MERCURY GENERAL CORP, 10-Q filed on 30 Jul 19
v3.19.2
Cover Page - shares
6 Months Ended
Jun. 30, 2019
Jul. 25, 2019
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2019  
Document Transition Report false  
Entity File Number 001-12257  
Entity Registrant Name MERCURY GENERAL CORPORATION  
Entity Incorporation, State or Country Code CA  
Entity Tax Identification Number 95-2211612  
Entity Address, Address Line One 4484 Wilshire Boulevard  
Entity Address, City or Town Los Angeles,  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 90010  
City Area Code 323  
Local Phone Number 937-1060  
Title of 12(b) Security Common Stock  
Trading Symbol MCY  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   55,354,691
Amendment Flag false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Entity Central Index Key 0000064996  
Current Fiscal Year End Date --12-31  
v3.19.2
Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
ASSETS    
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 0
Current income taxes 18,210 38,885
Deferred income taxes 0 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    
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 0
Deferred income taxes 15,654 0
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
v3.19.2
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Amortized cost on fixed maturities trading investments $ 3,053,621 $ 2,969,541
Cost - equity security trading investments 594,810 544,082
Cost - short-term investments 362,191 254,518
Fixed assets, accumulated depreciation $ 369,817 $ 359,269
Common Stock    
Common stock, no par value (in dollars per share) $ 0 $ 0
Common stock, shares authorized (in shares) 70,000,000 70,000,000
Common stock, shares issued (in shares) 55,355,000 55,340,000
Common stock, shares outstanding (in shares) 55,355,000 55,340,000
v3.19.2
Consolidated Statements Of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 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 (in dollars per share) $ 1.50 $ 1.09 $ 3.96 $ 0.32
Diluted (in dollars per share) $ 1.50 $ 1.09 $ 3.96 $ 0.32
Weighted average shares outstanding:        
Basic (in shares) 55,353 55,332 55,347 55,332
Diluted (in shares) 55,363 55,335 55,356 55,335
v3.19.2
Consolidated Statements of Shareholders' Equity Statement - USD ($)
$ in Thousands
Total
Common Stock [Member]
Retained Earnings [Member]
Shareholders' equity, beginning balance at Dec. 31, 2017   $ 97,523 $ 1,663,864
Proceeds from stock options exercised   0  
Share-based compensation expense   63  
Withholding tax on stock options exercised   0  
Net income $ 17,573   17,573
Dividends paid to shareholders     (69,165)
Shareholders' equity, ending balance at Jun. 30, 2018 1,709,858 97,586 1,612,272
Shareholders' equity, beginning balance at Mar. 31, 2018   97,546 1,586,675
Proceeds from stock options exercised   0  
Share-based compensation expense   40  
Withholding tax on stock options exercised   0  
Net income 60,180   60,180
Dividends paid to shareholders     (34,583)
Shareholders' equity, ending balance at Jun. 30, 2018 1,709,858 97,586 1,612,272
Shareholders' equity, beginning balance at Dec. 31, 2018 1,617,684 98,026 1,519,658
Proceeds from stock options exercised   591  
Share-based compensation expense   52  
Withholding tax on stock options exercised   (22)  
Net income 219,117   219,117
Dividends paid to shareholders     (69,460)
Shareholders' equity, ending balance at Jun. 30, 2019 1,767,962 98,647 1,669,315
Shareholders' equity, beginning balance at Mar. 31, 2019   98,495 1,620,799
Proceeds from stock options exercised   138  
Share-based compensation expense   36  
Withholding tax on stock options exercised   (22)  
Net income 83,250   83,250
Dividends paid to shareholders     (34,734)
Shareholders' equity, ending balance at Jun. 30, 2019 $ 1,767,962 $ 98,647 $ 1,669,315
v3.19.2
Consolidated Statements Of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2019
Jun. 30, 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
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 0
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
v3.19.2
General
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
General 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.
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.
v3.19.2
Recently Issued Accounting Standards
6 Months Ended
Jun. 30, 2019
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]  
Recently Issued Accounting Standards 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
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.
v3.19.2
Financial Instruments
6 Months Ended
Jun. 30, 2019
Financial Instruments, Owned, at Fair Value [Abstract]  
Financial Instruments 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
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.
v3.19.2
Fair Value Option
6 Months Ended
Jun. 30, 2019
Fair Value Option [Abstract]  
Fair Value Option 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
)

v3.19.2
Fair Value Measurement
6 Months Ended
Jun. 30, 2019
Financial Instruments, Financial Assets, Balance Sheet Groupings [Abstract]  
Fair Value Measurement 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
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.
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.

