MCY 10-K & 10-Q changes, risk factors and insider trading

The Company’s ability to retain its existing business or to attract new business in its Insurance Companies is affected by its rating by A.M. Best. A.M. Best currently rates all of the Insurance Companies as A (Excellent). On February 15,20, 2024,2025, A.M. Best affirmed the Financial Strength Rating ("FSR") of A (Excellent) withand revised the outlook from Stable outlookto Negative for the Company's Insurance Companies. The Company believes that if it is unable to maintain its A.M. Best ratings within the A ratings range, it may face greater challenges to grow its premium volume sufficiently to attain its financial performance goals, which may adversely affect the Company’s business, financial condition, and results of operations.

The Company’s future capital requirements, including to fund future growth opportunities, depend on many factors, including its ability to underwrite new business successfully, its ability to establish premium rates and reserves at levels sufficient to cover losses, the success of its expansion plans, the performance of its investment portfolio and its ability to obtain financing. The Company may seek to obtain financing through equity or debt issuances, or sales of all or a portion of its investment portfolio or other assets. The Company’s ability to obtain financing also depends on economic conditions affecting financial markets and financial strength and claims-paying ability ratings, which are assigned based upon an evaluation of the Company’s ability to meet its financial obligations. The Company’s current financial strength rating with Fitch and Moody's is A- with NegativeStable outlook and A3 with Negative outlook, respectively. If the Company were to seek financing through the capital markets in the future, there can be no assurance that the Company would obtain favorable ratings from rating agencies. Any equity or debt financing, if available at all, may not be available on terms that are favorable to the Company. In the case of equity financing, the Company’s shareholders could experience dilution. In addition, such securities may have rights, preferences, and privileges that are senior to those of the Company’s current shareholders. If the Company cannot obtain adequate capital on favorable terms or at all, its business, financial condition, and results of operations could be adversely affected.

The Company faces a significant risk of loss in the ordinary course of its business for property damage resulting from natural disasters, man-made catastrophes and other catastrophic events, particularly hurricanes, earthquakes, hail storms, explosions, tropical storms, rain storms, fires, mudslides, sinkholes, war, acts of terrorism, severe weather and other natural and man-made disasters. Such events typically increase the frequency and severity of automobile and other property claims. Because catastrophic loss events are by their nature unpredictable, historical results of operations may not be indicative of future results of operations, and the occurrence of claims from catastrophic events may result in substantial volatility in the Company’s financial condition and results of operations from period to period. Although the Company attempts to manage its exposure to such events, the occurrence of one or more major catastrophes in any given period could have a material and adverse impact on the Company’s financial condition and results of operations and could result in substantial outflows of cash as losses are paid. See Note 20.12. SubsequentLoss Eventand inLoss Adjustment Expense Reserves, of the Notes to Consolidated Financial Statements underin Part II-Item"Item 8. Financial Statements and SupplementalSupplementary Data" for discussion of significant catastrophe losses related to Southernthe CaliforniaPalisades and Eaton wildfires that occurred in January 2025.

At December 31, 2024,2025, the Company’s consolidated balance sheetssheet reflected approximately $43 million of goodwill and $8$7 million of other intangible assets. The Company evaluates whether events or circumstances have occurred that suggest that the fair values of its goodwill and other intangible assets are below their respective carrying values. The determination that the fair values of the Company’s goodwill and other intangible assets are less than their carrying values may result in an impairment write-down. An impairment write-down would be reflected as expense and could have a material adverse effect on the Company’s results of operations during the period in which it recognizes the expense. In the future, the Company may incur impairment charges related to goodwill and other intangible assets already recorded or arising out of future acquisitions.

The U.S. economy experienced elevated levels of inflation in 2022. Although the inflation moderated in 2023 andthrough 2024,2025, it has created a heightened level of risk for the Company, the insurance industry and the U.S. economy generally. Rising inflation may impact the reliability of the Company's loss reserve estimates and its ability to accurately price insurance products, and may create additional volatility in the fair value of its investments. Additionally, regulatory agencies, such as various state Departments of Insurance, the U.S. government and Federal Reserve may be slow to approve rate changes or adopt measures to attempt to control inflation during the highly inflationary periods, which could adversely affect the Company's ability to generate profits and cash flow. Continuing significant inflation could have a prolonged effect on the U.S. economy and could in turn increase the Company's operating and loss costs due to higher labor and materials costs, and may negatively affect its business, financial condition and results of operations.

The Company's business, financial condition and results of operations could be adversely affected by geopolitical conflicts and related disruptions in the global economy.economy, including the imposition of tariffs.

