UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
Form 10-Q


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


For the Quarterly Period Ended March 31, 20202021


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 number: 0-5534


graphic


PROTECTIVE INSURANCE CORPORATION
(Exact name of registrant as specified in its charter)


INDIANA
Indiana		 
35-0160330
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
   
111 Congressional Boulevard,
Carmel, Indiana
 
46032
(Address of principal executive offices) (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 class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, No Par ValuePTVCAThe Nasdaq Stock Market LLC
Class B Common Stock, No Par ValuePTVCBThe Nasdaq Stock Market LLC


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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 ____☐


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ✓☒  No ____☐


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


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


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


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


Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 5, 2020:4, 2021:


Common Stock, No Par Value:
Class A (voting)
 2,603,350 
 
Class B (non-voting)
 11,579,54611,552,801 
   14,182,89614,156,151 
- 1 -



PART I – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


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


 
March 31
2020
  
December 31
2019
  
March 31
2021
  
December 31
2020
 
Assets            
Investments:
            
Fixed income securities $746,856  
$
795,538
 
Fixed income securities (less allowance for credit losses of $825 and $1,035) $914,949  $919,692 
Equity securities 70,320  
76,812
   67,015   58,169 
Limited partnerships 7,981  
23,292
   7,476   7,214 
Commercial mortgage loans 11,882  
11,782
 
Commercial mortgage loans (less allowance of $195 and $195)  10,866   10,602 
Short-term and other  1,000   
1,000
   1,000   1,000 
 838,039  
908,424
   1,001,306   996,677 
              
Cash and cash equivalents 89,318  
67,851
   95,566   58,301 
Restricted cash and cash equivalents 10,813  
21,037
   11,538   12,128 
Accounts receivable 89,510  
111,762
 
Reinsurance recoverable 415,021  
432,067
 
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 94,009  
86,306
   91,839   90,256 
Current federal income taxes recoverable 4,381  
4,878
 
Deferred federal income taxes  11,004   
2,035
   10,764   8,980 
Total Assets
 $1,552,095  
$
1,634,360
  $1,762,675  $1,722,827 
              
Liabilities and shareholders' equity              
Reserves for losses and loss expenses $1,001,599  
$
988,305
  $1,108,132  $1,089,669 
Reserves for unearned premiums 70,686  
74,810
   59,049   63,731 
Reinsurance payable 47,562  
65,835
   75,898   76,617 
Short-term borrowings 20,000  
20,000
   20,000   20,000 
Accounts payable and other liabilities  106,865   
121,094
   129,367   108,962 
Current federal income taxes payable  3,551   766 
Total Liabilities
 1,246,712  
1,270,044
   1,395,997   1,359,745 
              
Shareholders' equity:              
Common stock-no par value:      
Class A voting -- authorized 3,000,000 shares; outstanding -- 2020 - 2,603,350; 2019 - 2,603,350 111  
111
 
Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2020 - 11,579,546; 2019 - 11,675,956 495  
499
 
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 53,045  
53,349
   55,645   54,571 
Accumulated other comprehensive income (loss) (12,179) 
9,369
 
Accumulated other comprehensive income  12,766   21,759 
Retained earnings  263,911   
300,988
   297,657   286,143 
Total Shareholders' Equity
  305,383   
364,316
   366,678   363,082 
Total Liabilities and Shareholders' Equity
 $1,552,095  
$
1,634,360
  $1,762,675  $1,722,827 


See notes to condensed consolidated financial statements.


-
2 -


Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share data)


 
Three Months Ended
March 31
  
Three Months Ended
March 31
 
 2020  2019  2021  2020 
Revenues            
Net premiums earned $109,659  
$
110,013
  $122,853  $109,659 
Net investment income 7,236  
6,232
   5,306   7,236 
Commissions and other income 1,663  
2,064
   1,858   1,663 
Net realized losses on investments, excluding impairment losses (4,787) 
(39
)
Net realized gains (losses) on investments, excluding impairment losses  2,339   (4,787)
Impairment losses on investments (40) 
(260
)
  (82)  (40)
Net unrealized gains (losses) on equity securities and limited partnership investments  (22,929)  
6,327
   8,252   (22,929)
Net realized and unrealized gains (losses) on investments  (27,756)  
6,028
   10,509   (27,756)
 90,802  
124,337
   140,526   90,802 
              
Expenses              
Losses and loss expenses incurred 81,831  
87,122
   82,318   81,831 
Other operating expenses  34,110   
33,701
   41,855   34,110 
  115,941   
120,823
   124,173   115,941 
Income (loss) before federal income tax expense (benefit) (25,139) 
3,514
   16,353   (25,139)
Federal income tax expense (benefit)  (2,983)  
766
   3,415   (2,983)
Net income (loss) $(22,156) 
$
2,748
  $12,938  $(22,156)
              
Per share data:      
Basic and diluted earnings (loss) $(1.56) 
$
.18
 
Net income (loss) per share:        
Basic $0.91  $(1.56)
Diluted $0.90  $(1.56)
              
Reconciliation of shares outstanding:      
Average shares outstanding - basic 14,169  
14,848
 
Weighted average number of shares outstanding:        
Basic  14,153   14,169 
Dilutive effect of share equivalents  –   
30
   154   n/a 
Average shares outstanding - diluted  14,169   
14,878
 
Diluted  14,307   14,169 


See notes to condensed consolidated financial statements.


-
3 -


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


 
Three Months Ended
March 31
  
Three Months Ended
March 31
 
 2020  2019  2021  2020 
Net income (loss)
 $(22,156) 
$
2,748
  $12,938  $(22,156)
              
Other comprehensive income (loss), net of tax:      
Unrealized net gains (losses) on fixed income securities (20,861) 
8,456
 
Other comprehensive loss, net of tax:        
Net unrealized losses on fixed income securities  (9,081)  (20,861)
              
Foreign currency translation adjustments (687) 
307
   88   (687)
                
Other comprehensive income (loss) (21,548) 
8,763
 
Other comprehensive loss  (8,993)  (21,548)
                
Comprehensive income (loss) $(43,704) 
$
11,511
  $3,945  $(43,704)


See notes to condensed consolidated financial statements.


-
4 -


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, 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
  –   –   –   –   –   –   (12,281)  (12,281)
Net loss
  –   –   –   –   –   –   (22,156)  (22,156)
Foreign currency translation adjustment, net of tax
  –   –   –   –   –   (687)  –   (687)
Change in unrealized gain (loss) on investments, net of tax
  –   –   –   –   –   (20,861)  –   (20,861)
Common stock dividends
  –   –   –   –   –   –   (1,426)  (1,426)
Repurchase of common stock
  –   –   (127)  (5)  (563)  –   (1,214)  (1,782)
Restricted stock grants
  –   –   31   1   259   –   –   260 
Balance at March 31, 2020
  2,603  $111   11,580  $495  $53,045  $(12,179) $263,911  $305,383 
  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        Common Stock  Additional  Accumulated Other       
 Class A  Class B  Paid-in  Comprehensive  Retained  Total  Class A  Class B  Paid-in  Comprehensive  Retained  Total 
Description Shares  Amount  Shares  Amount  Capital  Income (Loss)  Earnings  Equity  Shares  Amount  Shares  Amount  Capital  Income (Loss)  Earnings  Equity 
Balance at December 31, 2018
 
2,615
  
$
112
  
12,254
  
$
522
  
$
54,720
  
$
(7,347
)
 