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

 
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
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)
Liabilities
 
 
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
 
 
Unsecured notes
$
371,734

 
$
362,674

 
$

 
$
362,674

 
$



Unsecured Notes
The fair value of the Company’s publicly traded $375 million unsecured notes at June 30, 2019 and December 31, 2018 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 12. Notes Payable for additional information on unsecured notes.
v3.19.2
Leases (Notes)
6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Leases Leases

The Company adopted ASU 2016-02, "Leases (Topic 842)," which supersedes the guidance in Accounting Standards Codification ("ASC") 840, "Leases," on January 1, 2019, using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date (the "effective date method"). Under the effective date method, financial results reported in periods prior to 2019 are unchanged. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company not to reassess (a) whether arrangements contain leases, (b) lease classification and (c) initial direct costs. Adoption of the new standard resulted in the recognition of operating lease right-of-use ("ROU") assets and operating lease liabilities of approximately $41 million and $43 million, respectively, at the adoption date for the Company's operating leases. The difference of approximately $2 million between the operating lease ROU assets and operating lease liabilities represents reclassification of deferred rent liability (the difference between the straight-line rent expenses and paid rent amounts under the leases) to operating lease ROU assets from other liabilities at the adoption date. The Company did not have any cumulative-effect adjustment as a result of the adoption.

The Company has operating leases for office space for insurance operations and administrative functions, automobiles for certain employees and general uses, and office equipment such as printers and computers. As of June 30, 2019, the Company's leases had remaining terms ranging from less than one year to approximately 8 years. These leases may contain provisions for periodic adjustments to rates and charges applicable under such lease agreements. These rates and charges also may vary with the Company's level of uses. Certain of these leases include one or more options to renew or early terminate, and the exercise of these options is at the Company's sole discretion. Certain leases also include options to purchase the leased property. The Company's lease agreements do not contain any residual value guarantees.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and operating lease liabilities in the Company's consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company uses its estimated incremental borrowing rate for office space and office equipment leases, which is derived from information available at the lease commencement date, in determining the present value of lease payments, as the rate implicit in the lease is not readily available for such leases. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. For automobile leases, the Company uses the rate implicit in the lease at the lease commencement date in determining the present value of lease payments, as the readily-determinable implicit rate is provided in such leases. The Company's lease terms include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company does not use the short-term lease exemption practical expedient and records all leases on the balance sheets, including leases with a term of twelve months or less. The Company accounts for the lease and non-lease components as a single lease component for all of its leases. Lease expense for scheduled lease payments is recognized on a straight-line basis over the lease term.

The components of lease expense were as follows:
 
 
 
 
Three Months Ended
 
Six Months Ended
Lease Cost
 
Classification
 
June 30, 2019
 
June 30, 2019
 
 
 
 
(Amounts in thousands)
Operating lease cost (1)
 
Other operating expenses
 
$
4,124

 
$
7,314

Variable lease cost (1)
 
Other operating expenses
 
417

 
1,156

Total lease cost
 
 
 
$
4,541


$
8,470

__________ 
(1) Includes short-term leases, which are immaterial.

Supplemental balance sheet information related to leases was as follows:
 
 
June 30, 2019
 
 
(Amounts in thousands)
Operating lease ROU assets
 
$
44,432

Operating lease liabilities
 
47,091



Weighted-average lease term and discount rate were as follows:
 
 
June 30, 2019
Weighted-average remaining lease term (in years):
 
 
      Operating leases
 
4.3

 
 
 
Weighted-average discount rate:
 
 
      Operating leases
 
3.16
%

Supplemental cash flow and other information related to leases was as follows:
 
 
Six Months Ended
 
 
June 30, 2019
 
 
(Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
      Operating cash flows from operating leases
 
$
6,928

 
 
 
ROU assets obtained in exchange for lease liabilities:
 
 
      Operating leases
 
8,319









Maturities of lease liabilities as of June 30, 2019 were as follows:
Year
 
Operating Leases
 
 
(Amounts in thousands)
Remainder of 2019
 
$
6,913

2020
 
13,268

2021
 
10,828

2022
 
8,597

2023
 
5,497

2024 and thereafter
 
5,359

          Total lease payments
 
$
50,462

Less: Imputed interest
 
3,371

          Total lease obligations
 
$
47,091



As of June 30, 2019, the Company had additional operating lease commitments that have not yet commenced of approximately $6 million with each lease term ranging from approximately 1 year to 8 years. These operating leases will commence in 2019 and 2020.