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 generalgeneral, including subrogation recovery estimates; the Company’s ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in states where the Company 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 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; effects of changing climate conditions; pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases; court decisions and trends in litigation and health care and auto repair costs; changes in global trade policies, including trade barriers or restrictions; and legal, cybersecurity, regulatory and litigation risks.

The Company’s net income for the year ended December 31, 20242025 was $468.0$541.1 million, or $8.45$9.77 per diluted share, compared to $96.3$468.0 million, or $1.74$8.45 per diluted share, for the same period in 2023.2024. Included in net income was $328.7 million of pre-tax net investment income that was generated during 2025 on a portfolio of $6.6 billion, at fair value, at December 31, 2025, compared to $280.0 million of pre-tax net investment income that was generated during 2024 on a portfolio of $6.1 billion, at fair value, at December 31, 2024, compared to $234.6 million of pre-tax net investment income that was generated during 2023 on a portfolio of $5.2 billion, at fair value, at December 31, 2023.2024. Also included in net income were pre-tax net realized investment gains of $88.7$131.4 million and $101.0$88.7 million in 20242025 and 2023,2024, respectively, and pre-tax catastrophe losses, net of reinsurance and reinstatement premiums earned, of approximately $277.0$608.6 million and $239.2$277.0 million in 20242025 and 2023,2024, respectively. Pre-taxThe netCompany’s realizedoperating investment gains for 2024results and 2023growth resultedhave largelyallowed it to consistently generate positive cash flow from theoperations, increaseswhich was approximately $1,087 million and $1,037 million in fair value of fixed maturity securities2025 and equity2024, securities.respectively.

The Company continued its marketing efforts to enhance name recognition and lead generation in 2024,2025, and increased the spending for advertising and marketing. The Company believes that its marketing efforts,efforts and broad independent agent distribution network, combined with its ability to maintain relatively low prices and a strong reputation, make its insurance products competitive in California and in other states.

•Loss Frequency—Another component of overall loss costs is loss frequency, which is the number of claims per risk insured. Loss frequency trends are affected by many factors such as fuel prices, the economy, the prevalence of distracted driving, and collision avoidance and other technology in vehicles, and stay-at-home orders issued by state and local governments due to the pandemic.vehicles.

•Underwriting Cycle and Competition—The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions. The Company believes that the automobile insurance market in most states waswent through a transitional period from hard to softening market conditions during 20242025 as many insurance carriers experienced improved profitability and increased competition, with inflation easing and rates reflecting high inflation and loss severity and tightened their underwriting. In addition, in California, several insurance carriers stopped writing new business policies.stabilizing.

The Company has invested in improvements to automation, customer and agent experience, internal process efficiencies, and cybersecurity protections in 2024.2025. In 2025,2026, the Company willexpects to continue to invest in customer and agent experience, automation, cybersecurity, and cybersecurity, in additionthe todecommissioning upgradesof tolegacy its architecture.systems.

In late 2024, as part of the California insurance commissioner’s “Sustainable Insurance Strategy,” the California Department of InsuranceDOI issued two regulations that may impact how insurers price and write certain of their California property insurance policies: one allowing insurers to incorporate catastrophe modeling into rate-making with a requirement for them to align their share of insured properties in distressed wildfire-prone areas of the state to at least 85% of their state-wide market share, which may be increased by 5% per year, if necessary, until that level is reached; and the other allowing insurers to incorporate reinsurance costs into rate-making for certain specific catastrophe perils and wildfire exposures when meeting the same requirement governing the use of catastrophe modeling. The California insurance commissioner has also implemented changes to the California FAIR Plan, expanding coverage offerings and changing the assessment and recoupment processes in order to enhance market stability: the FAIR Plan’s member insurers may now request the California insurance commissioner’s prior approval to collect temporary supplemental fees from their own policyholders in order to recoup up to 50% of amounts assessed up to $2$1 billion in aggregate assessments onin the industry,industry and 100% of all amounts assessed over that $1 billion threshold for each of personal and commercial lines of insurance business, and 100% of all amounts assessed over $2 billion threshold.in Theaggregate Companyassessments is expected to adhere toin the market-shareindustry requirementsfor inthe ordercombined topersonal incorporateand commercial lines of insurance business. In December 2025, the California DOI approved the Company's rate application, which incorporates catastrophe modeling and reinsurance costs into its rate-making,ratemaking althoughin accordance with the processnew regulations. The Company will adhere to file,the gainmarket-share approval,requirements and implementwhen the revisednew ratesrating willplan likelyis noteffective bein completeJuly until late 2025 at the earliest.2026.

