Newswires
MERCURY GENERAL CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Certain statements contained in this report are forward-looking statements based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the demand for the Company's insurance products, inflation and general economic conditions, including general market risks associated with the Company's investment portfolio; the accuracy and adequacy of the Company's pricing methodologies; catastrophes in the markets served by the Company; uncertainties related to estimates, assumptions and projections generally; the possibility that actual loss experience may vary adversely from the actuarial estimates made to determine the Company's loss reserves in general; the Company's ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in the states where it operates; legislation adverse to the automobile insurance industry or business generally that may be enacted in the states where the Company operates; the Company's success in managing its business in non-California states; the presence of competitors with greater financial resources and the impact of competitive pricing and marketing efforts; the Company's ability to successfully manage its claims organization outside ofCalifornia ; the Company's ability to successfully allocate the resources used in the states with reduced or exited operations to its operations in other states; changes in driving patterns and loss trends; acts of war and terrorist activities; pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases; court decisions and trends in litigation and health care and auto repair costs; and legal, cybersecurity, regulatory and litigation risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see the Company's Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 15, 2022 . OVERVIEW
A. General
The operating results of property and casualty insurance companies are subject to significant quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and severity of losses, the effect of weather and natural disasters on losses, general economic conditions, the general regulatory environment in states in which an insurer operates, state regulation of insurance including premium rates, changes in fair value of investments, and other factors such as changes in tax laws. The property and casualty insurance industry has been highly cyclical, with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. These cycles can have a significant impact on the Company's ability to grow and retain business.
This section discusses some of the relevant factors that management considers in
evaluating the Company's performance, prospects, and risks. It is not
all-inclusive and is meant to be read in conjunction with the entirety of
management's discussion and analysis, the Company's consolidated financial
statements and notes thereto, and all other items contained within this
Quarterly Report on Form 10-Q.
Note on General Business and Economic Conditions
The outbreak of COVID-19 has had a notable impact on general economic conditions, including, but not limited to, the temporary closures of many businesses and reduced consumer spending. The Company has taken and continues to take a number of precautionary steps to safeguard its customers, business and employees from COVID-19. Most of the Company's employees have been working remotely, with only certain operationally critical employees working on site at various locations. InNovember 2021 , the Company extended its "work-from-home" policy indefinitely under the new "Mercury's My Workplace" policy, allowing most of its employees to work from anywhere in theU.S. beginningJanuary 2022 . The Company's automobile line of insurance business experienced a rapid drop in loss frequency in the second quarter of 2020 due to reduced driving following the outbreak of the pandemic. Since then, loss frequency has increased and is now near pre-pandemic levels. Inflationary trends have accelerated to their highest level since the 1980s in 2022, with the most recent consumer price index increase of 8.2%. Excessive inflation has led to significant increases in loss severities related to vehicle repairs and bodily injuries. The COVID-19 pandemic also created more uncertainty, and the total effect on losses occurring 24 -------------------------------------------------------------------------------- Table of Contents during the COVID-19 era will not be known for several years. The Company expects more late reported claims and a prolonged settlement period. The sustained high loss severity, combined with loss frequency at near pre-pandemic levels, have negatively impacted the Company's results of operations, and the Company has submitted private passenger automobile rate filings in many states requesting rate increases. In addition, the Company is taking various non-rate actions to improve profitability. TheFederal Open Market Committee started raising the federal funds rate inMarch 2022 as a response to inflationary pressures. The ensuing increases in market interest rates, combined with the high inflation, the supply chain and labor issues, and theRussia -Ukraine war, have placed significant strain on financial markets leading to market volatility and turmoil. The fair values of the Company's equity securities have reflected such market volatility and the fair values of its fixed maturity securities have decreased significantly as a result of increases in market interest rates during the first nine months of 2022. The Company believes that it will continue to have sufficient liquidity to support its business operations without the forced sale of investments, based on its existing cash and short-term investments, future cash flows from operations, and$75 million of undrawn credit in its unsecured credit facility. The Company will continue to monitor the effects of COVID-19 and its variants, the high inflation and interest rates, the supply chain and labor issues, theRussia -Ukraine war, and the legislative relief programs, including the Inflation Reduction Act of 2022 signed into law inAugust 2022 . The extent of these effects on the Company's business and financial results will depend largely on future developments, including the duration of the high inflation and interest rates and the war, most of which are highly uncertain and cannot be predicted. InOctober 2022 , the Company reduced its workforce by approximately 40 employees, and a one-time cost of approximately$3 million associated with the workforce reduction will be recorded as an expense for the fourth quarter of 2022. The Company anticipates this reduction will result in ongoing annual cost savings of approximately$6 million .
B. Business
The Company is primarily engaged in writing personal automobile insurance
through 13 insurance subsidiaries ("Insurance Companies") in 11 states,
principally California . The Company also writes homeowners, commercial
automobile, commercial property, mechanical protection, and umbrella insurance.
The Company's insurance policies are mostly sold through independent agents who
receive a commission for selling policies. The Company believes that it has
thorough underwriting and claims handling processes that, together with its
agent relationships, provide the Company with competitive advantages.
The following tables present direct premiums written, by state and line of
insurance business, for the nine months ended
Nine Months Ended
(Dollars in thousands)
Private Commercial
Passenger Automobile Homeowners Automobile Other Lines (2) Total
California $ 1,672,123 $ 544,374 $ 143,991 $ 159,404 $ 2,519,892 81.1 %
Texas 73,022 81,129 34,555 4,998 193,704 6.2 %
Other states (1) 270,407 88,396 29,391 7,672 395,866 12.7 %
Total $ 2,015,552 $ 713,899 $ 207,937 $ 172,074 $ 3,109,462 100.0 %
64.8 % 23.0 % 6.7 % 5.5 % 100.0 %
Nine Months Ended
(Dollars in thousands)
Private Commercial
Passenger Automobile Homeowners Automobile Other Lines (2) Total
California $ 1,752,380 $ 484,264 $ 136,938 $ 140,700 $ 2,514,282 85.0 %
Other states (1) 254,005 116,399 60,424 13,283 444,111 15.0 %
Total $ 2,006,385 $ 600,663 $ 197,362 $ 153,983 $ 2,958,393 100.0 %
67.8 % 20.3 % 6.7 % 5.2 % 100.0 %
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-------------------------------------------------------------------------------- Table of Contents (1) No individual state accounted for more than 5% of total direct premiums written. (2) No individual line of insurance business accounted for more than 5% of total direct premiums written.
C. Regulatory and Legal Matters
The Department of Insurance ("DOI") in each state in which the Company operates is responsible for conducting periodic financial, market conduct, and rating and underwriting examinations of the Insurance Companies in their states. Market conduct examinations typically review compliance with insurance statutes and regulations with respect to rating, underwriting, claims handling, billing, and other practices.