$
308,075
  
$
356,082
 
Net income
 
–
  
–
  
–
  
–
  
–
  
–
  
2,748
  
2,748
 
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
 
–
  
–
  
–
  
–
  
–
  
307
  
–
  
307
   –   0   –   0   0   (687)  0   (687)
Change in unrealized gain (loss) on investments, net of tax
 
–
  
–
  
–
  
–
  
–
  
8,456
  
–
  
8,456
 
Change in unrealized gains (losses) on investments, net of tax  –   0   –   0   0   (20,861)  0   (20,861)
Common stock dividends
 
–
  
–
  
–
  
–
  
–
  
–
  
(1,493
)
 
(1,493
)
  –   0   –   0   0   0   (1,426)  (1,426)
Repurchase of common stock
 
–
  
–
  
(25
)
 
(1
)
 
(108
)
 
–
  
(359
)
 
(468
)
  0   0   (127)  (5)  (563)  0   (1,214)  (1,782)
Restricted stock grants
  
–
   
–
   
20
   
1
   
437
   
–
   
–
   
438
   0   0   31   1   259   0   0   260 
Balance at March 31, 2019
  
2,615
  
$
112
   
12,249
  
$
522
  
$
55,049
  
$
1,416
  
$
308,971
  
$
366,070
 
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.


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5 -


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


 
Three Months Ended
March 31
  
Three Months Ended
March 31
 
 2020  2019  2021  2020 
Operating activities            
Net income (loss) $(22,156) 
$
2,748
  $12,938  $(22,156)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities  20,844   
8,657
   7,973   20,844 
Net cash provided by (used in) operating activities  (1,312)  
11,405
   20,911   (1,312)
                
Investing activities                
Purchases of fixed income and equity securities  (82,641)  
(140,645
)
  (92,719)  (82,641)
Distributions from limited partnerships  14,636   
17,214
   186   14,636 
Proceeds from maturities  31,088   
16,776
 
Proceeds from maturities of fixed income securities  64,453   31,088 
Proceeds from sales of fixed income securities  48,552   
52,199
   44,427   48,552 
Proceeds from sales of equity securities  5,480   
9,169
   2,064   5,480 
Purchase of commercial mortgage loans  (368)  
(1,172
)
  (319)  (368)
Proceeds from commercial mortgage loans  72   
–
   54   72 
Purchases of property and equipment  (369)  
(797
)
  (1,046)  (369)
Net cash provided by (used in) investing activities  16,450   
(47,256
)
Net cash provided by investing activities  17,100   16,450 
                
Financing activities                
Dividends paid to shareholders  (1,426)  
(1,493
)
  (1,424)  (1,426)
Repurchase of common shares  (1,782)  
(468
)
Repurchase of common stock  0   (1,782)
Net cash used in financing activities  (3,208)  
(1,961
)
  (1,424)  (3,208)
                
Effect of foreign exchange rates on cash and cash equivalents  (687)  
307
   88   (687)
                
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents  11,243   
(37,505
)
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  88,888   
170,811
   70,429   88,888 
Cash, cash equivalents and restricted cash and cash equivalents at end of period $100,131  
$
133,306
  $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 Policies:


Description of Business:  Protective Insurance Corporation (the "Company"), based in Carmel, Indiana, is a property-casualty insurer specializing in marketing and underwriting property, liability and workers' compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors.  The Company offers a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.  The Company operates as one1 reportable property and casualty insurance segment based on how its operating results are regularly reviewed by its 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 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 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 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 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 the 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 terms or timing.  For additional information regarding the risks associated with the Merger, please see Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year 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, 20202021 or any other future period.


Accounting Policies


Investments: Carrying amounts for fixed income 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, 2020 in conjunction with the adoption of the new credit losses accounting standard discussed below.  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 the limited partnerships 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 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.


Fixed income securities are considered to be available-for-sale. The related unrealized net gains or losses (net of applicable tax effects) on fixed income securities are reflected directly in other comprehensive income (loss) within shareholders' equity.  Included within available-for-sale fixed income securities are convertible debt securities.  A portion of the changes in the fair values of convertible debt securities is reflected as a component of net realized lossesgains (losses) on 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 lossesgains (losses) on investments, excluding impairment losses.


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 lossesgains (losses) on investments, excluding impairment losses. 


Recognition of Revenue and Costs:  Premiums are earned over the period for which insurance protection is provided.  A reserve for unearned premiums is established to reflect 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 production 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.


- 7 -
The following accounting policies have been updated effective January 1, 2020 to reflect the Company's adoption of Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13,as described below.

Investment Impairments:  For a fixed income security in an unrealized loss position where the Company has the intent to sell the fixed income security, or it is more likely than not that the Company will have to sell the fixed income security before recovery of its amortized cost basis, the decline in value is recorded within 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 a fixed income 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 the security, the Company separates the credit loss component of the impairment from 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 operations.  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 cost 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 security, focusing on those below investment grade, with emphasis on securities downgraded below investment grade.  The credit loss is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed income 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.  Additionally, the Company may conclude that a qualitative analysis is sufficient to support its conclusion that the present value of the expected 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 lossesgains (losses) on investments, excluding impairment losses at the time the issuer defaults or is expected to default on payments.


Deductible Receivables: Under certain workers’ compensation insurance contracts with deductible features, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policyholder for the deductible amount. These amounts are included on a net of allowance basis in the condensed consolidated 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 January 1, 2020, in conjunction with the adoption of ASU 2016-13,March 31, 2021, the Company recorded an allowance for expected credit losses of $15,000$16,500 ($11,850,13,035, net of tax). See Note 10 – Litigation, Commitments and Contingencies for further discussion.


Recently Adopted Accounting Pronouncements: Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02.  Under the new guidance, lessees are 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 are 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.  The Company's adoption of the new standard did not have any impact on its condensed consolidated statements of operations or cash flows; however, the impact of adopting the new guidance resulted in a right-of-use asset and a lease liability being recorded on the condensed consolidated balance sheet as of March 31, 2020, each of approximately $94, which are included within other assets and accounts payable and other liabilities. 

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13.  ASU 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, but is not prescriptive about certain aspects of estimating expected losses.  The guidance replaced the current incurred loss model for measuring expected credit losses and provided 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, but provided clarification and implementation guidance on certain aspects of ASU 2016-13, and havehad 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$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.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.

- 8 -

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 no longer impact the determination of whether a credit loss exists.  The Company adopted the guidance related to available-for-sale fixed income securities on 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 August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13.  This update removed the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removed disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update added disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. The Company adopted ASU 2018-13 as of January 1, 2020.  As the requirements of this guidance are applicable to disclosure only, the adoption of ASU 2018-13 had no material impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements: 
9

In 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 simplifysimplified 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 currentprevious guidance, an entity maycould not adjust its annual effective tax rate for a tax law change until the period in which the law iswas 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 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, currentprevious guidance providesprovided an exception that when a loss in an interim period exceedsexceeded the anticipated loss for the year, the income tax benefit iswas 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 removesremoved this exception and providesprovided 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 isbecame effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods.  Early adoption is permitted.  The Company is currently evaluatingon January 1, 2021 and did not have a material effect on the effects the adoption of ASU 2019-12 will have on itsCompany's condensed consolidated financial statements.statements.


