36 15 106 
Withholding tax on stock options exercised  (11)(383)
Common stock, end of period98,947 98,908 98,947 98,908 
Retained earnings, beginning of period1,563,418 2,079,759 2,041,338 1,933,627 
Net (loss) income(98,303)1,288 (505,902)217,464 
Dividends paid to shareholders(17,581)(35,022)(87,902)(105,066)
Retained earnings, end of period1,447,534 2,046,025 1,447,534 2,046,025 
Total shareholders’ equity, end of period$1,546,481 $2,144,933 $1,546,481 $2,144,933 


































See accompanying Notes to Consolidated Financial Statements.
5

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months Ended September 30,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(505,902)$217,464 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization64,647 56,864 
Net realized investment losses (gains)581,237 (56,953)
Increase in premiums receivable(25,202)(58,529)
Decrease (increase) in reinsurance recoverables19,691 (1,437)
Changes in current and deferred income taxes(147,595)(22,454)
Increase in deferred policy acquisition costs(21,467)(16,280)
Increase in loss and loss adjustment expense reserves206,304 150,817 
Increase in unearned premiums115,660 139,424 
Decrease in accounts payable and accrued expenses(11,708)(12,958)
Share-based compensation15 106 
Other, net9,191 31,965 
Net cash provided by operating activities284,871 428,029 
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases(1,299,431)(1,044,819)
Sales621,519 117,754 
Calls or maturities388,421 397,524 
Equity securities available for sale in nature:
Purchases(755,838)(695,393)
Sales843,283 689,484 
Changes in securities payable and receivable(11,303)20,267 
Decrease in short-term investments 39,634 213,553 
Purchases of fixed assets(25,589)(29,498)
Other, net3,811 1,842 
Net cash used in investing activities(195,493)(329,286)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders(87,902)(105,066)
Proceeds from stock options exercised 215 
Payments on finance lease obligations(1,147)(765)
Net cash used in financing activities(89,049)(105,616)
Net increase (decrease) in cash329 (6,873)
Cash:
Beginning of the year335,557 348,479 
End of period$335,886 $341,606 
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid$16,612 $16,584 
Income taxes paid, net$179 $69,432 






See accompanying Notes to Consolidated Financial Statements.
6

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

1. General

Consolidation and Basis of Presentation
The interim consolidated financial statements include the accounts of Mercury General Corporation and its subsidiaries (referred to herein collectively as the “Company”). For the list of the Company’s subsidiaries, see Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which differ in some respects from those filed in reports to insurance regulatory authorities. The financial data of the Company included herein are unaudited. In the opinion of management, all material adjustments of a normal recurring nature have been made to present fairly the Company’s financial position at September 30, 2022 and the results of operations and cash flows for the periods presented. All intercompany transactions and balances have been eliminated.

Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted from the accompanying interim consolidated financial statements and related notes. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more complete descriptions and discussions. Operating results and cash flows for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates require the Company to apply complex assumptions and judgments, and often the Company must make estimates about the effects of matters that are inherently uncertain and will likely change in subsequent periods. The most significant assumptions in the preparation of these consolidated financial statements relate to reserves for losses and loss adjustment expenses ("LAE"). Actual results could differ from those estimates. See Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Earnings (Loss) per Share
Potentially dilutive securities representing approximately 18,000 shares of common stock were excluded from the computation of diluted loss per share for the three months ended September 30, 2022, because their effect would have been anti-dilutive. For the nine months ended September 30, 2022, 1,294 incremental shares were excluded from the computation of diluted loss per share as the Company generated a net loss. There were no potentially dilutive securities with anti-dilutive effect for the three and nine months ended September 30, 2021.
Dividends per Share
The Company declared and paid a dividend per share of $0.3175 and $0.6325 during the three months ended September 30, 2022 and 2021, respectively, and dividends per share of $1.5875 and $1.8975 during the nine months ended September 30, 2022 and 2021, respectively.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs consist of commissions paid to outside agents, premium taxes, salaries, and certain other underwriting costs that are incremental or directly related to the successful acquisition of new and renewal insurance contracts and are amortized over the life of the related policy in proportion to premiums earned. Deferred policy acquisition costs are limited to the amount that will remain after deducting from unearned premiums and anticipated investment income, the estimated losses and loss adjustment expenses, and the servicing costs that will be incurred as premiums are earned. The Company’s deferred policy acquisition costs are further limited by excluding those costs not directly related to the successful acquisition of insurance contracts. Deferred policy acquisition cost amortization was $168.9 million and $153.1 million for the three months ended September 30, 2022 and 2021, respectively, and $487.4 million and $468.6 million for the nine months
7