The following table presents a summary of recent and upcoming examinations:
State Exam Type Exam Period Covered Status
CA, FL, GA, Coordinated Multi-state
IL, OK, TX Financial 2018-2021 Examination began in the second quarter of 2022.
Examination was completed in the third quarter
CA Premium Tax 2018-2021 of 2022.
During the course of and at the conclusion of the examinations, the examining
DOI generally reports findings to the Company.
The California DOI has not approved a private passenger automobile rate filing from any major insurer since the beginning of the pandemic. The California DOI recently requested information from insurers to determine if, in its view, pandemic-related premium refunds were adequate. The California DOI is reviewing the information provided by insurers in conjunction with their rate filings. AlthoughCalifornia courts have ruled that the California DOI lacks the authority to order such refunds, the California DOI is not approving rate increases until it has gone through this review process. While delays in obtaining indicated rates can adversely impact results of operations in any environment, that impact is especially severe in the current inflationary environment. The Company and other insurers have expressed, in private discussions and in written arguments submitted by trade groups, that the California DOI has a statutory duty to review and approve rate filings. It is not reasonably possible to predict if, or when, the California DOI will approve the Company's pending rate filings. 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 endedDecember 31, 2021 . The Company establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. In addition, the Company accrues for anticipated legal defense costs associated with such lawsuits and regulatory actions. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company's pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of any additional regulatory or legal matters, see the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , and Note 12. Contingencies of the Notes to Consolidated Financial Statements of this Quarterly Report.
D. Critical Accounting Estimates
Loss and Loss Adjustment Expense Reserves ("Loss Reserves")
Preparation of the Company's consolidated financial statements requires
management's judgment and estimates. The most significant is the estimate of
loss reserves. Estimating loss reserves is a difficult process as many factors
can ultimately affect the final settlement of a claim and, therefore, the loss
reserve that is required. A key assumption in estimating loss reserves is the
degree to which the historical data used to analyze reserves will be predictive
of ultimate claim costs on incurred claims. Changes in the regulatory and legal
environments, results of litigation, medical costs, the cost of repair
materials, and
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labor rates, among other factors, can impact this assumption. In addition, time
can be a critical part of reserving determinations since the longer the span
between the incidence of a loss and the payment or settlement of a claim, the
more variable the ultimate settlement amount could be. Accordingly, short-tail
claims, such as property damage claims, tend to be more reasonably predictable
than long-tail liability claims.
The Company calculates a loss reserve point estimate rather than a range. There
is inherent uncertainty with estimates and this is particularly true with loss
reserve estimates. This uncertainty comes from many factors which may include
changes in claims reporting and settlement patterns, changes in the regulatory
and legal environments, uncertainty over inflation rates, and uncertainty for
unknown items. The Company does not make specific provisions for these
uncertainties, rather it considers them in establishing its loss reserve by
reviewing historical patterns and trends and projecting these out to current
loss reserves. The underlying factors and assumptions that serve as the basis
for preparing the loss reserve estimate include paid and incurred loss
development factors, expected average costs per claim, inflation trends,
expected loss ratios, industry data, and other relevant information.
The Company also engages independent actuarial consultants to review the
Company's loss reserves and to provide the annual actuarial opinions under
statutory accounting principles as required by state regulation. The Company
analyzes loss reserves quarterly primarily using the incurred loss, paid loss,
average severity coupled with the claim count development methods, and the
generalized linear model ("GLM") described below. When deciding among methods to
use, the Company evaluates the credibility of each method based on the maturity
of the data available and the claims settlement practices for each particular
line of insurance business or coverage within a line of insurance business. The
Company may also evaluate qualitative factors such as known changes in laws or
legal rulings that could affect claims handling or other external environmental
factors or internal factors that could affect the settlement of claims. When
establishing the loss reserve, the Company will generally analyze the results
from all of the methods used rather than relying on a single method. While these
methods are designed to determine the ultimate losses on claims under the
Company's policies, there is inherent uncertainty in all actuarial models since
they use historical data to project outcomes. The Company believes that the
techniques it uses provide a reasonable basis in estimating loss reserves.
•The incurred loss method analyzes historical incurred case loss (case reserves
plus paid losses) development to estimate ultimate losses. The Company applies
development factors against current case incurred losses by accident period to
calculate ultimate expected losses. The Company believes that the incurred loss
method provides a reasonable basis for evaluating ultimate losses, particularly
in the Company's larger, more established lines of insurance business which have
a long operating history.
•The paid loss method analyzes historical payment patterns to estimate the
amount of losses yet to be paid.
•The average severity method analyzes historical loss payments and/or incurred losses divided by closed claims and/or total claims to calculate an estimated average cost per claim. From this, the expected ultimate average cost per claim can be estimated. The average severity method coupled with the claim count development method provide meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing loss reserves. The claim count development method analyzes historical claim count development to estimate future incurred claim count development for current claims. The Company applies these development factors against current claim counts by accident period to calculate ultimate expected claim counts. •The GLM determines an average severity for each percentile of claims that have been closed as a percentage of estimated ultimate claims. The average severities are applied to open claims to estimate the amount of losses yet to be paid. The GLM utilizes operational time, determined as a percentile of claims closed rather than a finite calendar period, which neutralizes the effect of changes in the timing of claims handling. The Company analyzes catastrophe losses separately from non-catastrophe losses. For catastrophe losses, the Company generally determines claim counts based on claims reported and development expectations from previous catastrophes and applies an average expected loss per claim based on loss reserves established by adjusters and average losses on previous similar catastrophes. For catastrophe losses on individual properties that are expected to be total losses, the Company typically establishes reserves at the policy limits. AtSeptember 30, 2022 andDecember 31, 2021 , the Company recorded its point estimate of approximately$2.43 billion and$2.23 billion ($2.41 billion and$2.19 billion , net of reinsurance), respectively, in loss reserves, which included approximately$1.18 billion and$1.03 billion ($1.18 billion and$1.02 billion , net of reinsurance), respectively, of incurred but not reported loss reserves ("IBNR"). IBNR includes estimates, based upon past experience, of ultimate developed costs, which may differ from case estimates, unreported claims that occurred on or prior toSeptember 30, 2022 andDecember 31, 2021 , and estimated future payments for reopened claims. Management believes that the liability for loss reserves is adequate to cover the 27
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ultimate net cost of losses and loss adjustment expenses incurred to date;
however, since the provisions are necessarily based upon estimates, the ultimate
liability may be more or less than such provisions.
The Company evaluates its loss reserves quarterly. When management determines that the estimated ultimate claim cost requires a decrease for previously reported accident years, favorable development occurs and a reduction in losses and loss adjustment expenses is reported in the current period. If the estimated ultimate claim cost requires an increase for previously reported accident years, unfavorable development occurs and an increase in losses and loss adjustment expenses is reported in the current period.