Disclosures related to periods prior to adoption of ASC Topic 842

Total rent expense recognized under the Company's various lease agreements was $4.0 million and $7.6 million for the three and six months ended June 30, 2018, respectively. The following table presents future minimum commitments for operating leases as of December 31, 2018:
Year Ending December 31,
 
Operating Leases
 
 
(Amounts in thousands)
2019
 
$
12,812

2020
 
11,547

2021
 
8,732

2022
 
6,972

2023
 
3,659

Thereafter
 
1,966


v3.19.2
Derivative Financial Instruments
6 Months Ended
Jun. 30, 2019
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
Derivative Financial Instruments 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.

The Company also enters into derivative contracts to enhance returns on its investment portfolio.
On February 13, 2014, Fannette Funding LLC (“FFL”), a special purpose investment vehicle formed by and consolidated into the Company, entered into a total return swap agreement with Citibank. Under the agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap is secured by approximately $31 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. The Company paid interest at the rate of LIBOR plus 128 basis points prior to the renewal of the agreement in January 2018, LIBOR plus 120 basis points subsequent to the January 2018 renewal through July 2018, and LIBOR plus 105 basis points subsequent to the July 2018 renewal on the outstanding notional amount of the underlying obligations, which was approximately $99 million and $100 million as of June 30, 2019 and December 31, 2018, respectively. The agreement had an initial term of one year, subject to periodic renewal. In July 2018, the agreement was renewed through January 24, 2020, and the interest rate was changed to LIBOR plus 105 basis points.





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:
 
Liability Derivatives
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
(Amount in thousands)
Options sold - Other liabilities
$
405

 
$
3

Total return swap - Other liabilities
1,722

 
4,851

Total derivatives
$
2,127

 
$
4,854


 
Gains (Losses) Recognized in Income
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Total return swap - Net realized investment gains (losses)
$
515

 
$
(320
)
 
$
2,281

 
$
280

Options sold - Net realized investment gains (losses)
2,472

 
2,807

 
3,344

 
5,731

Total
$
2,987

 
$
2,487

 
$
5,625

 
$
6,011


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.
v3.19.2
Goodwill and Other Intangible Assets
6 Months Ended
Jun. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets
Goodwill
There were no changes in the carrying amount of goodwill during the three and six months ended June 30, 2019 and 2018. Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during the three and six months ended June 30, 2019 and 2018. All of the Company's goodwill is associated with the Property and Casualty business segment (See Note 14. Segment Information for additional information on the reportable business segment).
Other Intangible Assets
The following table presents the components of other intangible assets:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Useful Lives
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
 
(in years)
As of June 30, 2019:
 
 
 
 
 
 
 
Customer relationships
$
53,212

 
$
(50,104
)
 
$
3,108

 
11
Trade names
15,400

 
(6,738
)
 
8,662

 
24
Technology
4,300

 
(4,300
)
 

 
10
Insurance license
1,400

 

 
1,400

 
Indefinite
Total other intangible assets, net
$
74,312

 
$
(61,142
)
 
$
13,170

 
 
 
 
 
 
 
 
 
 
As of December 31, 2018:
 
 
 
 

 
 
Customer relationships
$
53,048

 
$
(47,897
)
 
$
5,151

 
11
Trade names
15,400

 
(6,417
)
 
8,983

 
24
Technology
4,300

 
(4,300
)
 

 
10
Insurance license
1,400

 

 
1,400

 
Indefinite
Total other intangible assets, net
$
74,148

 
$
(58,614
)
 
$
15,534

 
 


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 six months ended June 30, 2019 and 2018.
Other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Other intangible assets amortization expense was $1.3 million and $1.4 million for the three months ended June 30, 2019 and 2018, respectively, and $2.5 million and $2.7 million for the six months ended June 30, 2019 and 2018, respectively.