ended September 30, 2022 and 2021, respectively. The Company does not defer advertising expenditures but expenses them as incurred. The Company recorded net advertising expense of approximately $2.3 million and $19.4 million for the three months ended September 30, 2022 and 2021, respectively, and $10.0 million and $40.7 million for the nine months ended September 30, 2022 and 2021, respectively.

Reinsurance

Unearned premiums and loss and loss adjustment expense reserves are stated in the accompanying consolidated financial statements before deductions for ceded reinsurance. Unearned premiums and loss and loss adjustment expense reserves that are ceded to reinsurers are carried in other assets and reinsurance recoverables, respectively, in the Company's consolidated balance sheets. Earned premiums and losses and loss adjustment expenses are stated net of deductions for ceded reinsurance.
The Company is the assuming reinsurer under a Catastrophe Participation Reinsurance Contract (the "Contract") effective through December 31, 2022. The Company reimburses up to $25 million in losses for a proportional share of a portfolio of catastrophe losses under the Contract, to the extent the actual loss ratio exceeds the threshold loss ratio of 73.5%. If the actual loss ratio is less than the threshold loss ratio, the Company is eligible to receive a certain portion of the underwriting profit.

The Company is party to a Catastrophe Reinsurance Treaty (the "Treaty") covering a wide range of perils that is effective through June 30, 2023. The Treaty provides $936 million of coverage on a per occurrence basis after covered catastrophe losses exceed the $60 million Company retention limit. The Treaty specifically excludes coverage for any Florida business and for California earthquake losses on fixed property policies, such as homeowners, but does cover losses from fires following an earthquake. The Treaty provides for one full reinstatement of coverage limits with a minor exception at certain upper layers of coverage, and includes some additional minor territorial and coverage restrictions.

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

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
 (Amounts in thousands)
Premiums Written
Direct $1,049,088 $1,024,753 $3,086,222 $2,934,777 
Ceded(22,805)(17,322)(57,776)(48,750)
Assumed138 161 10,582 13,048 
     Net$1,026,421 $1,007,592 $3,039,028 $2,899,075 
Premiums Earned
Direct$1,009,829 $947,458 $2,974,651 $2,800,357 
Ceded(22,825)(17,175)(57,383)(48,335)
Assumed2,684 3,322 8,142 9,912 
     Net$989,688 $933,605 $2,925,410 $2,761,934 

The Company recognized ceded premiums earned of approximately $23 million and $17 million for the three months ended September 30, 2022 and 2021, respectively, and $57 million and $48 million for the nine months ended September 30, 2022 and 2021, respectively, which are included in net premiums earned in its consolidated statements of operations. The Company recognized ceded losses and loss adjustment expenses of approximately $(2) million and $(1) million for the three months ended September 30, 2022 and 2021, respectively, and $(15) million and $(4) million for the nine months ended September 30, 2022 and 2021, respectively, which are included in losses and loss adjustment expenses in its consolidated statements of operations. The negative ceded losses and loss adjustment expenses for the three and nine months ended September 30, 2022 and 2021 were primarily the result of favorable development on prior years' catastrophe losses that had been ceded to the Company's reinsurers.

The Company's insurance subsidiaries, as primary insurers, are required to pay losses to the extent reinsurers are unable to discharge their obligations under the reinsurance agreements.
Revenue from Contracts with Customers (Topic 606)

The Company's revenue from contracts with customers is commission income earned from third-party insurers by its
8

100% owned insurance agencies, which amounted to approximately $4.5 million and $4.6 million, with related expenses of $2.5 million and $3.0 million, for the three months ended September 30, 2022 and 2021, respectively, and $13.5 million and $15.9 million, with related expenses of $8.0 million and $9.9 million, for the nine months ended September 30, 2022 and 2021, respectively. All of the commission income, net of related expenses, is included in other revenues in the Company's consolidated statements of operations, and in other income of the Property and Casualty business segment in the Company's segment reporting (see Note 13. Segment Information).