- 9 -
10



(2)  Investments:


The following is a summary of available-for-sale securities at March 31, 20202021 and December 31, 2019:2020:


 
Fair
Value
  
Cost or
Amortized Cost
  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
  
Fair
Value
  
Cost or
Amortized Cost
  Allowance for Credit Losses  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
March 31, 2020               
March 31, 2021                  
Fixed income securities
                                 
Agency collateralized mortgage obligations $10,460  $11,016  $390  $(946) $(556) $11,821  $11,405  $0  $485  $(69) $416 
Agency mortgage-backed securities 58,619  55,675  2,950  (6) 2,944   114,822   113,228   0   2,254   (660)  1,594 
Asset-backed securities 93,369  107,774  237  (14,642) (14,405)  102,638   102,799   0   540   (701)  (161)
Bank loans 10,187  12,455  –  (2,268) (2,268)  12,073   11,998   0   130   (55)  75 
Certificates of deposit 2,835  2,835  –  –  – 
Collateralized mortgage obligations 4,076  4,327  19  (270) (251)  6,167   6,027   0   240   (100)  140 
Corporate securities 262,160  263,356  4,682  (5,878) (1,196)  362,442   353,462   0   11,149   (2,169)  8,980 
Mortgage-backed securities 47,993  53,697  74  (5,778) (5,704)  38,612   39,967   (825)  490   (1,020)  (530)
Municipal obligations 39,132  38,474  916  (258) 658   46,464   45,358   0   1,184   (78)  1,106 
Non-U.S. government obligations 28,842  27,992  850  –  850   30,648   30,083   0   574   (9)  565 
U.S. government obligations  189,183   179,850   9,333   –   9,333   189,262   186,682   0   3,738   (1,158)  2,580 
Total fixed income securities $746,856  $757,451  $19,451  $(30,046) $(10,595) $914,949  $901,009  $(825) $20,784  $(6,019) $14,765 


 
Fair
Value
  
Cost or
Amortized Cost
  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
  
Fair
Value
  
Cost or
Amortized Cost
  Allowance for Credit Losses  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
December 31, 2019               
December 31, 2020                  
Fixed income securities
                                 
Agency collateralized mortgage obligations 
$
12,093
  
$
11,557
  
$
536
  
$
–
  
$
536
  $11,931  $11,448  $0  $483  $0  $483 
Agency mortgage-backed securities 
56,280
  
54,286
  
2,005
  
(11
)
 
1,994
   102,107   99,060   0   3,062   (15)  3,047 
Asset-backed securities 
106,397
  
107,028
  
499
  
(1,130
)
 
(631
)
  107,696   108,686   0   596   (1,586)  (990)
Bank loans 
14,568
  
14,932
  
106
  
(470
)
 
(364
)
  11,361   11,590   0   128   (357)  (229)
Certificates of deposit 
2,835
  
2,835
  
–
  
–
  
–
 
Collateralized mortgage obligations 
5,616
  
5,123
  
493
  
–
  
493
   5,118   5,061   0   151   (94)  57 
Corporate securities 
281,381
  
274,340
  
7,492
  
(451
)
 
7,041
   360,241   344,059   0   16,380   (198)  16,182 
Mortgage-backed securities 
47,463
  
46,685
  
1,047
  
(269
)
 
778
   38,056   40,675   (1,035)  659   (2,243)  (1,584)
Municipal obligations 
36,286
  
35,749
  
684
  
(147
)
 
537
   45,143   43,353   0   1,820   (30)  1,790 
Non-U.S. government obligations 
24,179
  
23,889
  
290
  
–
  
290
   30,600   29,882   0   718   0   718 
U.S. government obligations  
208,440
   
206,623
   
2,891
   
(1,074
)
  
1,817
   207,439   200,654   0   7,000   (215)  6,785 
Total fixed income securities 
$
795,538
  
$
783,047
  
$
16,043
  
$
(3,552
)
 
$
12,491
  $919,692  $894,468  $(1,035) $30,997  $(4,738) $26,259 


The following table summarizes, for available-for-sale fixed income securities in an unrealized loss position at March 31, 20202021 and December 31, 2019,2020, the aggregate fair value and gross unrealized loss categorized by the duration individual securities have been continuously in an unrealized loss position.


 March 31, 2020  December 31, 2019  March 31, 2021  December 31, 2020 
 
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
 
Fixed income securities:
                                    
12 months or less 270  $225,745  $(25,029) 
88
  
$
108,387
  
$
(2,452
)
  174  $275,685  $(4,448)  100  $120,630  $(3,405)
Greater than 12 months  20   20,410   (5,017)  
69
   
66,860
   
(1,100
)
  31   51,441   (1,571)  24   33,065   (1,333)
Total fixed income securities  290  $246,155  $(30,046)  
157
  
$
175,247
  
$
(3,552
)
  205  $327,126  $(6,019)  124  $153,695  $(4,738)
                                          



- 10 -
11


The fair value and the cost or amortized costs of fixed income investments at March 31, 2020,2021, 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
  
Fair
Value
  
Cost or
Amortized Cost
 
One year or less 
$
97,469
  
$
96,889
  $96,999  $96,057 
Excess of one year to five years 
293,569
  
289,041
   368,593   358,662 
Excess of five years to ten years 
132,550
  
130,161
   165,436   163,115 
Excess of ten years  
12,828
   
13,198
   16,028   16,601 
Contractual maturities 
536,416
  
529,289
   647,056   634,435 
Asset-backed securities  
210,440
   
228,162
   267,893   266,574 
Total 
$
746,856
  
$
757,451
  $914,949  $901,009 



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
March 31
 
  2020  2019 
       
Gross gains on available-for-sale fixed income securities during the period
 $2,652  
$
3,171
 
Gross losses on available-for-sale fixed income securities during the period  (4,741)  
(3,527
)
         
Impairment losses on investments  (40)  
(260
)
         
Change in value of limited partnership investments  (676)  
408
 
         
Gains (losses) on equity securities:        
Realized gains (losses) on equity securities sold during the period  (2,698)  
317
 
Unrealized gains (losses) on equity securities held at the end of the period  (22,253)  
5,919
 
Realized and unrealized gains (losses) on equity securities during the period  (24,951)  
6,236
 
         
Net realized and unrealized gains (losses) on investments $(27,756) $6,028 

As discussed in Note 1, theThe Company adopted the provisions of the new CECL model for measuring expected credit losses for available-for-sale fixed income securities as of January 1, 2020.  The updated guidance amended the previous OTTI model for available-for-sale fixed income securities by requiring the recognition ofrecognizes impairments relatingrelated 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.  As of March 31, 2020,For those securities in an unrealized loss position throughout the period where the Company intended to sell onethe 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 an unrealized loss position for credit losses and in accordance withrecorded an allowance for credit losses of $825 as of March 31, 2021, a reduction of $210 from the new guidance,allowance of $1,035 recorded $40 of a write down to earnings.at December 31, 2020.  The Company reviewed its remaining fixed income securities in an unrealized loss position as of March 31, 20202021 and determined that the losses were primarily the result of non-credit factors, such as the increase in market volatility due to the recent disruption in global financial markets as a result of the novel coronavirus COVID-19 pandemic and responses to it.factors.  The Company currently does not intend to sell nor does it expect to be required to sell these securities before recovery of their amortized cost.  Based on the above factors, the Company did not record any allowance for credit losses related to its available-for-sale securities under the new guidance in the first quarter of 2020.


Shareholders' equity at March 31, 20202021 included approximately $4,453,$4,201, net of federal income tax expense, of reported earnings that remain undistributed by limited partnerships.

- 11 -

(3)  Reinsurance:


The following table summarizes the Company's transactions with reinsurers for the three months ended March 31, 20202021 and 20192020 comparative periods.