•In January 2023, the California DOI approved a 6.9% rate increase on the private passenger automobile line of insurance business for MIC and CAIC. These rate increases became effective in March 2023. The California DOI approved an additional 6.99% rate increase on the private passenger automobile line of insurance business for MIC and CAIC in June 2023. These rate increases became effective in July 2023. In addition, in January 2024, the California DOI approved a 22.5% rate increase for MIC and a 3.8% rate increase for CAIC on the private passenger automobile line of insurance business. These rate increases became effective in February 2024. The private passenger automobile line of insurance business of MIC and CAIC represented approximately 48%49% and 6%, respectively, of the Company's total net premiums earned in 2024.2025.

•In AprilMarch 2024, the California DOI approved a 14.9%6.99% rate increase on the California commercial automobilehomeowners line of insurance business. This rate increase became effective in JulyMay 2024. In addition,January in December 2024,2025, the California DOI approved a 15.6%12% rate increase on the California commercialhomeowners automobileline of insurance business. This rate increase became effective in March 2025. In addition, in December 2025, the California DOI approved a 6.9% rate increase on the California homeowners line of insurance business. This rate increase is expected to become effective in FebruaryJuly 2025.2026. The California commercial automobilehomeowners line of insurance business represented approximately 5%15% of the Company's total net premiums earned in 2024.2025.

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 looking at 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.information such as subrogation recoverable.

The Company also engages independent actuarial consultants to review the Company’s loss reserves and to provide the annual actuarial opinions required under state statutory accounting requirements. The Company analyzes loss reserves quarterly primarily using the incurred loss,loss method, paid loss,loss method, and average severity method coupled with the claim count development methods,method, and the generalized linear model ("GLM")as 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 generally analyzes 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.

There are many factors that can cause variability between the ultimate expected loss and the actual developed loss. While there are certainly other factors, the Company believes that the following threefour items tend to create the most variability between expected losses and actual losses.

The following table presents the typical cumulative closure patterns of BI claims in the Company's California personal automobile insurance coverage:

In 2022, inflationary trends accelerated to their highest level since the 1980s. Excessiveexcessive inflation led to significant increases in loss severities related to vehicle repairs and bodily injuries. The severe inflationary trend continued into 2023, but moderated as the year progressed. During 2024,2024 and 2025, the inflation rate continued to be moderate for automobile parts and labor but it was at an elevated level for bodily injury costs. In general, the Company expects that historical claims trends will continue with costs tending to increase, which is generally consistent with historical data, and therefore the Company believes that it is reasonable to expect inflation to continue. Many potential factors can affect the BI inflation rate, including changes in claims handling process, changes in statutes and regulations, the number of litigated files, increased use of medical procedures such as MRIs and epidural injections, general economic factors, timeliness of claims adjudication, vehicle safety, weather patterns, changes in the relative percentages of single- and multi-car accidents, social inflation, and gasoline prices, among other factors; however, the magnitude of the impact of such factors on the inflation rate is unknown.

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 2024,2025, the Company reported unfavorablefavorable development of approximately $25$92 million on the 20232024 and prior accident years’ loss and loss adjustment expense reserves. The unfavorablefavorable development in 20242025 was primarily attributable to higherlower than estimated losses and loss adjustment expenses in the commercial automobile and commercial propertyhomeowners lines of insurance business, partially offset byincluding favorable reserve development inon the privateprior passengeryears' automobilecatastrophe line of insurance business.losses.

The Company recorded catastrophe losses of approximately $508 million net of reinsurance of approximately $277 million in 2024.2025. Catastrophe losses dueincurred toin 2025 was reduced by approximately $586 million of subrogation recorded on the eventsPalisades thatand occurredEaton during 2024 totaled approximately $268 million, with no reinsurance benefits used for these losses.wildfires. The majority of the 20242025 catastrophe losses resulted from tornadoes,the hailstormsPalisades and convectiveEaton wildfires in California and severe storms in TexasTexas, Oklahoma and Oklahoma, winter storms, rainstorms and wildfires in California, and the impact of Hurricane Helene in Florida and Georgia.California. In addition, the Company experienced unfavorablefavorable development of approximately $9$23 million on prior years' catastrophe losses in 2024.2025.

Net premiums earned and net premiums written in 20242025 increased 18.7%8.5% and 20.5%,6.4%, respectively, from 2023.2024. The increases in net premiums earned and net premiums written were primarily due to rate increases in the California automobile and homeowners lines of insurance business andcombined anwith increaseincreases in the number of policies written in the California private passenger automobile and homeowners lines of insurance business.business, partially offset by increases in ceded premiums earned and ceded premiums written, respectively.