The following table presents the estimated future amortization expense related to other intangible assets as of June 30, 2019:
Year
 
Amortization Expense
 
 
(Amounts in thousands)
Remainder of 2019
 
$
2,535

2020
 
922

2021
 
902

2022
 
878

2023
 
714

Thereafter
 
5,819

Total
 
$
11,770


v3.19.2
Share-Based Compensation
6 Months Ended
Jun. 30, 2019
Share-based Compensation, Allocation and Classification in Financial Statements [Abstract]  
Share-Based Compensation Share-Based Compensation

In February 2015, the Company's Board of Directors adopted the 2015 Incentive Award Plan (the "2015 Plan"), replacing the 2005 Equity Incentive Plan which expired in January 2015. The 2015 Plan was approved at the Company's Annual Meeting of Shareholders in May 2015. A maximum of 4,900,000 shares of common stock are authorized for issuance under the 2015 Plan upon exercise of stock options, stock appreciation rights and other awards, or upon vesting of restricted stock unit ("RSU") or deferred stock awards. As of June 30, 2019, the Company had 70,000 stock options granted that were exercised or outstanding, and 4,830,000 shares of common stock available for future grant under the 2015 Plan.

Share-based compensation expenses for all stock options granted or modified are based on their estimated grant-date fair values. These compensation costs are recognized on a straight-line basis over the requisite service period of the award. The Company estimates forfeitures expected to occur in determining the amount of compensation cost to be recognized in each period. As of June 30, 2019, all outstanding stock options have a term of ten years from the date of grant and become exercisable in four equal installments on the first through fourth anniversaries of the grant date. The fair value of stock option awards is estimated using the Black-Scholes option pricing model with the grant-date assumptions and weighted-average fair values.

In February 2018, the Compensation Committee of the Company's Board of Directors awarded a total of 80,000 stock options to four senior executives under the 2015 Plan which will vest over the four-year requisite service period. 10,000 of these stock options were forfeited in February 2019 following the departure of a senior executive. The fair values of these stock options were estimated on the date of grant using a closed-form option valuation model (Black-Scholes).

The following table provides the assumptions used in the calculation of grant-date fair values of these stock options based on the Black-Scholes option pricing model:
Weighted-average grant-date fair value
$
8.09

Expected volatility
33.18
%
Risk-free interest rate
2.62
%
Expected dividend yield
5.40
%
Expected term in months
72



Expected volatilities are based on historical volatility of the Company’s stock over the term of the stock options. The Company estimated the expected term of stock options, which represents the period of time that stock options granted are expected to be outstanding, by using historical exercise patterns and post-vesting termination behavior. The risk-free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.
As of June 30, 2019, the Company had $0.4 million of unrecognized compensation expense related to stock options awarded under the 2015 Plan, which will be recognized ratably over the remaining vesting period of approximately 2.6 years.
The fair value of each RSU grant was determined based on the market price of the Company's common stock on the grant date for awards classified as equity and on each reporting date for awards classified as liability. The RSUs vested at the end of a three-year performance period beginning with the year of the grant, and then only if, and to the extent that, the Company’s
performance during the performance period achieved the threshold established by the Compensation Committee of the Company’s Board of Directors. Performance thresholds were based on the Company’s cumulative underwriting income, annual underwriting income, and net earned premium growth. Compensation cost was recognized based on management’s best estimate of the performance goals that would be achieved at the end of the performance period, taking into account expected forfeitures. If the minimum performance goals were not expected to be met, no compensation cost was recognized and any recognized compensation cost was reversed.

In February 2019, based on certification by the Compensation Committee of the Company's Board of Directors of the results of the three-year performance period ended December 31, 2018, all of the outstanding RSUs granted in 2016 expired unvested because the Company did not meet the minimum three-year performance threshold.

In March 2018, based on certification by the Compensation Committee of the Company's Board of Directors of the results of the three-year performance period ended December 31, 2017, all of the outstanding RSUs granted in 2015 expired unvested because the Company did not meet the minimum three-year performance threshold.
No RSUs or stock options were awarded during the six months ended June 30, 2019.
v3.19.2
Income Taxes
6 Months Ended
Jun. 30, 2019
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract]  
Income Taxes Income Taxes

For financial statement purposes, the Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if the positions are “more-likely-than-not” sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its consolidated financial statements.

