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

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

of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2021

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

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


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


Registrant's telephone number, including area code:  (317) (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 classTrading 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",filer," "accelerated filer",filer," "smaller reporting company"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:May 4, 2021:
Common Stock, No Par Value:                 Class A (voting)                                                                                                                                                    2,623,109
                                                            Class B (non-voting)                                                                                                                                          12,413,798
                                                                                                                                                                                                                                           15,036,907
Common Stock, No Par Value:Class A (voting)2,603,350
Class B (non-voting)11,552,801
14,156,151
- 1 -


PART I – FINANCIAL INFORMATION



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 

ITEM 1. FINANCIAL STATEMENTS



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

 
March 31
2021
  
December 31
2020
 
Assets      
Investments:      
Fixed income securities (less allowance for credit losses of $825 and $1,035) $914,949  $919,692 
Equity securities  67,015   58,169 
Limited partnerships  7,476   7,214 
Commercial mortgage loans (less allowance of $195 and $195)  10,866   10,602 
Short-term and other  1,000   1,000 
   1,001,306   996,677 
         
Cash and cash equivalents  95,566   58,301 
Restricted cash and cash equivalents  11,538   12,128 
Accounts receivable (less allowance of $19,960 and $19,960)  96,200   100,921 
Reinsurance recoverable (less allowance of $987 and $972)  455,462   455,564 
Other assets  91,839   90,256 
Deferred federal income taxes  10,764   8,980 
         Total Assets $1,762,675  $1,722,827 
         
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $1,108,132  $1,089,669 
Reserves for unearned premiums  59,049   63,731 
Reinsurance payable  75,898   76,617 
Short-term borrowings  20,000   20,000 
Accounts payable and other liabilities  129,367   108,962 
Current federal income taxes payable  3,551   766 
     Total Liabilities  1,395,997   1,359,745 
         
Shareholders' equity:        
Common stock-0 par value:        
Class A voting -- authorized 3,000,000 shares; outstanding -- 2021 - 2,603,350; 2020 - 2,603,350  111   111 
Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2021 - 11,705,070; 2020 - 11,674,345  499   498 
Additional paid-in capital  55,645   54,571 
Accumulated other comprehensive income  12,766   21,759 
Retained earnings  297,657   286,143 
     Total Shareholders' Equity  366,678   363,082 
         Total Liabilities and Shareholders' Equity $1,762,675  $1,722,827 

See notes to condensed consolidated financial statements.

-
2 -



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 

Protective Insurance Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 
Three Months Ended
March 31
 
  2021  2020 
Revenues      
Net premiums earned $122,853  $109,659 
Net investment income  5,306   7,236 
Commissions and other income  1,858   1,663 
     Net realized gains (losses) on investments, excluding impairment losses  2,339   (4,787)
     Impairment losses on investments  (82)  (40)
     Net unrealized gains (losses) on equity securities and limited partnership investments  8,252   (22,929)
Net realized and unrealized gains (losses) on investments  10,509   (27,756)
   140,526   90,802 
         
Expenses        
Losses and loss expenses incurred  82,318   81,831 
Other operating expenses  41,855   34,110 
   124,173   115,941 
Income (loss) before federal income tax expense (benefit)  16,353   (25,139)
Federal income tax expense (benefit)  3,415   (2,983)
Net income (loss) $12,938  $(22,156)
         
Net income (loss) per share:        
Basic $0.91  $(1.56)
Diluted $0.90  $(1.56)
         
Weighted average number of shares outstanding:        
Basic  14,153   14,169 
Dilutive effect of share equivalents  154   n/a 
Diluted  14,307   14,169 

See notes to condensed consolidated financial statements.

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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
March 31
 
  2021  2020 
Net income (loss) $12,938  $(22,156)
         
Other comprehensive loss, net of tax:        
Net unrealized losses on fixed income securities  (9,081)  (20,861)
         
Foreign currency translation adjustments  88   (687)
         
Other comprehensive loss  (8,993)  (21,548)
         
Comprehensive income (loss) $3,945  $(43,704)

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, 2020  2,603  $111   11,675  $498  $54,571  $21,759  $286,143  $363,082 
Net income  –   0   –   0   0   0   12,938   12,938 
Foreign currency translation adjustment, net of tax  –   0   –   0   0   88   0   88 
Change in unrealized gains (losses) on investments, net of tax  –   0   –   0   0   (9,081)  0   (9,081)
Common stock dividends  –   0   –   0   0   0   (1,424)  (1,424)
Restricted stock grants  0   0   30   1   1,074   0   0   1,075 
Balance at March 31, 2021  2,603  $111   11,705  $499  $55,645  $12,766  $297,657  $366,678 


  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, 2019  2,603  $111   11,676  $499  $53,349  $9,369  $300,988  $364,316 
Cumulative effect of the adoption of updated accounting guidance for credit losses, net of tax  0   0   0   0   0   0   (12,281)  (12,281)
Net loss  –   0   –   0   0   0   (22,156)  (22,156)
Foreign currency translation adjustment, net of tax  –   0   –   0   0   (687)  0   (687)
Change in unrealized gains (losses) on investments, net of tax  –   0   –   0   0   (20,861)  0   (20,861)
Common stock dividends  –   0   –   0   0   0   (1,426)  (1,426)
Repurchase of common stock  0   0   (127)  (5)  (563)  0   (1,214)  (1,782)
Restricted stock grants  0   0   31   1   259   0   0   260 
Balance at March 31, 2020  2,603  $111   11,580  $495  $53,045  $(12,179) $263,911  $305,383 

See notes to condensed consolidated financial statements.

-
5 -

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

 
Three Months Ended
March 31
 
  2021  2020 
Operating activities      
Net income (loss) $12,938  $(22,156)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities  7,973   20,844 
Net cash provided by (used in) operating activities  20,911   (1,312)
         
Investing activities        
Purchases of fixed income and equity securities  (92,719)  (82,641)
Distributions from limited partnerships  186   14,636 
Proceeds from maturities of fixed income securities  64,453   31,088 
Proceeds from sales of fixed income securities  44,427   48,552 
Proceeds from sales of equity securities  2,064   5,480 
Purchase of commercial mortgage loans  (319)  (368)
Proceeds from commercial mortgage loans  54   72 
Purchases of property and equipment  (1,046)  (369)
Net cash provided by investing activities  17,100   16,450 
         
Financing activities        
Dividends paid to shareholders  (1,424)  (1,426)
Repurchase of common stock  0   (1,782)
Net cash used in financing activities  (1,424)  (3,208)
         
Effect of foreign exchange rates on cash and cash equivalents  88   (687)
         
Increase in cash, cash equivalents and restricted cash and cash equivalents  36,675   11,243 
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period  70,429   88,888 
Cash, cash equivalents and restricted cash and cash equivalents at end of period $107,104  $100,131 

See notes to condensed consolidated financial statements.

6

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 Business:  Baldwin & Lyons, Inc.Business:  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.  The Company operates as one reportable property and casualty insurance segment, offeringoffers a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

The Company determined that its business constituted oneoperates as 1 reportable property and casualty insurance segment 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'sits chief operating decision maker when making decisions about how resources are allocated and assessing performance.

The term “Insurance Subsidiaries,” as used throughout this document, refers to Protective Insurance Company, Protective Specialty Insurance Company, Sagamore Insurance Company and B&L Insurance, Ltd.

Proposed Merger with The Progressive Corporation

Merger Agreement

On February 14, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Progressive Corporation, an Ohio corporation (“Progressive”), and Carnation Merger Sub Inc., an Indiana corporation and wholly-owned indirect subsidiary of Progressive (“Merger Sub”).  The Merger Agreement provides for, subject to the satisfaction or waiver of specified conditions, the merger of Merger Sub with and into the Company (the “Merger”), whereupon the separate existence of Merger Sub will cease and Protective will continue as the surviving corporation and as a wholly-owned indirect subsidiary of Progressive.

The Company's Board of Directors (the "Board"), at the unanimous recommendation of the Special Committee of the Board, unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and fair to, and in the best interests of, the Company and its shareholders, and approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby. The Merger is expected to close in June or July of 2021.  At the effective time of the Merger, each issued and outstanding share of common stock, without par value, of the Company (other than each share of the Company’s common stock that is owned by the Company as treasury stock or by any subsidiary of the Company and each share of the Company’s common stock owned by Progressive, Merger Sub or any other subsidiary of Progressive immediately prior to the effective time of the Merger) will be automatically canceled and converted into the right to receive $23.30 in cash, without interest, for a total transaction value of approximately $338 million.

The Merger Agreement contains various customary representations and warranties from each of the Company, Progressive and Merger Sub.  The Company has also agreed to various customary covenants, including but not limited to conducting its business in the ordinary course and not engaging in certain types of transactions during the period between the execution of the Merger Agreement and the closing of the Merger.  However, the Merger Agreement permits the Company to continue to pay regular quarterly dividends not to exceed $0.10 per share of the Company’s common stock. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period expired April 5, 2021.  In addition, at the special meeting of the Company’s shareholders held on May 5, 2021, the Company’s Class A shareholders approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.  The Merger remains subject to legal and regulatory approvals including from the Indiana Department of Insurance, as well as other customary closing conditions.