Net premiums earned included ceded premiums earned of $136.7$287.0 million and $109.4$136.7 million in 20242025 and 2023,2024, respectively. Net premiums written included ceded premiums written of $138.0$287.0 million and $109.6$138.0 million in 20242025 and 2023,2024, respectively. The increases in ceded premiums earned and ceded premiums written resulted mostly from reinstatement premiums earned and written of $101 million for use of reinsurance benefits associated with the Palisades and Eaton wildfires as well as 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 andpresented, 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 less any applicable reinsurance. Net premiums written is a statutory measure designed to determine production levels.

Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The Company’s loss ratio was affected by favorable development of approximately $92 million and unfavorable development of approximately $25 million and favorable development of approximately $36 million on prior accident years’ loss and loss adjustment expense reserves for the years ended December 31, 20242025 and 2023,2024, respectively. The favorable development in 2025 was primarily attributable to lower than estimated losses and loss adjustment expenses in the automobile and homeowners lines of insurance business, including favorable development on the prior years' catastrophe losses. The unfavorable development in 2024 was primarily attributable to higher than estimated losses and loss adjustment expenses in the commercial automobile and commercial property lines of insurance business, partially offset by favorable reserve development in the private passenger automobile line of insurance business. The favorable development in 2023 was primarily attributable to lower than estimated losses and loss adjustment expenses in the private passenger automobile and homeowners lines of insurance business, partially offset by unfavorable reserve development in the commercial property line of insurance business. The moderating inflationary trend in 2023 after the severe inflation in 2022 was a major contributor to the favorable reserve development in the private passenger automobile line of insurance business for 2023.

Excluding the effect of estimated prior periods’accident years’ loss development and catastrophe losses, the loss ratio was 66.8%64.0% and 77.4%66.8% for the years ended December 31, 20242025 and 2023,2024, respectively. The decrease in the loss ratio was primarily due to an increase in net premiums earned resulting from rate increases in the California automobile and homeowners lines of insurance business,business partiallyand offseta by increasesdecrease in loss severity and frequency in the California private passenger automobile line of insurance business.business, partially offset by an increase in loss severity in the California private passenger automobile line of insurance business and an increase in ceded premiums earned due to reinstatement premiums resulting from the Palisades and Eaton wildfires.

Expense ratio is calculated by dividing the sum of policy acquisition costs and other operating expenses by net premiums earned. The expense ratio for 2025 increased slightly,compared primarilyto 2024, largely due to increases in expenses for profitability-related accruals and advertising, as well as an increase in ceded premiums earned due to reinstatement premiums resulting from the Palisades and Eaton wildfires, partially offset by the rate increases discussed above.

Income tax expense was $106.9$122.6 million and $3.1$106.9 million for the years ended December 31, 20242025 and 2023,2024, respectively. The $103.8 million increase in income tax expense was mainly due to a significantan increase in pre-tax income of $475.5 million.income.

The Company’s effective income tax rate can be affected by several factors. These generally include large changes in fully-taxable income including net realized investment gains or losses, tax-exempt investment income, nondeductible expenses, and periodically, non-routine tax items such as adjustments to unrecognized tax benefits related to tax uncertainties. Income tax expense of $122.6 million on pre-tax income of $663.6 million, including tax-exempt investment income of $99.2 million, resulted in an effective tax rate of 18.5%, below the statutory tax rate of 21%, for 2025, and income tax expense of $106.9 million on pre-tax income of approximately $574.9 million, including tax-exempt investment income of $83.3 million, resulted in an effective tax rate of 18.6%, below the statutory tax rate of 21%,18.6% for 2024, and income tax expense of $3.1 million on pre-tax income of approximately $99.4 million, including tax-exempt investment income of approximately $86.6 million, resulted in an effective tax rate of 3.1% for the corresponding period in 2023.2024.

(3)Net investment income before and after income taxes increasedincreased, primarily due to higher average yieldinvested assets and cash combined with higher average invested assets and cash.yield. Average annual yield on investments before and after income taxes increasedincreased, primarily due to the maturity and replacement of lower yielding investments purchased when market interest rates were lower with higher yielding investments.investments, combined with the higher average yield on investments purchased in 2025 using cash generated from operations compared to the average yield on overall investments in 2024.

(2)The increases in fair value of fixed maturity securities in 20242025 and 20232024 wereresulted primarily due tofrom decreases in certain market interest rates associated with the Company's fixed maturity securities.

(3)The increases in fair value of equity securities in 20242025 and 20232024 wereresulted primarily due tofrom the overall improvement in equity markets associated with the Company's equity securities.markets.