For a further discussion of the Company's reserving methods, see the Company's
Annual Report on Form 10-K for the year ended
RESULTS OF OPERATIONS
Three Months Ended
Revenues
Net premiums earned and net premiums written for the three months endedSeptember 30, 2022 increased 6.0% and 1.9%, respectively, from the corresponding period in 2021. The increase in net premiums earned was primarily due to increases in the number of policies written outside ofCalifornia , and rate increases in theCalifornia homeowners line of insurance business and in certain lines of insurance business in some states outside ofCalifornia , partially offset by a decrease in the number of private passenger automobile policies written inCalifornia . The increase in net premiums written was primarily due to increases in the number of policies written outside ofCalifornia and rate increases in certain lines of insurance business in some states outside ofCalifornia , partially offset by a decrease in the number of private passenger automobile policies written inCalifornia . Net premiums earned included ceded premiums earned of$22.8 million and$17.2 million for the three months endedSeptember 30, 2022 and 2021, respectively. Net premiums written included ceded premiums written of$22.8 million and$17.3 million for the three months endedSeptember 30, 2022 and 2021, respectively. The increases in ceded premiums earned and ceded premiums written resulted mostly from higher reinsurance coverage and rates and growth in the covered book of business. Net premiums earned, a GAAP measure, represents the portion of net premiums written that is recognized as revenue in the financial statements for the periods presented and earned on a pro-rata basis over the term of the policies. Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period, net of any applicable reinsurance. Net premiums written is a statutory measure designed to determine production levels. The following is a reconciliation of net premiums earned to net premiums written: Three Months Ended September 30, 2022 2021 (Amounts in thousands) Net premiums earned $ 996,939$ 940,941
Change in net unearned premiums 37,537
74,026
Net premiums written $ 1,034,476 $ 1,014,967
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Expenses
Loss and expense ratios are used to interpret the underwriting experience of
property and casualty insurance companies. The following table presents the
Insurance Companies' loss, expense, and combined ratios determined in accordance
with GAAP:
Three Months Ended September 30,
2022 2021
Loss ratio 79.0 % 74.2 %
Expense ratio 23.8 % 24.8 %
Combined ratio 102.8 % 99.0 %
Loss ratio is calculated by dividing losses and loss adjustment expenses by net
premiums earned. The loss ratio for the third quarter of 2022 and 2021 was
affected by favorable development of approximately $1 million and $8 million ,
respectively, on prior accident years' loss and loss adjustment expense
reserves. The favorable development for the third quarter of 2022 was primarily
attributable to lower than estimated losses and loss adjustment expenses in the
commercial property and umbrella lines of insurance business. The favorable
development for the third quarter of 2021 was primarily attributable to lower
than estimated losses and loss adjustment expenses in the homeowners and private
passenger automobile lines of insurance business.
The 2022 loss ratio was negatively impacted by approximately $18 million of
catastrophe losses, excluding unfavorable development of approximately $1
million on prior years' catastrophe losses, primarily due to the impact of
Hurricane Ian in Florida which caused $11 million in losses, and rainstorms in
Texas and Oklahoma . The 2021 loss ratio was negatively impacted by approximately
$27 million of catastrophe losses, excluding favorable development of
approximately $2 million on prior years' catastrophe losses, primarily due to
wildfires in California and the impact of Hurricane Ida in New Jersey and New
York .
Excluding the effects of estimated prior periods' loss development and
catastrophe losses, the loss ratio was 77.3% and 72.2% for the third quarter of
2022 and 2021, respectively. The increase in the loss ratio was primarily due to
an increase in loss severity in the automobile line of insurance business.
Inflationary trends have accelerated to their highest level in decades in 2022,
which has had a significant impact on the cost of auto parts and labor as well
as medical expenses for bodily injuries, and supply chain and labor shortage
issues have lengthened the time to repair vehicles. Bodily injury costs are also
under pressure from social inflation. These inflationary pressures and the
supply chain and labor shortage issues have led to a significant increase in
automobile loss severity and increased losses and loss adjustment expenses for
the insured events of the current accident year for the three months ended
September 30, 2022 compared to the corresponding period in 2021. The Company has
filed for rate increases in many states and is taking various non-rate actions
to improve profitability.
Expense ratio is calculated by dividing the sum of policy acquisition costs and
other operating expenses by net premiums earned. The expense ratio for the three
months ended September 30, 2022 decreased compared to the corresponding period
in 2021, primarily due to lower advertising and other expenses.
Combined ratio is equal to loss ratio plus expense ratio and is the key measure
of underwriting performance traditionally used in the property and casualty
insurance industry. A combined ratio under 100% generally reflects profitable
underwriting results, and a combined ratio over 100% generally reflects
unprofitable underwriting results.
Income tax benefit was $30.6 million and $4.7 million for the three months ended
September 30, 2022 and 2021, respectively. The increase in income tax benefit
was primarily due to a $125.5 million increase in total pre-tax loss. Tax-exempt
investment income, a component of total pre-tax loss, remained relatively steady
with the corresponding period in 2021.
The Company's effective income tax rate can be affected by several factors.
These generally relate to large changes in the composition of fully taxable
income, including net realized investment gains or losses, tax-exempt investment
income, non-deductible expenses, and periodically, non-routine tax items such as
adjustments to unrecognized tax benefits related to tax uncertainties.
Tax-exempt investment income of approximately $19 million coupled with pre-tax
loss of approximately $129 million resulted in an effective tax rate of 23.7%,
above the statutory tax rate of 21%, for the three months ended September 30,
2022 , and tax-exempt investment income of approximately $18 million coupled with
pre-tax loss of approximately $3 million resulted in an effective tax rate of
138.1% for the corresponding period in 2021.
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Investments
The following table presents the investment results of the Company:
Three Months Ended September 30,
2022 2021
(Dollars in thousands)
Average invested assets at cost (1) $ 4,912,521 $
4,751,171
Net investment income (2)
Before income taxes $ 44,563 $
32,334
After income taxes $ 38,653 $
28,708
Average annual yield on investments
Before income taxes 3.6 %
2.7 %
After income taxes 3.2 %
2.4 %
Net realized investment losses$ (144,213) $
(43,543)
__________
(1) Fixed maturities and short-term bonds at amortized cost; equities and other short-term investments at cost. Average invested assets at cost are based on the monthly amortized cost of the invested assets for each period. (2) Higher net investment income before and after income taxes for the three months endedSeptember 30, 2022 compared to the corresponding period in 2021 resulted largely from higher average yield combined with higher average invested assets. Average annual yield on investments before and after income taxes for the three months endedSeptember 30, 2022 increased compared to the corresponding period in 2021, primarily due to the maturity and replacement of lower yielding investments purchased when market interest rates were lower with higher yielding investments, as a result of increasing market interest rates.
