Mercury General(MCY) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for the first quarter Item 1. Financial Statements Presents unaudited consolidated financial statements for Q1 2024 and 2023, including balance sheets, operations, equity, and cash flows Consolidated Balance Sheets Highlights key financial positions including total assets, liabilities, and shareholders' equity at period end Consolidated Balance Sheet Highlights (in thousands) | Item | March 31, 2024 | December 31, 2023 | Change | % Change | | :----------------------------------- | :------------- | :---------------- | :----- | :------- | | Assets | | | | | | Total investments | $5,453,126 | $5,228,520 | $224,606 | 4.30% | | Cash | $530,085 | $550,903 | $(20,818) | -3.78% | | Premiums receivable, net | $676,673 | $601,725 | $74,948 | 12.46% | | Total assets | $7,395,968 | $7,103,397 | $292,571 | 4.12% | | Liabilities | | | | | | Loss and loss adjustment expense reserves | $2,859,220 | $2,785,702 | $73,518 | 2.64% | | Unearned premiums | $1,854,184 | $1,735,660 | $118,524 | 6.83% | | Total liabilities | $5,791,941 | $5,555,252 | $236,689 | 4.26% | | Shareholders' Equity | | | | | | Total shareholders' equity | $1,604,027 | $1,548,145 | $55,882 | 3.61% | Consolidated Statements of Operations Details revenues, expenses, and net income (loss) for the three months ended March 31, 2024 and 2023 Consolidated Statements of Operations Highlights (in thousands, except per share data) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | % Change | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Net premiums earned | $1,166,679 | $1,004,704 | $161,975 | 16.12% | | Net investment income | $65,018 | $51,973 | $13,045 | 25.10% | | Net realized investment gains | $38,192 | $49,008 | $(10,816) | -22.07% | | Total revenues | $1,274,085 | $1,106,579 | $167,506 | 15.14% | | Losses and loss adjustment expenses | $903,965 | $929,529 | $(25,564) | -2.75% | | Policy acquisition costs | $196,040 | $164,507 | $31,533 | 19.17% | | Total expenses | $1,184,865 | $1,168,657 | $16,208 | 1.39% | | Income (loss) before income taxes | $89,220 | $(62,078) | $151,298 | -243.71% | | Net income (loss) | $73,462 | $(45,288) | $118,750 | -262.22% | | Basic net income (loss) per share | $1.33 | $(0.82) | $2.15 | -262.20% | | Diluted net income (loss) per share | $1.33 | $(0.82) | $2.15 | -262.20% | Consolidated Statements of Shareholders' Equity Outlines changes in shareholders' equity, including net income (loss) and dividends, for the reporting periods Consolidated Statements of Shareholders' Equity Highlights (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Common stock, beginning of period | $98,947 | $98,947 | | Retained earnings, beginning of period | $1,449,198 | $1,423,184 | | Net income (loss) | $73,462 | $(45,288) | | Dividends paid to shareholders | $(17,580) | $(17,580) | | Retained earnings, end of period | $1,505,080 | $1,360,316 | | Total shareholders' equity, end of period | $1,604,027 | $1,459,263 | Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities for the three months ended March 31, 2024 and 2023 Consolidated Statements of Cash Flows Highlights (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash provided by operating activities | $192,626 | $18,173 | $174,453 | | Net cash used in investing activities | $(194,879) | $(69,500) | $(125,379) | | Net cash (used in) provided by financing activities | $(18,565) | $31,931 | $(50,496) | | Net decrease in cash | $(20,818) | $(19,396) | $(1,422) | | Cash, end of period | $530,085 | $270,380 | $259,705 | Notes to Consolidated Financial Statements Provides detailed explanations of accounting policies, financial instruments, and other critical financial information Note 1. General Covers the basis of presentation, critical accounting estimates, and key financial events for the interim period - The interim consolidated financial statements are unaudited and prepared in conformity with U.S. GAAP, with certain annual financial information omitted for interim reporting purposes[19][20] - Management's estimates and assumptions, particularly for loss and loss adjustment expense reserves, are critical to financial statement preparation, and actual results may differ[22] - The Company declared and paid a dividend per share of $0.3175 for both the three-month periods ended March 31, 2024 and 2023[24] - Deferred policy acquisition costs amortization increased to $196.0 million in Q1 2024 from $164.5 million in Q1 2023, reflecting growth in new and renewal insurance contracts[25] - An office building in Brea, California, with a carrying amount of $10.8 million, was classified as held for sale at March 31, 2024, due to increased remote work[26] Effect of Reinsurance on Premiums (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------- | :-------------------------------- | :-------------------------------- | | Premiums Written | | | | Direct | $1,294,475 | $1,012,238 | | Ceded | $(31,299) | $(23,391) | | Assumed | $15,159 | $15,031 | | Net | $1,278,335 | $1,003,878 | | Premiums Earned | | | | Direct | $1,186,585 | $1,016,870 | | Ceded | $(31,079) | $(23,198) | | Assumed | $3,863 | $3,890 | | Net | $1,159,369 | $997,562 | - Ceded losses and loss adjustment expenses were approximately $(0.8) million for Q1 2024, primarily due to favorable development on prior years' catastrophe losses ceded to reinsurers, compared to $7.5 million in Q1 2023[30] - Commission income from third-party insurers increased to $5.7 million in Q1 2024 from $4.8 million in Q1 2023, included in other revenues[32] Allowance for Credit Losses on Premiums Receivable (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $5,300 | $5,800 | | Provision for expected credit losses | $1,116 | $1,136 | | Write-off amounts | $(813) | $(1,270) | | Recoveries | $197 | $134 | | Ending balance | $5,800 | $5,800 | Note 2. Recently Issued Accounting Standards Discusses the impact and evaluation of new FASB accounting standards on the Company's financial reporting - The FASB issued ASU 2024-01 (Compensation-Stock Compensation) effective January 1, 2025, to clarify scope application for profits interest awards, which the Company is evaluating[38][39] - ASU 2023-09 (Income Taxes) effective January 1, 2025, aims to enhance income tax disclosures, with the Company expecting presentation changes[40] - ASU 2023-07 (Segment Reporting) effective for fiscal years beginning after December 15, 2023, requires incremental segment expense disclosures, which the Company is evaluating[41] - ASU 2020-04 and 2022-06 (Reference Rate Reform) defer the sunset date of Topic 848 to December 31, 2024, with no material impact expected on the Company's financial statements[42] Note 3. Financial Instruments Details the fair values of financial instruments and the Company's involvement with special purpose investment vehicles Fair Values of Financial Instruments (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :------------------- | :------------- | :---------------- | | Assets | | | | Investments | $5,453,126 | $5,228,520 | | Note receivable | $9,818 | $9,974 | | Liabilities | | | | Options sold | $1,928 | $1,955 | | Notes payable | $560,618 | $557,710 | - The Company consolidates special purpose investment vehicles (VIEs) where it is the primary beneficiary, limiting loss exposure to collateral and original investment[47][48] - Unfunded commitments to non-consolidated private equity funds (VIEs) were approximately $7 million at March 31, 2024, and $8 million at December 31, 2023[49] - A promissory note of $9.8 million from an office building sale in March 2023 is carried at fair value, with interest recognized in other revenues and fair value changes in net realized investment gains or losses[50] Note 4. Fair Value Option Explains the application of the fair value option to certain financial assets and the resulting gains or losses - The Company applies the fair value option to all fixed maturity and equity investment securities, short-term investments, and note receivable for simplification and cost-benefit[53] Gains (Losses) from Fair Value Option (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------- | :-------------------------------- | :-------------------------------- | | Fixed maturity securities | $(9,294) | $39,776 | | Equity securities | $34,498 | $3,240 | | Short-term investments | $(104) | $34 | | Note receivable | $(156) | $— | | Total gains | $24,944 | $43,050 | Note 5. Fair Value Measurements Categorizes assets and liabilities measured at fair value into Level 1, 2, and 3 hierarchies based on input observability - The Company categorizes fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[56][57] - At March 31, 2024 and December 31, 2023, the Company had no financial assets or liabilities based on Level 3 measurements[68] - Private equity funds are measured at Net Asset Value (NAV) practical expedient and are not classified