Voting and Support Agreement

On February 14, 2021, the Company also entered into a Voting and Support Agreement (the “Voting Agreement”) with Progressive and certain of the Company's shareholders. The Voting Agreement required that the Company shareholders party to the Voting Agreement: (i) appear at the meeting of the holders of the Company's Class A common stock held on May 5, 2021 to consider resolutions to approve the Merger Agreement and the Merger or otherwise cause their shares of the Company's common stock to be allocatedcounted as present for purposes of calculating a quorum, and (ii) vote their shares (a) in favor of the adoption of the Merger Agreement, the Merger and the other transactions contemplated thereby and any action reasonably requested by Progressive or the Board in furtherance of the foregoing, (b) against any action or agreement that would result in a material breach of any covenant, representation or warranty or other obligation or agreement of the Company contained in the Merger Agreement and (c) against any takeover proposal or superior proposal (provided, that if the Board had changed its recommendation with respect to the segmentMerger, any shares of Class A common stock owned by such shareholders in excess of approximately 35% of the outstanding shares of Class A common stock would have been voted in the same proportion as those shares of Class A common stock voted by the holders of the Company’s Class A common stock that are not party to the Voting Agreement).  The Company shareholders party to the Voting Agreement voted their shares in favor of the Merger Agreement and assessingthe Merger at the special meeting of the Company's shareholders held on May 5, 2021, in accordance with the terms of the Voting Agreement.
7

There can be no assurance that the Merger will occur or, if it does occur, of its performance.  The prior period segmentterms or timing.  For additional information throughoutregarding the risks associated with the Merger, please see Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q was updated to conform toand Part I, Item 1A, "Risk Factors," of the currentCompany's Annual Report on Form 10-K for the year presentation.ended December 31, 2020.


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.10-K for the year ended December 31, 2020.  Operating results for interim periods are not necessarily indicative of results that may be expected for the year ending December 31, 20172021 or any other future period.


Accounting Policies

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 an 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 Company recorded an allowance of $195 on its commercial mortgage loans as of March 31, 2021 and December 31, 2020.

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 other comprehensive income (loss) within 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 (losses) on investments, excluding impairment losses.


- 6 -Equity securities are 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 (losses) on investments, excluding impairment losses. 

NotesRecognition of Revenue and Costs:  Premiums are earned over the period for which insurance protection is provided.  A reserve for unearned premiums is established to Unaudited Condensed Consolidated Financial Statements (continued)
In accordancereflect amounts applicable to subsequent accounting periods.  Commissions to unaffiliated companies and premium taxes applicable to unearned premiums are deferred and expensed as the related premiums are earned.  The Company does not defer acquisition costs that are not directly variable with the Financial Accounting Standards Board's ("FASB") other-than-temporary impairment guidance, ifproduction 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 reflect 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 contract assets, contract liabilities, or deferred contract costs recorded on its condensed consolidated balance sheet at March 31, 2021 or December 31, 2020.

Investment Impairments:  For a fixed maturityincome security is in an unrealized loss position andwhere 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 realizedwithin impairment losses on investments in the condensed consolidated statements of operations.  The new cost basis of the investment is the previous amortized cost basis less the impairment recognized.  The new cost basis is not adjusted for any subsequent recoveries in fair value.
8

For impaireda fixed maturity securitiesincome security that the Company does not intend to sell or in casesand where it is more likely than not that the Company will not have to sell such securities, butthe security, the Company expects that it will not fully recoverseparates the amortized cost basis, the credit loss component of the other-than-temporary impairment is recognized infrom the amount related to all other factors and reports the credit loss component within net realized lossesgains (losses) on investments, excluding impairment losses in the condensed consolidated statements of operationsoperations.  The impairment related to all other factors (non-credit factors) is reported in other comprehensive income (loss). The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the non-credit componentcost basis is not adjusted.

The Company considers the extent to which fair value is below amortized cost in determining whether a credit-related loss exists. The Company also considers the credit quality rating of the other-than-temporary impairment is recognized directly in shareholders' equity (accumulated other comprehensive income).

security, focusing on those below investment grade, with emphasis on securities downgraded below investment grade.  The credit component of an other-than-temporary impairmentloss 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 (net of applicable tax effect) related to equity securities 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 if 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 considerationmay conclude that a qualitative analysis is sufficient to support its conclusion that the present value of the Company's quantitative criteria defined above, as well asexpected cash flows equals or exceeds a security’s amortized cost.

The Company reports investment income due and accrued separately from available-for-sale fixed income securities and has elected not to measure an allowance for credit losses for investment income due and accrued. Investment income due and accrued is written off through net realized gains (losses) on investments, excluding impairment losses at the Company's intent and abilitytime the issuer defaults or is expected to retain the equity security for a period of time sufficient to allow for such recovery in fair value.default on payments.


- 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. WhileDeductible Receivables: Under certain workers’ compensation insurance contracts are not withinwith deductible features, the scope of this updated guidance,Company is obligated to pay 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 reflectclaimant for the transfer of promised goods or services to customers in anfull 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.  The Company does not expect the new standard to have a material impact on its condensed consolidated financial statements.
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 change 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, changes in fair value for investments of this nature are recognized in accumulated other comprehensive income as a component of shareholders' equity. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value 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 the unrealized gains or losses associated with the Company's equity investments.  Such unrealized gains or losses will be recognized upon adoption as a cumulative-effect adjustment with future unrealized gains or losses recognized in the statement of operations.  Refer to Note 2 for unrealized gains and losses currently recognized in other comprehensive income (loss).
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be 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 be 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 effective 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 approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements.claim. The Company is currently evaluatingsubsequently reimbursed by the effects that adoptionpolicyholder for the deductible amount. These amounts are included on a net of ASU 2016-02 will have on itsallowance basis in the condensed consolidated financial statements.balance sheets within accounts receivable.  The allowance is based upon the Company’s ongoing review of amounts outstanding, changes in policyholder credit standing, and other relevant factors.  A probability-of-default methodology, which reflects current and forecasted economic conditions, is used to estimate the allowance for expected credit losses for deductible receivables.  As of March 31, 2021, the Company recorded an allowance for expected credit losses of $16,500 ($13,035, net of tax). See Note 10 – Litigation, Commitments and Contingencies for further discussion.
- 8 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Recently Adopted Accounting Pronouncements:In June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13.  This update introducesASU 2016-13 introduced a current expected credit loss ("CECL") model for measuring expected credit losses for certain types of financial instruments held at the reporting date requiring significant judgment in application based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replacesforecasts, but is not prescriptive about certain aspects of estimating expected losses.  The guidance replaced 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 providesprovided for additional disclosure requirements.  Subsequently, the FASB issued additional ASUs on Topic 326 that did not change the core principle of the guidance in ASU 2016-
13 is effective for interim2016-13, but provided clarification 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 that adoptionimplementation guidance on certain aspects of ASU 2016-13, and had the same effective date and transition requirements as ASU 2016-13.  The Company adopted the guidance using a modified retrospective approach as of January 1, 2020 and recognized a cumulative effect adjustment of $15,545 ($12,281, net of tax), to the opening balance of retained earnings.  The adjustment was primarily related to estimating credit losses on the Company’s accounts receivable balances, reinsurance recoverable balances and commercial mortgage loans at the date of adoption with $15,000 ($11,850, net of tax) attributed to the ongoing litigation with Personnel Staffing Group ("PSG") discussed in Note 10 - Litigation, Commitments and Contingencies.

The updated guidance in ASU 2016-13 also amended the previous other-than-temporary impairment ("OTTI") model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  In addition, the length of time a security has been in an unrealized loss position will haveno longer impact the determination of whether a credit loss exists.  The Company adopted the guidance related to available-for-sale fixed income securities on its condensed consolidated financial statements.January 1, 2020 using a prospective transition approach for available-for-sale fixed income securities that were purchased with credit deterioration or had recognized an OTTI write-down prior to the effective date.  The effect of the prospective transition approach was to maintain the same amortized cost basis before and after the effective date.


In January 2017,August 2018, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other2018-13, Fair Value Measurement (Topic 350)820): SimplifyingDisclosure Framework - Changes to the TestDisclosure Requirements for Goodwill Impairment,Fair Value Measurement, or ASU 2017-04.2018-13.  This amendment removes Stepupdate removed the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the goodwill impairment test under current guidance.  The new guidance requires an impairment charge to be recognizedpolicy for timing of transfers between levels. This update also removed disclosure requirements for the amount by whichvaluation processes for Level 3 fair value measurements. Additionally, this update added disclosure requirements for the carrying amount exceeds the reporting unit'schanges in unrealized gains and losses for recurring Level 3 fair value.  ASU 2017-04 is effectivevalue measurements and quantitative information for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted.certain unobservable inputs in Level 3 fair value measurements. The Company does not expectadopted ASU 2018-13 as of January 1, 2020.  As the requirements of this guidance are applicable to have adisclosure only, the adoption of ASU 2018-13 had no material impact on itsthe Company's condensed consolidated financial statements.

-
9 -

NotesIn December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 2019-12.  Among other items, the amendments in ASU 2019-12 simplified the accounting treatment of tax law changes and year-to-date losses in interim periods.  An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates.  Under previous guidance, an entity could not adjust its annual effective tax rate for a tax law change until the period in which the law was effective.  This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate.  Regarding year-to-date losses in interim periods, an entity is required to Unaudited Condensed Consolidated Financial Statements (continued)estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis.  However, previous guidance provided an exception that when a loss in an interim period exceeded the anticipated loss for the year, the income tax benefit was limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year.  ASU 2019-12 removed this exception and provided that in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate.  ASU 2019-12 became effective on January 1, 2021 and did not have a material effect on the Company's condensed consolidated financial statements.