Net Income (Loss)

The Company has generated positive cash flow from operations in each full year 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 $1,004.1$1,652.6 million at December 31, 20242025 as well as $50 million of undrawn credit in its unsecured credit facility, the Company believes its cash flow from operations is adequate to satisfy its future 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 year ended December 31, 20242025 was $1,037.1$1,087.2 million, an increase of $584.1$50.1 million compared to the year ended December 31, 2023.2024. The increase was primarily due to an increaseincreases in reinsurance and subrogation recoveries, premium collections and an increase in investment income received, partially offset by increases in payments for taxeslosses and policyloss adjustment expenses and commissions and other acquisition costs. The Company utilized the cash provided by operating activities during the year ended December 31, 20242025 primarily for the net purchases of investment securities and payment of dividends to its shareholders.shareholders, with the remaining invested in cash accounts for future liquidity needs, including additional payment for losses from the Palisades and Eaton wildfires. The average annual net cash provided by operating activities for the past 10 years was approximately $468$557 million, and cash generated from operations was sufficient to meet the liquidity requirementsneeds over this period.

The following table presents the maturities and durations of the Company's fixed maturity securities and short-term investments:

The Company had $93.8$21.5 million and $174.5$93.8 million, or 1.9%0.4% and 4.0%1.9% of its fixed maturity portfolio, at fair value, in U.S. government bonds at December 31, 20242025 and 2023,2024, respectively. Moody's and Fitch ratings for U.S. government-issued debt were Aa1 and AA+, respectively, at December 31, 2025, and Aaa and AA+, respectively, at December 31, 2024 and 2023.2024. The Company understands that market participants continue to use rates of return on U.S. government debt as a risk-free rate and have continued to invest in U.S. Treasury securities. The modified duration of the U.S. government bonds portfolio reflecting anticipated early calls was 1.32.9 years and 0.91.3 years at December 31, 20242025 and 2023,2024, respectively.

At December 31, 2025 and 2024, respectively, $456.8 million and $492.7 million, respectively, of the Company's municipal securities, at fair value, were insured. 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 additionalfuture downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair value of those municipal bonds.

At December 31, 20242025 and 2023,2024, respectively, the company had corporate securities of $841.7$751.6 million and $599.6$841.7 million, or 17.1%13.8% and 13.9%17.1% of its fixed maturity securities portfolio, at fair value. The weighted-average rating was A and A- at December 31, 20242025 and 2023, respectively.2024. The modified duration reflecting anticipated early calls was 3.02.9 years and 2.43.0 years at December 31, 20242025 and 2023,2024, respectively.

(2) On March 31, 2021, the Company entered into an unsecured $75 million five-year revolving credit facility. On November 18, 2022, the Company entered into the First Amendment to this credit facility. The First Amendment extended the maturity date of the loan to November 16, 2026 from March 31, 2026 with possible further extension if certain conditions are met, increased the aggregate commitments by all the lenders to $200 million from $75 million, and replaced the LIBOR with the term SOFR. On November 30, 2023, the Company entered into the Second Amendment to this credit facility, which further increased the aggregate commitments by all the lenders to $250 million from $200 million. On November 22, 2024, the Company entered into the Third Amendment to this credit facility, which extended and fixed the maturity date of the loan to November 18, 2027. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from Term SOFR plus 112.5 basis points when the ratio is under 20% to Term SOFR 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 22.8%19.2% at December 31, 2024,2025, resulting in a 15.012.5 basis point commitment fee on any undrawn portion of the credit facility. As of February 11,17, 2025,2026, a total of $200 million was drawn under this facility on a three-month revolving basis at an annual interest rate of approximately 5.79%,5.09%, with $50 million available to be drawn. The Company contributed $150 million of the total amount drawn to the surplus of its consolidated insurance subsidiaries,subsidiaries in 2023, and used the remainder for general corporate purposes.

Cash returned to shareholders through dividends in 2024, 2023 and 2022 totaledwas approximately $70.3 million,million $70.3in millioneach of 2025, 2024 and $105.5 million, respectively.2023. On February 7,13, 2025,2026, the Board of Directors declared a $0.3175 quarterly dividend per share payable on March 27,26, 20252026 to shareholders of record on March 13,12, 2025,2026, with an expected payout of approximately $18 million. The Company currently expects quarterly dividends to continue in future periods, although the declaration and amount of any future cash dividends are at the discretion and subject to the approval of its Board of Directors. The decisions of the Company's Board of Directors regarding the amount and payment of dividends will depend on many factors, such as its financial condition, results of operations, capital requirements, business conditions, debt service obligations, industry practice, legal requirements, regulatory constraints, and other factors that its Board of Directors may deem relevant. The Company expects to fund its future dividend payments primarily with a combination of cash expected to be generated from future operations and cash and short-term investments on hand.