 2020  2019  2021  2020 
Three months ended March 31:            
Premiums ceded to reinsurers $28,467  
$
30,173
  $26,886  $28,467 
Losses and loss expenses ceded to reinsurers 23,536  
30,789
   16,986   23,536 
Commissions from reinsurers 7,528  
7,233
   6,867   7,528 
      


12

(4)  Loss and Loss Expense Reserves:


Activity in the reserves for losses and loss expenses for the three months ended March 31, 20202021 and 20192020 is summarized as follows.  All amounts are shown net of reinsurance, unless otherwise indicated.


 Three Months Ended  Three Months Ended 
 March 31  March 31 
 2020  2019  2021  2020 
Reserves, gross of reinsurance recoverable, at the beginning of the year
 $988,305  
$
865,339
  $1,089,669  $988,305 
Reinsurance recoverable on unpaid losses at the beginning of the year  398,305   
375,935
   424,368   398,305 
Reserves at the beginning of the year 590,000  
489,404
 
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 81,839  
88,180
   83,143   81,839 
Claims occurring during prior periods  (8)  
(1,058
)
  (825)  (8)
Total incurred 81,831  
87,122
   82,318   81,831 
              
Loss and loss expense payments:      
Loss and loss expense payments, net:        
Claims occurring during the current period 8,169  
8,708
   8,082   8,169 
Claims occurring during prior periods  61,812   
56,747
   52,847   61,812 
Total paid  69,981   
65,455
   60,929   69,981 
Reserves at the end of the period 601,850  
511,071
 
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  399,749   
383,150
   421,442   399,749 
Reserves, gross of reinsurance recoverable, at the end of the period $1,001,599  
$
894,221
  $1,108,132  $1,001,599 


The $8$825 prior accident year favorable development during the three months ended March 31, 20202021 was primarily due to favorable loss development in independent contractor coverages.  the Company's commercial automobile liability line of business for more recent accident years due to better than expected reported loss development.  This savings compares to a prior accident year savings of $1,058flat loss development for the three months ended March 31, 2019, which related to favorable loss development in workers' compensation and independent contractor coverages.2020.  Losses incurred from claims occurring during prior years reflect 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 as part of the normal reserving process.



(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 commercial automobile companies, as well as to independent contractors who contract with commercial automobile companies. 

- 12 -

The following table summarizes segment revenues for the three months ended March 31, 20202021 and 2019:2020:


 
Three Months Ended
March 31
  
Three Months Ended
March 31
 
 2020  2019  2021  2020 
Revenues:            
Net premiums earned $109,659  
$
110,013
  $122,853  $109,659 
Net investment income 7,236  
6,232
   5,306   7,236 
Net realized and unrealized gains (losses) on investments (27,756) 
6,028
   10,509   (27,756)
Commissions and other income  1,663   
2,064
   1,858   1,663 
Total revenues $90,802  
$
124,337
  $140,526  $90,802 


13


(6)  Debt:


On August 9, 2018, the Company entered into a credit agreement providing a revolving credit facility with a $40,000 limit, with 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 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 the Company's option.  Outstanding drawings on this revolving credit facility were $20,000 as of March 31, 2020.2021.  At March 31, 2020,2021, the effective interest rate was 2.03%1.21%, and the Company had $20,000 remaining available under the revolving credit facility.  The current outstanding borrowings were used to repay the Company's previous line of credit.  The Company's revolving credit facility has two2 financial covenants, each of which were met as of March 31, 2020.2021.  These covenants require the Company to have a minimum U.S. generally accepted accounting principles net worth and a maximum consolidated debt to equity ratio of 0.35.



(7)  Taxes:


The Company uses the 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 three months ended March 31, 2021 was 20.9% compared to 11.9% on consolidated loss for the three months ended March 31, 2020 was 11.9% compared to 21.8% on consolidated income for the three months ended March 31, 2019.2020.  The pre-tax loss for the three months ended March 31, 2020 makes these interim period effective tax rates less comparable year over year.year-over-year.  The difference in the effective federal income tax rate from the normal statutory rate in the three months ended March 31, 2021 was primarily related to the effects of tax-exempt investment income and the dividends received deduction.  The difference in the effective federal income tax rate from the normal statutory rate in the three months ended March 31, 2020 was primarily related to the recording of a valuation allowance inon the current period on ourCompany's deferred tax assets discussed below,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 deferred 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.  The Company considered several factors when analyzing the need for a valuation allowance including the Company's current three year cumulative loss throughAs of March 31, 2021 and December 31, 2020, the increase in deferred tax assets dueCompany had 0 valuation allowance.

In response to the adoption of CECL at January 1, 2020 discussed in Note 1,COVID-19 pandemic, the change in unrealized gainsCoronavirus Aid, Relief, and losses and the loss of a high taxable income year from the carryback period.  The three year cumulative loss limits the Company's ability to use projected income beyond 2020 in the analysis.  Based on this analysis, the Company has concluded that a valuation allowance is necessary for its deferred tax assets not supported by either carryback availability or future reversals of existing taxable temporary differences and recorded a valuation allowance of $4,929 for the three months ended March 31, 2020, of which $2,306 was recorded in the condensed consolidated statement of operations and the balance was recorded in shareholders' equity within accumulated other comprehensive income (loss).  The Company recognized this allowance entirely in the first quarterEconomic 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 (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of 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 relates to realized and unrealized capital losses duringdid not have a material impact on the quarter that are treated as a discrete item.Company's results of operations.


As of March 31, 2020,2021, the Company's calendar years2020, 2019, 2018 2017 and 20162017 remain subject to examination by the Internal Revenue Service.

- 13 -
14



(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 March 31, 2020:2021:


Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Fixed income securities:                        
Agency collateralized mortgage obligations $10,460  $–  $10,460  $–  $11,821  $0  $11,821  $0 
Agency mortgage-backed securities 58,619  –  58,619  –   114,822   0   114,822   0 
Asset-backed securities 93,369  –  93,369  –   102,638   0   102,638   0 
Bank loans 10,187  –  10,187  –   12,073   0   12,073   0 
Certificates of deposit 2,835  2,835  –  – 
Collateralized mortgage obligations 4,076  –  4,076  –   6,167   0   6,167   0 
Corporate securities 259,528  –  259,528  –   351,511   0   351,511   0 
Options embedded in convertible securities 2,632  –  2,632  –   10,931   0   10,931   0 
Mortgage-backed securities 47,993  –  47,993  –   38,612   0   38,612   0 
Municipal obligations 39,132  –  39,132  –   46,464   0   46,464   0 
Non-U.S. government obligations 28,842  –  28,842  –   30,648   0   30,648   0 
U.S. government obligations  189,183   –   189,183   –   189,262   0   189,262   0 
Total fixed income securities 746,856  2,835  744,021  –   914,949   0   914,949   0 
Equity securities:                            
Consumer 11,880  11,880  –  –   12,373   12,373   0   0 
Energy 1,508  1,508  –  –   1,661   1,661   0   0 
Financial 22,092  22,092  –  –   34,108   34,108   0   0 
Industrial 3,707  3,707  –  –   5,978   5,978   0   0 
Technology 2,963  2,963  –  –   3,669   3,669   0   0 
Funds (e.g., mutual funds, closed end funds, ETFs) 21,837  21,837  –  – 
Other  6,333   6,333   –   –   9,226   9,226   0   0 
Total equity securities
 70,320  70,320  –  –   67,015   67,015   0   0 
Short-term investments 1,000  1,000  –  –   1,000   1,000   0   0 
Cash equivalents  69,527   –   69,527   –   86,961   0   86,961   0 
Total $887,703  $74,155  $813,548  $–  $1,069,925  $68,015  $1,001,910  $0 


