UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2019

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file numbernumber: 0-5534
                                                                                September 30, 2017              0-5534

BALDWIN & LYONS, INC.PROTECTIVE INSURANCE CORPORATION
(Exact name of registrant as specified in its charter)

INDIANA
35-0160330
(State or other jurisdiction of
incorporation or organization)
35-0160330
(I.R.S. Employer
Identification Number)
111 Congressional Boulevard, Carmel, Indiana
46032
(Address of principal executive offices)
46032
(Zip Code)

Registrant's telephone number, including area code:  (317) 636-9800

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, No Par ValuePTVCAThe Nasdaq Stock Market LLC
Class B Common Stock, No Par ValuePTVCBThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    ✓       No___     No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ✓    No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____   Accelerated filer   ✓  Non-accelerated filer ____
Smaller reporting company ____                 Emerging growth company ____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____  No    ✓_

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of November 1, 2017:August 6, 2019:
Common Stock, No Par Value:                 Class A (voting)                                                                                                                                                    2,623,109
Common Stock, No Par Value:
Class A (voting)
2,612,288
Class B (non-voting)
11,779,483
14,391,771
                                                            Class B (non-voting)                                                                                                                                          12,413,798
                                                                                                                                                                                                                                           15,036,907
- 1 -

PART I – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS
Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Balance Sheets      
(in thousands, except share data)      
       
  September 30  December 31 
  2017  2016 
Assets      
Investments:      
   Fixed maturities $489,606  $491,904 
   Equity securities  194,167   119,945 
   Limited partnerships  69,568   76,469 
   Short-term and other  1,000   1,500 
   754,341   689,818 
         
Cash and cash equivalents  68,529   62,976 
Accounts receivable  80,112   64,984 
Reinsurance recoverable  307,239   255,024 
Other assets  81,655   78,732 
Current federal income taxes recoverable  5,680   2,603 
  $1,297,556  $1,154,137 
         
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $656,006  $576,330 
Reserves for unearned premiums  40,059   21,694 
Short-term borrowings  20,000   20,000 
Accounts payable and other liabilities  162,144   120,356 
Deferred federal income taxes  14,417   11,412 
   892,626   749,792 
Shareholders' equity:        
   Common stock-no par value:        
   Class A voting -- authorized 3,000,000 shares;        
      outstanding -- 2017 - 2,623,109; 2016 - 2,623,109  112   112 
   Class B non-voting -- authorized 20,000,000 shares;        
      outstanding -- 2017 - 12,413,798; 2016 - 12,460,900  530   532 
   Additional paid-in capital  54,845   54,286 
   Unrealized net gains on investments  45,488   34,051 
   Foreign exchange adjustment  (321)  (831)
   Retained earnings  304,276   316,195 
   404,930   404,345 
  $1,297,556  $1,154,137 

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share data)

  
June 30
2019
  
December 31
2018
 
Assets      
Investments:
      
Fixed income securities $737,148  
$
592,645
 
Equity securities  74,555   
66,422
 
Limited partnerships  35,535   
55,044
 
Commercial mortgage loans  8,884   
6,672
 
Short-term and other  1,000   
1,000
 
   857,122   
721,783
 
         
Cash and cash equivalents  80,772   
163,996
 
Restricted cash and cash equivalents  16,333   
6,815
 
Accounts receivable  111,573   
102,972
 
Reinsurance recoverable  410,445   
392,436
 
Other assets  87,425   
88,426
 
Current federal income taxes recoverable  4,599   
7,441
 
Deferred federal income taxes  2,757   
6,262
 
  $1,571,026  
$
1,490,131
 
         
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $933,463  
$
865,339
 
Reserves for unearned premiums  79,429   
71,625
 
Reinsurance payable  59,313   
66,632
 
Short-term borrowings  20,000   
20,000
 
Accounts payable and other liabilities  111,405   
110,453
 
   1,203,610   
1,134,049
 
Shareholders' equity:        
Common stock-no par value:        
Class A voting -- authorized 3,000,000 shares; outstanding -- 2019 - 2,612,446; 2018 - 2,615,339  112   
112
 
Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2019 - 11,932,076; 2018 - 12,253,922  509   
522
 
Additional paid-in capital  54,065   
54,720
 
Accumulated other comprehensive income (loss)  8,217   
(7,347
)
Retained earnings  304,513   
308,075
 
   367,416   
356,082
 
  $1,571,026  
$
1,490,131
 

See notes to condensed consolidated financial statements.

- 2 -


Protective Insurance Corporation and Subsidiaries
Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Operations            
(in thousands, except per share data)            
             
  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
Revenues            
Net premiums earned $89,100  $71,235  $231,070  $206,870 
Net investment income  4,027   3,513   12,434   10,501 
Commissions and other income  1,407   1,207   3,789   4,035 
Net realized gains on investments, excluding                
impairment losses  5,982   9,576   15,603   22,023 
Total other-than-temporary impairment losses on investments  (38)  (1,844)  (69)  (4,999)
Net realized gains on investments  5,944   7,732   15,534   17,024 
   100,478   83,687   262,827   238,430 
                 
Expenses                
Losses and loss expenses incurred  60,673   56,827   181,026   138,116 
Other operating expenses  29,187   21,225   82,185   64,326 
   89,860   78,052   263,211   202,442 
Income (loss) before federal income taxes (benefits)  10,618   5,635   (384)  35,988 
Federal income taxes (benefits)  3,184   1,634   (2,231)  11,906 
Net income $7,434  $4,001  $1,847  $24,082 
                 
Per share data:                
Basic and diluted earnings $.49  $.27  $.12  $1.60 
                 
    Dividends paid to shareholders $.27  $.26  $.81  $.78 
                 
Reconciliation of shares outstanding:                
   Average shares outstanding - basic  15,089   15,084   15,084   15,068 
   Dilutive effect of share equivalents  29   -   40   16 
   Average shares outstanding - diluted  15,118   15,084   15,124   15,084 

Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share data)

  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
  2019  2018  2019  2018 
Revenues            
Net premiums earned $115,631  
$
111,940
  $225,644  
$
217,402
 
Net investment income  6,500   
5,796
   12,732   
10,432
 
Commissions and other income  1,978   
2,263
   4,043   
4,076
 
Net realized gains on investments, excluding impairment losses  713   
915
   673   
1,290
 
Other-than-temporary impairment losses on investments  (86)  
–
   (346)  
–
 
Net unrealized gains (losses) on equity securities and limited partnership investments  2,262   
(4,350
)
  8,589   
(9,258
)
Net realized and unrealized gains (losses) on investments  2,889   
(3,435
)
  8,916   
(7,968
)
   126,998   
116,564
   251,335   
223,942
 
                 
Expenses                
Losses and loss expenses incurred  90,433   
77,488
   177,555   
149,787
 
Other operating expenses  34,615   
36,019
   68,316   
70,784
 
   125,048   
113,507
   245,871   
220,571
 
Income before federal income tax expense  1,950   
3,057
   5,464   
3,371
 
Federal income tax expense  415   
570
   1,181   
554
 
Net income $1,535  
$
2,487
  $4,283  
$
2,817
 
                 
Per share data:                
Basic and diluted earnings $.11  
$
.17
  $.28  
$
.19
 
                 
Dividends paid to shareholders $.10  
$
.28
  $.20  
$
.56
 
                 
Reconciliation of shares outstanding:                
Average shares outstanding - basic  14,616   
15,014
   14,731   
15,012
 
Dilutive effect of share equivalents  63   
9
   60   
9
 
Average shares outstanding - diluted  14,679   
15,023
   14,791   
15,021
 

See notes to condensed consolidated financial statements.

- 3 -

Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Comprehensive Income            
(in thousands)            
             
  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
             
Net income $7,434  $4,001  $1,847  $24,082 
                 
Other comprehensive income (loss), net of tax:                
Unrealized net gains (losses) on securities:                
Unrealized net gains arising during the period  4,862   4,900   15,999   7,471 
Less: reclassification adjustment for net gains                
included in net income  2,240   2,164   4,562   8,985 
   2,622   2,736   11,437   (1,514)
                 
Foreign currency translation adjustments  57   (145)  510   398 
                 
Other comprehensive income (loss)  2,679   2,591   11,947   (1,116)
                 
Comprehensive income $10,113  $6,592  $13,794  $22,966 

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)

  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
  2019  2018  2019  2018 
Net income $1,535  
$
2,487
  $4,283  
$
2,817
 
                 
Other comprehensive income (loss), net of tax:                
   Unrealized net gains (losses) on fixed income securities
  6,517   
(2,026
)
  14,973   
(5,147
)
                 
Foreign currency translation adjustments  284   
(188
)
  591   
(411
)
                 
Other comprehensive income (loss)  6,801   
(2,214
)
  15,564   
(5,558
)
                 
Comprehensive income (loss) $8,336  
$
273
  $19,847  
$
(2,741
)

See notes to condensed consolidated financial statements.

- 4 -


Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Statements of Cash Flows      
(in thousands)      
       
  Nine Months Ended 
  September 30 
  2017  2016 
       
Net cash provided by operating activities $55,235  $32,397 
Investing activities:        
   Purchases of available-for-sale investments  (305,130)  (310,398)
   Purchases of limited partnership interests  (897)  - 
   Proceeds from sales or maturities        
       of available-for-sale investments  257,977   286,580 
   Net sales of short-term investments  500   720 
   Distributions from limited partnerships  16,313   1,462 
   Other investing activities  (4,825)  (5,440)
Net cash used in investing activities  (36,062)  (27,076)
Financing activities:        
   Dividends paid to shareholders  (12,250)  (11,885)
   Repurchase of common shares  (1,880)  - 
Net cash used in financing activities  (14,130)  (11,885)
         
Effect of foreign exchange rates on cash and cash equivalents  510   398 
         
Increase (decrease) in cash and cash equivalents  5,553   (6,166)
Cash and cash equivalents at beginning of period  62,976   73,538 
Cash and cash equivalents at end of period $68,529  $67,372 
Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Shareholders' Equity
(in thousands)

  Common Stock  Additional  Accumulated Other       
  Class A  Class B  Paid-in  Comprehensive  Retained  Total 
Description Shares  Amount  Shares  Amount  Capital  Income (Loss)  Earnings  Equity 
Balance at December 31, 2018
  2,615  $112   12,254  $522  $54,720  $(7,347) $308,075  $356,082 
Net income
  –   –   –   –   –   –   4,283   4,283 
Foreign currency translation adjustment, net of tax
  –   –   –   –   –   591   –   591 
Change in unrealized gain (loss) on investments, net of tax
  –   –   –   –   –   14,973   –   14,973 
Common stock dividends
  –   –   –   –   –   –   (2,987)  (2,987)
Repurchase of common stock
  (3)  –   (371)  (15)  (1,614)  –   (4,858)  (6,487)
Restricted stock grants
  –   –   49   2   959   ––   –   961 
Balance at June 30, 2019
  2,612  $112   11,932  $509  $54,065  $8,217  $304,513  $367,416 


  Common Stock  Additional  Accumulated Other       
  Class A  Class B  Paid-in  Comprehensive  Retained  Total 
Description Shares  Amount  Shares  Amount  Capital  Income  Earnings  Equity 
Balance at March 31, 2019
  2,615  $112   12,249  $522  $55,049  $1,416  $308,971  $366,070 
Net income
  –   –   –   –   –   –   1,535   1,535 
Foreign currency translation adjustment, net of tax
  –   –   –   –   –   284   –   284 
Change in unrealized gain (loss) on investments, net of tax
  –   –   –   –   –   6,517   –   6,517 
Common stock dividends
  –   –   –   –   –   –   (1,494)  (1,494)
Repurchase of common stock
  (3)  –   (346)  (15)  (1,506)  –   (4,499)  (6,020)
Restricted stock grants
  –   –   29   2   522   –   –   524 
Balance at June 30, 2019
  2,612  $112   11,932  $509  $54,065  $8,217  $304,513  $367,416 


See notes to condensed consolidated financial statements.

- 5 -

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Shareholders' Equity
(in thousands)

  Common Stock  Additional  Accumulated Other       
  Class A  Class B  Paid-in  Comprehensive  Retained  Total 
Description Shares  Amount  Shares  Amount  Capital  Income (Loss)  Earnings  Equity 
Balance at December 31, 2017
  
2,623
  
$
112
   
12,424
  
$
530
  
$
55,078
  
$
46,391
  
$
316,700
  
$
418,811
 
Cumulative effect of adoption of ASU 2016-01, net of tax (Note 1)
  
–
   
–
   
–
   
–
   
–
   
(46,157
)
  
46,157
   
–
 
Cumulative effect of adoption of ASU 2018-02 (Note 1)
  
–
   
–
   
–
   
–
   
–
   
117
   
(117
)
  
–
 
Net income
  
–
   
–
   
–
   
–
   
–
   
–
   
2,817
   
2,817
 
Foreign currency translation adjustment, net of tax
  
–
   
–
   
–
   
–
   
–
   
(411
)
  
–
   
(411
)
Change in unrealized gain (loss) on investments, net of tax
  
–
   
–
   
–
   
–
   
–
   
(5,147
)
  
–
   
(5,147
)
Common stock dividends
  
–
   
–
   
–
   
–
   
–
   
–
   
(8,456
)
  
(8,456
)
Repurchase of common stock
  
–
   
–
   
(54
)
  
(2
)
  
(234
)
  
–
   
(1,044
)
  
(1,280
)
Restricted stock grants
  
–
   
–
   
10
   
–
   
901
   
–
   
–
   
901
 
Balance at June 30, 2018
  
2,623
  
$
112
   
12,380
  
$
528
  
$
55,745
  
$
(5,207
)
 
$
356,057
  
$
407,235
 


  Common Stock  Additional  Accumulated Other       
  Class A  Class B  Paid-in  Comprehensive  Retained  Total 
Description Shares  Amount  Shares  Amount  Capital  Loss  Earnings  Equity 
Balance at March 31, 2018
  
2,623
  
$
112
   
12,418
  
$
530
  
$
55,511
  
$
(2,993
)
 
$
358,651
  
$
411,811
 
Net income
  
–
   
–
   
–
   
–
   
–
   
–
   
2,487
   
2,487
 
Foreign currency translation adjustment, net of tax
  
–
   
–
   
–
   
–
   
–
   
(188
)
  
–
   
(188
)
Change in unrealized gain (loss) on investments, net of tax
  
–
   
–
   
–
   
–
   
–
   
(2,026
)
  
–
   
(2,026
)
Common stock dividends
  
–
   
–
   
–
   
–
   
–
   
–
   
(4,227
)
  
(4,227
)
Repurchase of common stock
  
–
   
–
   
(43
)
  
(2
)
  
(188
)
  
–
   
(854
)
  
(1,044
)
Restricted stock grants
  
–
   
–
   
5
   
–
   
422
   
–
   
–
   
422
 
Balance at June 30, 2018
  
2,623
  
$
112
   
12,380
  
$
528
  
$
55,745
  
$
(5,207
)
 
$
356,057
  
$
407,235
 


See notes to condensed consolidated financial statements.