10


(2)  Investments:

The following is a summary of available-for-sale securities at September 30, 2017March 31, 2021 and December 31, 2016:2020:


              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
  Allowance for Credit Losses  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
March 31, 2021                  
Fixed income securities                  
Agency collateralized mortgage obligations $11,821  $11,405  $0  $485  $(69) $416 
Agency mortgage-backed securities  114,822   113,228   0   2,254   (660)  1,594 
Asset-backed securities  102,638   102,799   0   540   (701)  (161)
Bank loans  12,073   11,998   0   130   (55)  75 
Collateralized mortgage obligations  6,167   6,027   0   240   (100)  140 
Corporate securities  362,442   353,462   0   11,149   (2,169)  8,980 
Mortgage-backed securities  38,612   39,967   (825)  490   (1,020)  (530)
Municipal obligations  46,464   45,358   0   1,184   (78)  1,106 
Non-U.S. government obligations  30,648   30,083   0   574   (9)  565 
U.S. government obligations  189,262   186,682   0   3,738   (1,158)  2,580 
Total fixed income securities $914,949  $901,009  $(825) $20,784  $(6,019) $14,765 


 
Fair
Value
  
Cost or
Amortized Cost
  Allowance for Credit Losses  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
December 31, 2020                  
Fixed income securities                  
Agency collateralized mortgage obligations $11,931  $11,448  $0  $483  $0  $483 
Agency mortgage-backed securities  102,107   99,060   0   3,062   (15)  3,047 
Asset-backed securities  107,696   108,686   0   596   (1,586)  (990)
Bank loans  11,361   11,590   0   128   (357)  (229)
Collateralized mortgage obligations  5,118   5,061   0   151   (94)  57 
Corporate securities  360,241   344,059   0   16,380   (198)  16,182 
Mortgage-backed securities  38,056   40,675   (1,035)  659   (2,243)  (1,584)
Municipal obligations  45,143   43,353   0   1,820   (30)  1,790 
Non-U.S. government obligations  30,600   29,882   0   718   0   718 
U.S. government obligations  207,439   200,654   0   7,000   (215)  6,785 
Total fixed income securities $919,692  $894,468  $(1,035) $30,997  $(4,738) $26,259 


- 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)


The following table summarizes, for available-for-sale fixed maturity and equity security investmentsincome securities in an unrealized loss position at September 30, 2017March 31, 2021 and December 31, 2016, respectively,2020, the aggregate fair value and gross unrealized loss categorized by the duration individual securities have been continuously in an unrealized loss position.


 March 31, 2021  December 31, 2020 
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
 
Fixed income securities:                  
12 months or less  174  $275,685  $(4,448)  100  $120,630  $(3,405)
Greater than 12 months  31   51,441   (1,571)  24   33,065   (1,333)
Total fixed income securities  205  $327,126  $(6,019)  124  $153,695  $(4,738)
                         


11
  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)



The fair value and the cost or amortized costs of fixed maturityincome investments at September 30, 2017,March 31, 2021, 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 $96,999  $96,057 
Excess of one year to five years  368,593   358,662 
Excess of five years to ten years  165,436   163,115 
Excess of ten years  16,028   16,601 
Contractual maturities  647,056   634,435 
Asset-backed securities  267,893   266,574 
Total $914,949  $901,009 


  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
March 31
 
  2021  2020 
       
Gross gains on available-for-sale fixed income securities during the period $4,151  $2,652 
Gross losses on available-for-sale fixed income securities during the period  (1,965)  (4,741)
         
Impairment losses on investments  (82)  (40)
         
Change in value of limited partnership investments  448   (676)
         
Gains (losses) on equity securities:        
Realized gains (losses) on equity securities sold during the period  153   (2,698)
Unrealized gains (losses) on equity securities held at the end of the period  7,804   (22,253)
Realized and unrealized gains (losses) on equity securities during the period  7,957   (24,951)
         
Net realized and unrealized gains (losses) on investments $10,509  $(27,756)

  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 adjustmentsCompany recognizes impairments related to credit losses through an allowance account on the balance sheet with a corresponding adjustment to earnings and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  For those securities in an unrealized loss position throughout the table above representperiod where the changesCompany intended to sell the security at the balance sheet date, a write down to earnings of $82 was recorded during the three months ended March 31, 2021.  The Company also analyzed securities in fair valuean unrealized loss position for credit losses and recorded an allowance for credit losses of options embedded$825 as of March 31, 2021, a reduction of $210 from the allowance of $1,035 recorded at December 31, 2020.  The Company reviewed its remaining fixed income securities in convertible debtan unrealized loss position as of March 31, 2021 and determined the losses were the result of non-credit factors.  The Company currently does not intend to sell nor does it expect to be required to sell these securities held by the Company.before recovery of their amortized cost.


Shareholders' equity at September 30, 2017March 31, 2021 included approximately $30,293,$4,201, 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 2017three months ended March 31, 2021 and 20162020 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 
 2021  2020 
Three months ended March 31:      
Premiums ceded to reinsurers $26,886  $28,467 
Losses and loss expenses ceded to reinsurers  16,986   23,536 
Commissions from reinsurers  6,867   7,528 


- 14 -
12
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 ninethree months ended September 30, 2017March 31, 2021 and 20162020 is summarized as follows.  All amounts are shown net of reinsurance, unless otherwise indicated.


 2017  2016  Three Months Ended 
Reserves, gross of reinsurance      
recoverable, at the beginning of the year $576,330  $513,596 
 March 31 
 2021  2020 
Reserves, gross of reinsurance recoverable, at the beginning of the year $1,089,669  $988,305 
Reinsurance recoverable on unpaid losses at the beginning of the year  251,563   211,843   424,368   398,305 
Reserves at the beginning of the year  324,767   301,753 
Reserves at the beginning of the year, net of reinsurance  665,301   590,000 
                
Provision for losses and loss expenses:        
Provision for losses and loss expenses, net:        
Claims occurring during the current period  164,546   129,404   83,143   81,839 
Claims occurring during prior periods  16,480   8,712   (825)  (8)
Total incurred  181,026   138,116   82,318   81,831 
                
Loss and loss expense payments:        
Loss and loss expense payments, net:        
Claims occurring during the current period  41,616   30,932   8,082   8,169 
Claims occurring during prior periods  109,616   81,427   52,847   61,812 
Total paid  151,232   112,359   60,929   69,981 
Reserves at the end of the period  354,561   327,510 
Reserves at the end of the period, net of reinsurance  686,690   601,850 
                
Reinsurance recoverable on unpaid losses at the end of the period  301,445   238,049   421,442   399,749 
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 $1,108,132  $1,001,599 


The table above shows a roll-forward$825 prior accident year favorable development during the three months ended March 31, 2021 was primarily due to favorable loss development in the Company's commercial automobile liability line of business for more recent accident years due to better than expected reported loss anddevelopment.  This savings compares to flat loss expense reserves fromdevelopment for the prior year end to the current balance sheet date with comparable prior year information.three months ended March 31, 2020.  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.reported as part of the normal reserving process.

The $16,480 prior accident year deficiency that developed during the first nine months of 2017 was largely due to infrequent, but severe, transportation losses that occurred primarily during the first six months of 2017.  This 2017 deficiency compares to a deficiency of $8,712 for the first nine months of 2016 that arose due mostly to management's review of reserve positions related to discontinued lines.



- 15 -(5)  Segment Information:
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(5) Segment 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 classes outside the transportation industry.


The following table summarizes segment revenues for the three and nine months ended September 30, 2017March 31, 2021 and 2016:2020:


 Three Months Ended  Nine Months Ended 
 September 30  September 30 
 2017  2016  2017  2016  
Three Months Ended
March 31
 
             2021  2020 
Revenues:                  
Net premiums earned $89,100  $71,235  $231,070  $206,870  $122,853  $109,659 
Net investment income  4,027   3,513   12,434   10,501   5,306   7,236 
Net realized gains on investments  5,944   7,732   15,534   17,024 
Net realized and unrealized gains (losses) on investments  10,509   (27,756)
Commissions and other income  1,407   1,207   3,789   4,035   1,858   1,663 
Total revenues $100,478  $83,687  $262,827  $238,430  $140,526  $90,802 


13


(6)  Debt:Debt:
The
On 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 September 30, 2017 and DecemberMarch 31, 2016.2021.  At September 30, 2017,March 31, 2021, the effective interest rate was 2.34%.  The1.21%, and the Company hashad $20,000 remaining and unusedavailable under the line ofrevolving credit at September 30, 2017.facility.  The current outstanding borrowings were used for general corporate purposes. 

(7) Taxes:
As of September 30, 2017,to repay the Company's calendar years 2016, 2015previous line of credit.  The Company's revolving credit facility has 2 financial covenants, each of which were met as of March 31, 2021.  These covenants require the Company to have a minimum U.S. generally accepted accounting principles net worth and 2014 remain subjecta maximum consolidated debt to examination byequity ratio of 0.35.

(7)  Taxes:

The Company uses the Internal Revenue Service.estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company’s best estimate of the effective tax rate expected for the full year based on projected annual taxable income (loss).  The effective tax rate can fluctuate throughout the year because estimates used in the quarterly tax provision are updated as more information becomes available throughout the year.