The Company's capital expenditures were approximately $58.4 million, $46.1 million,million and $36.8 million and $35.5 million for 2024,2025, 20232024 and 2022,2023, respectively, and they were primarily related to improving the Company's information technology infrastructure and corporate facilities.infrastructure. The Company expects the capital spending for 2025,2026, primarily for continued investments in its technology assets, to be somewhat larger than that for 2024.2025. The Company expects to fund its 20252026 capital expenditures primarily with a combination of cash expected to be generated from future operations and cash and short-term investments on hand.

(1)The Company’s debt contains various terms, conditions and covenants which, if violated by the Company, would result in a default and could result in the acceleration of the Company’s payment obligations. Amounts differ from the balances presented on the consolidated balance sheetssheet as of December 31, 20242025 because the debt amounts above include interest and exclude the discount and issuance costs of the debt.

The Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations. The RBC formula is used by insurance regulators to monitor capital and surplus levels. It was designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance business having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. The Company periodically monitors the RBC level of each of the Insurance Companies. As of December 31, 2024,2025, 20232024 and 2022,2023, each of the Insurance Companies exceeded the minimum required RBC level, as determined by the NAIC and adopted by the state insurance regulators. None of the Insurance Companies’ RBC ratios were less than 350% of the authorized control level RBC as of December 31, 2024,2025, none less than 350% as of December 31, 2023,2024 and none less than 330% as of December 31, 2022.2023. Generally, an RBC ratio of 200% or less would require some form of regulatory or company action.

During the course of and at the conclusion of the examinations, the examining DOI generally reports findings to the Company. No material findings have been communicated to the Company onin the Texas market conduct examination reports noted above.

The following tables present direct premiums written, by state and line of insurance business, for the threesix months ended MarchJune 31,30, 2026 and 2025:

The 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. During the course of and at the conclusion of the examinations, the examining DOI generally reports findings to the Company.

In late 2024, as part of the California insurance commissioner’s “Sustainable Insurance Strategy,” the California DOI issued two regulations that may impact how insurers price and write certain of their California property insurance policies: one allowing insurers to incorporate catastrophe modeling into rate-making with a requirement for them to align their share of insured properties in distressed wildfire-prone areas of the state to at least 85% of their state-wide market share,share whichor mayto beincrease increasedtheir share by 5% perin year,a iftwo-year necessary, until that level is reachedperiod; and the other allowing insurers to incorporate reinsurance costs into rate-making for certain specific catastrophe perils and wildfire exposures when meeting the same requirement governing the use of catastrophe modeling. The California insurance commissioner has also implemented changes to the California FAIR Plan, expanding coverage offerings and changing the assessment and recoupment processes in order to enhance market stability: the FAIR Plan’s member insurers may now request the California insurance commissioner’s prior approval to collect temporary supplemental fees from their own policyholders in order to recoup up to 50% of amounts assessed up to $1 billion in aggregate assessments in the industry and 100% of all amounts assessed over that $1 billion threshold for each of personal and commercial lines of insurance business, and 100% of all amounts assessed over $2 billion in aggregate assessments in the industry for the combined personal and commercial lines of insurance business. In December 2025, the California DOI approved the Company's rate application, which incorporates catastrophe modeling and reinsurance costs into its ratemaking in accordance with the new regulations. The new rating plan became effective in July 2026 and the Company will adhere to the market-share requirements when the new rating plan is effective in July 2026.requirements.

In January 2025, the California DOI approved a 12% rate increase on the California homeowners line of insurance business. This rate increase became effective in March 2025. In addition, in December 2025, the California DOI approved a 6.9% rate increase on the California homeowners line of insurance business. This rate increase is expected to becomebecame effective in July 2026. The California homeowners line of insurance business represented approximately 17%18% of the Company's total net premiums earned for the threesix months ended MarchJune 31,30, 2026. In addition, the Company intends to file an application with the California DOI in August 2026 for a rate increase of approximately 6% on the California private passenger automobile line of insurance business with a July 2027 effective date. The California private passenger automobile line of insurance business represented approximately 53% of the Company's total net premiums earned for the six months ended June 30, 2026.

At MarchJune 31,30, 2026 and December 31, 2025, the Company recorded its point estimate of approximately $3.65$3.67 billion and $3.63 billion ($3.61$3.64 billion and $3.60 billion, net of reinsurance), respectively, in loss reserves, which included approximately $2.16$2.23 billion and $2.12 billion ($2.16$2.23 billion and $2.12 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 to MarchJune 31,30, 2026 and December 31, 2025, and estimated future payments for reopened claims. Management believes that the liability for loss reserves is adequate to cover the 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.