- 6 -

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

  
Six Months Ended
June 30
 
  2019  2018 
Operating activities      
Net income $4,283  
$
2,817
 
Adjustments to reconcile net income to net cash provided by operating activities  34,113   
21,857
 
Net cash provided by operating activities  38,396   
24,674
 
         
Investing activities        
Purchases of fixed income and equity securities  (245,099)  
(215,226
)
Purchases of limited partnership interests  –   
(450
)
Distributions from limited partnerships  20,231   
369
 
Proceeds from maturities  38,917   
37,590
 
Proceeds from sales of fixed income securities  71,839   
102,408
 
Proceeds from sales of equity securities  14,449   
87,557
 
Purchase of insurance company-owned life insurance  –   
(10,000
)
Purchase of commercial mortgage loans  (2,213)  
–
 
Purchases of property and equipment  (1,346)  
(2,691
)
Proceeds from disposals of property and equipment  3   
8
 
Net cash used in investing activities  (103,219)  
(435
)
         
Financing activities        
Dividends paid to shareholders  (2,987)  
(8,456
)
Repurchase of common shares  (6,487)  
(1,280
)
Net cash used in financing activities  (9,474)  
(9,736
)
         
Effect of foreign exchange rates on cash and cash equivalents  591   
(411
)
         
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents  (73,706)  
14,092
 
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period  170,811   
68,713
 
Cash, cash equivalents and restricted cash and cash equivalents at end of period $97,105  
$
82,805
 

See notes to condensed consolidated financial statements.

- 7 -

Notes to Unaudited Condensed Consolidated Financial Statements
(All dollar amounts presented in these notes are in thousands, except share and per share data)

(1)  Summary of Significant Accounting PoliciesPolicies:

Description of BusinessBusiness:  :  Baldwin & Lyons, Inc.Protective Insurance Corporation (the "Company"), based in Carmel, Indiana, is a specialty property-casualty insurer providingspecializing in marketing and underwriting property, liability and workers' compensation coverage for large to small-sized trucking and public transportation fleets.fleets, as well as coverage for trucking industry independent contractors.  In addition, the Company offers workers' compensation coverage for a variety of operations outside the transportation industry.  The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

The Company determined that its business constituted one reportable property and casualty insurance segmentterm “Insurance Subsidiaries,” as of January 1, 2017.  During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance.  The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance.  The prior period segment informationused throughout this Quarterly Report on Form 10-Q was updateddocument, refers to conform to the current year presentation.Protective Insurance Company, Protective Specialty Insurance Company, Sagamore Insurance Company and B&L Insurance, Ltd.

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  Interim financial statements should be read in conjunction with the Company's annual audited financial statements and other disclosures included in the Company's most recent Annual Report on Form 10-K.  Operating results for interim periods are not necessarily indicative of results that may be expected for the year ending December 31, 20172019 or any other future period.

Investments: Carrying amounts for fixed maturityincome securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available.  Equity securities are carried at quoted market prices (fair value).  Commercial mortgage loans are carried primarily at amortized cost along with a valuation allowance for losses when necessary. These investments represent interests in commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans. There was no valuation allowance on the Company's commercial mortgage loans as of June 30, 2019.

The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership's net income.  To the extent that the limited partnership investeespartnerships include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its condensed consolidated statements of operations, its proportionate share of the investee's unrealized, as well as realized, investment gains or losses.losses within net unrealized gains (losses) on equity securities and limited partnership investments.

Short-term and other investments are carried at cost, which approximates their fair values.

Realized gains and losses on disposals of investments are recorded on the trade date and are determined by specific identification of cost of investments sold and are included in income.  All fixed maturity and equityFixed income securities are considered to be available-for-sale; theavailable-for-sale. The related unrealized net gains or losses (net of applicable tax effect)effects) on fixed income securities are reflected directly in shareholders' equity. Included within available for saleavailable-for-sale fixed maturityincome securities are convertible debt securities.  A portion of the changes in the fair values of convertible debt securities areis reflected as a component of net realized gains (losses) on investments.investments, excluding impairment losses within the condensed consolidated statements of operations.  Realized gains and losses on disposals of fixed income securities are recorded on the trade date.  Realized gains and losses on fixed income securities are determined by the specific identification of the cost of investments sold and are included in net realized gains on investments, excluding impairment losses.

- 6 -Effective January 1, 2018, the Company adopted new accounting guidance that requires equity securities to be recorded at fair value, with unrealized net gains or losses reflected as a component of net unrealized gains (losses) on equity securities and limited partnership investments within the condensed consolidated statements of operations.  Realized gains and losses on disposals of equity securities are recorded on the trade date and included in net realized gains on investments, excluding impairment losses.  Prior to adoption of the new accounting guidance, unrealized gains and losses related to equity securities were reflected directly in shareholders’ equity unless a decline in value was determined to be other-than-temporary, in which case the loss was charged to income.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In accordance with the Financial Accounting Standards Board's ("FASB") other-than-temporary impairment guidance, if a fixed maturityincome security is in an unrealized loss position and the Company has the intent to sell the fixed maturityincome security, or it is more likely than not that the Company will have to sell the fixed maturityincome security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realizedother-than-temporary impairment losses on investments in the condensed consolidated statements of operations.   For impaired fixed maturityincome securities that the Company does not intend to sell or in cases where it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realizedother-than-temporary impairment losses on investments in the condensed consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholders' equity (accumulated other comprehensive income).equity.

- 8 -
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturityincome security.  The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the appropriate effective interest rate.

The unrealized net gains or losses (netRecognition of Revenue and Costs:  Premiums are earned over the period for which insurance protection is provided.  A reserve for unearned premiums, computed by the daily pro-rata method, is established to reflect amounts applicable tax effect) related to equity securitiessubsequent accounting periods.  Commissions to unaffiliated companies and premium taxes applicable to unearned premiums are reflected directly in shareholders' equity, unless a decline in value is determined to be other-than-temporary, in which case the loss is charged to income.  In determining ifdeferred and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost.   For any equity security where the unrealized loss exceeds 20% of original or adjusted cost, or where that decline has existed for a period of at least one year, the decline is treated as an other-than-temporary impairment.  Additionally, the Company takes into account any known subjective information in evaluating for impairment, separate from consideration of the Company's quantitative criteria defined above, as wellexpensed as the Company's intent and ability to retain the equity security for a period of time sufficient to allow for such recovery in fair value.

- 7 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Recent Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contractsrelated premiums are not within the scope of this updated guidance, the Company's service and fee income, other than that directly associated with insurance contracts, will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the quarter ending March 31, 2018. The Company has performed an evaluation of the impact this guidance will have on its results of operations, financial position and liquidity as well as a technical assessment of material customer contracts.  The Company will use the modified retrospective method upon adoption in 2018.earned.  The Company does not expectdefer acquisition costs that are not directly variable with the new standardproduction of premiums.  If it is determined that expected losses and deferred expenses will likely exceed the related unearned premiums, the asset representing deferred policy acquisition costs is reduced and an expense is charged against current operations to havereflect any such premium deficiency.  In the event that the expected premium deficiency exceeds deferred policy acquisition costs, an additional liability would be recorded with a corresponding expense to current operations for the amount of the excess premium deficiency.  Anticipated investment income is considered in determining recoverability of deferred acquisition costs.  The Company had no material impactcontract assets, contract liabilities, or deferred contract costs recorded on its condensed consolidated financial statements.balance sheet at June 30, 2019.

Recently Adopted Accounting Pronouncements:In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 changechanged the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income.  Under current guidance,Previously, the Company's equity securities were classified as available-for-sale and changes in fair value for investments of this nature arewere recognized in accumulated other comprehensive income (loss) as a component of shareholders' equity.  Additionally,The Company adopted ASU 2016-01 simplifiesas of January 1, 2018 using the impairment assessmentmodified retrospective approach and recorded a cumulative-effect adjustment to reclassify unrealized gains on equity securities of equity investments without readily determinable fair values; requires entities$71,012 ($46,157, net of tax) from other comprehensive income (loss) to useretained earnings within the exit price when estimating the fair valueconsolidated balance sheet as of financial instruments; and modifies various presentation disclosure requirements for financial instruments. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017.  The effect of this guidance will be dependent on the31, 2018.  Going forward, unrealized gains or losses associated with the Company'son equity investments.  Such unrealized gains or lossessecurities will be recognized upon adoption as a cumulative-effect adjustment with futurein the consolidated statements of operations within net unrealized gains or losses recognized in the statement of operations.  Refer to Note 2 for unrealized gains(losses) on equity securities and losses currently recognized in other comprehensive income (loss).limited partnership investments.

In February 2016, the FASB issued ASUAccounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersedesuperseded the currentprior lease guidance in ASCAccounting Standards Codification ("ASC") Topic 840, Leases.  Under the new guidance, lessees will beare required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis.  Concurrently, lessees will beare required to recognize a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 is effectiveThe guidance provides for interim and annual reporting periods beginning after December 15, 2018.  Early adoption is permitted, but the Company plans to adopt this ASU on January 1, 2019.  This guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements.  In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, or ASU 2018-11, which provided adopters an additional transition method by allowing entities to initially apply ASU 2016-02, and subsequent related standards, at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.   The Company adopted the new guidance on January 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information was not adjusted for the effects of the new guidance. No cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. The Company's adoption of the new standard did not have any impact on the Company's condensed consolidated statements of operations or cash flows; however, the impact of adopting the new guidance resulted in a right-of-use asset and a lease liability being recorded on the condensed consolidated balance sheet as of June 30, 2019 of approximately $300, which are included within other assets and accounts payable and other liabilities. 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU allows for the option to reclassify, from accumulated other comprehensive income (loss) to retained earnings, stranded tax effects resulting from the newly enacted federal corporate income tax rate in the U.S. Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act"), which was enacted on December 22, 2017. The legislation included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification was the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. The Company adopted the new guidance in the first quarter of 2018 and recorded a cumulative-effect adjustment to reclassify the tax effects on fixed income investments of $117 from other comprehensive income (loss) to retained earnings within the consolidated balance sheet as of December 31, 2018.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. This update provides clarification, corrects errors in and makes minor improvements to various ASC topics. Many of the amendments in this update have transition guidance with effective dates for annual periods beginning after December 15, 2018, and some amendments in this update do not require transition guidance and were effective upon issuance of this update. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.


- 9 -

Recently Issued Accounting Pronouncements:  In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the effects thatthe adoption of ASU 2016-022018-13 will have on its condensed consolidated financial statements.
- 8 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
In June 2016,May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. These updates provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost and provide additional clarification and implementation guidance on certain aspects of the previously issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, and have the same effective date and transition requirements as ASU 2016-13. This updateASU 2016-13 introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-
132016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15,
2018. The Company is currently evaluating the effects thatthe adoption of ASU 2016-13 will have on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04.  This amendment removes Step 2 of the goodwill impairment test under current guidance.  The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value.  ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted.  The Company does not expect the guidance to have a material impact on its condensed consolidated financial statements.

- 910 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(2)  Investments:

(2) Investments:
The following is a summary of available-for-sale securities at SeptemberJune 30, 20172019 and December 31, 2016:2018:

              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
September 30, 2017               
Fixed maturities               
   Agency collateralized mortgage obligations  $11,017   $10,390   $636   $(9)  $627 
   Agency mortgage-backed securities  19,712   19,667   92   (47)  45 
   Asset-backed securities  50,030   48,969   1,133   (72)  1,061 
   Bank loans  24,986   24,914   182   (110)  72 
   Certificates of deposit  3,138   3,125   13   -   13 
   Collateralized mortgage obligations  7,055   6,625   470   (40)  430 
   Corporate securities  165,794   164,965   2,109   (1,280)  829 
   Mortgage-backed securities  20,643   19,534   1,508   (399)  1,109 
   Municipal obligations  102,805   102,272   744   (211)  533 
   Non-U.S. government obligations  32,942   33,399   512   (969)  (457)
   U.S. government obligations  51,484   51,766   20   (302)  (282)
      Total fixed maturities  489,606   485,626   7,419   (3,439)  3,980 
Equity securities:                    
   Consumer  41,913   19,749   22,728   (564)  22,164 
   Energy  8,168   5,454   2,795   (81)  2,714 
   Financial  42,596   29,780   13,213   (397)  12,816 
   Industrial  23,972   7,825   16,293   (146)  16,147 
   Technology  11,825   5,452   6,373   -   6,373 
   Mutual fund  58,178   55,025   3,163   (10)  3,153 
   Other  7,515   4,881   2,757   (123)  2,634 
      Total equity securities  194,167   128,166   67,322   (1,321)  66,001 
                     
      Total $683,773  $613,792  $74,741  $(4,760)  69,981 
                     
              Applicable federal income taxes   (24,493)
                     
              Net unrealized gains - net of tax  $45,488 
  
Fair
Value
  
Cost or
Amortized Cost
  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
June 30, 2019               
Fixed income securities
               
Agency collateralized mortgage obligations $15,730  $15,384  $352  $(6) $346 
Agency mortgage-backed securities  41,031   39,609   1,438   (16)  1,422 
Asset-backed securities  94,880   94,847   539   (506)  33 
Bank loans  16,074   16,279   60   (265)  (205)
Certificates of deposit  2,835   2,835   –   –   – 
Collateralized mortgage obligations  6,165   5,686   549   (70)  479 
Corporate securities  256,318   251,977   5,185   (844)  4,341 
Mortgage-backed securities  42,506   41,706   946   (146)  800 
Municipal obligations  32,834   32,177   688   (31)  657 
Non-U.S. government obligations  31,378   31,064   326   (12)  314 
U.S. government obligations  197,397   194,489   3,092   (184)  2,908 
Total fixed income securities $737,148  $726,053  $13,175  $(2,080) $11,095 