- 14 -
15

As of December 31, 2019:2020:


Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Fixed income securities:                        
Agency collateralized mortgage obligations 
$
12,093
  
$
–
  
$
12,093
  
$
–
  $11,931  $0  $11,931  $0 
Agency mortgage-backed securities 
56,280
  
–
  
56,280
  
–
   102,107   0   102,107   0 
Asset-backed securities 
106,397
  
–
  
106,397
  
–
   107,696   0   107,696   0 
Bank loans 
14,568
  
–
  
14,568
  
–
   11,361   0   11,361   0 
Certificates of deposit 
2,835
  
2,835
  
–
  
–
 
Collateralized mortgage obligations 
5,616
  
–
  
5,616
  
–
   5,118   0   5,118   0 
Corporate securities 
276,087
  
–
  
276,087
  
–
   352,837   0   352,837   0 
Options embedded in convertible securities 
5,294
  
–
  
5,294
  
–
   7,404   0   7,404   0 
Mortgage-backed securities 
47,463
  
–
  
47,463
  
–
   38,056   0   38,056   0 
Municipal obligations 
36,286
  
–
  
36,286
  
–
   45,143   0   45,143   0 
Non-U.S. government obligations 
24,179
  
–
  
24,179
  
–
   30,600   0   30,600   0 
U.S. government obligations  
208,440
   
–
   
208,440
   
–
   207,439   0   207,439   0 
Total fixed income securities 
795,538
  
2,835
  
792,703
  
–
   919,692   0   919,692   0 
Equity securities:                            
Consumer 
16,707
  
16,707
  
–
  
–
   11,598   11,598   0   0 
Energy 
3,074
  
3,074
  
–
  
–
   1,227   1,227   0   0 
Financial 
31,577
  
31,577
  
–
  
–
   29,064   29,064   0   0 
Industrial 
4,927
  
4,927
  
–
  
–
   5,180   5,180   0   0 
Technology 
2,817
  
2,817
  
–
  
–
   2,851   2,851   0   0 
Funds (e.g., mutual funds, closed end funds, ETFs) 
9,460
  
9,460
  
–
  
–
 
Other  
8,250
   
8,250
   
–
   
–
   8,249   8,249   0   0 
Total equity securities 
76,812
  
76,812
  
–
  
–
   58,169   58,169   0   0 
Short-term investments 
1,000
  
1,000
  
–
  
–
   1,000   1,000   0   0 
Cash equivalents  
59,780
   
–
   
59,780
   
–
   47,026   0   47,026   0 
Total 
$
933,130
  
$
80,647
  
$
852,483
  
$
–
  $1,025,887  $59,169  $966,718  $0 


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.


The Company did not0t have any Level 3 assets carried at fair value at March 31, 20202021 or December 31, 2019.2020.  Level 3 assets, when present, are valued using various unobservable inputs, including extrapolated data, proprietary models and indicative quotes. 


Quoted market prices are obtained whenever possible.  Where quoted market prices are not available, fair values are estimated using 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 significant transfers of assets between Level 1 and Level 2 during the three months ended March 31, 2020.


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 each class of financial instrument:


- 15 -
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; 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, they are classified as Level 3.investees.


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


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


A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's condensed consolidated balance sheets at March 31, 20202021 and December 31, 20192020 is as follows:


 Carrying  Fair Value  Carrying  Fair Value 
 Value  Level 1  Level 2  Level 3  Total  Value  Level 1  Level 2  Level 3  Total 
March 31, 2020               
March 31, 2021               
Assets:                               
Limited partnerships 
$
7,981
  
$
–
  
$
–
  
$
7,981
  
$
7,981
  $7,476  $0  $0  $7,476  $7,476 
Commercial mortgage loans 
11,882
  
–
  
–
  
12,492
  
12,492
   10,866   0   0   11,688   11,688 
Liabilities:                                    
Short-term borrowings 
20,000
  
–
  
20,000
  
–
  
20,000
   20,000   0   20,000   0   20,000 
                                   
December 31, 2019               
December 31, 2020                    
Assets:                                    
Limited partnerships 
$
23,292
  
$
–
  
$
–
  
$
23,292
  
$
23,292
  $7,214  $0  $0  $7,214  $7,214 
Commercial mortgage loans 
11,782
  
–
  
–
  
12,068
  
12,068
   10,602   0   0   11,425   11,425 
Liabilities:                                    
Short-term borrowings 
20,000
  
–
  
20,000
  
–
  
20,000
   20,000   0   20,000   0   20,000 


(9)  Stock-Based Compensation:


The Company issues shares of restricted Class B Common Stock to the Company's outside directors as part of their annual retainer compensation.  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 May 17, 2019, the Company granted shares of restricted Class B Common Stock in connection with the election of a new outside director, reflecting such director’s pro-rated annual retainer compensation, which shares will vestvested and bewere distributed on May 7, 2020.  Additionally, effective May 22, 2019, John D. Nichols, Jr. ceased serving as the Company's Interim Chief Executive Officer and principal executive officer, but continued to serve as Chairman of the Company's Board of Directors.  On May 22, 2019, the Company granted shares of restricted Class B Common Stock to Mr. Nichols in connection with this transition, reflecting his pro-rated annual retainer compensation, which shares will also vestvested and bewere distributed on May 7, 2020. The table below provides detail of the restricted stock issuances to directors for 20192020 and 2020:2021:


Grant Date 
Number of
Shares Issued
 Vesting DateService Period 
Grant Date Fair
Value Per Share
  
Number of
Shares Issued
 Vesting Date Service Period 
Grant Date Fair
Value Per Share
5/8/2018 19,085 5/8/20197/1/2018 - 6/30/2019 
$
23.05 
       
5/7/2019 29,536 5/7/20207/1/2019 - 6/30/2020 
$
16.25  29,536 5/7/2020 7/1/2019 - 6/30/2020 $16.25
                
5/17/2019 3,591 5/7/20207/1/2019 - 6/30/2020 
$
16.25  3,591 5/7/2020 7/1/2019 - 6/30/2020 $16.25
                
5/22/2019 3,541 5/7/20207/1/2019 - 6/30/2020 
$
16.25  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
         


Compensation expense related to the above stock grants is recognized over the period in which the directors render services.

- 16 -
17

In March 2018, the Company's Compensation Committee, granted equity-based awards pursuant tonow known as the Long-Term Incentive Plan.  Certain participants under the Long-Term Incentive Plan were granted equity awardsCompensation and Human Capital Committee (the "2018 LTIP Awards""Committee"), with the number of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 2018 growth in gross premiums earned and the Company's 2018 combined ratio.  The combined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating expenses, less commission and other income to (B) net premiums earned.  No 2018 LTIP Awards were earned based on the Company's performance in 2018, and therefore no shares were issued pursuant to the 2018 LTIP Awards.  In addition to the 2018 LTIP Awards, in March 2018 the Company's Compensation Committee also granted Value Creation Incentive Plan awards (the "2018 VCIP Awards") to certain participants under the Company's Long-Term Incentive Plan.Plan (the "Long-Term Incentive Plan").  The 2018 VCIP Awards arewere performance-based equity awards that willcould be earned based on the Company's cumulative operating income as defined above, over a three-year performance period from January 1, 2018 through December 31, 2020 relative to a cumulative operating income goal for the period set by the Compensation Committee in March 2018.  Any 2018 VCIP Awards that arewere earned will bewould have been paid in unrestricted shares of the Company's Class B Common Stock at the end of the three-year performance period, but no later than March 15, 2021.  NoNaN shares are eligible to be issuedwere earned under the 2018 VCIP Awards as of Marchfor 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 October 17, 2019; 21,250 shares will vestvested as of October 17, 2020, and 21,250 shares will vest as of October 17, 2021.  The Company incurred $14$183 of expense during the three months ended March 31, 20202021 related to the Nichols Stock Grant.