There was a $268,000 increase to the total amount of unrecognized tax benefits related to tax uncertainties during the six months ended June 30, 2019. The increase was the result of tax positions taken regarding California state tax issues based on management’s best judgment given the facts, circumstances, and information available at the reporting date.

The Company and its subsidiaries file income tax returns with the Internal Revenue Service and the taxing authorities of various states. Tax years that remain subject to examination by major taxing jurisdictions are 2015 through 2017 for federal taxes and 2011 through 2017 for California state taxes. For tax years 2003 through 2010, the Company achieved a resolution with the Franchise Tax Board (“FTB”) in December 2017 and paid a negotiated settlement amount in accordance with the settlement agreement provided by the FTB and signed by the Company. The settlement agreement was approved and executed in the first quarter of 2019.

The Company is currently under examination for tax years 2011 through 2016. For tax years 2011 through 2013, the FTB issued Notices of Proposed Assessments ("NPAs") to the Company, for which the Company submitted a formal protest in 2018. If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with the FTB, an appeal with the California Office of Tax Appeals, or litigation in Superior Court. For tax years 2014 through 2016, the FTB commenced its audit in December 2017 and has not yet completed its audit.

The Company believes that the resolution of these examinations and assessments will not have a material impact on the consolidated financial statements.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of the Company’s assets and liabilities, and expected benefits of utilizing net operating loss, capital loss, and tax-credit carryforwards. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in earnings in the period that includes the enactment date.

At June 30, 2019, the Company’s deferred income taxes were in a net liability position, which included a combination of ordinary and capital deferred tax expenses or benefits. In assessing the Company’s ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax planning strategies in making this assessment. The Company believes that through the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in order to maximize the full benefits of its deferred tax assets. Although realization is not assured, management believes that it
is more likely than not that the Company’s deferred tax assets will be realized.
v3.19.2
Loss And Loss Adjustment Expense Reserves
6 Months Ended
Jun. 30, 2019
Insurance Loss Reserves [Abstract]  
Loss And Loss Adjustment Expense Reserves Loss and Loss Adjustment Expense Reserves

The following table presents the activity in loss and loss adjustment expense reserves:
 
Six Months Ended June 30,
 
2019
 
2018
 
 
 
 
 
(Amounts in thousands)
Gross reserves at January 1 
$
1,829,412

 
$
1,510,613

Less reinsurance recoverables on unpaid losses
(180,859
)
 
(64,001
)
Net reserves at January 1
1,648,553

 
1,446,612

Incurred losses and loss adjustment expenses related to:
 
 
 
Current year
1,276,235

 
1,173,862

Prior years
10,758

 
63,919

Total incurred losses and loss adjustment expenses
1,286,993

 
1,237,781

Loss and loss adjustment expense payments related to:
 
 
 
Current year
701,282

 
640,496

Prior years
557,457

 
540,803

Total payments
1,258,739

 
1,181,299

Net reserves at June 30
1,676,807

 
1,503,094

Reinsurance recoverables on unpaid losses
107,117

 
46,756

Gross reserves at June 30
$
1,783,924

 
$
1,549,850



The increase in the provision for insured events of prior years in 2019 of approximately $10.8 million was primarily attributable to higher than estimated defense and cost containment expenses in the California automobile line of insurance business, partially offset by lower than estimated California homeowners losses largely due to reductions in the Company's retained losses on the Camp and Woolsey Fires under the Treaty after accounting for the assignment of subrogation rights and re-estimation of reserves as part of normal reserving procedures during the first quarter of 2019, as described further below. The increase in the provision for insured events of prior years in 2018 of approximately $63.9 million was primarily attributable to higher than estimated California automobile losses resulting from severity in excess of expectations for bodily injury claims as well as higher than estimated defense and cost containment expenses in the California automobile line of insurance business.