- 10 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
December 31, 2016               
Fixed maturities               
   Agency collateralized mortgage obligations $6,171  $6,000  $171  $-  $171 
   Agency mortgage-backed securities  4,770   4,751   57   (38)  19 
   Asset-backed securities  45,183   45,207   458   (482)  (24)
   Bank loans  10,349   10,222   149   (22)  127 
   Certificates of deposit  3,117   3,126   -   (9)  (9)
   Collateralized mortgage obligations  9,104   9,096   290   (282)  8 
   Corporate securities  142,683   143,356   1,643   (2,316)  (673)
   Mortgage-backed securities  24,571   23,904   1,132��  (465)  667 
   Municipal obligations  129,335   130,204   391   (1,260)  (869)
   Non-U.S. government obligations  24,681   26,461   230   (2,010)  (1,780)
   U.S. government obligations  91,940   92,234   74   (368)  (294)
      Total fixed maturities  491,904   494,561   4,595   (7,252)  (2,657)
Equity securities:                    
   Consumer  32,576   15,231   17,656   (311)  17,345 
   Energy  12,842   5,641   7,203   (2)  7,201 
   Financial  31,186   22,417   8,998   (229)  8,769 
   Industrial  21,145   6,239   15,098   (192)  14,906 
   Technology  8,858   4,117   4,769   (28)  4,741 
   Mutual fund  6,995   6,930   121   (56)  65 
   Other  6,343   4,327   2,181   (165)  2,016 
      Total equity securities  119,945   64,902   56,026   (983)  55,043 
                     
      Total $611,849  $559,463  $60,621  $(8,235)  52,386 
                     
              Applicable federal income taxes   (18,335)
                     
              Net unrealized gains - net of tax  $34,051 



- 11 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
  
Fair
Value
  
Cost or
Amortized Cost
  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
December 31, 2018               
Fixed income securities
               
Agency collateralized mortgage obligations 
$
10,687
  
$
10,636
  
$
145
  
$
(94
)
 
$
51
 
Agency mortgage-backed securities  
37,385
   
37,168
   
371
   
(154
)
  
217
 
Asset-backed securities  
64,422
   
66,241
   
14
   
(1,833
)
  
(1,819
)
Bank loans  
9,750
   
10,208
   
27
   
(485
)
  
(458
)
Certificates of deposit  
2,835
   
2,835
   
–
   
–
   
–
 
Collateralized mortgage obligations  
5,423
   
5,095
   
376
   
(48
)
  
328
 
Corporate securities  
190,450
   
196,925
   
127
   
(6,602
)
  
(6,475
)
Mortgage-backed securities  
38,540
   
38,586
   
377
   
(423
)
  
(46
)
Municipal obligations  
29,155
   
29,102
   
239
   
(186
)
  
53
 
Non-U.S. government obligations  
25,180
   
25,339
   
6
   
(165
)
  
(159
)
U.S. government obligations  
178,818
   
178,369
   
1,252
   
(803
)
  
449
 
Total fixed income securities 
$
592,645
  
$
600,504
  
$
2,934
  
$
(10,793
)
 
$
(7,859
)

The following table summarizes, for available-for-sale fixed maturity and equity security investmentsincome securities in an unrealized loss position at SeptemberJune 30, 20172019 and  December 31, 2016, respectively,2018, the aggregate fair value and gross unrealized loss categorized by the duration individual securities have been continuously in an unrealized loss position.

  June 30, 2019  December 31, 2018 
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
 
Fixed income securities:
                  
12 months or less  81  $76,363  $(1,166)  
275
  
$
282,646
  
$
(7,296
)
Greater than 12 months  149   95,614   (914)  
217
   
131,001
   
(3,497
)
Total fixed income securities  230  $171,977  $(2,080)  
492
  
$
413,647
  
$
(10,793
)
                         

  September 30, 2017  December 31, 2016 
  Number of Securities  Fair Value  Gross Unrealized Loss  Number of Securities  Fair Value  Gross Unrealized Loss 
Fixed maturity securities:                  
12 months or less  325  $233,926  $(1,999)  397  $291,048  $(4,380)
Greater than 12 months  47   25,633   (1,440)  54   32,054   (2,872)
Total fixed maturities  372   259,559   (3,439)  451   323,102   (7,252)
                         
Equity securities:                        
12 months or less  36   33,213   (1,321)  35   20,698   (983)
Greater than 12 months  -   -   -   -   -   - 
Total equity securities  36   33,213   (1,321)  35   20,698   (983)
Total fixed maturity and equity securities  408  $292,772  $(4,760)  486  $343,800  $(8,235)

- 11 -

The fair value and the cost or amortized costs of fixed maturityincome investments at SeptemberJune 30, 2017,2019, organized by contractual maturity, are shown below.  Actual maturities may ultimately differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.

  
Fair
Value
  
Cost or
Amortized Cost
 
One year or less 
$
99,531
  
$
99,574
 
Excess of one year to five years  
342,358
   
336,988
 
Excess of five years to ten years  
89,596
   
87,051
 
Excess of ten years  
11,517
   
10,894
 
Contractual maturities  
543,002
   
534,507
 
Asset-backed securities  
194,146
   
191,546
 
Total 
$
737,148
  
$
726,053
 


  Fair Value  Cost or Amortized Cost 
       
One year or less $47,563  $47,558 
Excess of one year to five years  272,390   272,639 
Excess of five years to ten years  60,122   59,322 
Excess of ten years  3,486   3,338 
   Contractual maturities  383,561   382,857 
Asset-backed securities  106,045   102,769 
Total $489,606  $485,626 


- 12 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Following is a summary of the components of net realized and unrealized gains (losses) on investments for the periods presented in the accompanying condensed consolidated statements of operations.


  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
Fixed maturities:            
   Gross gains $3,852  $7,496  $9,544  $9,338 
   Gross losses  (4,011)  (8,434)  (10,160)  (12,470)
      Net realized losses  (159)  (938)  (616)  (3,132)
                 
Equity securities:                
   Gross gains  4,103   5,086   8,601   21,722 
   Gross losses  (498)  (819)  (966)  (4,767)
      Net realized gains  3,605   4,267   7,635   16,955 
                 
Limited partnerships - net gain  2,498   4,403   8,515   3,201 
                 
                 
      Total net gains $5,944  $7,732  $15,534  $17,024 



Net realized gains activity for investments, as shown in the previous table, are further detailed as follows:


  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
             
Realized net gains on the disposal of securities $3,244  $3,482  $5,886  $10,649 
Mark-to-market adjustment  171   108   136   (326)
Equity in gains of limited partnership                
  investments - realized and unrealized  2,498   4,403   8,515   3,201 
Impairment:                
  Write-downs based upon objective criteria  (38)  (1,844)  (69)  (4,999)
  Recovery of prior write-downs                
    upon sale or disposal  69   1,583   1,066   8,499 
                 
Total net gains $5,944  $7,732  $15,534  $17,024 

The mark-to-market adjustments in the table above represent the changes in fair value of options embedded in convertible debt securities held by the Company.
  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
  2019  2018  2019  2018 
Gross gains on available-for-sale fixed income securities sold during the period
 $4,132  
$
3,691
  $7,303  
$
6,134
 
Gross losses on available-for-sale fixed income securities sold during the period
  (3,154)  
(3,088
)
  (6,681)  
(5,796
)
                 
Other-than-temporary impairments  (86)  
–
   (346)  
–
 
                 
Change in value of limited partnership investments  314   
(2,842
)
  722   
(5,445
)
                 
Gains (losses) on equity securities:                
Realized gains (losses) on equity securities sold during the period  (265)  
312
   51   
953
 
Unrealized gains (losses) on equity securities held at the end of the period  1,948   
(1,508
)
  7,867   
(3,814
)
Realized and unrealized gains (losses) on equity securities during the period  1,683   
(1,196
)
  7,918   
(2,861
)
                 
Net realized and unrealized gains (losses) on investments $2,889  
$
(3,435
)
 $8,916  
$
(7,968
)

Shareholders' equity at SeptemberJune 30, 20172019 included approximately $30,293,$25,071, net of federal income taxes,tax expense, of reported earnings whichthat remain undistributed by limited partnerships.


- 13 -
(3)  Reinsurance:

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

At September 30, 2017, limited partnership investments included approximately $40,169 invested in two partnerships which are managed by organizations in which certain of the Company's directors are officers, directors, general partners or owners.  Each of these investments contains profit sharing agreements, pursuant to which a portion of the gains will be paid to the affiliated organizations.

The Company's limited partnerships include one investment which primarily invests in public and private equity markets in India.  The limited partnership investment's value as of September 30, 2017 and 2016 was $26,970 and $29,718, respectively.  At September 30, 2017, the Company's estimated ownership interest in this limited partnership investment was approximately 5%.  The Company's share of earnings from this limited partnership investment was $4,817 and $1,448 for the nine months ended September 30, 2017 and 2016, respectively.

The summarized financial information of the partnership in which the Company has invested is as follows:

  As of and for the 
  Nine Months Ended 
  September 30 
  2017  2016 
Total assets $517,411  $487,784 
Total partners' capital  517,411   487,784 
Net increase in partners' capital resulting from operations  95,314   23,841 


At September 30, 2017, the Company's invested assets, excluding limited partnership investments, included approximately $24,229 in portfolios managed by organizations in which certain of the Company's directors are officers, directors, general partners or owners.

(3) Reinsurance:
The following table summarizes the Company's transactions with reinsurers for the 20172019 and 20162018 comparative periods.

  2017  2016 
Three months ended September 30:      
   Premiums ceded to reinsurers $34,025  $30,996 
   Losses and loss expenses        
      ceded to reinsurers  30,531   21,237 
   Commissions from reinsurers  7,205   11,898 
         
Nine months ended September 30:        
   Premiums ceded to reinsurers $111,124  $94,331 
   Losses and loss expenses        
      ceded to reinsurers  102,401   70,081 
   Commissions from reinsurers  21,000   32,587 
  2019  2018 
Three months ended June 30:      
Premiums ceded to reinsurers $32,425  
$
28,800
 
Losses and loss expenses ceded to reinsurers  28,859   
21,975
 
Commissions from reinsurers  8,176   
6,443
 
         
Six months ended June 30:        
Premiums ceded to reinsurers $62,598  
$
61,241
 
Losses and loss expenses ceded to reinsurers  59,648   
48,636
 
Commissions from reinsurers  15,410   
14,323
 
         

- 1412 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(4)  Loss and Loss Expense Reserves:

Activity in the reserves for losses and loss expenses for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 is summarized as follows.  All amounts are shown net of reinsurance, unless otherwise indicated.

 2017  2016  Six Months Ended 
Reserves, gross of reinsurance      
recoverable, at the beginning of the year $576,330  $513,596 
 June 30 
 2019  2018 
Reserves, gross of reinsurance recoverable, at the beginning of the year
 $865,339  
$
680,274
 
Reinsurance recoverable on unpaid losses at the beginning of the year  251,563   211,843   375,935   
308,143
 
Reserves at the beginning of the year  324,767   301,753  489,404  
372,131
 
              
Provision for losses and loss expenses:              
Claims occurring during the current period  164,546   129,404  179,211  
151,462
 
Claims occurring during prior periods  16,480   8,712   (1,656)  
(1,675
)
Total incurred  181,026   138,116  177,555  
149,787
 
              
Loss and loss expense payments:              
Claims occurring during the current period  41,616   30,932  30,573  
28,903
 
Claims occurring during prior periods  109,616   81,427   92,822   
88,965
 
Total paid  151,232   112,359   123,395   
117,868
 
Reserves at the end of the period  354,561   327,510  543,564  
404,050
 
              
Reinsurance recoverable on unpaid losses at the end of the period  301,445   238,049   389,899   
312,231
 
Reserves, gross of reinsurance        
recoverable, at the end of the period $656,006  $565,559 
Reserves, gross of reinsurance recoverable, at the end of the period $933,463  
$
716,281
 

The table above shows a roll-forwardreserve savings of loss and loss expense reserves from$1,656 that developed during the prior year end tosix months ended June 30, 2019 in the current balance sheet date with comparable prior year information.settlement of claims occurring on or before December 31, 2018.  Losses incurred from claims occurring during prior years reflectsreflect the development from prior accident years, composed of individual claim savings and deficiencies which, in the aggregate, have resulted from the settlement of claims at amounts higher or lower than previously reserved and from changes in estimates of losses incurred but not reported.

The $16,480$1,656 prior accident year deficiencysavings that developed during the first ninesix months of 2017ended June 30, 2019 was largelyprimarily due to infrequent, but severe, transportation losses that occurred primarily during the first six months of 2017.  favorable loss development in workers' compensation and independent contractor coverages.  This 2017 deficiencysavings compares to a deficiencysavings of $8,712$1,675 for the first ninesix months of 2016 that arose due mostly to management's review of reserve positionsended June 30, 2018, which was also related to discontinued lines.favorable loss development from workers' compensation and independent contractor coverages.


- 15 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(5)  Segment Information:Information:

The Company has one reportable business segment in its operations: Property and Casualty Insurance.  The property and casualty insurance segment provides multiple lines of insurance coverage primarily to fleet transportationcommercial automobile companies, as well as to independent contractors who contract with fleet transportationcommercial automobile companies.  In addition, the Company provides workers' compensation coverage for a variety of classesoperations outside the transportation industry.