Three Months Ended MarchJune 31,30, 2026 Compared to Three Months Ended MarchJune 31,30, 2025

Net premiums earned and net premiums written for the three months ended MarchJune 31,30, 2026 increased 13.2%9.6% and 17.9%,5.3%, respectively, from the corresponding period in 2025. The increasesincrease in net premiums earned and net premiums written werewas primarily due to a rate increase in the California homeowners line of insurance business and increases in the number of policies written in the California automobile and homeowners lines of insurance business, combinedpartially withoffset decreasesby an increase in ceded premiums earnedearned. The increase in net premiums written was primarily due to increases in the number of policies written in the California automobile and homeowners lines of insurance business, partially offset by an increase in ceded premiums written, respectively.written.

Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The loss ratio for the firstsecond quarter of 2026 and 2025 was affected by favorable development of approximately $9$35 million and $51unfavorable development of approximately $4 million, respectively, on prior accident years' loss and loss adjustment expense reserves. The favorable development for the firstsecond quarter of 2026 was primarily attributable to lower than estimated losses and loss adjustment expenses in the automobile lineand homeowners lines of insurance business, partially offset by adverse development on the homeowners line of insurance business, including adverse development on the prior years' catastrophe losses.business. The favorableunfavorable development for the firstsecond quarter of 2025 was primarilynot attributablesignificant toand lowerresulted thanfrom estimatedongoing losses in the automobile lineanalyses of insuranceloss business, and the homeowners line of insurance business, including favorable development on the prior years' catastrophe losses.trends.

In addition, the 2026 loss ratio was negatively impacted by approximately $36$71 million of catastrophe losses net of reinsurance, excluding unfavorable development of approximately $57$4 million on prior years' catastrophe losses, primarily due to storms in California, Texas and Oklahoma. The 2025 loss ratio was negatively impacted by approximately $459$15 million of catastrophe losses, excluding favorable development of approximately $12$2 million on prior years' catastrophe losses, primarily due to thestorms Palisadesin Texas and Eaton wildfires.Oklahoma.

Excluding the effects of estimated prior accident years’ loss development and catastrophe losses, the loss ratio was 62.4%62.6% and 63.4%67.4% for the firstsecond quarter of 2026 and 2025, respectively. The decrease in the loss ratio was primarily due to athe rate increase discussed above and a decrease in ceded premiums earned that are discussed above, partially offset by increases in loss severity and frequency in the private passenger automobile line of insurance business, partially offset by an increase in loss severity in the private passenger automobile line of insurance business.

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 MarchJune 31,30, 2026 increased from the corresponding period in 2025, which was largely attributable to increases in profitability-based accruals and advertising expenses, partially offset by athe rate increase and a decrease in ceded premiums earned that are discussed above.

Income tax expense (benefit) was $45.2$63.8 million and $(34.0)$40.3 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively. The increase in income tax expense was primarily due to a $377.9$120.6 million increase in total pre-tax income. 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. Income tax expense of $45.2$63.8 million on pre-tax income of $235.7$327.3 million, including tax-exempt investment income of $31.7$34.5 million, resulted in an effective tax rate of 19.2%,19.5%, below the statutory tax rate of 21%, for the three months ended MarchJune 31,30, 2026, and income tax benefitexpense of $34.0$40.3 million on pre-tax lossincome of $142.3$206.7 million, including tax-exempt investment income of $20.9$22.7 million, resulted in an effective tax rate of 23.9%, above the statutory tax rate of 21%,19.5% for the corresponding period in 2025.

(2) Net investment income includes approximately $11.2$11.9 million and $13.1$12.5 million of interest income earned on cash (approximately $8.9$9.4 million and $10.3$9.9 million after tax) for the three months ended MarchJune 31,30, 2026 and 2025, respectively. Average annual yield on investments does not include interest income earned on cash.

(3) Higher net investment income before and after income taxes for the three months ended MarchJune 31,30, 2026 compared to the corresponding period in 2025 resulted largely from higher average invested assets. Average annual yield on investments before income taxes decreased, primarily due to an increase in tax-exempt investments with lower pre-tax yields, combined with lower yields on floating rate investments resulting from lower short-term market interest rates. Average annual yield on investments after income taxes decreased, primarily due to lower yields on floating rate investments resulting from lower short-term market interest rates.yields.