The following tables present the components of net realized investment gains or
losses included in net income:
Three
Months Ended
Gains
(Losses) Recognized in Net Income
Changes in fair
Sales value Total
(Amounts in thousands)
Net realized investment gains (losses)
Fixed maturity securities (1)(2) $ (30,841) $ (83,257) $ (114,098)
Equity securities (1)(3) 14,017 (45,779) (31,762)
Short-term investments (1) (1,481) 1,817 336
Options sold 1,216 95 1,311
Total $ (17,089) $ (127,124) $ (144,213)
Three
Months Ended
Gains
(Losses) Recognized in Net Income
Changes in
Sales fair value Total
(Amounts in thousands)
Net realized investment gains (losses)
Fixed maturity securities (1)(2) $ (122) $ (26,120) $ (26,242)
Equity securities (1)(3) 2,153 (19,884) (17,731)
Short-term investments (1) - (170) (170)
Note receivable (1) - 43 43
Options sold 718 (161) 557
Total $ 2,749 $ (46,292) $ (43,543)
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(1)The changes in fair value of the investment portfolio and note receivable
resulted from application of the fair value option.
(2)The decreases in fair value of fixed maturity securities for the third
quarters of 2022 and 2021 primarily resulted from increases in market interest
rates.
(3)The primary cause for the decreases in fair value of equity securities for
the third quarters of 2022 and 2021 was the overall decline in equity markets.
Net (Loss) Income
Three Months Ended September 30,
2022 2021
(Amounts
in thousands, except per share
data)
Net (loss) income$ (98,303) $ 1,288 Basic average shares outstanding 55,371 55,371 Diluted average shares outstanding 55,371 55,375 Basic Per Share Data: Net (loss) income$ (1.78) $ 0.02 Net realized investment losses, net of tax$ (2.06) $ (0.62) Diluted Per Share Data: Net (loss) income$ (1.78) $ 0.02 Net realized investment losses, net of tax$ (2.06) $ (0.62)
Nine Months Ended
2021
Revenues Net premiums earned and net premiums written for the nine months endedSeptember 30, 2022 increased 5.9% and 4.8%, respectively, from the corresponding period in 2021. The increases in net premiums earned and net premiums written were primarily due to increases in the number of policies written outside ofCalifornia , and rate increases in theCalifornia homeowners line of insurance business and in certain lines of insurance business in some states outside ofCalifornia , partially offset by a decrease in the number of private passenger automobile policies written inCalifornia . Net premiums earned included ceded premiums earned of$57.4 million and$48.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net premiums written included ceded premiums written of$57.8 million and$48.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increases in ceded premiums earned and ceded premiums written resulted mostly from higher reinsurance coverage and rates and growth in the covered book of business. The following is a reconciliation of net premiums earned to net premiums written: Nine Months Ended September 30, 2022 2021 (Amounts in thousands) Net premiums earned$ 2,947,000 $ 2,783,682
Change in net unearned premiums 115,267
139,009
Net premiums written $ 3,062,267 $ 2,922,691
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The following table presents the Insurance Companies' loss, expense, and
combined ratios determined in accordance with GAAP:
Nine Months Ended September 30,
2022 2021
Loss ratio 82.7 % 71.2 %
Expense ratio 23.6 % 24.6 %
Combined ratio 106.3 % 95.8 %
The loss ratio for the nine months of 2022 and 2021 was affected by unfavorable
development of approximately $50 million and favorable development of
approximately $24 million , respectively, on prior accident years' loss and loss
adjustment expense reserves. The unfavorable development for the nine months of
2022 was primarily attributable to higher than estimated losses and loss
adjustment expenses in the private passenger automobile line of insurance
business. Inflationary trends have accelerated to their highest level in decades
in 2022, which has had a significant impact on the cost of auto parts and labor
as well as medical expenses for bodily injuries, and supply chain and labor
shortage issues have lengthened the time to repair vehicles. Bodily injury costs
are also under pressure from social inflation. These factors were major
contributors to the adverse reserve development in the private passenger
automobile line of insurance business. The favorable development for the nine
months of 2021 was primarily attributable to lower than estimated losses and
loss adjustment expenses in the private passenger automobile and homeowners
lines of insurance business.
The 2022 loss ratio was negatively impacted by approximately $58 million of
catastrophe losses, excluding unfavorable development of approximately $4
million on prior years' catastrophe losses, primarily due to winter storms,
rainstorms and hail in Texas and Oklahoma , the impact of Hurricane Ian in
Florida which caused $11 million in losses, and winter storms in California . The
2021 loss ratio was negatively impacted by approximately $91 million of
catastrophe losses, excluding favorable development of approximately $6 million
on prior years' catastrophe losses, primarily due to the deep freeze and other
extreme weather events in Texas and Oklahoma , wildfires and winter storms in
California , and the impact of Hurricane Ida in New Jersey and New York .
Excluding the effects of estimated prior periods' loss development and
catastrophe losses, the loss ratio was 79.0% and 68.8% for the nine months of
2022 and 2021, respectively. The increase in the loss ratio was primarily due to
increases in loss severity and frequency in the automobile line of insurance
business. The inflationary pressures and the supply chain and labor shortage
issues discussed above have led to a significant increase in automobile loss
severity and increased losses and loss adjustment expenses for the insured
events of the current accident year for the nine months ended September 30, 2022
compared to the corresponding period in 2021. After bottoming out in the second
quarter of 2020, automobile loss frequency has mostly been increasing and is
near pre-pandemic levels. The Company has filed for rate increases in many
states and is taking various non-rate actions to improve profitability.
The expense ratio for the nine months ended
compared to the corresponding period in 2021, primarily due to lower advertising
and other expenses.
Income tax (benefit) expense was$(147.5) million and$47.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in income tax expense was primarily due to a$917.8 million decrease in total pre-tax income. Tax-exempt investment income, a component of total pre-tax (loss) income, remained relatively steady with the corresponding period in 2021. Tax-exempt investment income of approximately$54 million coupled with pre-tax loss of approximately$653 million resulted in an effective tax rate of 22.6%, above the statutory tax rate of 21%, for the nine months endedSeptember 30, 2022 , while tax-exempt investment income of approximately$56 million coupled with pre-tax income of approximately$264 million resulted in an effective tax rate of 17.8%, below the statutory rate, for the corresponding period in 2021. 32
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The following table presents the investment results of the Company:
Nine Months Ended September 30,
2022 2021
(Dollars in thousands)
Average invested assets at cost (1) $ 4,889,050 $
4,643,916
Net investment income (2) Before income taxes$ 118,469 $ 95,566 After income taxes$ 103,091 $ 85,168 Average annual yield on investments Before income taxes 3.2 % 2.7 % After income taxes 2.8 % 2.5 % Net realized investment (losses) gains$ (581,237) $ 56,953
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(1) Fixed maturities and short-term bonds at amortized cost; equities and other short-term investments at cost. Average invested assets at cost are based on the monthly amortized cost of the invested assets for each period. (2) Higher net investment income before and after income taxes for the nine months endedSeptember 30, 2022 compared to the corresponding period in 2021 resulted largely from higher average yield combined with higher average invested assets. Average annual yield on investments before and after income taxes for the nine months endedSeptember 30, 2022 increased compared to the corresponding period in 2021, primarily due to the maturity and replacement of lower yielding investments purchased when market interest rates were lower with higher yielding investments, as a result of increasing market interest rates.