The effective federal tax rate on consolidated income for the third quarter of 2017three months ended March 31, 2021 was 30.0%20.9% compared to 29.0%11.9% on consolidated loss for the 2016 third quarter.three months ended March 31, 2020.  The pre-tax loss for the three months ended March 31, 2020 makes these interim period effective tax rates less comparable year-over-year.  The difference in the effective federal income tax rate differs from the normal statutory rate in the three months ended March 31, 2021 was primarily as a resultrelated to the effects of tax-exempt investment income.

income and the dividends received deduction.  The difference in the effective federal income 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 andfrom the normal statutory rate in the three months ended March 31, 2020 was primarily related to the resultrecording of a valuation allowance on the Company's deferred tax assets in that period, in addition to the effects of tax-exempt investment income and the dividends received deduction.

In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the Company'sdeferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or availability to carryback the losses to taxable income during the periods in which those temporary differences become deductible.  As of March 31, 2021 and December 31, 2020, the Company had 0 valuation allowance.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), was signed into law on March 27, 2020, to provide national emergency economic relief measures.  The CARES Act, among other things, permits net operating loss through(“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the first nine monthsCARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of 2017.the five preceding taxable years to generate a refund of previously paid income taxes. The Company has evaluated the impact of the CARES Act and has determined it did not have a material impact on the Company's results of operations.



As of March 31, 2021, the Company's calendar years2020, 2019, 2018 and 2017 remain subject to examination by the Internal Revenue Service.
- 16 -
14


Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(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 March 31, 2021:


Description Total  Level 1  Level 2  Level 3 
Fixed income securities:            
Agency collateralized mortgage obligations $11,821  $0  $11,821  $0 
Agency mortgage-backed securities  114,822   0   114,822   0 
Asset-backed securities  102,638   0   102,638   0 
Bank loans  12,073   0   12,073   0 
Collateralized mortgage obligations  6,167   0   6,167   0 
Corporate securities  351,511   0   351,511   0 
Options embedded in convertible securities  10,931   0   10,931   0 
Mortgage-backed securities  38,612   0   38,612   0 
Municipal obligations  46,464   0   46,464   0 
Non-U.S. government obligations  30,648   0   30,648   0 
U.S. government obligations  189,262   0   189,262   0 
Total fixed income securities  914,949   0   914,949   0 
Equity securities:                
Consumer  12,373   12,373   0   0 
Energy  1,661   1,661   0   0 
Financial  34,108   34,108   0   0 
Industrial  5,978   5,978   0   0 
Technology  3,669   3,669   0   0 
Other  9,226   9,226   0   0 
Total equity securities  67,015   67,015   0   0 
Short-term investments  1,000   1,000   0   0 
Cash equivalents  86,961   0   86,961   0 
Total $1,069,925  $68,015  $1,001,910  $0 



- 17 -
15


Notes to Unaudited Condensed Consolidated Financial Statements (continued)As of December 31, 2020:


Description Total  Level 1  Level 2  Level 3 
Fixed income securities:            
Agency collateralized mortgage obligations $11,931  $0  $11,931  $0 
Agency mortgage-backed securities  102,107   0   102,107   0 
Asset-backed securities  107,696   0   107,696   0 
Bank loans  11,361   0   11,361   0 
Collateralized mortgage obligations  5,118   0   5,118   0 
Corporate securities  352,837   0   352,837   0 
Options embedded in convertible securities  7,404   0   7,404   0 
Mortgage-backed securities  38,056   0   38,056   0 
Municipal obligations  45,143   0   45,143   0 
Non-U.S. government obligations  30,600   0   30,600   0 
U.S. government obligations  207,439   0   207,439   0 
Total fixed income securities  919,692   0   919,692   0 
Equity securities:                
Consumer  11,598   11,598   0   0 
Energy  1,227   1,227   0   0 
Financial  29,064   29,064   0   0 
Industrial  5,180   5,180   0   0 
Technology  2,851   2,851   0   0 
Other  8,249   8,249   0   0 
Total equity securities  58,169   58,169   0   0 
Short-term investments  1,000   1,000   0   0 
Cash equivalents  47,026   0   47,026   0 
Total $1,025,887  $59,169  $966,718  $0 

As of December 31, 2016:            
             
Description Total  Level 1  Level 2  Level 3 
             
Fixed maturities:            
Agency collateralized mortgage obligations $6,171  $-  $6,171  $- 
Agency mortgage-backed securities  4,770   -   4,770   - 
Asset-backed securities  45,183   -   37,919   7,264 
Bank loans  10,349   -   -   10,349 
Certificates of deposit  3,117   3,117   -   - 
Collateralized mortgage obligations  9,104   -   6,409   2,695 
Corporate securities  137,932   -   135,794   2,138 
Options embedded in convertible securities  4,751   -   4,751   - 
Mortgage-backed securities  24,571   -   22,206   2,365 
Municipal obligations  129,335   -   129,190   145 
Non-U.S. government obligations  24,681   -   24,419   262 
U.S. government obligations  91,940   -   91,940   - 
      Total fixed maturities  491,904   3,117   463,569   25,218 
Equity securities:                
Consumer  32,576   32,576   -   - 
Energy  12,842   12,842   -   - 
Financial  31,186   30,943   243   - 
Industrial  21,145   20,262   883   - 
Technology  8,858   8,858   -   - 
Mutual fund  6,995   -   6,995   - 
Other  6,343   6,343   -   - 
      Total equity securities  119,945   111,824   8,121   - 
Short-term  1,500   1,500   -   - 
Cash equivalents  59,683   -   59,683   - 
Total $673,032  $116,441  $531,373  $25,218 


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 0t have any Level 3 assets consist primarily of a portfolio of corporate and mortgage-backed securities.  Thecarried at fair value at March 31, 2021 or December 31, 2020.  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 material transfers of assets between Level 1 and Level 2 during the nine months ended September 30, 2017 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.
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 theseThese investments are not actively traded and the corresponding inputs are based on data provided by the investees, theyinvestees.

Commercial mortgage loans:  Commercial mortgage loans are classified as Level 3.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.
- 19 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


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 September 30, 2017March 31, 2021 and December 31, 2016 are2020 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 
March 31, 2021               
Assets:                 
Limited partnerships $7,476  $0  $0  $7,476  $7,476 
Commercial mortgage loans  10,866   0   0   11,688   11,688 
Liabilities:                      
Short-term borrowings  20,000   0   20,000   0   20,000 
                     
December 31, 2020                    
Assets:                      
Limited partnerships $7,214  $0  $0  $7,214  $7,214 
Commercial mortgage loans  10,602   0   0   11,425   11,425 
Liabilities:                      
Short-term borrowings  20,000   0   20,000   0   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 lieuas part 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 vestvested and bewere 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 also vested and were distributed on May 7, 2020. The table below provides detail of the restricted stock issuances to directors for 20162020 and 2017:2021:


          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 Date Service Period 
Grant Date Fair
Value Per Share
5/7/2019 29,536 5/7/2020 7/1/2019 - 6/30/2020 $16.25
          
5/17/2019 3,591 5/7/2020 7/1/2019 - 6/30/2020 $16.25
          
5/22/2019 3,541 5/7/2020 7/1/2019 - 6/30/2020 $16.25
          
5/5/2020 42,220 5/5/2021 7/1/2020 - 6/30/2021 $14.21
          


- 20 -

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.

17

In May 2017,March 2018, the Company's Compensation Committee, granted equity-based awards. Undernow known as the Long-Term Incentive Plan ("LTIP") the final bonus amount will be determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 2017 growth in net premiums earnedCompensation and the 2017 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 LTIP awards for the Company's named executive officers ("NEOs"Human Capital Committee (the "Committee") 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 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. The, granted Value Creation Incentive Plan ("VCIP"awards (the "2018 VCIP Awards") is an equity-based award for NEO'sto certain participants under the Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan").  The 2018 VCIP Awards were performance-based equity awards that could be earned based on athe Company's cumulative increase in operating income 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 awards areAwards that were earned would have been 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.  No2021.  NaN shares have been issuedwere earned under the 2018 VCIP Awards for the three-year performance period ended December 31, 2020.

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 vested as of September 30, 2017October 17, 2019; 21,250 shares vested as of October 17, 2020, and 21,250 shares will vest as of October 17, 2021.  The Company incurred $183 of expense during the three months ended March 31, 2021 related to the Nichols Stock Grant.

In March 2019, the Committee granted equity-based awards pursuant to the Long-Term Incentive Plan.  Certain participants under these plans.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 was determined based on the Company's achievement of 2019 underwriting income compared to the plan target.  The Company's underwriting income was calculated as income (loss) before federal income tax expense (benefit), less net realized and unrealized gains (losses) on investments, less net investment income.  The personal performance component of the 2019 LTIP Awards was determined based on the achievement of personal goals that aligned with departmental and corporate objectives for 2019.  2019 LTIP Awards earned were 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 incurred $30 of expense during the three months ended March 31, 2021 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 incurred $399 of expense during the three months ended March 31, 2021 related to the Edgecliffe-Johnson Stock Grant.

On November 5, 2019, the Board of the Company, upon the recommendation of the Committee, approved equity compensation awards to be granted to 7 members of senior management as of November 12, 2019 under the Long-Term Incentive Plan.  The Board approved a total of $1,100 in grants of restricted shares of the Company’s Class B Common Stock, which will vest on January 1, 2023, subject to the recipient’s continued employment with the Company through the vesting date. The Company incurred $52 of expense during the three months ended March 31, 2021 related to this grant.