In March 2019, the Company's Compensation Committee granted equity-based awards pursuant to the Long-Term Incentive Plan.  Certain participants under the Long-Term Incentive Plan were granted equity awards (the "2019 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a corporate performance component as well as a personal performance component.  The corporate performance component of the 2019 LTIP Awards 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 alignaligned 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 $35$30 of expense during the three months ended March 31, 20202021 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 $39$399 of expense during the three months ended March 31, 20202021 related to the Edgecliffe-Johnson Stock Grant.


On November 5, 2019, the Board of the Company, upon the recommendation of the Compensation Committee, approved equity compensation awards to be granted to seven7 members of senior management as of November 12, 2019 under the Company’s 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 $88$52 of expense during the three months ended March 31, 20202021 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 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, other than as noted below.

18

Personnel 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 PSG from January 1, 2017 through June 30, 2018, which was subject to a $500 per claim deductible to be paid by PSG.  NoNaN 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.

- 17 -

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.


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 the parties’ agreements, finding that any interpretation should be addressed by the court in the California Action.  On April 28, 2020,Following the court's granting of Protective’s motion to dismiss in 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 of the order of dismissal in the California Action.  On May 1, 2020, Protective filed a motion with the Indiana Court to re-open the Indiana Action.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 for 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, 2020,2021, Protective had approximately $14,680$24,068 in deductible 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 deductible invoices have been approximately $1,300.$778.  PSG’s estimated ultimate obligation under the agreements is approximately $44,600$47,000 as of March 31, 20202021 (inclusive of the $14,680$24,068 in deductible receivables noted above).  At March 31, 2020,2021, 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.

The Company includedconsidered this matter in its assessment of measuring credit losses under the impact of adopting ASU 2016-13, the newCECL guidance for measuring CECL, which is discussed in Note 1.  A1 by applying a probability-of-default methodology was applied 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). There was no change 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 2020, as2021.  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 and projected cash flows had not materially changed since January 1, 2020 whendiscussed above less the initial measurement of the credit risk was conducted.CECL allowance.

19



(11)  Shareholders' Equity:


On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B Common Stock.  On August 6, 2019, the Company's Board of Directors reaffirmed its share repurchase program, but also provided that the aggregate dollar amount of shares of the Company's common stock that may be repurchased under the share repurchase program between August 6, 2019 and August 6, 2020 may not exceed $25,000, including a limit of up to $6,250 per quarter.  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 common stock.


During the three months ended March 31, 2020,2021, the Company paid $1,782 todid 0t repurchase 126,764any shares of Class B Common Stock under the share repurchase program.  No share repurchases have been made since March 20, 2020.


- 18 -The following table illustrates changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2021:

 
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 three months ended March 31, 2020:


 
Foreign
Currency
  
Unrealized Holding Gains (Losses) on
Available-for-sale Securities
  Total  
Foreign
Currency
  
Unrealized Holding Gains (Losses) on
Available-for-sale Securities
  Total 
Beginning balance at December 31, 2019 
$
(494
)
 
$
9,863
  
$
9,369
  $(494) $9,863  $9,369 
                     
Other comprehensive income (loss) before reclassifications
 
(687
)
 
(20,256
)
 
(20,943
)
  (687)  (20,256)  (20,943)
Amounts reclassified from accumulated other comprehensive income (loss)
  
–
   
(605
)
  
(605
)
  0   (605)  (605)
                     
Net current-period other comprehensive income (loss)  
(687
)
  
(20,861
)
  
(21,548
)
  (687)  (20,861)  (21,548)
                     
Ending balance at March 31, 2020 
$
(1,181
)
 
$
(10,998
)
 
$
(12,179
)
 $(1,181) $(10,998) $(12,179)
The following table illustrates changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2019:

  
Foreign
Currency
  
Unrealized Holding Gains (Losses) on
Available-for-sale Securities
  Total 
Beginning balance at December 31, 2018 
$
(1,139
)
 
$
(6,208
)
 
$
(7,347
)
             
Other comprehensive loss before reclassifications
  
307
   
7,671
   
7,978
 
Amounts reclassified from accumulated other comprehensive income (loss)
  
–
   
785
   
785
 
             
Net current-period other comprehensive income (loss)  
307
   
8,456
   
8,763
 
             
Ending balance at March 31, 2019 
$
(832
)
 
$
2,248
  
$
1,416
 



(12)  Related Parties:


The Company utilizes the services of an investment firm of which one1 director of the Company is a partial owner.  This investment firm manages equity securities and fixed income portfolios held by the Company with an aggregate market value of approximately $6,698$8,857 at March 31, 2020.2021.  Total commissions and net fees earned by this investment firm and its affiliates on these portfolios were $37$8 and $34$37 for the three months ended March 31, 20202021 and 2019.2020.



(13)  Subsequent Events:


On May 5, 2020,4, 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 dividend per share will be payable June 2, 20201, 2021 to shareholders of record on May 19, 2020.18, 2021.


- 19 -
20



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Protective Insurance Corporation is a property-casualty insurer specializing in marketing and underwriting property, liability and workers' compensation coverage for trucking and public transportation fleets, 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.


Expected Credit Losses Standard (CECL) AdoptionSpecial 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 January 1, 2020, weFebruary 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 provisionsMerger Agreement and the transactions contemplated thereby. The Merger is expected to close in June or July of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement2021.  At the effective time of Credit Losses on Financial Instruments,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 ASU 2016-13.  ASU 2016-13 introducedby 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 current expected credit loss ("CECL") model for measuring expected credit losses fortotal 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 in the ordinary course and not engaging in certain types of financial instruments heldtransactions during the period between the execution of the Merger Agreement and the closing 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 reporting date requiring significant judgment in application basedspecial meeting of Protective’s shareholders held on historical experience, current conditionsMay 5, 2021, Protective’s Class A shareholders approved the Merger Agreement, the Merger and reasonable supportable forecasts, but is not prescriptive aboutthe 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.

For additional information regarding the risks associated with the Merger, please see Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2020.
21

Voting and Support Agreement

On February 14, 2021, Protective also entered into a Voting and Support Agreement (the “Voting Agreement”) with Progressive and certain aspects of estimating expected losses. We adoptedProtective's shareholders. The Voting Agreement required that the guidance using a modified retrospective approach as of January 1, 2020 and recognized a cumulative effect adjustment of $15.5 million ($12.3 million net of tax),Protective shareholders party to the opening balance of retained earnings.  The adjustment was primarily related to estimating credit losses on our accounts receivable balances, reinsurance recoverable balances and commercial mortgage loansVoting Agreement: (i) appear at the datemeeting of adoption. We did not recordthe 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 significant additional impactaction 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 statementMerger, any shares of operationsClass 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 2020.