within the fair value hierarchy, totaling approximately $83.8 million at March 31, 2024[69][70] Assets and Liabilities Measured at Fair Value (March 31, 2024, in thousands) | Item | Level 1 | Level 2 | Level 3 | Total | | :----------------------------------- | :------ | :-------- | :------ | :-------- | | Assets | | | | | | Fixed maturity securities | $141,161 | $4,348,391 | $— | $4,489,552 | | Equity securities (excl. NAV) | $672,106 | $45,241 | $— | $717,347 | | Private equity funds (NAV) | | | | $83,761 | | Short-term investments | $160,636 | $1,830 | $— | $162,466 | | Note receivable | $— | $9,818 | $— | $9,818 | | Total assets at fair value | $973,903 | $4,405,280 | $— | $5,462,944 | | Liabilities | | | | | | Options sold | $1,928 | $— | $— | $1,928 | | Total liabilities at fair value | $1,928 | $— | $— | $1,928 | Financial Instruments Disclosed, But Not Carried, at Fair Value (March 31, 2024, in thousands) | Item | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | | :----------------------- | :------------- | :--------- | :------ | :-------- | :------ | | Unsecured notes | $373,829 | $360,611 | $— | $360,611 | $— | | Unsecured credit facility | $200,000 | $200,007 | $— | $200,007 | $— | | Total | $573,829 | $560,618 | $— | $560,618 | $— | Note 6. Derivative Financial Instruments Describes the Company's use of derivative instruments, primarily covered call options, to manage equity price risk - The Company uses derivative instruments, primarily covered call options, to manage equity price risk and enhance investment portfolio returns[79][80] Derivative Fair Values and Gains (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :---------------- | | Options sold - Other liabilities | $1,928 | $1,955 | | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------- | :-------------------------------- | :-------------------------------- | | Options sold - Net realized investment gains | $4,316 | $1,228 | Note 7. Goodwill and Other Intangible Assets Reports on the carrying amounts of goodwill and other intangible assets, including amortization expense and future estimates - Goodwill, associated with the Property and Casualty business segment, remained unchanged at March 31, 2024, with no impairment indicators identified[81][82] Other Intangible Assets, Net (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :---------------- | | Customer relationships | $1,338 | $1,158 | | Trade names | $5,615 | $5,775 | | Technology | $— | $— | | Insurance license | $1,400 | $1,400 | | Total other intangible assets, net | $8,353 | $8,333 | - Amortization expense for other intangible assets with definite useful lives was $0.2 million for both Q1 2024 and Q1 2023[84] Estimated Future Amortization Expense (in thousands) | Year | Amortization Expense | | :----------------------- | :------------------- | | Remainder of 2024 | $671 | | 2025 | $856 | | 2026 | $856 | | 2027 | $856 | | 2028 | $856 | | Thereafter | $2,858 | | Total | $6,953 | Note 8. Share-Based Compensation Details the Company's incentive award plans, performance-based PSUs, and related share-based compensation expense - The 2015 Incentive Award Plan authorized 4,900,000 shares, with 4,830,000 shares available for future grants as of March 31, 2024[86] - The 2024 Long-Term Incentive Plan (LTIP) was adopted in February 2024, granting performance-based PSUs (phantom stock units) to key employees, settled in cash upon vesting based on corporate and individual performance[87][88][91] - The Company recorded approximately $0.8 million of share-based compensation expense for performance-based PSUs for the three months ended March 31, 2024[93] Note 9. Income Taxes Discusses unrecognized tax benefits and the realization of deferred income tax assets for the reporting period - Unrecognized tax benefits decreased by approximately $1.9 million in Q1 2024, mainly due to payment for a California Franchise Tax Board audit for tax year 2011[95] - The Company's deferred income taxes were in a net asset position at March 31, 2024, and management believes these assets are more likely than not to be realized[99] Note 10. Loss and Loss Adjustment Expense Reserves Presents activity in loss and loss adjustment expense reserves, including prior year development and catastrophe impacts Loss and Loss Adjustment Expense Reserves Activity (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Gross reserves, beginning of period | $2,785,702 | $2,584,910 | | Net reserves, beginning