The following tables present the components of net realized investment gains or losses included in net income or loss:

(3)The decreasesincreases in fair value of equity securities for the firstsecond quarters of 2026 and 2025 primarily resulted from the overall declineimprovement in equity markets.

Net Income (Loss)

The Company has generated positive cash flow from operations in each full year 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 $1,792.7$2,069.2 million at MarchJune 31,30, 2026, the Company believes its cash flow from future operations is adequate to satisfy its liquidity requirements. 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 threesix months ended MarchJune 31,30, 2026 was $325.6$543.3 million, an increase of $394.3$240.4 million from the corresponding period in 2025. The increase was primarily due to an increase in premium collections and a decrease in payments for losses and loss adjustment expenses, net of reinsurance, partially offset by an increaseincreases in payments for commissionsoperating expenses and otherincome acquisition costs.taxes. The Company utilized the cash provided by operating activities during the threesix months ended MarchJune 31,30, 2026 primarily for the net purchases of investment securities and payment of dividends to its shareholders, with the remaining invested in cash accounts.shareholders.

The following table presents the estimated fair value of fixed maturity securities at MarchJune 31,30, 2026 by contractual maturity in the next five years:

The Company is the assuming reinsurer under a Catastrophe Portfolio Participation Reinsurance Contract (the "Contract") effective through December 31, 2028. 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%. The total assumed premium under the Contract is $15.0 million for each of the 12-month periods ending December 31, 2025 through 2028. The total possible amount of losses for the Company under the Contract is $30.0 million for each of the 12-month periods ending December 31, 2025 through 2028. The Company recognized $(5.2)incurred losses of approximately $1.1 million and $(1.70.4) million in incurred losses for the three months ended MarchJune 31,30, 2026 and 2025, respectively, and $(4.1) million and $(2.0) million for the six months ended June 30, 2026 and 2025, respectively, under the Contract. The negative incurred losses for the three months ended MarchJune 31,30, 2025 and the six months ended June 30, 2026 and 2025 resulted primarily from favorable development on prior years' catastrophe losses that had previously been ceded to the Company under the Contract.

The Company is the assuming reinsurer under a Property Quota Share Reinsurance Contract ("Quota Share Contract") effective through December 31, 2026 and reimburses ceding companies for a proportional share of losses based on the premiums ceded to the Company under the Quota Share Contract. The total annual assumed premium under the Quota Share Contract is approximately $17 million and $11 million for the 12 months ending December 31, 2026 and 2025, respectively. The total annual possible amount of losses that can be ceded to the Company under the Quota Share Contract is approximately $60 million and $32 million for the 12 months ending December 31, 2026 and 2025, respectively. The Company recognized incurred losses of approximately $3.4 million and $2.1 million in incurred losses for the three months ended MarchJune 31,30, 2026 and 2025, respectively, and $6.9 million and $4.2 million for the six months ended June 30, 2026 and 2025, respectively, under the Quota Share Contract.

The Company is the assuming reinsurer under a Catastrophe Quota Share Reinsurance Agreement ("Quota Share Agreement") effective through December 31, 2026 and reimburses ceding companies for a proportional share of losses based on the premiums ceded to the Company under the Quota Share Agreement. The total assumed premium under the Quota Share Agreement is approximately $5 million for the 12 months ending December 31, 2026. The total possible amount of losses for the Company under the Quota Share Agreement is approximately $12 million for the 12 months ending December 31, 2026. The Company recognized incurred losses of approximately $1.4$0.5 million inand incurred$1.9 lossesmillion for the three and six months ended MarchJune 31,30, 2026, respectively, under the Quota Share Agreement. The Quota Share Agreement commenced on January 1, 2026.

The Company is the ceding party to a Catastrophe Reinsurance Treaty (the "Treaty") covering a wide range of perils that is effective through June 30, 2026.2027. For the 12 months ending June 30, 20262027 and 2025,2026, the Treaty provides approximately $2,140$2,790 million and $1,290$2,140 million of coverage, respectively, on a per occurrence basis after covered catastrophe losses exceed the Company retention limit of $200 million and $150 million, respectively.million. The Treaty ending June 30, 20262027 and 20252026 each excludes coverage for any Florida business and for California earthquake losses on fixed property policies such as homeowners, but does cover losses from fires following an earthquake with certain exceptions as shown below.earthquake. The Treaty ending June 30, 20262027 and 20252026 each includes additional restrictions as noted below. Coverage terms and conditions also vary among various participants in different layers of coverage.

(63) The coverage of this layer is provided by a catastrophe bond that is in effect from July 15, 2025 through July 14, 2028. This layer covers only California wildfires and fires following an earthquake in California, and is not subject to reinstatement.