The following table summarizes segment revenues for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:

 Three Months Ended  Nine Months Ended 
 September 30  September 30 
 2017  2016  2017  2016  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
             2019  2018  2019  2018 
Revenues:                        
Net premiums earned $89,100  $71,235  $231,070  $206,870  $115,631  
$
111,940
  $225,644  
$
217,402
 
Net investment income  4,027   3,513   12,434   10,501  6,500  
5,796
  12,732  
10,432
 
Net realized gains on investments  5,944   7,732   15,534   17,024 
Net realized and unrealized gains (losses) on investments 2,889  
(3,435
)
 8,916  
(7,968
)
Commissions and other income  1,407   1,207   3,789   4,035   1,978   
2,263
   4,043   
4,076
 
Total revenues $100,478  $83,687  $262,827  $238,430  $126,998  
$
116,564
  $251,335  
$
223,942
 

- 13 -
(6)  Debt:

(6) Debt:
TheOn August 9, 2018, the Company maintainsentered into a credit agreement providing a revolving line of credit facility with a $40,000 limit, andwith the option for up to an additional $35,000 in incremental loans at the discretion of the lenders.  This credit agreement has an expiration date of September 23, 2018.August 9, 2022.  Interest on this line ofrevolving credit facility is referenced to LIBORthe London Interbank Offered Rate and can be fixed for periods of up to one year at the Company's option.  Outstanding drawings on this line ofrevolving credit facility were $20,000 as of both SeptemberJune 30, 2017 and December 31, 2016.2019.  At SeptemberJune 30, 2017,2019, the effective interest rate was 2.34%.  The3.50% and the Company hashad $20,000 remaining and unused under the line ofrevolving credit at September 30, 2017.facility.  The current outstanding borrowings were used for general corporate purposes. to repay the Company's previous line of credit.  The Company's revolving credit facility has two financial covenants, each of which were met as of June 30, 2019.  These covenants require the Company to have a minimum U.S. generally accepted accounting principles net worth and a maximum consolidated leverage ratio of 0.35 to 1.00.


(7)  Taxes:
As of September 30, 2017, the Company's calendar years 2016, 2015 and 2014 remain subject to examination by the Internal Revenue Service.

The effective federal tax rate on consolidated income for the third quarter of 2017three months ended June 30, 2019 was 30.0%21.3% compared to 29.0%18.6% for the 2016 third quarter.three months ended June 30, 2018.  The effective federal tax rate on consolidated income for the six months ended June 30, 2019 was 21.6% compared to 16.4% for the six months ended June 30, 2018.  The effective federal income tax rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.  For the three and six months ended June 30, 2019, the Company had lower tax-exempt income when compared to the same periods in 2018, primarily due to the reduction of tax exempt municipal securities within the Company's investment portfolio in the current year as well as a decrease in dividend income, which provides a deduction for taxes, related to the reallocation of equity securities to fixed income securities within the Company’s investment portfolio throughout 2018.

The effective federal tax rate on consolidated income (loss) for the first nine monthsAs of 2017 was 581.0% compared to 33.1% for the 2016 period.  The significant difference between the effective rate and the normal statutory rate was the result ofJune 30, 2019, the Company's operating loss throughcalendar years 2017, 2016 and 2015 remain subject to examination by the first nine months of 2017.

Internal Revenue Service.

- 1614 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(8)  Fair Value:

(8) Fair Value:
Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:

As of September 30, 2017:            
             
Description Total  Level 1  Level 2  Level 3 
             
Fixed maturities:            
Agency collateralized mortgage obligations $11,017  $-  $11,017  $- 
Agency mortgage-backed securities  19,712   -   19,712   - 
Asset-backed securities  50,030   -   50,030   - 
Bank loans  24,986   -   24,986   - 
Certificates of deposit  3,138   3,138   -   - 
Collateralized mortgage obligations  7,055   -   7,055   - 
Corporate securities  160,716   -   160,558   158 
Options embedded in convertible securities  5,078   -   5,078   - 
Mortgage-backed securities  20,643   -   20,413   230 
Municipal obligations  102,805   -   102,805   - 
Non-U.S. government obligations  32,942   -   32,942   - 
U.S. government obligations  51,484   -   51,484   - 
      Total fixed maturities  489,606   3,138   486,080   388 
Equity securities:                
Consumer  41,912   41,912   -   - 
Energy  8,168   8,168   -   - 
Financial  46,167   46,167   -   - 
Industrial  23,971   23,971   -   - 
Technology  11,826   11,826   -   - 
Mutual fund  53,528   53,528   -   - 
Other  8,595   8,595   -   - 
      Total equity securities  194,167   194,167   -   - 
Short-term  1,000   1,000   -   - 
Cash equivalents  64,153   -   64,153   - 
Total $748,926  $198,305  $550,233  $388 

As of June 30, 2019:



Description Total  Level 1  Level 2  Level 3 
Fixed income securities:            
Agency collateralized mortgage obligations $15,730  $–  $15,730  $– 
Agency mortgage-backed securities  41,031   –   41,031   – 
Asset-backed securities  94,880   –   94,880   – 
Bank loans  16,074   –   16,074   – 
Certificates of deposit  2,835   2,835   –   – 
Collateralized mortgage obligations  6,165   –   6,165   – 
Corporate securities  251,394   –   251,394   – 
Options embedded in convertible securities  4,924   –   4,924   – 
Mortgage-backed securities  42,506   –   42,506   – 
Municipal obligations  32,834   –   32,834   – 
Non-U.S. government obligations  31,378   –   31,378   – 
U.S. government obligations  197,397   –   197,397   – 
Total fixed income securities  737,148   2,835   734,313   – 
Equity securities:                
Consumer  17,125   17,125   –   – 
Energy  3,340   3,340   –   – 
Financial  29,117   29,117   –   – 
Industrial  4,176   4,176   –   – 
Technology  2,414   2,414   –   – 
Funds (e.g. mutual funds, closed end funds, ETFs)  9,796   9,796   –   – 
Other  8,587   8,587   –   – 
Total equity securities
  74,555   74,555   –   – 
Short-term  1,000   1,000   –   – 
Cash equivalents  76,967   –   76,967   – 
Total $889,670  $78,390  $811,280  $– 

- 1715 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)As of December 31, 2018:


As of December 31, 2016:            
            
Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
            
Fixed maturities:            
Fixed income securities:            
Agency collateralized mortgage obligations $6,171  $-  $6,171  $-  
$
10,687
  
$
–
  
$
10,687
  
$
–
 
Agency mortgage-backed securities  4,770   -   4,770   -  
37,385
  
–
  
37,385
  
–
 
Asset-backed securities  45,183   -   37,919   7,264  
64,422
  
–
  
64,422
  
–
 
Bank loans  10,349   -   -   10,349  
9,750
  
–
  
9,750
  
–
 
Certificates of deposit  3,117   3,117   -   -  
2,835
  
2,835
  
–
  
–
 
Collateralized mortgage obligations  9,104   -   6,409   2,695  
5,423
  
–
  
5,423
  
–
 
Corporate securities  137,932   -   135,794   2,138  
186,651
  
–
  
186,651
  
–
 
Options embedded in convertible securities  4,751   -   4,751   -  
3,799
  
–
  
3,799
  
–
 
Mortgage-backed securities  24,571   -   22,206   2,365  
38,540
  
–
  
38,540
  
–
 
Municipal obligations  129,335   -   129,190   145  
29,155
  
–
  
29,155
  
–
 
Non-U.S. government obligations  24,681   -   24,419   262  
25,180
  
–
  
25,180
  
–
 
U.S. government obligations  91,940   -   91,940   -   
178,818
   
–
   
178,818
   
–
 
Total fixed maturities  491,904   3,117   463,569   25,218 
Total fixed income securities 
592,645
  
2,835
  
589,810
  
–
 
Equity securities:                            
Consumer  32,576   32,576   -   -  
17,945
  
17,945
  
–
  
–
 
Energy  12,842   12,842   -   -  
3,179
  
3,179
  
–
  
–
 
Financial  31,186   30,943   243   -  
25,253
  
25,253
  
–
  
–
 
Industrial  21,145   20,262   883   -  
6,920
  
6,920
  
–
  
–
 
Technology  8,858   8,858   -   -  
2,303
  
2,303
  
–
  
–
 
Mutual fund  6,995   -   6,995   - 
Funds (e.g. mutual funds, closed end funds, ETFs) 
5,489
  
5,489
  
–
  
–
 
Other  6,343   6,343   -   -   
5,333
   
5,333
   
–
   
–
 
Total equity securities  119,945   111,824   8,121   -  
66,422
  
66,422
  
–
  
–
 
Short-term  1,500   1,500   -   -  
1,000
  
1,000
  
–
  
–
 
Cash equivalents  59,683   -   59,683   -   
156,855
   
–
   
156,855
   
–
 
Total $673,032  $116,441  $531,373  $25,218  
$
816,922
  
$
70,257
  
$
746,665
  
$
–
 

Level inputs, as defined by the FASB guidance, are as follows:

Level Input: Input Definition:
   
Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
   
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
   
Level 3 Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.


- 18 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The Company'sCompany did not have any Level 3 assets consist primarily of a portfolio of corporate and mortgage-backed securities.  Theat June 30, 2019 or December 31, 2018.  Level 3 assets, when present, are valued using various unobservable inputs including extrapolated data, proprietary models and indicative quotes. Transfers into Level 3 relate to securities previously classified as Level 2.  A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the nine months ended September 30, 2017 and for the year ended December 31, 2016:

  2017  2016 
Beginning of period balance $25,218  $16,793 
Total gains (realized or unrealized)        
included in income  316   1,846 
Purchases  81   5,540 
Settlements  (8,950)  (8,791)
Transfers into Level 3  144   10,202 
Transfers out of Level 3  (16,421)  (372)
End of period balance $388  $25,218 

Quoted market prices are obtained whenever possible.  Where quoted market prices are not available, fair values are estimated using present value or other valuation techniques.broker/dealer quotes for specific securities.  These techniques are significantly affected by the Company's assumptions, including discount rates and estimates of future cash flows.  Potential taxes and other transaction costs have not been considered in estimating fair values.

Transfers between levels, if any, are recorded as of the beginning of the reporting period.  There were no materialsignificant transfers of assets between Level 1 and Level 2 during the ninesix months ended SeptemberJune 30, 20172019 and 2016.  The transfers out of Level 3 during the third quarter of 2017 consisted mainly of bank loans, asset-backed securities and certain mortgage-backed securities and corporate securities, which were based on quoted market prices of similar securities and other observable inputs.2018.

In addition to the preceding disclosures on assets recorded at fair value in the condensed consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the condensed consolidated balance sheets.

Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures.  Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value of the Company.  The following methods, assumptions and inputs were used to estimate the fair value of limited partnerships and short-term borrowings.each class of financial instrument:

- 16 -
Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to carry the investment at its proportionate share of the limited partnership's equity.   The underlying assets of the Company's investments in limited partnerships are carried primarily at fair value, and,value; therefore, the Company's carrying value of limited partnerships approximates fair value.  As these investments are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level 3.

- 19 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)Commercial mortgage loans:  Commercial mortgage loans are carried primarily at amortized cost along with a valuation allowance for losses when necessary. These investments represent interests in commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans.  The fair value of the Company’s investment in these commercial mortgage loans is based on expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.  These investments are classified as Level 3.

Short-term borrowings: The fair value of the Company's short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current market interest rates available to the Company for debt of similar terms and remaining maturities.

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's condensed consolidated balance sheets at SeptemberJune 30, 20172019 and December 31, 2016 are2018 is as follows:

  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
                
September 30, 2017               
Assets:   Limited partnerships $69,568  $-  $-  $69,568  $69,568 
Liabilities:   Short-term borrowings  20,000   -   20,000   -   20,000 
                     
December 31, 2016                    
Assets:   Limited partnerships  76,469   -   -   76,469   76,469 
Liabilities:   Short-term borrowings  20,000   -   20,000   -   20,000 
  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
June 30, 2019               
Assets:                 
Limited partnerships $35,535  $–  $–  $35,535  $35,535 
Commercial mortgage loans  8,884   –   –   8,884   8,884 
Liabilities:                      
Short-term borrowings  20,000   –   20,000   –   20,000 
                     
December 31, 2018                    
Assets:                      
Limited partnerships 
$
55,044
  
$
–
  
$
–
  
$
55,044
  
$
55,044
 
Commercial mortgage loans  
6,672
   
–
   
–
   
6,672
   
6,672
 
Liabilities:                      
Short-term borrowings  
20,000
   
–
   
20,000
   
–
   
20,000
 


(9)  Stock BasedStock-Based Compensation:

The Company grantsissues shares of restricted Class B restricted stockCommon Stock to the Company's outside directors in lieu of cash, as their annual retainer compensation (the "annual retainer shares").  These annual retainercompensation.  The shares are distributed to the outside directors on the vesting date, which, with the exception of pro-rated annual retainers granted to outside directors, is one year following the date of grant.  On August 31, 2017,May 17, 2019, the Company granted shares of restricted Class B restricted stock toCommon Stock in connection with the election of a new outside director, in lieu of cash, asreflecting such director'sdirector’s pro-rated annual retainer compensation, which shares will vest and be distributed on May 9, 2018.7, 2020.  Additionally, effective May 22, 2019, John D. Nichols, Jr. ceased serving as the Company's Interim Chief Executive Officer and principal executive officer, but continued to serve as Chairman of the Company's Board of Directors.  On May 22, 2019, the Company granted shares of restricted Class B Common Stock to Mr. Nichols in connection with this transition, reflecting his pro-rated annual retainer compensation, which shares will also vest and be distributed on May 7, 2020.  The table below provides detail of the restricted stock issuances to directors for 20162018 and 2017:2019:

          Value 
          Per Share 
 Effective Number of Shares  Vesting Service on Grant 
 Date Issued  Date Period Date 
         
5/10/2016  17,677��5/10/20177/1/2016 - 6/30/2017 $24.89 
           
5/9/2017  18,183 5/9/20187/1/2017 - 6/30/2018 $24.20 
           
8/31/2017  1,257 5/9/20188/31/2017 - 6/30/2018 $21.90 

Grant Date 
Number of
Shares Issued
 Vesting DateService Period 
Grant Date Fair
Value Per Share
 
5/9/2017  18,183 5/9/20187/1/2017 - 6/30/2018 
$
24.20 
           
8/31/2017  1,257 5/9/20188/31/2017 - 6/30/2018 
$
21.90 
           
2/9/2018  408 5/9/20182/9/2018 - 6/30/2018 
$
24.20 
           
5/8/2018  19,085 5/8/20197/1/2018 - 6/30/2019 
$
23.05 
           
5/7/2019  29,536 5/7/20207/1/2019 - 6/30/2020 
$
16.25 
           
5/17/2019  3,591 5/7/20207/1/2019 - 6/30/2020 
$
16.25 
           
5/22/2019  3,541 5/7/20207/1/2019 - 6/30/2020 
$
16.25 

- 2017 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Compensation expense related to the above stock grants is recognized over the period in which the directors render services.
On February 8, 2017, the Company awarded 20,181 shares of Class B restricted stock to certain of the Company's executives under the Company's Restricted Stock Compensation Plan.   The restricted shares were granted to certain executives under the terms of the Company's Executive Incentive Bonus Plan.  The restricted shares will vest over a three-year period from the date of grant and will be distributed solely in the Company's Class B common stock.  The restricted shares were valued based on the closing price of the Company's Class B common stock on the day the award was granted.  Each share was valued at $23.80 per share, representing a total value of $480.  Non-vested restricted shares will be forfeited should an executive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee of the Company's Board of Directors.