On July 6, 2020, the Committee granted a total of 101,400 restricted shares of the Company's Class B Common Stock to certain members of senior management under the Long-Term Incentive Plan.  These 101,400 restricted shares will vest on July 1, 2023, subject to the recipient’s continued employment with the Company through the vesting date. The Company incurred $328 of expense during the three months ended March 31, 2021 related to this grant.

(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.Company, other than as noted below.


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18

NotesPersonnel Staffing Group Litigation

In July 2019, Protective Insurance Company (“Protective”) was named as a defendant in an action brought by a former insured, Personnel Staffing Group d/b/a MVP Staffing (“PSG”), in the U.S. District Court for the Central District of California (the “California Action”) alleging that Protective had breached its workers’ compensation insurance policy and had breached the duties of good faith and fair dealing. Protective provided workers’ compensation insurance to Unaudited Condensed Consolidated Financial Statements (continued)PSG from January 1, 2017 through June 30, 2018, which was subject to a $500 per claim deductible to be paid by PSG.  NaN specific damages were included in the complaint.  In August 2019, Protective filed a motion to dismiss or stay the action.  On April 28, 2020, Protective's motion to dismiss the California Action was granted without prejudice on grounds that Indiana is the more appropriate forum.  On May 4, 2020, PSG filed a notice of appeal in the 9th Circuit Court of Appeals, challenging the order of dismissal in the California Action.  On April 15, 2021, the 9th Circuit Court of Appeals reversed and remanded, finding that dismissal is unavailable, because transfer to another federal district court is possible. Protective filed a petition for rehearing with the 9th Circuit on April 26, 2021, which was denied on April 27, 2021.


(11) Shareholders' Equity:In August 2019, Protective filed a lawsuit against PSG in Marion County Superior Court, in Indianapolis, Indiana (the “Indiana Court”) alleging breach of contract, breach of the parties' collateral agreement, breach of the parties' indemnity agreement, and seeking a declaratory judgment regarding PSG’s obligation to fund its ongoing claim deductible obligations and adequately collateralize Protective’s current and ongoing claims exposure pursuant to terms of the parties' agreements (the “Indiana Action”).  In October 2019, Protective amended the complaint to include allegations of misrepresentation as to source of coverage, negligent misrepresentation, fraud and racketeering and seeking injunctive relief.  In November 2019, PSG filed a motion to dismiss the Indiana Action on the basis of comity with the California Action, claiming that California was the proper forum for Protective’s claims.
Changes
In February 2020, the Indiana Court issued an order dismissing the Indiana Action without prejudice; the Indiana Court declined to rule on the legal effect of the forum selection clause in common stock outstandingthe parties’ agreements, finding that any interpretation should be addressed by the court in the California Action.  Following the court's granting of Protective’s motion to dismiss in the California Action, on May 1, 2020, Protective filed a motion with the Indiana Court to re-open the Indiana Action, which was denied on September 23, 2020.  On December 22, 2020, Protective moved for reconsideration of its Motion to Re-Open the Indiana Action, which the Indiana Court granted on February 5, 2021.  On February 18, 2021, PSG moved for further reconsideration and additional paid-in-capital arefor hearing, which was held on March 2, 2021.  On March 31, 2021, the Indiana Court ruled that Protective had shown good cause to reinstate the Indiana Action, premised on the California Action remaining dismissed.  Protective intends to vigorously pursue its claims against PSG, however, the ultimate outcome cannot be presently determined.

Pursuant to the terms of the workers’ compensation policies, Protective has a duty to adjust and pay claims arising under the policies regardless of whether PSG makes payments to Protective for deductible obligations under the policies.  Under its contractual obligations to Protective, 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 Protective’s current open case reserves on workers’ compensation claims arising under the policies.

As of March 31, 2021, Protective had approximately $24,068 in receivables on claims arising under PSG’s workers’ compensation policies and had exhausted all collateral provided by PSG.  Protective continues to pay claims settlements under the policies without reimbursement from PSG.  For the past six months, the average monthly invoices have been approximately $778.  PSG’s estimated ultimate obligation under the agreements is approximately $47,000 as follows:of March 31, 2021 (inclusive of the $24,068 in receivables noted above).  At March 31, 2021, based on the Company's assessment that PSG will continue to operate as a business and that the terms of the agreement with PSG will be legally enforceable, the Company believes that it will fully collect all current and future amounts due from PSG relating to this matter.



                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 
The Company considered this matter in its assessment of measuring credit losses under the CECL guidance discussed in Note 1 by applying a probability-of-default methodology to projected estimated cash flows to estimate the allowance for expected credit losses for this matter.  The Company considered the delay in reimbursement for claims paid as well as probability of default assumptions when analyzing the credit loss related to this matter.  As of January 1, 2020, in conjunction with the adoption of ASU 2016-13, the Company recorded an allowance for expected credit losses of $15,000 ($11,850, net of tax) as a reduction to equity.  During the third quarter of 2020, the Company performed an update to its CECL allowance calculation related to the PSG matter.  As noted above, there have been further delays in the litigation process, which have extended the estimated cash flow timing.  As a result of these delays and an increase in the estimated ultimate obligation, the Company recorded an additional allowance of $1,500 ($1,185, net of tax) within other operating expenses in the condensed consolidated statement of operations during the third quarter of 2020.  No additional allowance was recorded in the fourth quarter of 2020 or the first quarter of 2021.  In the event of a situation that results in no recovery from PSG, the Company would incur an estimated charge to the consolidated statement of operations of $30,500 ($24,095, net of tax), which represents the estimated ultimate obligation discussed above less the CECL allowance.
19


(11)  Shareholders' Equity:

On August 31, 2017, the Company paid $1,880 to repurchase 84,960 sharesCompany's Board of Class B common stock under aDirectors authorized the reinstatement of its share repurchase program approved byfor up to 2,464,209 shares of the Company's Class A or Class B Common Stock.  No duration has been placed on the Company's share repurchase program, and 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 Board of Directors on August 31, 2017.common stock.


The components of equity forDuring the ninethree months ended September 30, 2017 were as follows:March 31, 2021, the Company did 0t repurchase any shares under the share repurchase program.  No share repurchases have been made since March 20, 2020.


  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 



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Notes to Unaudited Condensed Consolidated Financial Statements (continued)


The following table illustrates changes in accumulated other comprehensive income (loss) by component for the ninethree months ended September 30, 2017:March 31, 2021:


     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, 2020 $(245) $22,004  $21,759 
             
Other comprehensive income (loss) before reclassifications  88   (8,580)  (8,492)
Amounts reclassified from accumulated other comprehensive income (loss)  0   (501)  (501)
             
Net current-period other comprehensive income (loss)  88   (9,081)  (8,993)
             
Ending balance at March 31, 2021 $(157) $12,923  $12,766 


The following table illustrates changes in accumulated other comprehensive income (loss) by component for the ninethree months ended September 30, 2016:March 31, 2020:


     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, 2019 $(494) $9,863  $9,369 
             
Other comprehensive income (loss) before reclassifications  (687)  (20,256)  (20,943)
Amounts reclassified from accumulated other comprehensive income (loss)  0   (605)  (605)
             
Net current-period other comprehensive income (loss)  (687)  (20,861)  (21,548)
             
Ending balance at March 31, 2020 $(1,181) $(10,998) $(12,179)
(12) Other Operating Expenses:
During 2015,
(12)  Related Parties:

The Company utilizes the Company entered into a consulting contract withservices of an insurance brokerageinvestment firm of which a1 director of the Company is CEOa partial owner.  This investment firm manages equity securities and a Managing Director.  The consulting contract provides forfixed income portfolios held by the Company with an annual feeaggregate market value of $300 for 2017approximately $8,857 at March 31, 2021.  Total commissions and 2016, respectively.  The Company also has a brokerage agreement withnet fees earned by this entity.  The Company incurred commission expense in connection with insurance policies written in 2017investment firm and 2016 under this brokerage agreement.  Total commission expenseits affiliates on these portfolios were $8 and $37 for the three months ended September 30, 2017March 31, 2021 and 2016 was $164 and $140, respectively.  Total commission expense for the nine months ended September 30, 2017 and 2016 was $523 and $280, respectively.2020.


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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(13)  Subsequent Events:

On May 4, 2021, 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 Company has evaluated subsequent events for recognition or disclosure in these condensed consolidated financial statements fileddividend per share will be payable June 1, 2021 to shareholders of record on Form 10-Q with the Securities and Exchange Commission, and no events have occurred through the filing date of this Form 10-Q which require recognition or disclosure.May 18, 2021.



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20



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 thetrucking and public transportation industry.  The Company operatesfleets, as well as coverage for trucking industry independent contractors.  We 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 term “Protective,” as used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), refers to Protective 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 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.

Special Committee and Contingent Sale Agreement

On May 5, 2020, the Board of Directors (the “Board”) of Protective formed a special committee of independent directors (the “Special Committee”) to evaluate a Stockholder Support and Contingent Sale Agreement (the “Contingent Sale Agreement”) entered into by and among certain prospective third party purchasers (the “Offering Parties”), certain of Protective’s shareholders and the other parties thereto.  The Contingent Sale Agreement was amended and restated on August 17, 2020.