of period | $2,753,554 | $2,559,588 | | Total incurred losses and loss adjustment expenses | $903,965 | $929,529 | | Total payments | $828,546 | $841,857 | | Net reserves, end of period | $2,828,973 | $2,647,260 | | Gross reserves, end of period | $2,859,220 | $2,677,561 | - The decrease in prior years' provision for insured events was $5.8 million in Q1 2024 (due to lower auto LAE, offset by unfavorable catastrophe development) and $15.5 million in Q1 2023 (due to lower homeowners L&LAE)[100] - Catastrophe losses net of reinsurance were approximately $72 million in Q1 2024 and $98 million in Q1 2023, with no reinsurance benefits available due to losses not exceeding retention limits[101] - Unfavorable development of approximately $4 million on prior years' catastrophe losses occurred in Q1 2024[102] Note 11. Notes Payable Details the Company's outstanding debt, including senior unsecured notes and credit facility, and debt to capital ratio Notes Payable (in thousands) | Lender | Interest Rate | Maturity Date | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------ | :------------ | :------------- | :---------------- | | Senior unsecured notes | 4.40% | March 15, 2027 | $375,000 | $375,000 | | Unsecured credit facility | Term SOFR + 112.5-150.0 bps | November 16, 2026 | $200,000 | $200,000 | | Total principal amount | | | $575,000 | $575,000 | | Less unamortized discount and debt issuance costs | | | $1,171 | $1,271 | | Total debt | | | $573,829 | $573,729 | - The unsecured credit facility was increased to $250 million from $200 million on November 30, 2023, with $200 million drawn at March 31, 2024[104] - The Company's debt to total capital ratio was 26.4% at March 31, 2024[104] Note 12. Contingencies Addresses ongoing lawsuits, regulatory actions, and the Company's assessment of their potential financial impact - The Company is involved in various lawsuits and regulatory actions, primarily related to insurance claims, for which reserves are established[104][106] - The California Department of Insurance (DOI) served a Notice of Non-Compliance (NNC) in September 2021, alleging violations from a 2014 examination report. Settlement discussions are ongoing, but no meaningful progress was made in March 2024 mediation[105] - Management does not believe the ultimate resolution of currently pending legal or regulatory proceedings will have a material adverse effect on its financial condition or cash flows[106] Note 13. Segment Information Provides financial results and premium data by reportable segment and line of business for the insurance operations - The Company operates primarily in the Property and Casualty business segment, offering personal automobile, homeowners, commercial automobile, and commercial property insurance[108][109][111] - The Chief Operating Decision Maker evaluates operating results based on pre-tax underwriting results, excluding investment income, realized gains/losses, other income, and interest expense[109][110] - The 'Other' business segment, which does not meet reportable thresholds, offers automobile mechanical protection warranties[112] Operating Results by Reportable Segment (Three Months Ended March 31, in millions) | Item | Property & Casualty 2024 | Other 2024 | Total 2024 | Property & Casualty 2023 | Other 2023 | Total 2023 | | :----------------------------------- | :----------------------- | :--------- | :--------- | :----------------------- | :--------- | :--------- | | Net premiums earned | $1,159.4 | $7.3 | $1,166.7 | $997.6 | $7.1 | $1,004.7 | | Losses and loss adjustment expenses | $900.0 | $4.0 | $904.0 | $925.8 | $3.7 | $929.5 | | Underwriting expenses | $269.3 | $3.8 | $273.1 | $230.8 | $3.5 | $234.3 | | Underwriting loss | $(9.9) | $(0.5) | $(10.4) | $(159.0) | $(0.1) | $(159.1) | | Pre-tax income (loss) | | | $89.2 | | | $(62.1) | | Net income (loss) | | | $73.5 | | | $(45.3) | Net Premiums Earned by Line of Business (Three Months Ended March 31, in millions) | Line of Business | Property & Casualty 2024 | Other 2024 | Total 2024 | Property & Casualty 2023 | Other 2023 | Total 2023 | | :----------------------- | :----------------------- | :--------- | :--------- | :----------------------- | :--------- | :--------- | | Private passenger automobile | $754.3 | $— | $754.3 | $660.6 | $— | $660.6 | | Homeowners | $266.9 | $— | $266.9 | $222.5 | $— | $222.5 | | Commercial automobile | $89.2 | $— | $89.2 | $69.1 | $— | $69.1 | | Other | $49.0 | $7.3 | $56.3 | $45.4 | $7.1 | $52.5 | | Net premiums earned | $1,159.4 | $7.3 | $1,166.7 | $997.6 | $7.1 | $1,004.7 | Direct Premiums Written by Line of Business (Three Months Ended March 31, in millions) | Line of Business | Property & Casualty 2024 | Other 2024 | Total 2024 | Property & Casualty 2023 | Other 2023 | Total 2023 | | :----------------------- | :----------------------- | :--------- | :--------- | :----------------------- | :--------- | :--------- | | Private passenger automobile | $825.5 | $— | $825.5 | $634.3 | $— | $634.3 | | Homeowners | $302.1 | $— | $302.1 | $241.6 | $— | $241.6 | | Commercial automobile | $104.0 | $— | $104.0 | $80.0 | $— | $80.0 | | Other | $62.9 | $6.6 | $69.5 | $56.3 | $6.4 | $62.7 | | Direct premiums written | $1,294.5 | $6.6 | $1,301.1 | $1,012.2 | $6.4 | $1,018.6 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on Q1 2024 financial condition and results, covering revenue, expenses, investments, liquidity, and regulatory impacts OVERVIEW Provides a general business context, regulatory updates, and critical accounting estimates impacting the financial statements A. General Discusses factors influencing operating results, including competition, loss frequency, weather, and regulatory environment - Operating results are subject to significant fluctuations due to competition, loss frequency/severity, weather, economic conditions, and regulatory environment[117] B. Business Outlines the Company's primary insurance lines and geographical distribution of direct premiums written by state - The Company primarily writes personal automobile insurance through 12 subsidiaries in 11 states, mainly California, and also offers homeowners, commercial automobile, commercial property, mechanical protection, and umbrella insurance[119] Direct Premiums Written by State (Three Months Ended March 31, 2024, in thousands) | State | Private Passenger Automobile | Commercial Automobile | Homeowners | Other Lines | Total | % of Total | | :------------------- | :--------------------------- | :-------------------- | :--------- | :---------- | :---------- | :--------- | | California | $682,146 | $73,338 | $208,000 | $65,643 | $1,029,127 | 79.1% | | Texas | $34,054 | $18,197 | $51,372 | $1,486 | $105,109 | 8.1% | | Other states | $109,325 | $42,775 | $12,454 | $2,334 | $166,888 | 12.8% | | Total | $825,525 | $134,310 | $271,826 | $69,463 | $1,301,124 | 100.0% | C. Regulatory and Legal Matters Reports on recent rate approvals and ongoing regulatory actions, including a Notice of Non-Compliance from the California DOI - The California DOI approved a 22.5% rate increase for Mercury Insurance Company (MIC) and a 3.8% rate increase for California Automobile Insurance Company (CAIC) on private passenger automobile insurance, effective February 2024[124] - An additional 6.99% rate increase on California homeowners insurance was approved in March 2024, expected to be effective in May 2024[125] - The Company is involved in a Notice of Non-Compliance from the California DOI regarding a 2014 examination report, with ongoing settlement discussions[105][129] D. Critical Accounting Estimates Focuses on the estimation of loss and loss adjustment expense reserves, highlighting the complexities and methodologies used - Estimating loss and loss adjustment expense reserves is the most significant critical accounting estimate, involving complex judgments due to factors like regulatory changes, litigation, and medical/repair costs[130] - The Company uses multiple actuarial methods (incurred loss, paid loss, average severity, GLM) and considers qualitative factors to establish loss reserves, which are reviewed quarterly[132] - At March 31, 2024, the Company's point estimate for loss reserves was approximately $2.86 billion ($2.83 billion net of reinsurance), including $1.66 billion of incurred but not reported (IBNR) reserves[135] RESULTS OF OPERATIONS Analyzes the Company's financial performance, including revenue, expenses, underwriting ratios, and investment results Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 Compares key financial metrics and performance drivers for Q1 2024 against Q1 2023, highlighting changes in premiums and ratios - Net premiums earned increased by 16.1% and net premiums written increased by 27.2% for Q1 2024, driven by rate increases and higher policy counts in California automobile and homeowners lines[139] Key Underwriting Ratios | Ratio | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------- | :-------------------------------- | :-------------------------------- | | Loss ratio | 77.5% | 92.5% | | Expense ratio | 23.4% | 23.3% | | Combined ratio | 100.9% | 115.8% | - The Q1 2024 loss ratio improved significantly to 77.5% from 92.5% in Q1 2023, primarily due to rate increases, despite being negatively impacted by $68 million in catastrophe losses[144][145][146] - Excluding prior periods' loss development and catastrophe losses, the loss ratio decreased to 72.2% in Q1 2024 from 84.3% in Q1 2023[146] - The combined ratio improved to 100.9% in Q1 2024 from 115.8% in Q1 2023, reflecting improved underwriting performance[148] - Income tax expense was $15.8 million in Q1 2024 (17.7% effective rate) compared to a benefit of $(16.8) million in Q1 2023 (27.0% effective rate), driven by a $151.3 million increase in pre-tax income[149][150] Investment Results (in thousands, except yield) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Average invested assets at cost | $5,358,848 | $5,022,572 | | Net investment income (before tax) | $65,018 | $51,973 | | Average annual yield on investments (before tax) | 4.4% | 4.0% | | Net realized investment gains | $38,192 | $49,008 | | Net income (loss) | $73,462 | $(45,288) | | Basic Net income (loss) per share | $1.33 | $(0.82) | - Net investment income increased due to higher average yield (4.4% vs. 4.0%) and higher average invested assets, resulting from the replacement of lower-yielding investments with higher-yielding ones[151] LIQUIDITY AND CAPITAL RESOURCES Assesses the Company's cash flows, reinsurance arrangements, investment portfolio, debt, and regulatory capital requirements A. Cash Flows Examines changes in cash provided by operating activities and the adequacy of cash and short-term investments for liquidity - Net cash provided by operating activities increased by $174.5 million to $192.6 million in Q1 2024, driven by higher premium collections, lower loss payments, and increased investment income[156] - The Company's cash and short-term investments totaled $692.6 million at March 31, 2024, deemed adequate for liquidity needs[155] Estimated Fair Value of Fixed Maturity Securities by Contractual Maturity (March 31, 2024, in thousands) | Maturity | Fair Value | | :----------------------------------- | :--------- | | Due in one year or less | $263,504 | | Due after one year through two years | $187,645 | | Due after two years through three years | $263,540 | | Due after three years through four years | $328,398 | | Due after four years through five years | $227,217 | | Total due within five years | $1,270,304 | B. Reinsurance Details the Company's reinsurance contracts, coverage limits, retention levels, and the impact of catastrophe events - The Company participates as an assuming reinsurer in a Catastrophe Participation Reinsurance Contract, reimbursing up to $30 million in losses for a proportional share of catastrophe losses[159] - Under the Catastrophe Reinsurance Treaty, the Company has $1,111 million of coverage for the 12 months ending June 30, 2024, after a $100 million retention limit[160][161] - Catastrophe events in Q1 2024 caused approximately $68 million in losses, but no reinsurance benefits were available as individual events did not exceed the $100 million retention limit[164] - The annual premium for the Catastrophe Reinsurance Treaty increased to $99 million for the 12 months ending June 30, 2024, from $74 million in the prior year, due to increased coverage and rates[162] C. Invested Assets Describes the investment strategy, portfolio composition, and characteristics of fixed maturity and equity securities Portfolio Composition Outlines the investment strategy and the breakdown of the total investment portfolio by security type and fair value - The investment strategy prioritizes safety of principal, consistent income generation, and maximizing after-tax yield, with a focus on a diversified, investment-grade fixed income portfolio[168] Composition of Total Investment Portfolio (March 31, 2024, in thousands) | Security Type | Cost | Fair Value | | :----------------------------------- | :--------- | :--------- | | Fixed maturity securities | $4,574,492 | $4,489,552 | | Equity securities | $690,856 | $801,108 | | Short-term investments | $163,454 | $162,466 | | Total investments | $5,428,802 | $5,453,126 | - At March 31, 2024, 39.3% of the total investment portfolio and 47.8% of fixed maturity