As of September 30, 2022 and December 31, 2021, the Company had no contract assets and contract liabilities, and no remaining performance obligations associated with unrecognized revenues.

Allowance for Credit Losses

Financial Instruments - Credit Losses (Topic 326) uses the "expected loss" methodology for recognizing credit losses for financial assets that are not accounted for at fair value through net income. The Company's investment portfolio, which does not include accrued investment income, is not subject to Topic 326 as it applies the fair value option to all of its investments (see Note 4. Fair Value Option). The estimated allowance amounts for credit losses at September 30, 2022 and December 31, 2021 related to premiums receivable.

Premiums Receivable

The majority of the Company's premiums receivable are short-term in nature and are due within a year, consistent with the policy term of its insurance policies sold. Generally, premiums are collected prior to providing risk coverage, minimizing the Company's exposure to credit risk. In estimating an allowance for uncollectible premiums receivable, the Company assesses customer balances and write-offs by state, line of business, and the year the premiums were written. The estimated allowance is based on historical write-off percentages adjusted for the effects of current trends and reasonable and supportable forecasts, as well as expected recoveries of amounts written off.

The improving economy and declining unemployment rate contributed to the reduction in allowance for credit losses for the nine months ended September 30, 2021. However, the rising inflation and interest rates had negative impacts on the allowance for credit losses for the nine months ended September 30, 2022, mostly offsetting the positive impacts of some improvements in the economy.

The following table presents a summary of changes in allowance for credit losses on premiums receivable:
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
 (Amounts in thousands)
Beginning balance$6,000 $6,000 $6,000 $10,000 
     Provision during the period for expected credit losses 1,153 694 3,330 (1,837)
Write-off amounts during the period(1,311)(838)(3,798)(2,610)
Recoveries during the period of amounts previously written off 158 144 468 447 
Ending balance $6,000 $6,000 $6,000 $6,000 

Accrued Interest Receivables

The Company made certain accounting policy elections for its accrued interest receivables allowed under Topic 326: a) an election to present accrued interest receivable balances separately from the associated financial assets on the balance sheet, and b) an election not to measure an allowance for credit losses on accrued interest receivable amounts and instead write off uncollectible accrued interest amounts in a timely manner by reversing interest income. The Company's accrued interest receivable balances are included in accrued investment income receivable in its consolidated balance sheets. There were no accrued interest receivable amounts considered uncollectible or written off during the three and nine months ended September 30, 2022 and 2021.

2. Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform
9

(Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or other interbank offered rates expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company expects to apply the optional expedients in this ASU to its unsecured credit facility that references LIBOR (see Note 11), when the facility is modified with a replacement rate before LIBOR is discontinued. The Company does not expect any material impact on its consolidated financial statements and related disclosures resulting from applying this ASU.

3. Financial Instruments

Financial instruments recorded in the consolidated balance sheets include investments, note receivable, other receivables, options sold, accounts payable, and unsecured notes payable. Due to their short-term maturities, the carrying values of other receivables and accounts payable approximate their fair values. All investments are carried at fair value in the consolidated balance sheets.

The following table presents the fair values of financial instruments:
September 30, 2022December 31, 2021
 (Amounts in thousands)
Assets
Investments$4,682,815 $5,142,589 
Liabilities
Options sold169 301 
Notes payable349,643 413,378 
Investments
The Company applies the fair value option to all fixed maturity and equity securities and short-term investments at the time an eligible item is first recognized. The cost of investments sold is determined on a first-in and first-out method and realized gains and losses are included in net realized investment gains or losses 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 September 30, 2022 and December 31, 2021. The Company's financial or other support provided to these VIEs and its loss exposure are limited to its collateral and original investment.

The Company invests, directly or indirectly through its consolidated VIEs, in limited partnerships or limited liability companies such as private equity funds. These investments are non-consolidated VIEs as the Company has determined it is not the primary beneficiary of such VIEs. The Company's maximum exposure to loss with respect to these VIEs is limited to the total carrying value that is included in equity securities in the Company's consolidated balance sheets. At September 30, 2022 and December 31, 2021, the Company had approximately $10 million and $32 million, respectively, in unfunded commitments to these VIEs.

    
10

Options Sold
The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Company as realized gains from investments on the expiration date. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Liabilities for covered call options are included in other liabilities in the Company's consolidated balance sheets.