In June 2020, Protective announced that the Board determined the transactions contemplated by the Contingent Sale Agreement were not in the best interests of Protective and our stakeholders. As part of this evaluation, the Board determined that it would also recommend against the potential tender offer contemplated by the Contingent Sale Agreement if it were commenced, and that if the transactions contemplated by the Contingent Sale Agreement were consummated, it expected to take the necessary actions to redeem all or certain of the Class A shares of Protective purchased by the Offering Parties pursuant to Protective’s Code of By-laws.  Protective also announced that the Special Committee of the Board was exploring, with the assistance of its independent financial and legal advisors, strategic alternatives that may be available to Protective.

Proposed Merger with The Progressive Corporation

Merger Agreement

On February 14, 2021, Protective entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Progressive Corporation, an Ohio corporation (“Progressive”), and Carnation Merger Sub Inc., an Indiana corporation and wholly-owned indirect subsidiary of Progressive (“Merger Sub”).  The Merger Agreement provides for, subject to the satisfaction or waiver of specified conditions, the merger of Merger Sub with and into Protective (the “Merger”), whereupon the separate existence of Merger Sub will cease and Protective will continue as the surviving corporation and as a wholly-owned indirect subsidiary of Progressive.

The Board, at the unanimous recommendation of the Special Committee, unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and fair to, and in the best interests of, Protective and its shareholders, and approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby. The Merger is expected to close in June or July of 2021.  At the effective time of the Merger, each issued and outstanding share of common stock, without par value, of Protective (other than each share of Protective's common stock that is owned by Protective as treasury stock or by any subsidiary of Protective and each share of Protective's common stock owned by Progressive, Merger Sub or any other subsidiary of Progressive immediately prior to the effective time of the Merger) will be automatically canceled and converted into the right to receive $23.30 in cash, without interest, for a total transaction value of approximately $338 million.

The Merger Agreement contains various customary representations and warranties from each of Protective, Progressive and Merger Sub.  Protective has also agreed to various customary covenants, including but not limited to conducting its business constituted one reportable propertyin the ordinary course and casualty insurance segment asnot engaging in certain types of January 1, 2017.  During 2016transactions during the period between the execution of the Merger Agreement and prior years, the Company had two reportable segments – propertyclosing of the Merger.  However, the Merger Agreement permits Protective to continue to pay regular quarterly dividends not to exceed $0.10 per share of its common stock. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period expired April 5, 2021. In addition, at the special meeting of Protective’s shareholders held on May 5, 2021, Protective’s Class A shareholders approved the Merger Agreement, the Merger and casualty insurance and reinsurance.  The Company moved to a single reportable segment based on how its operating results are regularly reviewedthe other transactions contemplated by the Company's chief operating decision maker when making decisions about how resources areMerger Agreement.  The Merger remains subject to be allocated tolegal and regulatory approvals including from the segment and assessing its performance.  The prior period segmentIndiana Department of Insurance, as well as other customary closing conditions.

For additional information throughoutregarding the risks associated with the Merger, please see Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q was updated to conformand Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2020.
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Voting and Support Agreement

On February 14, 2021, Protective also entered into a Voting and Support Agreement (the “Voting Agreement”) with Progressive and certain of Protective's shareholders. The Voting Agreement required that the Protective shareholders party to the currentVoting Agreement: (i) appear at the meeting of the holders of Protective's Class A common stock held on May 5, 2021 to consider resolutions to approve the Merger Agreement and the Merger or otherwise cause their shares of Protective's common stock to be counted as present for purposes of calculating a quorum, and (ii) vote their shares (a) in favor of the adoption of the Merger Agreement, the Merger and the other transactions contemplated thereby and any action reasonably requested by Progressive or the Board in furtherance of the foregoing, (b) against any action or agreement that would result in a material breach of any covenant, representation or warranty or other obligation or agreement of Protective contained in the Merger Agreement and (c) against any takeover proposal or superior proposal (provided, that if the Board had changed its recommendation with respect to the Merger, any shares of Class A common stock owned by such shareholders in excess of approximately 35% of the outstanding shares of Class A common stock would have been voted in the same proportion as those shares of Class A common stock voted by the holders of Protective's Class A common stock that were not party to the Voting Agreement).  The Protective shareholders party to the Voting Agreement voted their shares in favor of the Merger Agreement and the Merger at the special meeting of Protective's shareholders held on May 5, 2021, in accordance with the terms of the Voting Agreement.

During the first quarter of 2021, we incurred $3.5 million ($2.7 million, net of tax) of expenses in conjunction with the activities of the Special Committee related to the Merger with Progressive discussed above.

COVID-19 Impacts

Beginning in March 2020 and continuing through the date of this Quarterly Report on Form 10-Q, the global pandemic associated with the novel coronavirus ("COVID-19") and related economic conditions have impacted the global economy and our results of operations.  We saw improvements in net premiums earned during the third and fourth quarters of 2020 within our commercial automobile products that continued through the first quarter of 2021.  However, net premiums earned within our public transportation products were negatively impacted due to a reduction in miles driven, which is the basis for premiums we receive, as well as an overall reduction in public transportation units insured.  Additionally, during the fourth quarter of 2020, given ongoing profitability challenges, we discontinued writing new public transportation business.  However, losses and loss expenses incurred during the three months ended March 31, 2021 reflected favorable impacts within all commercial automobile products as a result of declines in accident frequency due to lower traffic density.  Additionally, insurance departments throughout the country have issued bulletins and regulations urging or requiring insurers to extend grace periods for the payment of policy premiums and to refrain from canceling or non-renewing policies for the non-payment of policy premiums for policyholders adversely affected by COVID-19; however, we have not seen a material decrease or slowdown in premium collection to date. Our liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the first three months of 2021.  For further discussion regarding the potential impacts of COVID-19 and related economic conditions on our results, see Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year presentation.ended December 31, 2021.


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.Common Stock. 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.  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 as toother market conditions. During the exact numberthree months ended March 31, 2021, we did not repurchase any shares under the share repurchase program. No share repurchases have been made since March 20, 2020.  Additionally, in connection with the Merger Agreement with Progressive discussed above, we are prohibited from repurchasing any of shares that will be repurchased, if any. 

our Class A or Class B Common Stock under the share repurchase program.
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22

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.


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 March 31, 2021 would be expected to maintain itsfall by approximately 2.9%.  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 6.8 years during the first nine months of 2017 from 4.5and 7.1 years at March 31, 2021 and December 31, 2016.2020.  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 marketmarkets, 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.
The net
Net cash used in investingprovided by operating activities totaled $36.1was $20.9 million forduring the first ninethree months of 2017.  Thisended March 31, 2021 compared to net cash used in investingoperating activities of $27.1$1.3 million duringfor the 2016 period.three months ended March 31, 2020.  The increase in operating cash flows during the three months ended March 31, 2021 compared to the same period of 2020 reflected higher premium volume, partially offset by lower net investment income.

Net cash provided by investing activities was $17.1 million for the three months ended March 31, 2021 compared to $16.5 million for the three months ended March 31, 2020.  The increase reflected higher proceeds from maturities and sales of fixed income and equity securities, partially offset by $14.4 million less in limited partnership distributions and $10.1 million higher purchases of fixed income and equity securities during the three months ended March 31, 2021 when compared to the same period in 2020.

Net cash used in investing activities was the result of the normal timing of purchases and sales and maturities in our investment portfolio, partially offset by increased distributions from limited partnership investments.

Financingfinancing activities for the first ninethree months of 2017ended March 31, 2021 consisted of the regular cash dividend payments to shareholders of $12.3$1.4 million ($.810.10 per share) combined with the repurchase of 84,960 shares of the Company's Class B common stock during the third quarter of 2017 for $1.9 million..  Financing activities for the first ninethree months of 2016ended  March 31, 2020 consisted solely of the regular cash dividend payments to shareholders of $11.9$1.4 million ($.780.10 per share). and $1.8 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 September 30, 2017March 31, 2021 included $65.2$87.0 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$97.0 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 or our premiums are further restricted due to market conditions, including related to the impact of COVID-19, we believe 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.


- 26 -We 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 lenders, which has an expiration date of August 9, 2022.  Interest on this revolving credit facility is referenced to the 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 March 31, 2021.  At March 31, 2021, the effective interest rate was 1.21% and we had $20.0 million remaining under the revolving credit facility.  The current outstanding borrowings were used to repay our previous line of credit.  Our revolving credit facility has two financial covenants, each of which were met as of March 31, 2021.  These covenants require us to have a minimum U.S. generally accepted accounting principles ("GAAP") net worth and a maximum consolidated debt to equity ratio of 0.35.

Annualized net premiums written by our Insurance Subsidiaries for the first quarter of 2021 equaled approximately 130% of the combined statutory surplus of these subsidiaries. According to the NAIC, acceptable ranges for the ratio of net premiums written to statutory surplus include results of up to 300%.  This ratio is designed to measure our ability to absorb above-average losses and our financial strength. Additionally, the statutory capital of each of our Insurance Subsidiaries substantially exceeded minimum risk-based capital requirements set by the NAIC as of March 31, 2021.  As a result, we have the ability to increase our business without seeking additional capital to meet regulatory guidelines.

Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of the insurance subsidiaries.our Insurance Subsidiaries.  As such, there are statutory restrictions on the transfer of substantial portions of this equity to the parent company.Protective.  At September 30, 2017, $54.3March 31, 2021, $68.6 million may be transferred by dividend or loan to the parent companyProtective during the remainder of 20172021 without approval by, or prior notification to, regulatory authorities.  An additional $258.1$158.1 million of shareholders' equity of the Company's insurance subsidiariesour Insurance Subsidiaries could be advanced or loaned to the parent companyProtective with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical.  The Company believes thatWe believe these restrictions pose no material liquidity concerns to the Company.  The Companyfor us.  We also believes thatbelieve the financial strength and stability of the Company's insurance subsidiariesour Insurance Subsidiaries would permit access by the parent companyProtective to short-term and long-term sources of credit when needed.  The parent companyProtective had cash and marketable securities valued at $11.1$7.8 million at September 30, 2017.March 31, 2021.

23
Net premiums written

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 Company'spre-tax profitability or loss of our insurance subsidiaries foroperations and is derived by subtracting net realized and unrealized gains (losses) on investments and net investment income from income (loss) before federal income tax expense (benefit).  For the first ninethree months of 2017 equaled approximately 82%ended March 31, 2021, we also excluded corporate charges incurred in conjunction with the Board's review of the combined statutory surplusMerger Agreement, the Voting Agreement and the Merger discussed above from the calculation of underwriting income (loss).  We believe the exclusion of these subsidiaries,corporate charges more accurately reflects our operational results.  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 level consistentsubstitute for income (loss) 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.  For the three months ended March 31, 2021, we also excluded the corporate charges discussed above from other operating expenses when calculating our expense ratio and our combined ratio, as these ratios are intended to depict our underlying business performance and ongoing operating trends.  We also believe the exclusion of these charges improves the comparability of our expense and combined ratios with our ratios in prior years.  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 
  March 31 
 (dollars in thousands) 2021  2020 
Income (loss) before federal income tax expense (benefit) $16,353  $(25,139)
Less: Net realized and unrealized gains (losses) on investments  10,509   (27,756)
Less: Net investment income  5,306   7,236 
       Less: Corporate charges included in other operating expenses 1
  (3,474)  - 
Underwriting income (loss) $4,012  $(4,619)
         
Other operating expenses  41,855   34,110 
Less: Corporate charges 1
  3,474   - 
Other operating expenses, excluding corporate charges  38,381   34,110 
         
Ratios        
Losses and loss expenses incurred $82,318  $81,831 
Net premiums earned  122,853   109,659 
Loss ratio  67.0%  74.6%
         
Other operating expenses $41,855  $34,110 
Less: Commissions and other income  1,858   1,663 
Other operating expenses, less commissions and other income  39,997   32,447 
Net premiums earned  122,853   109,659 
Expense ratio  32.6%  29.6%
         
Impact of corporate charges  (2.9)%  - 
Expense ratio, excluding corporate charges  29.7%  29.6%
         
Combined ratio  99.6%  104.2%
Combined ratio, excluding corporate charges  96.7%  104.2%

1 Represents the corporate charges incurred in conjunction with the increase in premiums written during 2017.  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 eachactivities of the Company's insurance subsidiaries substantially exceeded minimum risk based capital requirements set bySpecial Committee related to the National Association of Insurance Commissioners as of September 30, 2017.  Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet regulatory guidelines.Merger with Progressive discussed above.

24

Results of Operations


Comparison of ThirdFirst Quarter 20172021 to ThirdFirst Quarter 2016

The following table provides information regarding premiums written and earned for the quarters ended September 30 (dollars 2020(in thousands):


 2021  2020  Change  % Change 
Gross premiums written $145,056  $134,006  $11,050   8.2%
Ceded premiums written  (26,229)  (24,772)  (1,457)  5.9%
Net premiums written $118,827  $109,234  $9,593   8.8%
                 
Net premiums earned $122,853  $109,659  $13,194   12.0%
Net investment income  5,306   7,236   (1,930)  (26.7)%
Commissions and other income  1,858   1,663   195   11.7%
Net realized and unrealized gains (losses) on investments  10,509   (27,756)  38,265   (137.9)%
Total revenue  140,526   90,802         
Losses and loss expenses incurred  82,318   81,831   487   0.6%
Other operating expenses  41,855   34,110   7,745   22.7%
Total expenses  124,173   115,941         
Income (loss) before federal income tax expense (benefit)  16,353   (25,139)  41,492     
Federal income tax expense (benefit)  3,415   (2,983)  6,398     
Net income (loss) $12,938  $(22,156) $35,094     
                 

  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 


Gross premiums written during the thirdfirst quarter of 20172021 increased $29.6$11.1 million (29.0%(8.2%), while net premiums earned increased $17.9$13.2 million (25.1%(12.0%), as compared to the same period in 2016.first quarter of 2020.  The higher gross premiums written and net premiums earned in the first quarter of 2021 were primarily the result of increased premiums related to rate increases, growth in existing business lines and new business policies sold primarily in our commercial automobile line of business.  This increase was partially offset by declines in premiums within our public transportation commercial automobile products as a result of a reduction in miles driven, which is the basis for premiums we receive, as well as an overall reduction in public transportation units insured, both due to increases in salesthe impact of both commercial automobile and workers' compensation products and were consistent withCOVID-19.  Additionally, during the Company's growth strategy.  fourth quarter of 2020, given ongoing profitability challenges, we discontinued writing new public transportation 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.
- 27 -

Premiums ceded to reinsurers on the Company'sour insurance business averaged 26.8%18.1% of gross premiums written for the thirdfirst quarter of 20172021 compared to 30.8%18.5% in the 2016 third quarter.
first quarter of 2020.  The decrease in the percentage of premiums ceded was the result of higher growth in certain products that are not reinsured and an increase in the percentage of premium earning in under the 2020 reinsurance treaty year which had lower ceding participation than the previous treaty.

Losses and loss expenses incurred during the first quarter of 2021 increased $0.5 million (0.6%) compared to reinsurance decreasedthe first quarter of 2020, resulting in a loss ratio of 67.0% during the first quarter of 2021 compared to a loss ratio of 74.6% during the first quarter of 2020.  The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned.  The lower loss ratio in the first quarter of 2021 reflected results of our underwriting actions, including non-renewal of unprofitable business as well as rate increases in commercial automobile.  Additionally, losses and loss expenses incurred reflected favorable impacts from COVID-19 within several of our commercial automobile products as a result of changesdeclines in the Company's reinsurance structure.accident frequency due to lower traffic density.


Net investment income duringfor the thirdfirst quarter of 2017 was 14.6% higher than2021 decreased 26.7% to $5.3 million compared to $7.2 million for the thirdfirst quarter of 2016, due primarily to higher2020.  The decrease reflected lower interest rates leading to higherearned on cash and cash equivalent balances and lower interest rates on reinvestment yields for short-duration fixed income securities, increased dividends and a 3.0%in the first quarter of 2021, partially offset by an increase in average funds invested resulting from positive cash flow.  After-tax investment income increased by 13.6%flows from operations compared to $2.9the first quarter of 2020.
Net realized and unrealized gains on investments of $10.5 million during the thirdfirst quarter of 2017, compared to $2.5 2021 were primarily driven by $7.8million in unrealized gains on equity securities during the 2016 thirdperiod and $2.3 million in realized gains on sales of securities as a result of continued improvement in the global financial markets.  Additionally, we saw a $0.4 million increase in the value of our limited partnership investments in the first quarter reflectingof 2021.  These gains were partially offset by impairments on our fixed income securities of $0.1 million recognized during the aforementioned higher interest rates and reinvestment yield environment.  

The thirdperiod.  Comparative first quarter 20172020 net realized investment gainsand unrealized losses on investments of $5.9$27.8 million resultedwere primarily from $3.4driven by $22.3 million in gains from trading activities and $2.5unrealized losses on equity securities, which were largely attributable to disruptions in the financial markets related to COVID-19, $4.8 million in gains from the Company's investments in limited partnerships.  Comparative third quarter 2016 net realized investment gains were $7.7losses on sales of securities, excluding impairment losses, and a $0.7 million consisting primarilydecrease in the value of $4.4 million in gains reported from the Company's investments inour limited partnerships and $3.3 million in gains from trading activities.partnership investments.  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.

25
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 thirdfirst quarter of 20172021 increased $8.0$7.7 million, or 37.5%22.7%, fromto $41.9 million compared to $34.1 million for the thirdfirst quarter of 2016.  2020.  The increase was driven primarily by $3.5 million of corporate charges incurred during the first quarter of 2021 for third party advisors to the Special Committee in other operating expenses was primarily dueconnection with the Merger with Progressive, as discussed above, and higher variable costs related to increased commission expenses as a result of increased premiums written.  The ratio of consolidated other operating expenses less commissions and other income to netthe premiums earned was 31.2% during the thirdfirst quarter of 20172021.  The expense ratio was 32.6% during the first quarter of 2021, or 29.7% excluding the corporate charges discussed above, compared to 28.1%29.6% for the 2016 third quarter.first quarter of 2020.