securities were invested in tax-exempt state and municipal bonds[169] Fixed Maturity Securities and Short-Term Investments Analyzes the duration and credit quality of the fixed maturity portfolio, including changes in credit ratings - The fixed maturity portfolio has a moderate duration, with a modified duration reflecting anticipated early calls of 3.0 years at March 31, 2024 (3.1 years at Dec 31, 2023)[171][172] - The weighted-average portfolio credit quality rating for fixed maturity securities was A+ at March 31, 2024[172] - At March 31, 2024, 97.2% of fixed maturity securities experienced no change in their overall credit rating, with 2.1% upgraded and 0.7% downgraded[175][176] U.S. Government Bonds and Agencies Reports on the fair value and modified duration of investments in U.S. government bonds and agency securities - Holdings in U.S. government bonds and agencies were $200.3 million (4.5% of fixed maturity portfolio) at March 31, 2024, with a modified duration of 1.0 years[177] Municipal Securities Details the fair value, average rating, and modified duration of the municipal securities portfolio - Municipal securities totaled $2.80 billion (62.3% of fixed maturity portfolio) at March 31, 2024, with an average rating of A+ for insured municipal securities[178][179] - The modified duration of the municipal securities portfolio was 3.1 years at March 31, 2024[179] Mortgage-Backed Securities Provides information on the fair value, weighted-average rating, and modified duration of mortgage-backed securities - Mortgage-backed securities were $193.0 million (4.3% of fixed maturity portfolio) at March 31, 2024, with a weighted-average rating of AA and a modified duration of 4.6 years[181][182] Corporate Securities Presents the fair value, percentage of portfolio, modified duration, and weighted-average rating of corporate securities Corporate Securities (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :---------------- | | Corporate securities at fair value | $706,210 | $599,630 | | Percentage of total fixed maturity securities portfolio | 15.7% | 13.9% | | Modified duration | 2.6 years | 2.4 years | | Weighted-average rating | A | A | Collateralized Loan Obligations Details the fair value, portfolio percentage, modified duration, and weighted-average rating of CLO investments Collateralized Loan Obligations (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :---------------- | | CLOs at fair value | $495,523 | $484,947 | | Percentage of total fixed maturity securities portfolio | 11.0% | 11.2% | | Modified duration | 3.6 years | 3.5 years | | Weighted-average rating | AA- | AA | Other Asset-Backed Securities Reports on the fair value, portfolio percentage, modified duration, and weighted-average rating of other asset-backed securities Other Asset-Backed Securities (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :---------------- | | Other asset-backed securities at fair value | $98,758 | $96,164 | | Percentage of total fixed maturity securities portfolio | 2.2% | 2.2% | | Modified duration | 2.0 years | 2.2 years | | Weighted-average rating | A- | A | Equity Securities Discusses the increase in equity holdings and their proportion within the total investment portfolio - Equity holdings increased to $801.1 million at March 31, 2024, from $730.7 million at December 31, 2023, primarily due to overall improvement in equity markets[186] - Equity securities represented 14.7% of the total investment portfolio at fair value at March 31, 2024[187] D. Debt Summarizes the Company's outstanding debt, including senior unsecured notes and credit facility draws - The Company's debt at March 31, 2024, consisted of $375 million in senior unsecured notes and $200 million drawn under an unsecured credit facility[188] E. Regulatory Capital Requirements Reports on the Company's compliance with regulatory capital requirements, specifically the net premiums written to surplus ratio - The ratio of net premiums written to statutory policyholders' surplus was 2.79 to 1 at March 31, 2024, below the industry guideline of 3.0 to 1[190] Item 3. Quantitative and Qualitative Disclosures about Market Risks Details exposure to market risks, including interest rate, equity price, and credit risks, and the strategies for their management Overview Explains the Company's approach to managing market and investment risks through policies and executive oversight - The Company manages market and investment risks