The following tables present the components of net realized investment gains or
losses included in net income:
Nine
Months Ended
Gains
(Losses) Recognized in Net Income
Changes in fair
Sales value Total
(Amounts in thousands)
Net realized investment gains (losses)
Fixed maturity securities (1)(2) $ (53,224) $ (329,458) $ (382,682)
Equity securities (1)(3) 20,311 (220,469) (200,158)
Short-term investments (1) (2,488) 152 (2,336)
Options sold 3,915 24 3,939
Total $ (31,486) $ (549,751) $ (581,237)
Nine
Months Ended
Gains
(Losses) Recognized in Net Income
Changes in
Sales fair value Total
(Amounts in thousands)
Net realized investment gains (losses)
Fixed maturity securities (1)(2) $ (3,607) $ (21,729) $ (25,336)
Equity securities (1)(3) 33,802 47,057 80,859
Short-term investments (1) 236 (161) 75
Note receivable (1) - 15 15
Options sold 1,579 (239) 1,340
Total $ 32,010 $ 24,943 $ 56,953
__________
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(1)The changes in fair value of the investment portfolio and note receivable
resulted from application of the fair value option.
(2)The decreases in fair value of fixed maturity securities for the nine months
of 2022 and 2021 primarily resulted from increases in market interest rates.
(3)The primary cause for the decrease in fair value of equity securities for the
nine months of 2022 was the overall decline in equity markets. The primary cause
for the increase in fair value of equity securities for the nine months of 2021
was the overall improvement in equity markets.
Net (Loss) Income
Nine Months Ended September 30,
2022 2021
(Amounts in thousands, except per share
data)
Net (loss) income $ (505,902) $ 217,464
Basic average shares outstanding 55,371 55,367
Diluted average shares outstanding 55,371 55,375
Basic Per Share Data:
Net (loss) income $ (9.14) $ 3.93
Net realized investment (losses) gains, net of tax $ (8.29) $ 0.82
Diluted Per Share Data:
Net (loss) income $ (9.14) $ 3.93
Net realized investment (losses) gains, net of tax $ (8.29) $ 0.82
LIQUIDITY AND CAPITAL RESOURCES
A. Cash Flows
The Company has generated positive cash flow from operations since the public
offering of its common stock in November 1985 . The Company does not attempt to
match the duration and timing of asset maturities with those of liabilities;
rather, it manages its portfolio with a view towards maximizing total return
with an emphasis on after-tax income. With combined cash and short-term
investments of $436.5 million at September 30, 2022 as well as $75 million of
credit available on the unsecured credit facility, the Company believes its cash
flow from operations is adequate to satisfy its liquidity requirements without
the forced sale of investments. Investment maturities are also available to meet
the Company's liquidity needs. However, the Company operates in a rapidly
evolving and often unpredictable business environment that may change the timing
or amount of expected future cash receipts and expenditures. Accordingly, there
can be no assurance that the Company's sources of funds will be sufficient to
meet its liquidity needs or that the Company will not be required to raise
additional funds to meet those needs or for future business expansion, through
the sale of equity or debt securities or from credit facilities with lending
institutions.
Net cash provided by operating activities for the nine months ended
September 30, 2022 was $284.9 million , a decrease of $143.2 million compared to
the corresponding period in 2021. The decrease was primarily due to increases in
payments for losses and loss adjustment expenses and policy acquisition costs,
partially offset by an increase in premium collections, a decrease in payments
for income taxes, and an increase in net investment income received. The Company
utilized the cash provided by operating activities during the nine months ended
September 30, 2022 primarily for the net purchases of investment securities and
payment of dividends to its shareholders.
On July 29, 2022 , the Board did not extend its authorization of the repurchase
of up to $200 million of the Company's Common Stock and allowed its
authorization to expire on that date, which the Board originally authorized on
July 31, 2020 . The Company has not repurchased any of the Company's Common Stock
under this authorization.
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The following table presents the estimated fair value of fixed maturity
securities at
Fixed Maturity Securities
(Amounts in thousands)
Due in one year or less $
243,303
Due after one year through two years
198,306
Due after two years through three years
136,983
Due after three years through four years
206,455
Due after four years through five years
349,909
Total due within five years $ 1,134,956
B. Reinsurance
For
exposure from earthquakes by placing earthquake risks directly with the
catastrophe exposure to fires following an earthquake.
The Company is the assuming reinsurer under a Catastrophe Participation Reinsurance Contract (the "Contract") effective for the 12 months endingDecember 31, 2022 . The Company reimburses a group of affiliates of a ceding company for a proportional share of a portfolio of catastrophe losses based on the premiums ceded to the Company under the Contract, to the extent the actual loss ratio exceeds the threshold loss ratio of 73.5% and 71.0% for the 12 months endingDecember 31, 2022 and 2021, respectively. The total assumed premium under the Contract is$10.0 million and$12.5 million for the 12 months endingDecember 31, 2022 and 2021, respectively. The total possible amount of losses for the Company under the Contract is$25.0 million and$31.3 million for the 12 months endingDecember 31, 2022 and 2021, respectively. The Company recognized$2.5 million and$3.1 million in earned premiums and$2.2 million and$5.5 million in incurred losses under the Contract for the three months endedSeptember 30, 2022 and 2021, respectively, and$7.5 million and$9.4 million in earned premiums and$6.3 million and$13.4 million in incurred losses for the nine months endedSeptember 30, 2022 and 2021, respectively. The Company is the ceding party to a Catastrophe Reinsurance Treaty (the "Treaty") covering a wide range of perils that is effective throughJune 30, 2023 . For the 12 months endingJune 30, 2023 and 2022, the Treaty provides approximately$936 million and$792 million of coverage, respectively, on a per occurrence basis after covered catastrophe losses exceed the Company retention limit of$60 million and$40 million , respectively. The Treaty specifically excludes coverage for anyFlorida business and forCalifornia earthquake losses on fixed property policies such as homeowners, but does cover losses from fires following an earthquake. The Treaty includes additional restrictions as noted in the tables below.