Notes Payable
The fair value of the Company’s publicly traded $375 million unsecured notes at September 30, 2022 and December 31, 2021 was obtained from a third party pricing service.

For additional disclosures regarding methods and assumptions used in estimating fair values, see Note 5. Fair Value Measurements.

4. Fair Value Option

The Company applies the fair value option to all fixed maturity and equity investment securities and short-term investments at the time an eligible item is first recognized. In addition, the Company elected to apply the fair value option to the note receivable recognized as part of the sale of land in August 2017. The Company received the full principal amount due on the note receivable in November 2021. The primary reasons for electing the fair value option were simplification and cost-benefit considerations as well as the expansion of the use of fair value measurement by the Company consistent with the long-term measurement objectives of the FASB for accounting for financial instruments.

Gains or losses due to changes in fair value of financial instruments measured at fair value pursuant to application of the fair value option are included in net realized investment gains or losses in the Company’s consolidated statements of operations. Interest and dividend income on investment holdings are recognized on an accrual basis at each measurement date and are included in net investment income in the Company’s consolidated statements of operations, while interest earned on the note receivable was included in other revenues in the Company’s consolidated statements of operations.

The following table presents gains or losses recognized due to changes in fair value of financial instruments pursuant to application of the fair value option:
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
 (Amounts in thousands)
Fixed maturity securities$(83,257)$(26,120)$(329,458)$(21,729)
Equity securities(45,779)(19,884)(220,469)47,057 
Short-term investments1,817 (170)152 (161)
    Total investments$(127,219)$(46,174)$(549,775)$25,167 
Note receivable 43  15 
       Total (losses) gains $(127,219)$(46,131)$(549,775)$25,182 

5. Fair Value Measurements

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





11

Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair values and the level of market price observability, as follows:

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

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

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities
The Company’s fair value measurements are based on the market approach, which utilizes market transaction data for the same or similar instruments. The Company obtained unadjusted fair values on 97.8% of its investment portfolio at fair value from an independent pricing service at September 30, 2022.

Level 1 measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio.
U.S. government bonds and agencies /Short-term bonds: Valued using unadjusted quoted market prices for identical assets in active markets.
Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.
Money market instruments: Valued based on unadjusted quoted prices for identical assets in active markets.
Options sold: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on unadjusted quoted prices for identical instruments in active markets.
Level 2 measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the investment portfolio.
Municipal securities: Valued based on models or matrices using inputs such as quoted prices for identical or similar assets in active markets.
Mortgage-backed securities: Comprised of securities that are collateralized by residential and commercial mortgage loans valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. The Company had holdings of $27.8 million and $25.2 million at fair value in commercial mortgage-backed securities at September 30, 2022 and December 31, 2021, respectively.

Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as
12

benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets.
Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets.
Collateralized loan obligations ("CLOs"): Valued based on underlying debt instruments and the appropriate benchmark spread for similar assets in active markets.
Other asset-backed securities: Comprised of securities that are collateralized by non-mortgage assets, such as automobile loans, valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets.
Level 3 measurements - Fair values of financial assets and financial liabilities are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere are deemed to be of a distressed trading level. At September 30, 2022 and December 31, 2021, the Company did not have any financial assets or financial liabilities based on Level 3 measurements.
Fair value measurement using NAV practical expedient - The fair value of the Company's investment in private equity funds measured at net asset value ("NAV") is determined using NAV as advised by the external fund managers and the third party administrators. The NAV of the Company's limited partnership or limited liability company interest in such a fund is based on the manager's and the administrator's valuation of the underlying holdings in accordance with the fund's governing documents and GAAP. In accordance with applicable accounting guidance, private equity funds measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy. At September 30, 2022, the Company had invested or committed capital in five such funds: the strategy of three such funds with a combined fair value of approximately $92.1 million at September 30, 2022 is to provide current income to investors by investing mainly in secured loans, CLOs or CLO issuers, and equity interests in vehicles established to purchase and warehouse loans; the strategy of another such fund with a fair value of approximately $0.6 million at September 30, 2022 is to achieve favorable long-term financial returns and measurable positive social and environmental returns by investing in privately held technology, healthcare, specialty consumer goods and service companies; and the strategy of the other such fund with a fair value of approximately $0.1 million at September 30, 2022 is to achieve long-term capital appreciation through privately-negotiated venture capital investments in seed- and early-stage portfolio companies with technology-enabled business models. The Company had approximately $10 million in unfunded commitments at September 30, 2022 with respect to the private equity funds measured at NAV. The underlying assets of the funds are expected to be liquidated over the period of approximately one year to ten years from September 30, 2022. In addition, the Company does not have the ability to redeem or withdraw from the funds, or to sell, assign, pledge or transfer its investment, without the consent from the General Partner or Managers of each fund, but will receive distributions based on the liquidation of the underlying assets and the interest proceeds from the underlying assets.
The Company’s financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment gains or losses in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.