In May 2017, the Company's Compensation Committee granted equity-based awards. Underawards pursuant to the Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan"), which was approved by the Company's shareholders at the 2017 Annual Meeting of Shareholders.  Certain participants under the Long-Term Incentive Plan ("LTIP"were granted Value Creation Incentive Plan awards (the "2017 VCIP Awards").  The 2017 VCIP Awards are performance-based equity awards that will be earned based on the final bonus amountCompany's cumulative operating income over a three-year performance period from January 1, 2017 through December 31, 2019 relative to a cumulative operating income goal for the period set by the Compensation Committee in March 2017.  For the purpose of the 2017 VCIP Awards, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments.  Any 2017 VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B Common Stock at the end of the three-year performance period, but no later than March 15, 2020.  No shares are eligible to be issued under the 2017 VCIP Awards as of June 30, 2019.

In March 2018, the Company's Compensation Committee granted equity-based awards pursuant to the Long-Term Incentive Plan.  Certain participants under the Long-Term Incentive Plan were granted equity awards (the "2018 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 20172018 growth in netgross premiums earned and the 2017Company's 2018 combined ratio.  The combined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating expenses, less commission and other income to (B) net premiums earned.  All  No 2018 LTIP awards forAwards were earned based on the Company's named executive officers ("NEOs") will be paidperformance in restricted2018, and therefore no shares ofwere issued pursuant to the 2018 LTIP Awards.  In addition to the 2018 LTIP Awards, in March 2018 the Company's Class B common stock at the end of the 2017 annual performance period and will vest after a one year period.  All LTIP awards for non-NEOs will be paid in restricted shares of the Company's Class B common stock at the end of the 2017 annual performance period and will vest over a three year period. TheCompensation Committee also granted Value Creation Incentive Plan ("VCIP"awards (the "2018 VCIP Awards") is an equity-based award for NEO'sto certain participants under the Long-Term Incentive Plan.  The 2018 VCIP Awards are performance-based equity awards that will be earned based on athe Company's cumulative increase in operating income, as defined above, over a three-year performance period.  Each target VCIP share opportunity will be determined by a measurement of the Corporation's cumulative operating incomeperiod from January 1, 20172018 through December 31, 20192020 relative to ana cumulative operating income goal for the period set by the Compensation Committee in March 2017.  For the purpose of2018.  Any 2018 VCIP calculation, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments.  All VCIP awardsAwards that are earned will be paid in unrestricted shares of the Company's Class B common stockCommon Stock at the end of the three-year performance period, but no later than March 15, 2020.2021.  No shares have beenare eligible to be issued under the 2018 VCIP Awards as of SeptemberJune 30, 2017 under these plans.2019.

On November 13, 2018, the Company entered into an employment agreement with its Interim Chief Executive Officer, John D. Nichols, Jr.  Pursuant to the terms of this employment agreement, on November 13, 2018, Mr. Nichols was granted 85,000 restricted shares of the Company's Class B Common Stock (the "Nichols Stock Grant"), of which 42,500 shares will vest as of October 17, 2019; 21,250 shares will vest as of October 17, 2020, and 21,250 shares will vest as of October 17, 2021.  The Company recorded $559 of expense during the six months ended June 30, 2019 related to the Nichols Stock Grant.


In March 2019, the Company's Compensation Committee granted equity-based awards pursuant to the Long-Term Incentive Plan.  Certain participants under the Long-Term Incentive Plan were granted equity awards (the "2019 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a corporate performance component as well as a personal performance component.  The corporate performance component of the 2019 LTIP Awards will be determined based on the Company's achievement of 2019 underwriting income compared to the plan target.  The Company's underwriting income will be calculated as income (loss) before federal income tax expense (benefit), less net realized gains (losses) on investments, less net unrealized gains (losses) on equity securities and limited partnerships, less net investment income.  The personal performance component of the 2019 LTIP Awards will be determined based on the achievement of personal goals that align with departmental and corporate objectives for 2019.  Any 2019 LTIP Awards earned will be paid in shares of restricted Class B Common Stock in early 2020.  One-third of such shares will vest annually over the three-year period beginning one year from the date of issue.  The Company recorded $51 of expense during the six months ended June 30, 2019 related to the 2019 LTIP Awards.

On May 22, 2019, the Company entered into an employment agreement with its new Chief Executive Officer, Jeremy D. Edgecliffe-Johnson.  Pursuant to the terms of this employment agreement, on May 22, 2019, Mr. Edgecliffe-Johnson was granted 70,000 restricted shares of the Company's Class B Common Stock (the "Edgecliffe-Johnson Stock Grant"), of which 35,000 shares will vest as of June 1, 2022, 21,000 shares will vest as of June 1, 2023, and 14,000 shares will vest as of June 1, 2024.  The Company recorded $36 of expense during the six months ended June 30, 2019 related to the Edgecliffe-Johnson Stock Grant.


- 18 -
(10)  Litigation, Commitments and Contingencies:

In the ordinary, regular and routine course of their business, the Company and its insurance subsidiariesInsurance Subsidiaries are frequently involved in various matters of litigation relating principally to claims for insurance coverage provided.  No currently pending matter is deemed by management to be material to the Company.


- 21 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)Personnel Staffing Group Litigation

In July 2019, Protective Insurance Company (“PIC”) was named as a defendant in a California action brought by former insured, Personnel Staffing Group d/b/a MVP Staffing (“PSG”) alleging breach of PIC’s workers’ compensation insurance policy and breach of the duties of good faith and fair dealing.  PIC provided workers’ compensation insurance to PSG from January 1, 2017 through June 30, 2018, which was subject to a $500 per claim deductible to be paid by PSG.  No specific damages were included in the complaint.   The Company intends to vigorously defend these claims; however, the ultimate outcome cannot be presently determined.

In August 2019, PIC filed its own lawsuit against PSG in Marion County, Indiana alleging breach of contract, breach of the parties collateral agreement, breach of the parties indemnity agreement, and seeking declaratory judgment regarding PSG’s ongoing obligation to fund its ongoing claims deductible obligations and adequately collateralize PIC’s current and ongoing claims exposure, pursuant to the parties agreements.  Pursuant to the terms of the workers’ compensation policies, PIC has a duty to adjust and pay claims arising under the policies as they develop regardless of whether PSG fulfills its deductible obligations.  Under its contractual obligations to PIC, PSG is required to maintain a “loss fund” for the payment of claims, the balance of which is to remain at or above $4,000; in addition, PSG is required to provide collateral in an amount equal to 110% of PIC’s current open case reserves on workers’ compensation claims arising under PSG’s policies.

As of June 30, 2019, PIC had approximately $20,000 in open case reserves within PSG’s $500 deductible, in addition to $1,800 in deductible receivables on claims arising under PSG’s workers’ compensation policies and had exhausted all collateral provided by PSG.  Continued claims development is anticipated to be consistent with similar lines of workers’ compensation as described in the Company’s 2018 Annual Report on Form 10-K and therefore, PSG’s ultimate obligations to PIC under the agreements is estimated to be approximately $40,000 as of June 30, 2019 (inclusive of the $20,000 in open case reserves and $1,800 in deductible receivable amounts noted above).  At June 30, 2019, the Company believes that it will fully collect all future amounts due from PSG relating to this contingency and therefore has not recorded a provision for any potential asset impairment.


(11)  Shareholders' Equity:
Changes
On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B Common Stock.  On August 7, 2018, the Company's Board of Directors reaffirmed its share repurchase program, but also provided that the aggregate dollar amount of shares of the Company's Common Stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25,000.  As of June 30, 2019, the Company has repurchased $9,293 under the share repurchase program.  Pursuant to this share repurchase program, the Company entered into a Rule 10b5-1 plan on June 21, 2019, which authorized the repurchase of up to $4,000 of the Company's outstanding Common Stock at various pricing thresholds, in common stock outstandingaccordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934.  The Rule 10b5-1 plan expires on August 8, 2019.  No duration has been placed on the Company's share repurchase program, and additional paid-in-capital are as follows:the Company reserves the right to amend, suspend or discontinue it at any time.  The share repurchase program does not commit the Company to repurchase any shares of its Common Stock.


                Additional 
    Class A    Class B  Paid-in 
  Shares   Amount  Shares   Amount  Capital 
Balance at December 31, 2016  2,623,109   $112   12,460,900   $532  $54,286 
   Restricted stock grants  -    -   37,858    2   919 
   Repurchase of common shares  -    -   (84,960)   (4)  (360)
Balance at September 30, 2017  2,623,109   $112   12,413,798   $530  $54,845 
During the third quarter of 2017,six months ended June 30, 2019, the Company paid $1,880$6,487 to repurchase 84,9602,893 shares of Class A and 371,188 shares of Class B common stockCommon Stock under athe share repurchase program approved by its Board of Directors on August 31, 2017.

The components of equity for the nine months ended September 30, 2017 were as follows:


  Total equity 
Balance at December 31, 2016 $404,345 
Net income  1,847 
Other comprehensive income  11,947 
Cash dividends paid to shareholders  (12,250)
Restricted stock grants  921 
Repurchase of common shares  (1,880)
Balance at September 30, 2017 $404,930 


The components of equity for the nine months ended September 30, 2016 were as follows:


  Total equity 
Balance at December 31, 2015 $394,498 
Net income  24,082 
Other comprehensive loss  (1,116)
Cash dividends paid to shareholders  (11,885)
Restricted stock grants  1,343 
Balance at September 30, 2016 $406,922 



- 22 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)program.

The following table illustrates changes in accumulated other comprehensive income (loss) by component for the ninesix months ended SeptemberJune 30, 2017:2019:

     Unrealized    
     holding gains on    
  Foreign  available-for-sale    
  Currency  securities  Total 
          
Beginning balance $(831) $34,051  $33,220 
             
   Other comprehensive income            
      before reclassifications  510   15,999   16,509 
             
   Amounts reclassified from            
      accumulated other            
      comprehensive income  -   (4,562)  (4,562)
             
Net current-period other            
   comprehensive income  510   11,437   11,947 
             
Ending balance $(321) $45,488  $45,167 
  
Foreign
Currency
  
Unrealized Holding Gains (Losses) on
Available-for-sale Securities
  Total 
Beginning balance at December 31, 2018 
$
(1,139
)
 
$
(6,208
)
 
$
(7,347
)
             
Other comprehensive income before reclassifications
  
591
   
14,758
   
15,349
 
Amounts reclassified from accumulated other comprehensive income (loss)
  
–
   
215
   
215
 
             
Net current-period other comprehensive income  
591
   
14,973
   
15,564
 
             
Ending balance at June 30, 2019 
$
(548
)
 
$
8,765
  
$
8,217
 


- 19 -
The following table illustrates changes in accumulated other comprehensive income (loss) by component for the ninesix months ended SeptemberJune 30, 2016:2018:

     Unrealized    
     holding gains on    
  Foreign  available-for-sale    
  Currency  securities  Total 
          
Beginning balance $(1,066) $38,924  $37,858 
             
   Other comprehensive income            
      before reclassifications  398   7,471   7,869 
             
   Amounts reclassified from            
      accumulated other            
      comprehensive income  -   (8,985)  (8,985)
             
Net current-period other            
   comprehensive income  398   (1,514)  (1,116)
             
Ending balance $(668) $37,410  $36,742 
  
Foreign
Currency
  
Unrealized Holding Gains (Losses) on
Available-for-sale Securities
  Total 
Beginning balance at December 31, 2017 
$
(309
)
 
$
46,700
  
$
46,391
 
             
Cumulative effect of adoption of ASU 2016-01, net of tax  
–
   
(46,157
)
  
(46,157
)
             
Balance at January 1, 2018  
(309
)
  
543
   
234
 
             
Cumulative effect of adoption of ASU 2018-02  
–
   
117
   
117
 
Other comprehensive loss before reclassifications
  
(411
)
  
(4,050
)
  
(4,461
)
Amounts reclassified from accumulated other comprehensive income (loss)
  
–
   
(1,097
)
  
(1,097
)
             
Net current-period other comprehensive loss  
(411
)
  
(5,147
)
  
(5,558
)
             
Ending balance at June 30, 2018 
$
(720
)
 
$
(4,487
)
 
$
(5,207
)

(12) Other Operating Expenses:
During 2015,
(12)  Related Parties:

At June 30, 2019, the Company entered into a consulting contractwas invested in one limited partnership, the New Vernon India Fund, with an insurance brokerage firmaggregate estimated value of $17,489, that is managed by an organization in which aone director of the Company is CEOan executive officer and a Managing Director.owner.  The consulting contract provides for an annual fee of $300 for 2017 and 2016, respectively.  The Company also has a brokerage agreement withCompany's ownership interest in this entity.  The Company incurred commission expense in connection with insurance policies written in 2017 and 2016 under this brokerage agreement.  Total commission expense forlimited partnership at June 30, 2019 was 4%.  For the threesix months ended SeptemberJune 30, 20172019 and 2016 was $1642018, the Company recorded $125 and $140, respectively.  Total commission expense for$275 of fees related to the nine months ended September 30, 2017 and 2016 was $523 and $280, respectively.management of this limited partnership investment.