For the six months ended June 30, 2019 and 2018, the Company recorded catastrophe losses net of reinsurance of approximately $14 million and $11 million, respectively. Gross catastrophe losses due to the catastrophe events that occurred during the six months ended June 30, 2019 totaled approximately $17 million resulting primarily from winter storms in California and tornadoes and wind and hail storms in the Midwest, with no reinsurance benefits used for these losses. These losses were partially offset by favorable development of approximately $3 million on prior years' catastrophe losses, primarily from reductions in the Company’s retained portion of losses on the Camp and Woolsey Fires, as described further below. The 2018 catastrophe losses were primarily due to winter storms and mudslides in California, winter storms in the states along the Atlantic Seaboard, and storms in Texas. There were no reinsurance benefits used for catastrophe losses incurred during the first half of 2018.

During the first quarter of 2019, the Company completed the sale of its subrogation rights related to the 2018 Camp and Woolsey Fires and the 2017 Thomas Fire (which was a component of the "2017 Southern California fires") to a third party. The Company’s reinsurers were the primary beneficiaries of this transaction, as they had absorbed most of the losses under the terms of the Treaty. The Company re-estimated its gross and net losses from the 2018 Camp and Woolsey Fires and the 2017 Southern California fires in conjunction with this sale, and its total gross losses from these catastrophes, after accounting for the assignment of subrogation rights and adjustments made to claims reserves as part of normal reserving procedures, were approximately $208 million, and its total net losses, after reinsurance benefits, were approximately $40 million at March 31, 2019. The Company benefited by approximately $10 million, before taxes, in the first quarter of 2019 from the sale of the subrogation rights, including adjustments made to the associated claims as a result of normal reserving procedures, reductions in the Company's retained portion of losses on the Camp and Woolsey Fires, and reduced reinstatement premiums recognized.
v3.19.2
Notes Payable
6 Months Ended
Jun. 30, 2019
Notes Payable [Abstract]  
Notes Payable Notes Payable

The following table presents information about the Company's notes payable:
 
 
Lender
 
Interest Rate
 
Maturity Date
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Senior unsecured notes(1)
 
Publicly traded
 
4.40%
 
March 15, 2027
 
$
375,000

 
$
375,000

Unsecured credit facility(2)
 
Bank of America and Wells Fargo Bank
 
LIBOR plus 112.5-162.5 basis points
 
March 29, 2022
 

 

    Total principal amount
 
 
 
 
 
 
 
375,000

 
375,000

Less unamortized discount and debt issuance costs(3)
 
 
 
 
 
 
 
3,066

 
3,266

Total debt
 
 
 
 
 
 
 
$
371,934

 
$
371,734

__________ 
(1) 
On March 8, 2017, the Company completed a public debt offering issuing $375 million of senior notes. The notes are unsecured, senior obligations of the Company with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off amounts outstanding under the existing loan and credit facilities and for general corporate purposes. The Company incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate including debt issuance costs of approximately 4.45%.
(2) 
On March 29, 2017, the Company entered into an unsecured credit agreement that provides for revolving loans of up to $50 million and matures on March 29, 2022. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is greater than or equal to 25%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 15% to 22.5 basis points when the ratio is greater than or equal to 25%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 17.5% at June 30, 2019, resulting in a 15 basis point commitment fee on the $50 million undrawn portion of the credit facility. As of July 25, 2019, there have been no borrowings under this facility.
(3) 
The unamortized discount and debt issuance costs are associated with the publicly traded $375 million senior unsecured notes. These are amortized to interest expense over the life of the notes, and the unamortized balance is presented in the Company's consolidated balance sheets as a direct deduction from the carrying amount of the debt. The unamortized debt issuance cost of approximately $0.1 million associated with the $50 million five-year unsecured revolving credit facility maturing on March 29, 2022 is included in other assets in the Company's consolidated balance sheets and amortized to interest expense over the term of the credit facility.
v3.19.2
Contingencies
6 Months Ended
Jun. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Contingencies Contingencies

The Company is, from time to time, named as a defendant in various lawsuits or regulatory actions incidental to its insurance business. The majority of lawsuits brought against the Company relate to insurance claims that arise in the normal course of business and are reserved for through the reserving process. For a discussion of the Company’s reserving methods, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