Coverage on individual catastrophes provided for the 12 months ending
2023
Catastrophe Losses and LAE
Percentage of
In Excess of Up to Coverage
(Amounts in millions)
Retained $ - $ 60 - %
Layer of Coverage 60 100 19.5
Layer of Coverage 100 200 98.8
Layer of Coverage (1) 200 530 98.6
Layer of Coverage (2) (3) (4) 530 930 100.0
Layer of Coverage 930 1,035 98.9
__________
(1) 5% of this layer covers California , Arizona and Nevada only.
(2) 33% of this layer covers California , Arizona and Nevada only.
(3) Layer of Coverage represents multiple actual treaty layers that are grouped
for presentation purposes.
(4) 6.3% of this layer covers only California wildfires and fires following an
earthquake in California , and is not subject to reinstatement.
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Coverage on individual catastrophes provided for the 12 months ended June 30,
2022 under the Treaty is presented below in various layers:
Catastrophe Losses and LAE
Percentage of
In Excess of Up to Coverage
(Amounts in millions)
Retained $ - $ 40 - %
Layer of Coverage 40 100 70
Layer of Coverage (1) (2) 100 450 100
Layer of Coverage (1) (3) (4) (5) 450 850 100
__________
(1) Layer of Coverage represents multiple actual treaty layers that are grouped for presentation purposes. (2) 4.1% of this layer excludesTexas . (3) 11.9% of this layer excludesTexas . (4) 15.0% of this layer coversCalifornia ,Arizona andNevada only. (5) 12.7% of this layer covers onlyCalifornia wildfires and fires following an earthquake inCalifornia , and is not subject to reinstatement.
The table below presents the combined total reinsurance premiums under the
Treaty (annual premiums and reinstatement premiums) for the 12 months ending
Annual Premium Reinstatement Premium Total Combined
Treaty (1) (2) Premium (2)
(Amounts in millions)
For the 12 months ending June 30, 2023 $ 74 $ - $ 74
For the 12 months ended June 30, 2022 $ 55 $ - $ 55
__________
(1) The increase in the annual premium is primarily due to an increase in reinsurance coverage and rates and growth in the covered book of business. (2) The reinstatement premium and the total combined premium for the treaty period endingJune 30, 2023 are projected amounts to be paid based on the assumption that there will be no reinstatements occurring during this treaty period. The reinstatement premium for the treaty period endedJune 30, 2022 is zero, as there were no actual reinstatement premiums paid. The Treaty endingJune 30, 2023 and 2022 each provides for one full reinstatement of coverage limits. Reinstatement premiums are based on the amount of reinsurance benefits used by the Company at 100% of the annual premium rate, with the exception of the reinstatement restrictions noted in the tables above, up to the maximum reinstatement premium of approximately$72 million and$51 million if the full amount of benefit is used for the 12 months endingJune 30, 2023 and 2022, respectively. The total amount of reinstatement premiums is recorded as ceded reinstatement premiums written at the time of the catastrophe event based on the total amount of reinsurance benefits expected to be used for the event, and such reinstatement premiums are recognized ratably over the remaining term of the Treaty as ceded reinstatement premiums earned. The catastrophe events that occurred in 2022 caused approximately$58 million in losses to the Company, resulting primarily from winter storms, rainstorms and hail inTexas andOklahoma , the impact of Hurricane Ian inFlorida which caused$11 million in losses, and winter storms inCalifornia . No reinsurance benefits were available under the Treaty for these losses as none of the 2022 catastrophe events individually resulted in losses in excess of the Company's per-occurrence retention limit of$60 million and$40 million under the Treaty for the 12 months endingJune 30, 2023 and 2022, respectively. The catastrophe events that occurred in 2021 caused approximately$113 million in losses to the Company as ofSeptember 30, 2022 , resulting primarily from the deep freeze and other extreme weather events inTexas andOklahoma , rainstorms, wildfires and winter storms inCalifornia , and the impact of Hurricane Ida inNew Jersey andNew York . No reinsurance benefits were available under the Treaty for these losses as none of the 2021 catastrophe events individually resulted in losses in excess of the Company's per-occurrence retention limit of$40 million under the Treaty for each of the 12 months endingJune 30, 2022 and 2021. 36 -------------------------------------------------------------------------------- Table of Contents The Company carries a commercial umbrella reinsurance treaty and a per-risk property reinsurance treaty, and seeks facultative arrangements for large property risks. In addition, the Company has other reinsurance in force that is not material to the consolidated financial statements. If any reinsurers are unable to perform their obligations under a reinsurance treaty, the Company will be required, as primary insurer, to discharge all obligations to its policyholders in their entirety.
C. Invested Assets
Portfolio Composition
An important component of the Company's financial results is the return on its investment portfolio. The Company's investment strategy emphasizes safety of principal and consistent income generation, within a total return framework. The investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a well-diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve return on capital and profitable growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and defaults. The Company believes that this strategy enables the optimal investment performance necessary to sustain investment income over time. The Company's portfolio management approach utilizes a market risk and consistent asset allocation strategy as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for determining overall below investment grade exposure and diversification requirements. Within the ranges set by the asset allocation strategy, tactical investment decisions are made in consideration of prevailing market conditions.
The following table presents the composition of the total investment portfolio
of the Company at
Cost (1) Fair Value
(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies $ 69,806 $ 69,363
Municipal securities 2,797,095 2,688,727
Mortgage-backed securities 181,850 165,208
Corporate securities 560,699 510,811
Collateralized loan obligations 307,457 285,360
Other asset-backed securities 188,667 178,390
4,105,574 3,897,859
Equity securities:
Common stock 485,603
537,455
Non-redeemable preferred stock 64,429
54,042
Private equity funds measured at net asset value (2) 138,369
92,838
688,401 684,335
Short-term investments 101,548 100,621
Total investments $ 4,895,523 $ 4,682,815
______________
(1) Fixed maturities and short-term bonds at amortized cost; equities and other
short-term investments at cost.
(2) The fair value is measured using the NAV practical expedient. See Note 5.
Fair Value Measurements of the Notes to Consolidated Financial Statements for
additional information.
At September 30, 2022 , 50.6% of the Company's total investment portfolio at fair
value and 60.8% of its total fixed maturity securities at fair value were
invested in tax-exempt state and municipal bonds. Equity holdings consist of
non-redeemable preferred stocks, dividend-bearing common stocks on which
dividend income is partially tax-sheltered by the 50% corporate dividend
received deduction, and private equity funds. At September 30, 2022 , 84.6% of
short-term investments consisted of highly rated short-duration securities
redeemable on a daily or weekly basis.