The updated guidance2021, we incurred $3.5 million ($2.7 million, net of tax) of expenses in ASU 2016-13 also amendedconjunction with the previous other-than-temporary impairment ("OTTI") model for available-for-sale fixed income securities by requiringactivities of the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit lossSpecial Committee related 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 no longer impact the determination of whether a credit loss exists.  We adopted the guidance related to available-for-sale fixed income securities on January 1, 2020 using a prospective transition approach for available-for-sale fixed income securities that were purchasedMerger 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.  As of March 31, 2020, we intended to sell one security in an unrealized loss position and, in accordance with the new guidance, recorded a write down to earnings of less than $0.1 million.  We reviewed our remaining fixed income securities in an unrealized loss position as of March 31, 2020 and determined that the losses were primarily the result of non-credit factors, such as the increase in market volatility due to the recent disruption in global financial markets as a result of the novel coronavirus COVID-19 ("COVID-19") pandemic and responses to it. We currently do not intend to sell nor do we expect to be required to sell these securities before recovery of their amortized cost. Based on the above factors, we did not record any allowance for credit losses under the new guidance related to our available-for-sale securities under the new guidance in the first quarter of 2020.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 COVID-19the novel coronavirus ("COVID-19") and related economic conditions began to impacthave impacted the global economy and our results of operations.  WhileWe 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 did not see a material impact on our underwriting income (loss),receive, as defined below,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, 2020, we did incur net realized and unrealized losses on investments of $27.8 million during the period, primarily driven by the impact of changes in fair value on our equity investments2021 reflected favorable impacts within all commercial automobile products as a result of the recent disruptiondeclines in global financial markets.  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. We have also taken additional steps including a temporary freeze on hiringOur liquidity and share repurchasescapital resources were not materially impacted by COVID-19 and reductions to discretionary spending in response to COVID-19.  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 the Company,our results, see "Part II,Part I, Item 1A, "Risk Factors," of this Quarterlyour Annual Report on Form 10-Q.
10-K for the year ended December 31, 2021.



- 20 -
Liquidity and Capital Resources


The primary sources of our 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.


We generally experience positive cash flow from operations.  Premiums are collected on insurance policies in advance of the disbursement of funds for payment of claims.  Operating costs of our property/casualty Insurance Subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, 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.  Our cash flow relating to premiums is significantly affected by reinsurance programs in effect, whereby we 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 us from our insureds.


On August 31, 2017, our Board of Directors authorized the reinstatement of our share repurchase program for up to 2,464,209 shares of our Class A or Class B Common Stock.  On August 6, 2019, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our common stock that may be repurchased under the share repurchase program between August 6, 2019 and August 6, 2020 may not exceed $25.0 million and added a limit of no more than $6.25 million in repurchases per quarter. 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 us to repurchase any shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on hand. The actual number and value of the shares to be purchased will depend on the performance of our stock price, market volume and other market conditions. During the three months ended March 31, 2020,2021, we paid $1.8 million todid not repurchase 126,764any 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 our Class A or Class B Common Stock under the share repurchase program.

22

For several years, our investment philosophy has emphasized the purchase of short-term bonds with high quality and liquidity.  Our fixed income investment portfolio continues to emphasize shorter-duration instruments.  If there was a hypothetical increase in interest rates of 100 basis points, the price of our fixed income portfolio, including cash, at March 31, 20202021 would be expected to fall by approximately 2.5%2.9%.  The credit quality of our fixed income securities remains high with a weighted average rating of AA-, including cash.  The average contractual life of our fixed income and short-term investment portfolio was 6.96.8 years and 7.1 years at both March 31, 20202021 and December 31, 2019.2020.  The average duration of our fixed income portfolio remains shorter than the average duration of our liabilities.  We also remain an active participant in the equity securities market,markets, using capital in excess of amounts considered necessary to fund our current operations.  The long-term horizon for our equity investments allows us to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus.  Investments made by our domestic property/casualty Insurance 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.


Net cash used inprovided by operating activities was $1.3$20.9 million during the three months ended March 31, 20202021 compared to net cash flows from operationsused in operating activities of $11.4$1.3 million for the three months ended March 31, 2019.2020.  The decreaseincrease in operating cash flows was primarily related to lower premium volume as well as the timing of payments required under our reinsurance treaties, partially offset by higher investment income from our fixed income securities during the three months ended March 31, 20202021 compared to the same period in 2019.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 compared to cash used in investing activities of $47.3 million for the three months ended March 31, 2019.2020.  The $63.8 million change was primarily due to a decrease in the investment of cash and cash equivalent investments into fixed income securities and an increase in netreflected higher proceeds from maturities and sales of fixed income and equity securities, partially offset by $2.6$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, 20202021 when compared to the same period in 2019.2020.


Net cash used in financing activities for the three months ended March 31, 2021 consisted of regular cash dividend payments to shareholders of $1.4 million ($0.10 per share).  Financing activities for the three months ended  March 31, 2020 consisted of regular cash dividend payments to shareholders of $1.4 million ($0.10 per share) and $1.8 million to repurchase shares of our Class B Common Stock.  Financing activities for the three months ended March 31, 2019 consisted of regular cash dividend payments to shareholders of $1.5 million ($0.10 per share) and $0.5 million to repurchase shares of our Class A and B Common Stock.


Our assets at March 31, 20202021 included $69.5$87.0 million of investments included within cash and cash equivalents on the condensed consolidated balance sheet that are readily convertible to cash without market penalty and an additional $97.5$97.0 million of fixed income investments maturing in less than one year.  We believe these liquid investments, plus the expected cash flow from premium collections, are sufficient to provide for projected claim payments and operating cost demands.  In the event competitive conditions produce inadequate premium rates and we 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 our investment portfolio would permit us to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. In addition, our reinsurance program is structured to avoid significant cash outlays that accompany large losses.

- 21 -

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, 2020.2021.  At March 31, 2020,2021, the effective interest rate was 2.03%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, 2020.2021.  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 20202021 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, 2020.2021.  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 our Insurance Subsidiaries.  As such, there are statutory restrictions on the transfer of substantial portions of this equity to Protective.  At March 31, 2020, $61.92021, $68.6 million may be transferred by dividend or loan to Protective during the remainder of 20202021 without approval by, or prior notification to, regulatory authorities.  An additional $140.4$158.1 million of shareholders' equity of our Insurance Subsidiaries could be advanced or loaned to Protective with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical.  We believe these restrictions pose no material liquidity concerns for us.  We also believe the financial strength and stability of our Insurance Subsidiaries would permit access by Protective to short-term and long-term sources of credit when needed.  Protective had cash and marketable securities valued at $14.7$7.8 million at March 31, 2020.