through investment policies, asset allocation, duration limits, and credit ratings, with executive oversight by its investment committee[193][194] Credit Risk Describes how credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio - Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio, with a weighted-average rating of A+ at March 31, 2024[195] Fixed Maturity Municipal Securities by State (March 31, 2024, in thousands) | States | Fair Value | Average Rating | | :------------------- | :--------- | :------------- | | Florida | $306,390 | A | | California | $238,448 | AA | | Texas | $225,297 | AA | | New York | $210,687 | AA | | Illinois | $158,369 | A+ | | Other states | $1,656,486 | A+ | | Total | $2,795,677 | | - Only 0.1% of the total fixed maturity securities portfolio was rated below investment grade at March 31, 2024[197] Equity Price Risk Discusses the management of equity price risk, including the proportion of equity investments and hypothetical market impact - Equity price risk is managed with common equity investments primarily aimed at current income and diversification, comprising 12.3% of total investments at fair value at March 31, 2024[198][199] Estimated Reductions in Common Stock Portfolio Value (in thousands) | Scenario | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :---------------- | | Average Beta | 0.91 | 0.87 | | Hypothetical 25% reduction in stock market value | $152,568 | $129,742 | | Hypothetical 50% reduction in stock market value | $305,136 | $259,483 | Interest Rate Risk Analyzes the interest rate risk exposure of the fixed maturity securities portfolio and the impact of hypothetical rate changes - The fixed maturity securities portfolio, representing 82.3% of total investments, is subject to interest rate risk, with a modified duration of 2.9 years at March 31, 2024[202][203] - A hypothetical 100 basis point rise in interest rates would decrease the fair value of the fixed maturity securities portfolio by an estimated $134.2 million at March 31, 2024[204] Item 4. Controls and Procedures Confirms effectiveness of disclosure controls and procedures, reporting no material changes in internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2024[206][207] - There were no material changes in the Company's internal control over financial reporting during the most recent fiscal quarter[208] PART II - OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, equity sales, defaults, and other disclosures Item 1. Legal Proceedings Details ongoing lawsuits and regulatory actions, with management not anticipating a material adverse effect on financial condition - The Company is a defendant in various lawsuits and regulatory actions related to its insurance business, with the majority concerning insurance claims reserved through the normal process[210] - Reserves are established for non-insurance claims when a loss is probable and estimable; for reasonably possible losses, disclosure of nature and estimated range is provided[211] - Management believes the ultimate resolution of pending legal or regulatory proceedings will not have a material adverse effect on the Company's financial condition or cash flows[211] Item 1A. Risk Factors Confirms no material changes to risk factors previously identified in the Annual Report on Form 10-K for 2023 - The risk factors previously identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, have not changed in any material respect[214] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities or use of proceeds during the three months ended March 31, 2024 - There were no unregistered sales of equity securities and no use of proceeds during the three months ended March 31, 2024[215] Item 3. Defaults Upon Senior Securities Confirms no defaults upon senior securities occurred during the three months ended March 31, 2024 - There were no defaults upon senior securities during the three months ended March 31, 2024[216] Item 4. Mine Safety Disclosures States that this item is not applicable to the Company's operations - This item is not applicable to the Company[217] Item 5. Other Information Confirms no director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended March 31, 2024[218][220] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - The report includes certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2) and various XBRL taxonomy extension documents (101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF)[222]