Fixed maturity securities include debt securities, which are mostly long-term
bonds and other debt with maturities of at least one year from purchase, and
which may have fixed or variable principal payment schedules, may be held for
indefinite periods of time, and may be used as a part of the Company's
asset/liability strategy or sold in response to changes in interest
37
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rates, anticipated prepayments, risk/reward characteristics, liquidity needs,
tax planning considerations, or other economic factors. Short-term instruments
include money market accounts, options, and short-term bonds that are highly
rated short duration securities and redeemable within one year.
A primary exposure for the fixed maturity securities is interest rate risk. The
longer the duration, the more sensitive the asset is to market interest rate
fluctuations. As assets with longer maturity dates tend to produce higher
current yields, the Company's historical investment philosophy has resulted in a
portfolio with a moderate duration. The Company's portfolio is heavily weighted
in investment grade tax-exempt municipal bonds. Fixed maturity securities
purchased by the Company typically have call options attached, which further
reduce the duration of the asset as interest rates decline. The holdings that
are heavily weighted with high coupon issues, are expected to be called prior to
maturity. Modified duration measures the length of time it takes, on average, to
receive the present value of all the cash flows produced by a bond, including
reinvestment of interest. As it measures four factors (maturity, coupon rate,
yield and call terms) which determine sensitivity to changes in interest rates,
modified duration is considered a better indicator of price volatility than
simple maturity alone.
The following table presents the maturities and durations of the Company's fixed
maturity securities and short-term investments:
September 30, 2022 December 31, 2021
(in years)
Fixed Maturity Securities
Nominal average maturity:
excluding short-term investments 12.2 10.8
including short-term investments 11.9 10.4
Call-adjusted average maturity:
excluding short-term investments 6.7 4.6
including short-term investments 6.5 4.5
Modified duration reflecting anticipated early calls:
excluding short-term investments
3.9 3.5 including short-term investments 3.8 3.4 Short-Term Investments - - Another exposure related to the fixed maturity securities is credit risk, which is managed by maintaining a weighted-average portfolio credit quality rating of A+, at fair value, atSeptember 30, 2022 , consistent with the average rating atDecember 31, 2021 . The Company's municipal bond holdings, of which 88.1% were tax exempt, represented 60.8% of its fixed maturity securities portfolio atSeptember 30, 2022 , at fair value, and are broadly diversified geographically. See Part I-Item 3. Quantitative and Qualitative Disclosures About Market Risks for a breakdown of municipal bond holdings by state. To calculate the weighted-average credit quality ratings disclosed throughout this Quarterly Report on Form 10-Q, individual securities were weighted based on fair value and credit quality ratings assigned by nationally recognized securities rating organizations. Taxable holdings consist principally of investment grade issues. AtSeptember 30, 2022 , fixed maturity securities holdings rated below investment grade and non-rated bonds totaled$5.8 million and$13.8 million , respectively, at fair value, and represented 0.1% and 0.4%, respectively, of total fixed maturity securities. The majority of non-rated issues are a result of municipalities pre-funding and collateralizing those issues withU.S. government securities with an implicitAAA equivalent credit risk. AtDecember 31, 2021 , fixed maturity securities holdings rated below investment grade and non-rated bonds totaled$7.1 million and$17.3 million , respectively, at fair value, and represented 0.2% and 0.4%, respectively, of total fixed maturity securities. The overall credit ratings for the Company's fixed maturity securities portfolio were relatively stable during the nine months endedSeptember 30, 2022 , with 95.8% of fixed maturity securities at fair value experiencing no change in their overall rating. 3.7% and 0.5% of fixed maturity securities at fair value experienced upgrades and downgrades, respectively, during the nine months endedSeptember 30, 2022 . 38
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Table of Contents
The following table presents the credit quality ratings of the Company's fixed
maturity securities by security type at fair value:
September 30, 2022
(Dollars in thousands)
Total Fair
Security Type AAA(1) AA(1) A(1) BBB(1) Non-Rated/Other(1) Value(1)
U.S. government bonds and agencies:
Agencies $ 10,036 $ - $ - $ - $ - $ 10,036
Treasuries 59,327 - - - - 59,327
Total 69,363 - - - - 69,363
100.0 % - % - % - % - % 100.0 %
Municipal securities:
Insured 33,543 241,428 71,978 33,593 2,417 382,959
Uninsured 75,283 590,747 1,406,811 215,091 17,836 2,305,768
Total 108,826 832,175 1,478,789 248,684 20,253 2,688,727
4.0 % 31.0 % 55.0 % 9.2 % 0.8 % 100.0 %
Mortgage-backed securities:
Commercial 17,252 5,819 4,760 - - 27,831
Agencies 555 - - - - 555
Non-agencies:
Prime 17,405 99,219 18,491 - 404 135,519
Alt-A - 450 - 146 707 1,303
Total 35,212 105,488 23,251 146 1,111 165,208
21.3 % 63.8 % 14.1 % 0.1 % 0.7 % 100.0 %
Corporate securities:
Communications - 167 - 6,334 - 6,501
Consumer, cyclical - 1,825 - 52,997 - 54,822
Consumer, non-cyclical - - 21,790 9,065 - 30,855
Energy - 6,685 3,456 35,855 - 45,996
Financial - 19,785 150,688 58,079 5,622 234,174
Industrial - 15,000 53,367 48,119 - 116,486
Technology - - - 692 - 692
Utilities - - 9,040 12,245 - 21,285
Total - 43,462 238,341 223,386 5,622 510,811
- % 8.5 % 46.7 % 43.7 % 1.1 % 100.0 %
Collateralized loan obligations:
Corporate 9,706 77,251 198,403 - - 285,360
Total 9,706 77,251 198,403 - - 285,360
3.4 % 27.1 % 69.5 % - % - % 100.0 %
Other asset-backed securities 4,196 76,994 62,742 34,458 - 178,390
2.4 % 43.1 % 35.2 % 19.3 % - % 100.0 %
Total $ 227,303 $
1,135,370
$ 3,897,859 5.8 % 29.1 % 51.4 % 13.0 % 0.7 % 100.0 % _____________
(1)Intermediate ratings are included at each level (e.g., AA includes AA+, AA
and AA-).
The Company had
maturity securities portfolio, at fair
39 -------------------------------------------------------------------------------- Table of Contents value, inU.S. government bonds and agencies atSeptember 30, 2022 andDecember 31, 2021 , respectively. AtSeptember 30, 2022 , Moody's and Fitch ratings forU.S. government-issued debt were Aaa andAAA , respectively, although a significant increase in government deficits and debt could lead to a downgrade. The Company understands that market participants continue to use rates of return onU.S. government debt as a risk-free rate and have continued to invest inU.S. Treasury securities. The modified duration of theU.S. government bonds and agencies portfolio reflecting anticipated early calls was 1.6 years and 0.9 years atSeptember 30, 2022 andDecember 31, 2021 , respectively.