- 23 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)The Company utilizes the services of an investment firm of which one director of the Company is a partial owner.  This investment firm manages equity securities and fixed income portfolios held by the Company with an aggregate market value of approximately $8,601 at June 30, 2019.  Total commissions and net fees earned by this investment firm and its affiliates on these portfolios were $12 and $54 for the six months ended June 30, 2019 and 2018.


(13)  Subsequent Events:

In July 2019, the Company withdrew $11,127 from the Arbiter Partners LP, a limited partnership, which liquidated the Company's investment in this limited partnership.

On August 6, 2019, the Company's Board of Directors declared a regular quarterly dividend of $0.10 per share on the Company's Class A and Class B Common Stock.  The dividend per share will be payable September 3, 2019 to shareholders of record on August 20, 2019.

Pursuant to the Rule 10b5-1 plan entered into on June 21, 2019, the Company has evaluated subsequent events for recognition or disclosure in these condensed consolidated financial statements filed on Form 10-Q withpaid $2,565 to repurchase 158 shares of Class A and 152,593 shares of Class B Common Stock between July 1, 2019 and the Securities and Exchange Commission, and no events have occurred through the filing date of this Quarterly Report on Form 10-Q which require recognition or disclosure.10-Q.


- 2420 -

ITEM 22. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The Company specializesProtective Insurance Corporation is a property-casualty insurer specializing in marketing and underwriting insuranceproperty, liability and workers' compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors.  Additionally, we offer workers' compensation coverage for a variety of operations outside the transportation industry.  The Company operatesWe operate as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

The Company determined that its business constituted one reportable property and casualty insurance segmentterm “Protective,” as of January 1, 2017.  During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance.  The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance.  The prior period segment informationused throughout this Quarterly Report on Form 10-Q was updatedManagement’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), refers to conformProtective Insurance Corporation, the parent company.  The terms the “Company,” “we,” “us” and “our,” as used throughout this MD&A, refer to Protective and all of its subsidiaries, unless the current year presentation.context clearly indicates otherwise.  The term “Insurance Subsidiaries,” as used throughout this MD&A, refers to Protective Insurance Company, Protective Specialty Insurance Company, Sagamore Insurance Company and B&L Insurance, Ltd.

Liquidity and Capital Resources

The primary sources of the Company'sour liquidity are (1) funds generated from insurance operations, including net investment income, (2) proceeds from the sale of investments, and (3) proceeds from maturing investments.

The CompanyWe generally experiencesexperience positive cash flow from operations.  Premiums are collected on insurance policies in advance of the disbursement of funds infor payment of claims.  Operating costs of the Company'sour property/casualty insurance subsidiaries,Insurance Subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than one-third of net premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided and the timing of the claim payments. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues.  The Company'sOur cash flow relating to premiums is significantly affected by reinsurance programs in effect, from time-to-time, whereby the Company cedeswe cede both premium and risk to other insurance and reinsurance companies.  These programs vary significantly among products, and certain contracts call for reinsurance payment patterns, which do not coincide with the collection of premiums by the Companyus from itsour insureds.

On August 31, 2017, the Company'sour Board of Directors authorized the reinstatement of itsour share repurchase program for up to 2,464,209 shares of the Company'sour Class A or Class B Common Stock.  On August 7, 2018, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our common stock.stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25.0 million.  As of June 30, 2019 we have repurchased $9.3 million under the share repurchase program reaffirmed on August 7, 2018.  The repurchases may be made in the open market or through privately negotiated transactions, from time-to-time, and in accordance with applicable laws, rules and regulations. On June 21, 2019, we entered into a stock repurchase plan for the purpose of repurchasing up to $4.0 million of shares of our common stock, at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Rule 10b5-1 Plan"). The Rule 10b5-1 Plan was established pursuant to, and as part of, our share repurchase program and permits shares to be repurchased in accordance with pre-determined criteria when repurchases would otherwise be prohibited, such as during self-imposed blackout periods, or under insider trading laws. The Rule 10b5-1 plan expires on August 8, 2019.  Pursuant to the Rule 10b5-1 plan, we paid $2.6 million to repurchase 158 shares of Class A and 152,593 shares of Class B Common Stock between July 1, 2019 and the date of this Quarterly Report on Form 10-Q.  The share repurchase program expiringmay be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on March 5, 2018, authorizes the repurchase of up to $17.5 millionhand. The actual number and value of the Company's outstanding common shares at various pricing thresholds.  Because repurchasesto be purchased will be subject todepend on the performance of our stock price, market volume and timing constraints, there is no assurance asother market conditions.  During the six months ended June 30, 2019, we paid $6.5 million to repurchase 2,893 shares of Class A and 371,188 shares of Class B Common Stock under the exact number of shares that will be repurchased, if any. 

- 25 -

For the first nine months of 2017, the Company produced positive cash flow from operations totaling $55.2 million, which compared to positive cash flow from operations of $32.4 million generated during the first nine months of 2016.  The increase in cash flow from the 2016 period was mainly due to higher premium volume during the first nine months of 2017.share repurchase program.

For several years, the Company'sour investment philosophy has emphasized the purchase of short-term bonds with superiorhigh quality and liquidity.  As flat yield curves have not provided incentiveOur fixed income investment portfolio continues to lengthen maturitiesemphasize shorter-duration instruments.  If there was a hypothetical increase in recent years,interest rates of 100 basis points, the Company has continuedprice of our fixed income portfolio, including cash, at June 30, 2019 would be expected to maintain itsfall by approximately 2.2%.  The credit quality of our fixed maturity portfolio at short-term levels.income securities remains high with a weighted average rating of AA-, including cash.  The average contractual life of the Company'sour fixed maturityincome and short-term investment portfolio increased slightly to 4.8was 5.9 years during the first nine months of 2017 from 4.5at June 30, 2019 and 5.5 years at December 31, 2016.2018.  The average duration of the Company'sour fixed maturityincome portfolio remains much shorter than both the contractual maturity average and the duration of the Company'sour liabilities.  The CompanyWe also remainsremain an active participant in the equity securities market, using capital which is in excess of amounts considered necessary to fund our current operations.  The long-term horizon for the Company'sour equity investments allows itus to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus.  Investments made by the Company'sour domestic property/casualty insurance subsidiariesInsurance Subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners (the "NAIC"), which are designed to provide protection for both policyholders and shareholders.

- 21 -

Net cash flows from operations increased $13.7 million to $38.4 million during the six months ended June 30, 2019 compared to $24.7 million for the six months ended June 30, 2018.  The netincrease in operating cash flows was primarily related to higher premium volume and higher investment income during the six months ended June 30, 2019 compared to the same period in 2018.

Net cash used in investing activities totaled $36.1was $103.2 million for the first ninesix months of 2017.  Thisended June 30, 2019 compared to net cash used in investing activities of $27.1$0.4 million duringfor the 2016 period.six months ended June 30, 2018.  The $102.8 million increase in cash used in investing activities in the six months ended June 30, 2019 was primarily the result of a decrease in proceeds from sales of our equity and fixed income securities of $103.7 million compared to the normal timingsix months ended June 30, 2018, when we reallocated our equity portfolio to fixed income securities.  We also had higher purchases of purchasesequity and salesfixed income securities of $29.9 million and maturitiesan additional investment of $2.2 million in our investment portfolio,commercial mortgage loans in the first half of 2019, partially offset by increased$19.9 million of higher distributions received from limited partnership investments.partnerships during the first half of 2019 and a $1.3 million reduction in purchases of property and equipment. Additionally, the first half of 2018 included the purchase of $10.0 million of company-owned life insurance, which did not recur in the first half of 2019.

FinancingNet cash used in financing activities for the first ninesix months of 2017ended June 30, 2019 consisted of the regular cash dividend payments to shareholders of $12.3$3.0 million ($.810.20 per share) combined with theand $6.5 million to repurchase of 84,960 shares of the Company'sour Class A and B common stock during the third quarter of 2017 for $1.9 million.Common Stock.  Financing activities for the first ninesix months of 2016ended June 30, 2018 consisted solely of the regular cash dividend payments to shareholders of $11.9$8.5 million ($.780.56 per share). and $1.3 million to repurchase shares of our Class B Common Stock.

The Company maintains a revolving line of credit with a $40.0 million limit and an expiration date of September 23, 2018.  Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company's option.  Outstanding drawings on this line of credit were $20.0 million as of both September 30, 2017 and December 31, 2016.  At September 30, 2017, the effective interest rate was 2.34%.  The Company had $20.0 million remaining under the line of credit at September 30, 2017.  The Company's revolving line of credit has three financial covenants, all of which were met as of September 30, 2017.  The three financial covenants relate to a minimum Generally Accepted Accounting Principles ("GAAP") net worth, a minimum statutory surplus and a minimum A.M. Best rating.
The Company'sOur assets at SeptemberJune 30, 20172019 included $65.2$77.0 million of investments classified as short-termincluded within cash and cash equivalents on the condensed consolidated balance sheet that wereare readily convertible to cash without significant market penalty.  Anpenalty and an additional $48.8$99.5 million of fixed maturityincome investments will mature within the twelve-month period following September 30, 2017.  The Company believes thatmaturing in less than one year.  We believe these liquid investments, plus the expected cash flow from premium collections, are more than sufficient to provide for projected claim payments and operating cost demands.  In the event competitive conditions produce inadequate premium rates and the Company chooseswe choose to further restrict volume, the liquidity of itsour investment portfolio would permit managementus to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time.  In addition, our reinsurance program is structured to avoid significant cash outlays that accompany large losses.

- 26 -
Consolidated shareholders' equity is composed largely of GAAP shareholders' equityWe maintain a revolving credit facility with a $40.0 million limit, with the option for up to an additional $35.0 million in incremental loans at the discretion of the insurance subsidiaries.  As such, there are statutory restrictionslenders, which has an expiration date of August 9, 2022.  Interest on the transfer of substantial portions of this equityrevolving credit facility is referenced to the parent company.London Interbank Offered Rate and can be fixed for periods of up to one year at our option.  Outstanding drawings on this revolving credit facility were $20.0 million as of June 30, 2019.  At SeptemberJune 30, 2017, $54.32019, the effective interest rate was 3.50% and we had $20.0 million may be transferred by dividend or loanremaining under the revolving credit facility.  The current outstanding borrowings were used to the parent company during the remainderrepay our previous line of 2017 without approval by, or prior notificationcredit.  Our revolving credit facility has two financial covenants, each of which were met as of June 30, 2019.  These covenants require us to regulatory authorities.  An additional $258.1 millionhave a minimum U.S. generally accepted accounting principles ("GAAP") net worth and a maximum consolidated leverage ratio of shareholders' equity of the Company's insurance subsidiaries could be advanced or loaned0.35 to the parent company with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical.  The Company believes that these restrictions pose no material liquidity concerns to the Company.  The Company also believes that the financial strength and stability of the Company's insurance subsidiaries would permit access by the parent company to short-term and long-term sources of credit when needed.  The parent company had cash and marketable securities valued at $11.1 million at September 30, 2017.1.00.

NetAnnualized net premiums written by the Company's insurance subsidiariesour Insurance Subsidiaries for the first nine monthssecond quarter of 20172019 equaled approximately 82%124% of the combined statutory surplus of these subsidiaries, a level consistent with the increase inhigher premiums written during 2017.written.  Premium writings of up to 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities.  Further, the statutory capital of each of the Company's insurance subsidiariesour Insurance Subsidiaries substantially exceeded minimum risk basedrisk-based capital requirements set by the National Association of Insurance CommissionersNAIC as of SeptemberJune 30, 2017.2019.  Accordingly, the Company haswe have the ability to significantly increase itsour business without seeking additional capital to meet regulatory guidelines.

Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of our Insurance Subsidiaries.  As such, there are statutory restrictions on the transfer of substantial portions of this equity to Protective.  At June 30, 2019, $37.1 million may be transferred by dividend or loan to Protective during the remainder of 2019 without approval by, or prior notification to, regulatory authorities.  An additional $216.2 million of shareholders' equity of our Insurance Subsidiaries could be advanced or loaned to Protective with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical.  We believe these restrictions pose no material liquidity concerns for us.  We also believe the financial strength and stability of our Insurance Subsidiaries would permit access by Protective to short-term and long-term sources of credit when needed.  Protective had cash and marketable securities valued at $12.1 million at June 30, 2019.


- 22 -

Non-GAAP Measures

We believe investors’ understanding of our performance is enhanced by our disclosure of underwriting income (loss), which is a measure that is not calculated in accordance with GAAP. Underwriting income (loss) represents the pre-tax profitability of our insurance operations and is derived by subtracting net realized and unrealized gains (losses) on investments and net investment income from income before federal income tax expense (benefit). We use underwriting income (loss) as an internal performance measure in the management of our operations because we believe it gives us and users of our financial information useful insight into our results of operations, our underlying business performance and our ongoing operating trends. Underwriting income (loss) should not be viewed as a substitute for income before federal income tax expense (benefit) calculated in accordance with GAAP, and other companies may define underwriting income (loss) differently.

The ratio of consolidated other operating expenses, less commissions and other income, to net premiums earned, or our expense ratio, and the ratio of losses and loss expenses incurred, plus other operating expenses, less commissions and other income, to net premiums earned, or our combined ratio, are measures of our profitability that we believe increase the period-to-period comparability of our operational results.  Our management uses these ratios to evaluate performance, allocate resources and forecast future operating periods.  While expense ratios and combined ratios are widely used within our industry, our use of such ratios may not be directly comparable to similarly titled measures reported by other companies.