In March 2006, the California DOI issued an Amended Notice of Non-Compliance to a Notice of Non-Compliance originally issued in February 2004 (as amended, “2004 NNC”) alleging that the Company charged rates in violation of the California Insurance Code, willfully permitted its agents to charge broker fees in violation of California law, and willfully misrepresented the actual price insurance consumers could expect to pay for insurance by the amount of a fee charged by the consumer's insurance broker. The California DOI sought to impose a fine for each policy on which the Company allegedly permitted an agent to charge a broker fee, to impose a penalty for each policy on which the Company allegedly used a misleading advertisement, and to suspend certificates of authority for a period of one year. In January 2012, the administrative law judge bifurcated the 2004 NNC between (a) the California DOI’s order to show cause (the “OSC”), in which the California DOI asserts the false advertising allegations and accusation, and (b) the California DOI’s notice of noncompliance (the “NNC”), in which the California DOI asserts the unlawful rate allegations. In February 2012, the administrative law judge (“ALJ”) submitted a proposed decision dismissing the NNC, but the Commissioner rejected the ALJ’s proposed decision. The Company challenged the rejection in Los Angeles Superior Court in April 2012, and the Commissioner responded with a demurrer. Following a hearing, the Superior Court sustained the Commissioner’s demurrer, based on the Company’s failure to exhaust its administrative remedies, and the Company appealed.
The Court of Appeal affirmed the Superior Court's ruling that the Company was required to exhaust its administrative remedies, but expressly preserved for later appeal the legal basis for the ALJ’s dismissal: violation of the Company’s due process rights. Following an evidentiary hearing in April 2013, post-hearing briefs, and an unsuccessful mediation, the ALJ closed the evidentiary record on April 30, 2014. Although a proposed decision was to be submitted to the Commissioner on or before June 30, 2014, after which the Commissioner would have 100 days to accept, reject or modify the proposed decision, the proposed decision was not submitted until December 8, 2014. On January 7, 2015, the Commissioner adopted the ALJ’s proposed decision, which became the Commissioner’s adopted order (the "Order"). The decision and Order found that from the period July 1, 1996, through 2006, the Company’s "brokers" were actually operating as "de facto agents" and that the charging of "broker fees" by these producers constituted the charging of "premium" in excess of the Company's approved rates, and assessed a civil penalty in the amount of $27.6 million against the Company. On February 9, 2015, the Company filed a Writ of Administrative Mandamus and Complaint for Declaratory Relief (the “Writ”) in the Orange County Superior Court seeking, among other things, to require the Commissioner to vacate the Order, to stay the Order while the Superior Court action is pending, and to judicially declare as invalid the Commissioner’s interpretation of certain provisions of the California Insurance Code. Subsequent to the filing of the Writ, a consumer group petitioned and was granted the right to intervene in the Superior Court action. The Court did not order a stay, and the $27.6 million assessed penalty was paid in March 2015. The Company filed an amended Writ on September 11, 2015, adding an explicit request for a refund of the penalty, with interest.

On August 12, 2016, the Superior Court issued its ruling on the Writ, for the most part granting the relief sought by the Company. The Superior Court found that the Commissioner and the California DOI did commit due process violations, but declined to dismiss the case on those grounds. The Superior Court also agreed with the Company that the broker fees at issue were not premium, and that the penalties imposed by the Commissioner were improper, and therefore vacated the Order imposing the penalty. The Superior Court entered final judgment on November 17, 2016, issuing a writ requiring the Commissioner to refund the entire penalty amount within 120 days, plus prejudgment interest at the statutory rate of 7%. On January 12, 2017, the California DOI filed a notice of appeal of the Superior Court's judgment. While the appeal was pending, the California DOI returned the entire penalty amount plus accrued interest, a total of $30.9 million, to the Company in June 2017 in order to avoid accruing further interest. Because the matter has not been settled or otherwise finally resolved, the Company did not recognize the $30.9 million as a gain in the consolidated statements of operations; instead, it recorded the $30.9 million plus interest earned, a total of approximately $31.9 million at June 30, 2019, in other liabilities in the consolidated balance sheets. The Company had filed a motion to dismiss the false advertising portion of the case based on the Superior Court's findings, but the ALJ denied that motion after the appeal was filed. The ALJ did, however, grant the Company's alternative request to stay further proceedings pending the final determination of the appeal. On May 7, 2019, the California Court of Appeal issued its decision reversing the Superior Court’s original judgment and directing the Superior Court to enter a new judgment in favor of the California DOI. The Company filed a petition for rehearing, which was denied, and subsequently filed a petition for review in the Supreme Court of California. Based on the decision of the California Court of Appeal, the Company accrued approximately $3 million in the second quarter of 2019, which represents an estimated amount of statutory interest the Company may be ordered to pay beyond the actual interest it has earned on the $30.9 million. The Company has accrued a liability for the estimated cost to continue to defend itself in the false advertising OSC. Based upon its understanding of the facts and the California Insurance Code, the Company does not expect that the ultimate resolution of the false advertising OSC will be material to its financial position.