Federal income tax expense was $3.4 million for the first quarter of 2021 compared to a $3.0 million federal income tax benefit for the first quarter of 2020.  The effective federal tax rate on consolidated income for the thirdfirst quarter of 20172021 was 30.0%20.9% compared to 29.0%11.9% on consolidated loss for the 2016 third quarter.first quarter of 2020.  The difference in the effective federal income tax rate differs from the normal statutory rate was primarily as a resultrelated to the effects of tax-exempt investment income.income and the dividends received deduction.  The effective tax rate for the first quarter of 2020 was impacted by the recording of a valuation allowance of $4.9 million on our deferred tax assets, of which $2.3 million was recorded in the condensed consolidated statement of operations and the balance was recorded in shareholders' equity within accumulated other comprehensive income (loss) in the prior period.  We did not record a valuation allowance on our deferred tax assets in the first quarter of 2021.  The effective tax rate can fluctuate throughout the year because estimates used in the quarterly tax provision are updated as more information becomes available throughout the year.


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$35.1 million during the third quarter of 2017 as compared to the 2016 third quarter.

- 28 -
Comparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016

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$12.9 million during the first nine monthsquarter of 20172021 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 monthsnet loss 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 monthsquarter of 2017 as2020.


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 3, 2013 through July 2, 2019 are subject to an unlimited aggregate stop-loss provision.  Currently, each of these treaty years is reserved at or above the attachment level of these treaties.  For every $100 of additional loss, we are responsible only for our $25 retention.  Commercial automobile products covered by our reinsurance treaty from July 3, 2019 through July 2, 2020 are also subject to an unlimited 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 the 2016 period.combination of (1) a decreased need for stop-loss reinsurance protection resulting from a decrease in our commercial automobile subject limits profile, (2) a higher cost for this coverage and (3) our confidence in profitability improvements given the limit reductions and rate increases on our commercial automobile products.  In 2020, due to continued rate achievement in our commercial automobile products, improvements in our mix of business and reductions to our average policy loss limits, we decided to non-renew the annual aggregate deductible treaty for policies written on and after July 3, 2020.




Forward-Looking Information


Any forward-looking statementsThe disclosures in this report, including without limitation, statements relating toQuarterly Report on Form 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 Quarterly Report on 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 intentionsgenerally beyond our control.  Investors are subjectcautioned not to change at any time at the discretionplace undue reliance on these forward-looking statements that speak only as of the Company;  (ii)date hereof.  Investors are also urged to carefully review and consider the Company's business is highly competitive and the entrance of new competitors into or the expansionvarious disclosures made by us, which attempt to advise interested parties of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adverselyfactors that 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 Commissionour business, including but not limited to, those risks"Risk Factors" set forth in Part I, Item 1A Risk of our Annual Report on Form 10-K for the year ended December 31, 2020 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.  Except to the extent otherwise required by federal securities laws, we do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof.
26

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

●general economic conditions, including continued volatility 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;

●the risks related to our proposed Merger with Progressive, and Merger Sub described above, including:

our inability to complete the proposed Merger due to the failure to satisfy any of the conditions to completion of the proposed Merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the Merger;
•          uncertainty as to the timing of completion of the proposed Merger;
the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;
risks related to disruption of management’s attention from our ongoing business operations due to the proposed Merger;
the effect of the announcement of the proposed Merger on our relationships with our clients, operating results and business generally; and
the outcome of the pending legal proceedings initiated against us and the members of our Board of Directors related to the proposed Merger and the outcome of any other legal proceedings initiated against us, Progressive or others related to the proposed Merger;

●the effects of the COVID-19 pandemic and associated government actions on our operating and financial performance;

●our ability to obtain adequate premium rates and manage our growth strategy;

●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;

●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 in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2020.  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.

27

Critical Accounting Policies

A summary of our significant accounting policies that we consider to be the most dependent on the application of estimates and assumptions can be found in the Company'sManagement’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2016; and (iv) other risks and factors which may be beyond the control or foresight2020.  As of the Company.  Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While the Company believes the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

- 30 -
Critical Accounting Policies

There have been no changes in the Company'sMarch 31, 2021, our critical accounting policies as disclosedand estimates have not changed from those described in the Company'sour Annual Report on Form 10-K filed for the year ended December 31, 2016.2020.



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 September 30, 2017,March 31, 2021, amounts due from reinsurers on paid and unpaid losses were estimated to total approximately $303$421 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;this 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.



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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, 2016.2020.


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 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 March 31, 2021 to selected hypothetical changes in interest rates (dollars in thousands).

 Fair Value  
Estimated Change
in Fair Value
 
200 basis point increase $860,539  $(54,410)
100 basis point increase  887,744   (27,205)
Current fair value  914,949   – 
100 basis point decrease  942,154   27,205 
200 basis point decrease  969,359   54,410 

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 September 30, 2017,March 31, 2021 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".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, 2016.2020. Those risk factors could materially affect the Company's business, financial condition and results of operations. There have been no material changes fromto the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2020 other than described below.

We may not consummate our proposed merger with Progressive within the timeframe or in the manner we anticipate, or at all, which could negatively affect our business and our stock price.

On February 14, 2021, we entered into the Merger Agreement with Progressive and Merger Sub. The Merger Agreement provides for, subject to the satisfaction or waiver of specified conditions, the merger of Merger Sub with and into Protective, whereupon the separate existence of Merger Sub shall cease and Protective shall continue as the surviving corporation and as a wholly-owned indirect subsidiary of Progressive.

Consummation of the Merger remains subject to various conditions, including (i) the receipt of required regulatory approvals, including from the Indiana Department of Insurance; (ii) the absence of any law, injunction or order preventing or prohibiting the consummation of the Merger; (iii) the accuracy of representations and warranties subject to applicable materiality standards; (iv) compliance with all covenants under the Merger Agreement and (v) the absence of a material adverse effect. There can be no assurance that these conditions to the consummation of the Merger will be satisfied or waived or that other events or circumstances will not intervene to delay or result in the termination of the Merger. Subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated by November 14, 2021. If the Merger is not consummated, the price of our common stock may change to the extent that the current market price of our common stock may reflect an assumption that the Merger will be consummated.

Pending the consummation of the Merger, the Merger Agreement also restricts us from engaging in certain actions without Progressive’s consent, which could prevent us from pursuing opportunities that may arise prior to the effective time of the Merger. In addition, if the Merger Agreement is terminated, depending on the circumstances giving rise to termination, we may be required to pay a termination fee of approximately $13.3 million.

Our financial condition, results of operations and cash flows could be adversely impacted as a result of the proposed Merger, regardless of whether it is consummated.

The Merger may cause disruptions to our business or business relationships, which could have an adverse impact on our financial condition, results of operations and cash flows, regardless of whether the Merger is consummated. For example:


the attention of our management and our employees may be directed to Merger-related considerations and may be diverted from the day-to-day operations of our business;


our employees may experience uncertainty about their future roles with us, which might adversely affect our ability to retain and recruit key employees;

customers, suppliers or other parties with whom we maintain business relationships may experience uncertainty about our future and seek alternative relationships with third parties or seek to alter their business relationships with us; and

the pending legal proceedings instituted against us and the members of our Board of Directors related to the Merger, and any other legal proceedings instituted against us, our directors and/or our officers with respect to the proposed Merger, will require us to devote [substantial] resources and executive time to defend.

In addition, we have incurred, and will continue to incur, significant costs, fees and expenses for professional services and other costs related to the Merger Agreement and the Merger, and many of these costs, fees and expenses are payable by us regardless of whether or not the Merger is consummated.

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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 


(1) On August 31, 2017,The following table presents information related to our repurchases of common stock for 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 at any time.periods indicated:


 
Total Number of
Shares Purchased (1)
  
Average Price
Paid per Share
  
Total Number of Shares
Purchased Under the Program (2)
  
Remaining Shares Available to be Purchased Under the Program (2)
 
January 1 - January 31  -  $-   -   1,375,729 
February 1 - February 28  -   -   -   1,375,729 
March 1 - March 31  4,075   22.90   -   1,375,729 
Total  4,075       -     

(1)Amounts represent shares withheld by the Company in connection with employee payroll tax withholding upon the vesting of stock awards. Stock amounts in the condensed consolidated statements of shareholders’ equity are shown net of these shares withheld.

(2)
On August 31, 2017, our Board of Directors authorized the reinstatement of the Company’s share repurchase program for up to 2,464,209 shares of its Class A or Class B Common Stock.  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.  The share repurchase program may be amended, suspended or discontinued at any time and does not commit the Company to repurchase any shares of its Common Stock. The Company has funded, and intends to continue to fund, the share repurchase program from cash on hand.  No share repurchases have been made by the Company under the program since March 20, 2020.  Additionally, in connection with the Merger Agreement with Progressive, the Company is prohibited from repurchasing any of its Class A or Class B Common Stock under the repurchase program.

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ITEM 6. EXHIBITS
ITEM 6 (a)  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
2.1
Agreement and Plan of Merger, dated as of February 14, 2021, by and among Protective Insurance Corporation, The Progressive Corporation and Carnation Merger Sub Inc., incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on February 16, 2021.
3.1
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.
3.2
Code of By-Laws of Protective Insurance Corporation, as amended through January 3, 2021, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on January 4, 2021.
10.1
Voting and Support Agreement, dated as of February 14, 2021, by and among Protective Insurance Corporation, The Progressive Corporation and the Company's shareholders listed therein, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 16, 2021.
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
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 September 30, 2017,March 31, 2021, formatted in Inline 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.
104
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)


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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



Date May 6, 2021
 BALDWIN & LYONS, INC.
By:/s/ Jeremy D. Edgecliffe-Johnson
Jeremy D. Edgecliffe-Johnson
Chief Executive Officer






Date May 6, 2021


By:/s/ John R. Barnett
John R. Barnett
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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