  Three Months Ended  Six Months Ended 
  June 30  June 30 
  2019  2018  2019  2018 
Income before federal income tax expense
 $1,950  
$
3,057
  $5,464  
$
3,371
 
Less: Net realized and unrealized gains (losses) on investments  2,889   
(3,435
)
  8,916   
(7,968
)
Less: Net investment income  6,500   
5,796
   12,732   
10,432
 
Underwriting income (loss) $(7,439) 
$
696
  $(16,184) 
$
907
 
                 
                 
Ratios                
Losses and loss expenses incurred $90,433  
$
77,488
  $177,555  
$
149,787
 
Net premiums earned  115,631   
111,940
   225,644   
217,402
 
Loss ratio  78.2%  
69.2
%
  78.7%  
68.9
%
                 
Other operating expenses $34,615  
$
36,019
  $68,316  
$
70,784
 
Less: Commissions and other income  1,978   
2,263
   4,043   
4,076
 
Other operating expenses, less commissions and other income  32,637   
33,756
   64,273   
66,708
 
Net premiums earned  115,631   
111,940
   225,644   
217,402
 
Expense ratio  28.2%  
30.2
%
  28.5%  
30.7
%
                 
Combined ratio  106.4%  
99.4
%
  107.2%  
99.6
%


- 23 -

Results of Operations

Comparison of ThirdSecond Quarter 20172019 to ThirdSecond Quarter 20162018

The following table provides information regarding premiums written and earned for the quarters ended September 30 (dollars in thousands):


  2017  2016  Change 
          
Gross Premiums Written $131,523  $101,921  $29,602 
Net Premiums Written  96,222   70,530   25,692 
Net Premiums Earned  89,100   71,235   17,865 
  2019  2018  Change  % Change 
Gross premiums written $147,152  
$
142,270
  
$
4,882
   
3.4
%
Ceded premiums written  (31,457)  
(28,016
)
  
(3,441
)
  
12.3
%
Net premiums written $115,695  
$
114,254
  
$
1,441
   
1.3
%
                 
Net premiums earned $115,631  
$
111,940
  
$
3,691
   
3.3
%
Net investment income  6,500   
5,796
   
704
   
12.1
%
Commissions and other income  1,978   
2,263
   
(285
)
  
(12.6
)%
Net realized and unrealized gains (losses) on investments  2,889   
(3,435
)
  
6,324
   
184.1
%
Total revenue  126,998   
116,564
         
Losses and loss expenses incurred  90,433   
77,488
   
12,945
   
16.7
%
Other operating expenses  34,615   
36,019
   
(1,404
)
  
(3.9
)%
Total expenses  125,048   
113,507
         
Income before federal income tax expense  1,950   
3,057
   
(1,107
)
    
Federal income tax expense  415   
570
   
(155
)
    
Net income $1,535  
$
2,487
  
$
(952
)
    
                 

Gross premiums written during the thirdsecond quarter of 20172019 increased $29.6$4.9 million (29.0%(3.4%), while net premiums earned increased $17.9$3.7 million (25.1%(3.3%), as compared to the second quarter of 2018.  The higher net premiums earned were the result of growth in workers' compensation business.

Premiums ceded to reinsurers on our insurance business averaged 21.4% of gross premiums written for the second quarter of 2019 compared to 19.7% in the second quarter of 2018.  The increase in premiums ceded reflected the differences in reinsurance ceding rates on the mix of our business in-force.  During the second quarter of 2019, we had higher gross premiums written in our workers' compensation coverages, which carry a higher reinsurance ceding rate.

Losses and loss expenses incurred during the second quarter of 2019 increased $12.9 million (16.7%) compared to the second quarter of 2018, resulting in a loss ratio of 78.2% during the second quarter of 2019 compared to a loss ratio of 69.2% during the second quarter of 2018.  The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned.  The increased losses and loss expenses and the higher loss ratio in the second quarter of 2019 reflected an increase in current accident year losses driven by severe commercial automobile claims, including continued emergence of severity.  This current accident year development was partially offset by prior accident year net savings of $0.6 million that developed during the three months ended June 30, 2019, primarily due to favorable loss development in workers' compensation and independent contractor coverages.

Net investment income for the second quarter of 2019 increased 12.1% to $6.5 million compared to $5.8 million for the second quarter of 2018. The increase reflected an increase in average funds invested resulting from positive cash flow, as well as a reallocation from equity investments held in limited partnerships into short-duration, high-quality bonds.  After-tax investment income increased by 10.6% to $5.2 million during the second quarter of 2019, compared to $4.7 million during the second quarter of 2018, reflecting the aforementioned increase in average funds invested and reallocation from limited partnerships to short-duration, high- quality bonds.

Net realized and unrealized gains on investments of $2.9 million during the second quarter of 2019 were primarily driven by $2.0 million in unrealized gains on equity securities during the period, net realized gains on sales of securities, excluding impairment losses, of $0.7 million and a $0.3 million increase in the value of our limited partnership investments, partially offset by other-than-temporary impairments on our fixed income securities of $0.1 million recognized during the period.  Comparative second quarter 2018 net realized and unrealized losses on investments of $3.4 million were driven by a $2.8 million decrease in the value of our limited partnership investments and $1.5 million in unrealized losses on equity securities during the period, partially offset by net realized gains on sales of securities, excluding impairment losses, of $0.9 million.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in the aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

Other operating expenses for the second quarter of 2019 decreased $1.4 million, or 3.9%, to $34.6 million compared to the second quarter of 2018.  The decrease was driven primarily by lower salary and benefit expense in addition to lower other operating expenses, partially offset by higher commission expenses as a result of the mix of premium written in the second quarter of 2019.  The ratio of consolidated other operating expenses, less commissions and other income, to net premiums earned (the “expense ratio”) was 28.2% during the second quarter of 2019 compared to 30.2% for the second quarter of 2018.  The decrease in the expense ratio was primarily related to the leveraging effect of higher net premiums earned in the second quarter of 2019 compared to the second quarter of 2018.

- 24 -
Federal income tax expense was $0.4 million for the second quarter of 2019 compared to federal income tax expense of $0.6 million for the second quarter of 2018.  The effective tax rate for the second quarter of 2019 was 21.3% compared to 18.6% in the second quarter of 2018.  The effective federal income tax rate in the current year differed from the normal statutory rate primarily as a result of tax-exempt investment income.  For the three months ended June 30, 2019, we had lower tax-exempt income when compared to the same period in 2018, primarily due to the reduction of tax exempt municipal securities within our investment portfolio in the current year as well as a decrease in dividend income, which provides a deduction for taxes, related to the reallocation of equity securities to fixed income securities within our investment portfolio throughout 2018.

As a result of the factors mentioned above, net income decreased $1.0 million to $1.5 million during the second quarter of 2019 compared to net income of $2.5 million during the second quarter of 2018.



Comparison of Six Months Ended June 30, 2019 to Six Months Ended June 30, 2018

  2019  2018  Change  % Change 
Gross premiums written $296,045  
$
291,093
  
$
4,952
   
1.7
%
Ceded premiums written  (65,028)  
(63,405
)
  
(1,623
)
  
2.6
%
Net premiums written $231,017  
$
227,688
  
$
3,329
   
1.5
%
                 
Net premiums earned $225,644  
$
217,402
  
$
8,242
   
3.8
%
Net investment income  12,732   
10,432
   
2,300
   
22.0
%
Commissions and other income  4,043   
4,076
   
(33
)
  
(0.8
)%
Net realized and unrealized gains (losses) on investments  8,916   
(7,968
)
  
16,884
   
211.9
%
Total revenue  251,335   
223,942
         
Losses and loss expenses incurred  177,555   
149,787
   
27,768
   
18.5
%
Other operating expenses  68,316   
70,784
   
(2,468
)
  
(3.5
)%
Total expenses  245,871   
220,571
         
Income before federal income tax expense  5,464   
3,371
   
2,093
     
Federal income tax expense  1,181   
554
   
627
     
Net income $4,283  
$
2,817
  
$
1,466
     
                 

Gross premiums written during the six months ended June 30, 2019 increased $5.0 million (1.7%), while net premiums earned increased $8.2 million (3.8%), as compared to the same period in 2016.2018.  The higher gross premiums written and net premiums earned were duethe result of the changes in our reinsurance structure discussed below in addition to increasesgrowth in sales of both commercial automobile and workers' compensation products and were consistent with the Company's growth strategy.  business.  The difference in the percentage change for premiums written compared to earned iswas reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.in-force described below.
- 27 -

Premiums ceded to reinsurers on the Company'sour insurance business averaged 26.8%22.0% of gross premiums written for the six months ended June 30, 2019 compared to 21.8% for the same period of 2018.  The increase for the 2019 period reflected the ceding of an additional $1.6 million in commercial automobile premium from prior treaty years related to variable premium adjustment provisions in our historical reinsurance treaties.  Additionally, during the first half of 2019, we had higher gross premiums written in workers' compensation coverages, which carry a higher reinsurance ceding rate.  These increases were offset by changes made to our reinsurance structure in the third quarter of 2017, when we lowered the quota share rate on our workers' compensation premiums to reflect growing profitability and confidence in this book of business.  We also restructured our commercial automobile reinsurance treaty, moving away from variable premium ceded rates (based on loss performance) to a flat ceding arrangement with no material changes to the economic risks taken for these products (i.e. ceded losses will decrease by a similar amount as ceded premiums).

Losses and loss expenses incurred during the six months ended June 30, 2019 increased $27.8 million (18.5%) compared to 30.8%the same period of 2018, resulting in a loss ratio of 78.7% for the period.   This compares to a loss ratio of 68.9% during the same period of 2018.  The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned.  The increased losses and loss expenses and the higher loss ratio in the 2016 third quarter.
The percentagesix months ended June 30, 2019 reflected an increase in current accident year losses driven by severe commercial automobile claims, including continued emergence of premiumsseverity.  This current accident year development was partially offset by prior accident year net savings of $1.7 million that developed during the six months ended June 30, 2019, primarily due to favorable loss development in workers' compensation and independent contractor coverages.  Including the impact of additional ceded to reinsurance decreased as a result of changes inpremium discussed above, the Company's reinsurance structure.total prior accident year impacts were favorable by $0.1 million for the six months ended June 30, 2019.

Net investment income duringfor the third quartersix months ended June 30, 2019 increased 22.0% to $12.7 million compared to $10.4 million in the same period of 2017 was 14.6% higher than the third quarter of 2016, due primarily to higher interest rates leading to higher reinvestment yields for short-duration fixed income securities, increased dividends and a 3.0%2018. The increase reflected an increase in average funds invested resulting from positive cash flow.flow, as well as a reallocation from equity investments held in limited partnerships into short-duration, high-quality bonds.  After-tax investment income increased by 13.6%21.4% to $2.9$10.2 million during the third quarter of 2017,six months ended June 30, 2019, compared to $2.5$8.4 million during the 2016 third quarter,same period of 2018, reflecting the aforementioned higher interest ratesincrease in average funds invested and reinvestment yield environment.  reallocation from limited partnerships to short-duration, high-quality bonds.

The third quarter 2017
- 25 -
Net realized and unrealized gains on investments of $8.9 million during the six months ended June 30, 2019 were primarily driven by $7.9 million in unrealized gains on equity securities during the period, a $0.7 million increase in the value of our limited partnership investments and net realized investment gains on sales of $5.9securities, excluding impairment losses, of $0.6 million, resulted primarily from $3.4partially offset by other-than-temporary impairments on our fixed income securities of $0.3 million recognized during the period.  Comparative six months ended June 30, 2018 net realized and unrealized losses on investments of $8.0 million were driven by a $5.5 million decrease in the value of our limited partnership investments and $3.8 million in gains from trading activities and $2.5 million in gains fromunrealized losses on equity securities, excluding impairment losses, during the Company's investments in limited partnerships.  Comparative third quarter 2016period, partially offset by net realized investment gains were $7.7 million, consisting primarilyon sales of $4.4 million in gains reported from the Company's investments in limited partnerships and $3.3 million in gains from trading activities.securities of $1.3 million.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in the aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

Losses and loss expenses incurred during the third quarter of 2017 increased $3.8 million (6.8%) compared to the 2016 third quarter, resulting in a loss ratio of 68.1%, compared to a loss ratio of 79.8% during the third quarter of 2016.  The year-over-year decrease in the loss ratio reflects a $10.1 million reserve strengthening that occurred during the third quarter of 2016.

Other operating expenses for the third quarter of 2017 increased $8.0six months ended June 30, 2019 decreased $2.5 million, or 37.5%3.5%, fromto $68.3 million compared to $70.8 million for the third quartersame period of 2016.2018.  The increasedecrease was driven primarily by lower salary and benefit expense in addition to lower other operating expenses, was primarily due to increasedpartially offset by higher commission expenses as a result of increased premiums written.the mix of premium written in the six months ended June 30, 2019.  The expense ratio was 28.5% during the six months ended June 30, 2019 compared to 30.7% for the same period of consolidated other operating expenses less commissions and other income2018.  The decrease in the expense ratio was primarily related to the leveraging effect of higher net premiums earned was 31.2% duringin the third quarter of 2017six months ended June 30, 2019 compared to 28.1%the same period of 2018.

Federal income tax expense was $1.2 million for the 2016 third quarter.

six months ended June 30, 2019 compared to $0.6 million for the same period of 2018.  The effective tax rate for the six months ended June 30, 2019 was 21.6% compared to 16.4% in the same period of 2018.  The effective federal income tax rate on consolidated income forin the third quarter of 2017 was 30.0% compared to 29.0% for the 2016 third quarter.  The effective rate differscurrent year differed from the normal statutory rate primarily as a result of tax-exempt investment income.  For the six months ended June 30, 2019, we had lower tax-exempt income when compared to the same period in 2018, primarily due to the reduction of tax exempt municipal securities within our investment portfolio in the current year as well as a decrease in dividend income, which provides a deduction for taxes, related to the reallocation of equity securities to fixed income securities within our investment portfolio throughout 2018.

As a result of the factors mentioned above, and primarily the $10.1 million reserve strengthening that occurred during the third quarter of 2016, net income increased $3.4$1.5 million to $4.3 million during the third quarter of 2017 assix months ended June 30, 2019 compared to net income of $2.8 million during the 2016 third quarter.same period of 2018.



Sensitivity Analysis

Management is aware of the potential for variation from the reserves established at any particular point in time. Savings or deficiencies could develop in future valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The majority of our reserves for losses and loss expenses, on a net of reinsurance basis, relate to our commercial automobile products. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for our commercial automobile products for policies subject to certain major reinsurance treaties.