13

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:

 September 30, 2022
 Level 1Level 2Level 3Total
 (Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies$59,327 $10,036 $ $69,363 
Municipal securities 2,688,727  2,688,727 
Mortgage-backed securities  165,208  165,208 
Corporate securities 510,811  510,811 
Collateralized loan obligations 285,360  285,360 
Other asset-backed securities 178,390  178,390 
Total fixed maturity securities59,327 3,838,532  3,897,859 
Equity securities:
Common stock537,455   537,455 
Non-redeemable preferred stock 54,042  54,042 
Private equity funds measured at net asset value (1)
92,838 
Total equity securities537,455 54,042  684,335 
Short-term investments:
Short-term bonds15,488   15,488 
Money market instruments85,094   85,094 
Other39   39 
Total short-term investments100,621   100,621 
Total assets at fair value$697,403 $3,892,574 $ $4,682,815 
Liabilities
Other liabilities:
Options sold$169 $ $ $169 
Total liabilities at fair value$169 $ $ $169 
14

 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 nine months ended September 30, 2022 and 2021.

At September 30, 2022, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.
Financial Instruments Disclosed, But Not Carried, at Fair Value
The following tables present the carrying value and fair value of the Company’s financial instruments disclosed, but not carried, at fair value, and the level within the fair value hierarchy at which such instruments are categorized:
 September 30, 2022
 Carrying ValueFair ValueLevel 1Level 2Level 3
 (Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes$373,230 $349,643 $ $349,643 $ 
15

 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 September 30, 2022 and December 31, 2021 was based on the spreads above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. See Note 11. Notes Payable for additional information on unsecured notes.

6. Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is equity price risk. Equity contracts (options sold) on various equity securities are intended to manage the price risk associated with forecasted purchases or sales of such securities. From time to time, the Company also enters into derivative contracts to enhance returns on its investment portfolio.
The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains or losses in the consolidated statements of operations:
 Derivatives
September 30, 2022December 31, 2021
 (Amount in thousands)
Options sold - Other liabilities$169 $301 
Total $169 $301 
 Gains Recognized in Net Income
 Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
 (Amounts in thousands)
Options sold - Net realized investment (losses) gains$1,311 $557 $3,939 $1,340 
Total$1,311 $557 $3,939 $1,340 

Most options sold consist of covered calls. The Company writes covered calls on underlying equity positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under statutory regulations. The Company manages the risk associated with covered calls through strict capital limitations and asset diversification throughout various industries. See Note 5. Fair Value Measurements for additional disclosures regarding options sold.
7. Goodwill and Other Intangible Assets
Goodwill
There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2022 and 2021. No accumulated goodwill impairment losses existed at September 30, 2022 and December 31, 2021. Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during the three and nine months ended September 30, 2022 and 2021. All of the Company's goodwill is associated with the Property and Casualty business segment (See Note 13. Segment Information for additional information on the reportable business segment).
16

Other Intangible Assets
The following table presents the components of other intangible assets:
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Useful Lives
 (Amounts in thousands)(in years)
As of September 30, 2022:
Customer relationships$54,862 $(53,385)$1,477 11
Trade names15,400 (8,822)6,578 24
Technology4,300 (4,300) 10
Insurance license1,400  1,400 Indefinite
Total other intangible assets, net$75,962 $(66,507)$9,455 
As of December 31, 2021:
Customer relationships$54,862 $(53,065)$1,797 11
Trade 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 and nine months ended September 30, 2022 and 2021.

Other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Amortization expense for other intangible assets was $0.3 million for each of the three months ended September 30, 2022 and 2021, and $0.8 mi