The Company had$2.69 billion and$2.84 billion , or 69.0% and 70.5% of its fixed maturity securities portfolio, at fair value, in municipal securities,$383.0 million and$424.1 million of which were insured, atSeptember 30, 2022 andDecember 31, 2021 , respectively. The underlying ratings for insured municipal bonds have been factored into the average rating of the securities by the rating agencies with no significant disparity between the absolute securities ratings and the underlying credit ratings as ofSeptember 30, 2022 andDecember 31, 2021 . AtSeptember 30, 2022 andDecember 31, 2021 , 64.5% and 56.8%, respectively, of the insured municipal securities, at fair value, most of which were investment grade, were insured by bond insurers that provide credit enhancement and ratings reflecting the credit of the underlying issuers. AtSeptember 30, 2022 andDecember 31, 2021 , the average rating of the Company's insured municipal securities was A+, which corresponded to the average rating of the investment grade bond insurers. The remaining 35.5% and 43.2% of insured municipal securities atSeptember 30, 2022 andDecember 31, 2021 , respectively, were non-rated or below investment grade, and were insured by bond insurers that the Company believes did not provide credit enhancement. The modified duration of the municipal securities portfolio reflecting anticipated early calls was 3.8 years and 3.1 years atSeptember 30, 2022 andDecember 31, 2021 , respectively. The Company considers the strength of the underlying credit as a buffer against potential market value declines which may result from future rating downgrades of the bond insurers. In addition, the Company has a long-term time horizon for its municipal bond holdings, which generally allows it to recover the full principal amounts upon maturity and avoid forced sales prior to maturity of bonds that have declined in market value due to the bond insurers' rating downgrades. Based on the uncertainty surrounding the financial condition of these insurers, it is possible that there will be future downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair value of municipal bonds.
AtSeptember 30, 2022 andDecember 31, 2021 , substantially all of the mortgage-backed securities portfolio of$165.2 million and$137.0 million , or 4.2% and 3.4%, respectively, of the Company's fixed maturity securities portfolio, at fair value, was categorized as loans to "prime" residential and commercial real estate borrowers. The Company had holdings of$27.8 million and$25.2 million at fair value ($29.0 million and$25.1 million at amortized cost) in commercial mortgage-backed securities atSeptember 30, 2022 andDecember 31, 2021 , respectively. The weighted-average rating of the entire mortgage-backed securities portfolio was AA at each ofSeptember 30, 2022 andDecember 31, 2021 . The modified duration of the mortgage-backed securities portfolio reflecting anticipated early calls was 5.1 years and 7.9 years atSeptember 30, 2022 andDecember 31, 2021 , respectively.Corporate Securities
Corporate securities included in fixed maturity securities were as follows:
September 30, 2022 December 31, 2021
(Dollars in thousands)
Corporate securities at fair value $ 510,811 $ 523,853
Percentage of total fixed maturity securities portfolio 13.1 % 13.0 %
Modified duration 3.4 years 3.8 years
Weighted-average rating A- BBB+
40
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Collateralized Loan Obligations
Collateralized loan obligations included in fixed maturity securities were as
follows:
September 30, 2022 December 31, 2021
(Dollars in thousands)
Collateralized loan obligations at fair value $ 285,360 $ 314,153
Percentage of total fixed maturity securities portfolio 7.3 % 7.8 %
Modified duration 5.0 years 6.3 years
Weighted-average rating A+ AA-
Other Asset-Backed Securities
Other asset-backed securities included in fixed maturity securities were as
follows:
September 30, 2022 December 31, 2021
(Dollars in thousands)
Other asset-backed securities at fair value $ 178,390 $ 200,209
Percentage of total fixed maturity securities portfolio 4.6 % 5.0 %
Modified duration 3.5 years 2.6 years
Weighted-average rating A+ AA-
Equity Securities
Equity holdings of $684.3 million and $970.9 million at fair value, as of
September 30, 2022 and December 31, 2021 , respectively, consisted of
non-redeemable preferred stocks, common stocks on which dividend income is
partially tax-sheltered by the 50% corporate dividend received deduction, and
private equity funds. The Company had a net (loss) gain of $(220.5) million and
$47.1 million due to changes in fair value of the Company's equity securities
portfolio for the nine months ended September 30, 2022 and 2021, respectively.
The primary cause for the decrease in fair value of the Company's equity
securities portfolio for the nine months ended September 30, 2022 was the
overall decline in equity markets. The primary cause for the increase in fair
value of the Company's equity securities portfolio for the nine months ended
September 30, 2021 was the overall improvement in equity markets.
The Company's common stock allocation is intended to enhance the return of and
provide diversification for the total portfolio. At September 30, 2022 , 14.6% of
the total investment portfolio at fair value was held in equity securities,
compared to 18.9% at December 31, 2021 .
D. Debt
OnMarch 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 onMarch 15 andSeptember 15 of each year commencingSeptember 15, 2017 . The notes mature onMarch 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%. OnMarch 29, 2017 , the Company entered into the 2017 Credit Agreement that provided for revolving loans of up to$50 million and was set to mature onMarch 29, 2022 . OnMarch 31, 2021 , the Company entered into the Amended and Restated Credit Agreement that amended and restated the 2017 Credit Agreement. The Amended and Restated Credit Agreement, among other things, extended the maturity date of the loan that was the subject of the 2017 Credit Agreement toMarch 31, 2026 , addedU.S. Bank as an additional lender, and increased the aggregate commitments by all the lenders to$75 million from$50 million under the 2017 Credit Agreement. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 20% to LIBOR plus 150.0 basis points when the ratio is greater than or equal to 30%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 20% to 22.5 basis points when the ratio is greater than or equal to 30%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 19.5% atSeptember 30, 2022 , resulting in a 12.5 basis point commitment 41 -------------------------------------------------------------------------------- Table of Contents fee on the$75 million undrawn portion of the credit facility. As ofOctober 27, 2022 , there have been no borrowings under this facility. The Company was in compliance with all of the financial covenants pertaining to minimum statutory surplus, debt to total capital ratio, and risk based capital ratio under the unsecured credit facility atSeptember 30, 2022 .
For additional information on debt, see Note 11. Notes Payable of the Notes to
Consolidated Financial Statements.
E. Regulatory Capital Requirements
Among other considerations, industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to statutory policyholders' surplus should not exceed 3.0 to 1. Based on the combined surplus of all the Insurance Companies of$1.59 billion atSeptember 30, 2022 , and net premiums written of$3.99 billion for the twelve months ended on that date, the ratio of net premiums written to surplus was 2.51 to 1 atSeptember 30, 2022 .
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