Commercial automobile products covered by our reinsurance treaties from July-2013 through June-2019 are subject to an aggregate stop-loss provision.  Once this aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible only for our $25 retention.  The following table illustrates the benefit of these reinsurance treaties, as the net financial loss to us of a further increase in ultimate losses for each of the six most recent reinsurance treaty years (2013-2018) covering these commercial automobile products, is only about 25% of the gross loss:

  
5% Increase in
Ultimate Loss Ratio
  
10% Increase in
Ultimate Loss Ratio
 
Gross loss expense from further strengthening current reserve position 
$
42.6
  
$
85.2
 
Net financial loss  
10.7
   
21.3
 
         
$/share (after tax) 
$
0.57
  
$
1.14
 

Commercial automobile products covered by our reinsurance treaty from July-2019 through June-2020 are also subject to an aggregate stop-loss provision.  Once the aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible for our $65 retention.  This increase in our retention compared to recent years, reflects both: (1) our decision to buy less reinsurance, due to a higher cost of reinsurance for the 2019 treaty-year, and (2) our confidence in profitability improvements given rate increases we are receiving on our commercial automobile products.

- 2826 -
Comparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016Forward-Looking Information

The following table provides information regarding premiums written and earned for the nine months ended September 30 (dollars in thousands):

  2017  2016  Change 
          
Gross Premiums Written $360,558  $298,120  $62,438 
Net Premiums Written  246,459   202,764   43,695 
Net Premiums Earned  231,070   206,870   24,200 

Gross premiums written during the first nine months of 2017 increased $62.4 million (20.9%), while net premiums earned increased $24.2 million (11.7%), as compared to the same period in 2016.  The higher premiums written and earned were due to increases in sales of both commercial automobile and workers' compensation products and were consistent with the Company's growth strategy.  The difference in the percentage change for premiums written compared to earned is reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.
Premiums ceded to reinsurers on the Company's insurance business averaged 31.6% of gross premiums written for the 2017 period compared to 32.0% a year earlier.  The percentage of premiums ceded to reinsurance decreased as a result of changes in the Company's reinsurance structure.  The change in net premiums earned, compared to growth in gross premiums written, was a function of premium adjustment provisions in the Company's historical commercial automobile reinsurance treaties.  This historical reinsurance structure, which was revised in the current reinsurance renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year.

Net investment income during the first nine months of 2017 was 18.4% higher than the first nine months of 2016 primarily due to higher interest rates leading to higher reinvestment yields for short-duration fixed income securities, increased dividends and a 6.3% increase in average funds invested resulting from positive cash flow.  After-tax investment income increased by 18.6% to $8.9 million during the first nine months of 2017 compared to $7.5 million during the 2016 period, reflecting the aforementioned higher interest rates and reinvestment yield environment.

Net realized investment gains for the first nine months of 2017 totaled $15.5 million and resulted primarily from $8.5 million in gains from the Company's investments in limited partnerships and $7.0 million in gains from trading activities.  For the same period of 2016, overall net realized investment gains were $17.0 million, consisting primarily of $13.8 million in gains from trading activities and $3.2 million in gains from the Company's investments in limited partnerships.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

- 29 -
Losses and loss expenses incurred during the first nine months of 2017 increased $42.9 million (31.1%) compared to the first nine months of 2016, resulting in a loss ratio of 78.3%, compared to a loss ratio of 66.8% during the first nine months of 2016.  The year-over-year increase in losses and loss expenses and in the loss ratio was related to significant unfavorable loss experience from prior years.  A reserve deficiency of $16.5 million developed during the first nine months of 2017 largely due to infrequent, but severe, transportation losses that occurred primarily during the first six months of 2017.

Other operating expenses for the first nine months of 2017 increased $17.9 million, or 27.8%, from the first nine months of 2016.  The increase in other operating expenses was primarily due to increased commission expenses as a result of increased premiums written.  The ratio of consolidated other operating expenses less commissions and other income to net premiums earned was 33.9% during the 2017 period compared to 29.1% for the 2016 period.

The effective federal tax rate on consolidated income (loss) for the first nine months of 2017 was 581.0% compared to 33.1% for the 2016 period.  The significant difference between the effective rate and the normal statutory rate was the result of the Company's operating loss through the first nine months of 2017.

As a result of the factors mentioned above, and primarily the reserve strengthening that occurred during the second quarter of 2017, net income decreased $22.2 million during the first nine months of 2017 as compared to the 2016 period.


Forward-Looking Information

Any forward-looking statementsdisclosures in this report, including without limitation, statements relating toForm 10-Q contain "forward-looking statements" (within the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisionsmeaning of the Private Securities Litigation Reform Act of 1995.  1995). All statements, trend analyses and other information contained in this Form 10-Q relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "may," "target," "anticipate," "believe," "plan," "estimate," "expect," "intend," "project," and other similar expressions, constitute forward-looking statements.

Investors are cautioned that such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.  These risksstatements, many of which are difficult to predict and uncertainties include without limitation the following:  (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company;  (ii) the Company's business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adversely affect the Company's plans and results of operations;  (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission including, but not limited to, those risks set forth in Part I, Item 1A, Risk Factors, in the Company's Annual Report on Form 10-K for the year ended December 31, 2016; and (iv) other risks and factors which may begenerally beyond the control or foresight of the Company.  Readers of this reportour control.  Investors are cautioned not to place undue reliance on these forward-looking statements. Whilestatements that speak only as of the Company believesdate hereof.  Investors are also urged to carefully review and consider the assumptionsvarious disclosures made by us, which attempt to advise interested parties of the factors that affect our business, including "Risk Factors" set forth in Part I, Item 1A of our Annual Report on whichForm 10-K for the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will provefiscal year ended December 31, 2018 and our reports filed with the U.S. Securities and Exchange Commission from time to be accurate. The Company expressly disclaimstime.  Except to the extent otherwise required by federal securities laws, we do not undertake any obligation to update or revise anyrepublish revised forward-looking statements whether as a result of new information, futureto reflect events or otherwise, except as otherwise required by law.circumstances after the date hereof.

Factors that could contribute to these differences include, among other things:

●general economic conditions, including weakness of the financial markets, prevailing interest rate levels and stock and credit market performance, which may affect or continue to affect (among other things) our ability to sell our products and to collect amounts due to us, our ability to access capital resources and the costs associated with such access to capital and the market value of our investments;

●our ability to obtain adequate premium rates and manage our operating strategies;

●increasing competition in the sale of our insurance products and services resulting from the entrance of new competitors into, or the expansion of the operations of existing competitors in, our markets and our ability to retain existing customers;

●other changes in the markets for our insurance products;

●the impact of technological advances, including those specific to the transportation industry;

●changes in the legal or regulatory environment, which may affect the manner in which claims are adjusted or litigated, including loss and loss adjustment expense;

●legal or regulatory changes or actions, including those relating to the regulation of the sale, underwriting and pricing of insurance products and services and capital requirements;

●the impact of a downgrade in our financial strength rating;

●technology or network security disruptions or breaches;

●adequacy of insurance reserves;

●availability of reinsurance and ability of reinsurers to pay their obligations;

●our ability to attract and retain qualified employees and to successfully complete our executive officer transition;

●tax law and accounting changes; and

●legal actions brought against us.

Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.  You should read that information in conjunction with this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q.

- 3027 -

Critical Accounting Policies

There have been no changes in the Company'sour critical accounting policies as disclosed in the Company'sour Annual Report on Form 10-K filed for the year ended December 31, 2016.2018.


Concentrations of Credit Risk

The Company's insurance subsidiariesOur Insurance Subsidiaries cede portions of their gross premiums to numerous reinsurers under quota share and excess of loss treaties, as well as facultative placements.  These reinsurers assume commensurate portions of the risk of loss covered by the contracts.  As losses are reported and reserved, portions of the gross losses attributable to reinsurers are established as receivable assets and losses incurred are reduced.  At SeptemberJune 30, 2017,2019, amounts due from reinsurers on paid and unpaid losses were estimated to total approximately $303$390 million.  Because of the large policy limits reinsured by the Company,us, the ultimate amount of incurred but not reported losses and loss adjustment expenses attributable to reinsurers could vary significantly from the estimate provided;estimate; provided, however, absent the inability to collect from reinsurers, such variance would not result in changes in net claim losses incurred by the Company.us.


Off-Balance Sheet Arrangements

The Company hasWe have no off-balance sheet arrangements.


- 28 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


ThereOther than as set forth below, there have been no material changes in the Company's exposure to market risk since the disclosure in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2018.

Interest Rate Risk
We are exposed to interest rate risk on our fixed income investments. Given the anticipated duration of our liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, a 100 to 200 basis point increase in interest rates would not have a material impact on our ability to conduct daily operations or to meet our obligations and could result in significantly higher investment income in a relatively short period of time, as short-term investments and maturing bonds could be reinvested in higher yielding securities.

The table below summarizes our interest rate risk by illustrating the sensitivity of the fair value of our fixed income investments as of June 30, 2019 to selected hypothetical changes in interest rates (dollars in thousands).

  Fair Value  
Estimated Change
in Fair Value
 
200 basis point increase
 
$
702,383
  
$
(34,765
)
100 basis point increase
  
719,203
   
(17,945
)
Current fair value
  
737,148
   
–
 
100 basis point decrease
  
755,094
   
17,946
 
200 basis point decrease
  
771,913
   
34,765
 

Our selection of the range of values chosen to represent changes in interest rates should not be construed as our prediction of future market events, but rather as an illustration of the impact of such events should they occur.  Several other factors, including but not limited to the financial strength of the issuer, prepayment options, relative values of alternative investments, liquidity of the investment, currency fluctuations for non-U.S. debt holdings and other general market conditions, can impact the fair values of fixed income investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented above.


ITEM 4. CONTROLS AND PROCEDURES


The Company carried out an evaluation as of SeptemberJune 30, 2017,2019 under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the "Exchange Act". Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act isis: (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms; and (b) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company noted no change in its internal control over financial reporting that occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, theits internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required with respect to this item can be found in Note 10 - Litigation, Commitments and Contingencies of Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I,TEM Item 1 of this Quarterly Report on Form 10-Q and is incorporated by reference into this Part II, Item 1.


ITEM 1A. RISK FACTORS


In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of the Company's common stock, you should carefully review and consider the information contained in the Company's other reports and periodic filings that it makes with the Securities and Exchange Commission, including, without limitation, the information contained under the caption Part I, Item 1A "Risk Factors" in its Annual Report on Form 10-K for the year ended December 31, 2016.2018. Those risk factors could materially affect the Company's business, financial condition and results of operations. There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
2018.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Issuer Purchases of Equity Securities

           Approximate dollar 
        Total number of  value of shares still 
  Total number     shares purchased  available to be purchased 
  of shares purchased  Average price paid per share  
as part of program (1)
  
under the program (000s) (1)
 
July 1 - July 31  -   -   -  $- 
August 1 - August 31  -   -   -   17,500 
September 1 - September 30  84,960  $22.12   84,960   15,620 
Total  84,960       84,960  $15,620 
  
Total Number of
Shares Purchased
  
Average Price
Paid per Share
  
Total Number of
Shares Purchased
Under the Program (1)
  
Remaining Shares
Available to be Purchased
Under the Program (1)
 
April 1 – April 30
  
172,439
  
$
17.52
   
172,439
   
1,982,184
 
May 1 – May 31
  
86,082
   
16.60
   
86,082
   
1,896,102
 
June 1 – June 30
  
90,602
   
17.33
   
90,602
   
1,805,500
 
Total  
349,123
       
349,123
     

(1) On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B common stock.  Pursuant to this share repurchase program, on September 21, 2017 the Company entered into a Rule 10b5-1 plan expiring on March 5, 2018, authorizing the repurchase of up to $17.5 million of the Company's outstanding common shares, at various pricing thresholds (the "Plan").  Because repurchases under the Plan will be subject to price, market volume and timing constraints, there is no assurance as to the exact number of shares that will be repurchased, if any.  The Company may terminate the Plan
(1)
On August 31, 2017, our Board of Directors authorized the reinstatement of our share repurchase program for up to 2,464,209 shares of our Class A or Class B Common Stock.  On August 7, 2018, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our Common Stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25.0 million.  Pursuant to this share repurchase program, we entered into a Rule 10b5-1 plan on June 21, 2019, which authorizes the repurchase of up to $4.0 million of our outstanding common stock, at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act. The Rule 10b5-1 plan expires on August 8, 2019.  No duration has been placed on our share repurchase program, and we reserve the right to amend, suspend or discontinue it at any time.   The share repurchase program does not commit us to repurchase any shares of our Common Stock.  We have funded, and intend to continue to fund, the share repurchase program from cash on hand.

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ITEM 6 (a)6. EXHIBITS

INDEX TO EXHIBITS

Table of Regulation S-K Item 601Exhibit No.

(31.1)Certification of CEO                 EXHIBIT 31.1
pursuant to Section 302 of the        Certification of CEO
Sarbanes-Oxley Act of 2002


(31.2)Certification of CFO                 EXHIBIT 31.2
pursuant to Section 302 of the        Certification of CFO
Sarbanes-Oxley Act of 2002


(32)Certification of CEO and CFO   EXHIBIT 32
pursuant to 18 U.S.C. 1350, as        Certification of CEO
adopted pursuant to Section 906   and CFO
of the Sarbanes-Oxley Act of 2002


(101)Exhibit No.Description
Amended and Restated Articles of Incorporation of Protective Insurance Corporation, incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed August 8, 2018.
Code of By-Laws of Protective Insurance Corporation, as amended effective May 17, 2019.
Employment Agreement, effective as of May 22, 2019, by and between the Company and Jeremy D. Edgecliffe-Johnson, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 22, 2019.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from Baldwin & Lyons, Inc.'sProtective Insurance Corporation's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2019, formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (Loss), (4) the Condensed Consolidated Statements of Shareholders' Equity, (5) the Condensed Consolidated Statements of Cash Flows, and (5)(6) the Notes to Unaudited Condensed Consolidated Financial Statements.

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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PROTECTIVE INSURANCE CORPORATION


 BALDWIN & LYONS, INC.Date August 7, 2019


By:
/s/ Jeremy D. Edgecliffe-Johnson
Jeremy D. Edgecliffe-Johnson
Chief Executive Officer




Date August 7, 2019

By:
/s/ William C. Vens
William C. Vens
Chief Financial Officer
Date    November 8, 2017By /s/ W. Randall Birchfield
                                                 W. Randall Birchfield,
                                        Chief Executive Officer & President







Date    November 8, 2017By /s/ William C. Vens
                                                                                                                                                        William C. Vens,
                                                                                                                                                        Chief Financial Officer




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