The Company establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company's pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition or cash flows.

In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
v3.19.2
Segment Information
6 Months Ended
Jun. 30, 2019
Segment Reporting [Abstract]  
Segment Information Segment Information

The Company is primarily engaged in writing personal automobile insurance and provides related property and casualty insurance products to its customers through 14 subsidiaries in 11 states, principally in California.
The Company has one reportable business segment - the Property and Casualty business segment.
The Company’s Chief Operating Decision Maker evaluates operating results based on pre-tax underwriting results which is calculated as net premiums earned less (a) losses and loss adjustment expenses and (b) underwriting expenses (policy acquisition
costs and other operating expenses).
Expenses are allocated based on certain assumptions that are primarily related to premiums and losses. The Company’s net investment income, net realized investment gains or losses, other income, and interest expense are excluded in evaluating pretax underwriting profit. The Company does not allocate its assets, including investments, or income taxes in evaluating pre-tax underwriting profit.
Property and Casualty Lines
The Property and Casualty business segment offers several insurance products to the Company’s individual customers and small business customers. These insurance products are: private passenger automobile which is the Company’s primary business, and related insurance products such as homeowners, commercial automobile and commercial property. These related insurance products are primarily sold to the Company’s individual customers and small business customers, which increases retention of the Company’s private passenger automobile client base. The insurance products comprising the Property and Casualty business segment are sold through the same distribution channels, mainly through independent and 100% owned insurance agents, and go through a similar underwriting process.
Other Lines
The Other business segment represents net premiums written and earned from an operating segment that does not meet the quantitative thresholds required to be considered a reportable segment. This operating segment offers automobile mechanical protection warranties which are primarily sold through automobile dealerships and credit unions.
The following tables present the Company's operating results by reportable segment:
 
Three Months Ended June 30,
 
2019
 
2018
 
Property & Casualty
 
Other
 
Total
 
Property & Casualty
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in millions)
Net premiums earned
$
881.8

 
$
7.0

 
$
888.8

 
$
826.2

 
$
7.8

 
$
834.0

Less:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
653.3

 
3.3

 
656.6

 
601.5

 
4.0

 
605.5

Underwriting expenses
213.5

 
3.5

 
217.0

 
198.7

 
3.8

 
202.5

Underwriting gain
15.0

 
0.2

 
15.2

 
26.0

 

 
26.0

Investment income
 
 
 
 
35.0

 
 
 
 
 
34.8

Net realized investment gains
 
 
 
 
53.3

 
 
 
 
 
14.3

Other income
 
 
 
 
2.4

 
 
 
 
 
2.4

Interest expense
 
 
 
 
(4.3
)
 
 
 
 
 
(4.3
)
Pre-tax income
 
 
 
 
$
101.6

 
 
 
 
 
$
73.2

Net income
 
 
 
 
$
83.3

 
 
 
 
 
$
60.2


    
 
Six Months Ended June 30,
 
2019
 
2018
 
Property & Casualty
 
Other
 
Total
 
Property & Casualty
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in millions)
Net premiums earned
$
1,744.9

 
$
14.1

 
$
1,759.0

 
$
1,626.4

 
$
15.6

 
$
1,642.0

Less:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
1,280.1

 
6.9

 
1,287.0

 
1,229.9

 
7.9

 
1,237.8

Underwriting expenses
426.0

 
6.9

 
432.9

 
401.2

 
7.6

 
408.8

Underwriting gain (loss)
38.8

 
0.3

 
39.1

 
(4.7
)
 
0.1

 
(4.6
)
Investment income
 
 
 
 
69.2

 
 
 
 
 
66.3

Net realized investment gains (losses)
 
 
 
 
164.4

 
 
 
 
 
(44.4
)
Other income
 
 
 
 
4.6

 
 
 
 
 
4.7