2021.
- 22 -
23


Non-GAAP Measures


We believe investors’ understanding of our performance is enhanced by our disclosure of underwriting income (loss), which is a measure that is not calculated in accordance with GAAP. Underwriting income (loss) represents the pre-tax profitability or loss of our insurance operations 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 three months ended March 31, 2021, we also excluded corporate charges incurred in conjunction with the Board's review of the Merger Agreement, the Voting Agreement and the Merger discussed above from the calculation of underwriting income (loss).  We believe the exclusion of these 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 substitute 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  Three Months Ended 
 March 31  March 31 
(dollars in thousands)
 2020  2019  2021  2020 
Income (loss) before federal income tax expense (benefit)
 $(25,139) 
$
3,514
  $16,353  $(25,139)
Less: Net realized and unrealized gains (losses) on investments (27,756) 
6,028
   10,509   (27,756)
Less: Net investment income  7,236   
6,232
   5,306   7,236 
Underwriting loss $(4,619) 
$
(8,746
)
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 $81,831  
$
87,122
  $82,318  $81,831 
Net premiums earned  109,659   
110,013
   122,853   109,659 
Loss ratio 74.6% 
79.2
%
  67.0%  74.6%
              
Other operating expenses $34,110  
$
33,701
  $41,855  $34,110 
Less: Commissions and other income  1,663   
2,064
   1,858   1,663 
Other operating expenses, less commissions and other income 32,447  
31,637
   39,997   32,447 
Net premiums earned  109,659   
110,013
   122,853   109,659 
Expense ratio 29.6% 
28.8
%
  32.6%  29.6%
              
Impact of corporate charges  (2.9)%  - 
Expense ratio, excluding corporate charges  29.7%  29.6%
        
Combined ratio 104.2% 
108.0
%
  99.6%  104.2%
Combined ratio, excluding corporate charges  96.7%  104.2%


1 Represents the corporate charges incurred in conjunction with the activities of the Special Committee related to the Merger with Progressive discussed above.
- 23 -
24


Results of Operations


Comparison of First Quarter 20202021 to First Quarter 2019 2020(in thousands)


 2020  2019  Change  % Change  2021  2020  Change  % Change 
Gross premiums written $134,006  
$
148,893
  
$
(14,887
)
 
(10.0
)%
 $145,056  $134,006  $11,050   8.2%
Ceded premiums written  (24,772)  
(33,571
)
  
8,799
  
(26.2
)%
  (26,229)  (24,772)  (1,457)  5.9%
Net premiums written $109,234  
$
115,322
  
$
(6,088
)
 
(5.3
)%
 $118,827  $109,234  $9,593   8.8%
                            
Net premiums earned $109,659  
$
110,013
  
$
(354
)
 
(0.3
)%
 $122,853  $109,659  $13,194   12.0%
Net investment income 7,236  
6,232
  
1,004
  
16.1
%
  5,306   7,236   (1,930)  (26.7)%
Commissions and other income 1,663  
2,064
  
(401
)
 
(19.4
)%
  1,858   1,663   195   11.7%
Net realized and unrealized gains (losses) on investments  (27,756)  
6,028
   
(33,784
)
 
(560.5
)%
  10,509   (27,756)  38,265   (137.9)%
Total revenue 90,802  
124,337
         140,526   90,802         
Losses and loss expenses incurred 81,831  
87,122
  
(5,291
)
 
(6.1
)%
  82,318   81,831   487   0.6%
Other operating expenses  34,110   
33,701
   
409
  
1.2
%
  41,855   34,110   7,745   22.7%
Total expenses  115,941   
120,823
         124,173   115,941         
Income (loss) before federal income tax expense (benefit) (25,139) 
3,514
  
(28,653
)
     16,353   (25,139)  41,492     
Federal income tax expense (benefit)  (2,983)  
766
   
(3,749
)
     3,415   (2,983)  6,398     
Net income (loss) $(22,156) 
$
2,748
  
$
(24,904
)
    $12,938  $(22,156) $35,094     
                            


Gross premiums written during the first quarter of 2020 decreased $14.92021 increased $11.1 million (10.0%(8.2%), while net premiums earned decreased $0.4increased $13.2 million (0.3%(12.0%), as compared to the first quarter of 2019.2020.  The lowerhigher net premiums earned in the first quarter of 20202021 were primarily the result of declines inincreased premiums associated with lower retention rates as we continuerelated to take actions to improve profitability, including rate increases, and non-renewal of certain risks, partially offset by rate increasesgrowth in existing business lines and new business policies sold.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 the impact of COVID-19.  Additionally, during the 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 was 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 our insurance business averaged 18.5%18.1% of gross premiums written for the first quarter of 20202021 compared to 22.5%18.5% in the first quarter of 2019.2020.  The decrease in the percentage of premiums ceded was primarily due to a mix shift toward more commercial automobile business (specifically Independent Contractor linesthe result of higher growth in certain products that carry noare not reinsured and an increase in the percentage of premium earning in under the 2020 reinsurance coverage) and less workers' compensation business.treaty year which had lower ceding participation than the previous treaty.


Losses and loss expenses incurred during the first quarter of 2020 decreased $5.32021 increased $0.5 million (6.1%(0.6%) compared to the first quarter of 2019,2020, 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 compared to a loss ratio of 79.2% during the first quarter of 2019.2020.  The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned.  The lower losses and loss expenses and lower loss ratio in the first quarter of 20202021 reflected results of our underwriting actions, including non-renewal of unprofitable business as well as significant 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 declines in accident frequency due to lower traffic density.


Net investment income for the first quarter of 2020 increased 16.1%2021 decreased 26.7% to $7.2$5.3 million compared to $6.2$7.2 million for the first quarter of 2019.2020.  The increasedecrease reflected lower interest rates earned on cash and cash equivalent balances and lower interest rates on reinvestment in the first quarter of 2021, partially offset by an increase in average funds invested resulting from positive cash flows from operations compared to the first quarter of 2019,2020.
Net realized and unrealized gains on investments of $10.5 million during the first quarter of 2021 were primarily driven by $7.8million in unrealized gains on equity securities during the period and $2.3 million in realized gains on sales of securities as well asa result of continued improvement in the continued reallocation from equityglobal financial markets.  Additionally, we saw a $0.4 million increase in the value of our limited partnership investments in limited partnerships and cash and cash equivalent investments into short-duration, high-quality bonds.  

Netthe first quarter of 2021.  These gains were partially offset by impairments on our fixed income securities of $0.1 million recognized during the period.  Comparative first quarter 2020 net realized and unrealized losses on investments of $27.8 million during the first quarter of 2020 were primarily driven by $22.3 million in unrealized losses on equity securities, which were largely attributable to disruptions in the financial markets related to COVID-19, $4.8 million in net realized losses on sales of securities, excluding impairment losses, and a $0.7 million decrease in the value of our limited partnership investments.  Comparative first quarter 2019 net realized and unrealized gains on investments of $6.0 million were primarily driven by $6.0 million in unrealized gains on equity securities and a $0.4 million increase in the value of our limited partnership investments, partially offset by impairments on our fixed income securities of $0.3 million recognized during the period.  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

Other operating expenses for the first quarter of 20202021 increased $0.4$7.7 million, or 1.2%22.7%, to $41.9 million compared to $34.1 million compared tofor the first quarter of 2019.  2020.  The increase was driven primarily by higher commission expenses as a result$3.5 million of the mix of premium writtencorporate charges incurred during the first quarter of 2020 partially offset by lower salary2021 for third party advisors to the Special Committee in connection with the Merger with Progressive, as discussed above, and benefit expenses duringhigher variable costs related to the period.  The expense ratio was 29.6%premiums earned during the first quarter of 20202021.  The expense ratio was 32.6% during the first quarter of 2021, or 29.7% excluding the corporate charges discussed above, compared to 28.8%29.6% for the first quarter of 2019.  The increase in the expense ratio was primarily related to the higher commission expenses noted above as well as the decrease in net premiums earned during the period.2020.

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Federal income tax benefitexpense was $3.0$3.4 million for the first quarter of 20202021 compared to a $3.0 million federal income tax expense of $0.8 millionbenefit for the first quarter of 2019.2020.  The effective tax rate on consolidated income for the first quarter of 20202021 was an 11.9% tax benefit20.9% compared to a 21.8% tax expense in11.9% on consolidated loss for the first quarter of 2019.  The pre-tax loss for the three months ended March 31, 2020 makes these interim period effective tax rates less comparable year over year.2020.  The difference in the effective federal income tax rate from the normal statutory rate was primarily related to the recording of a valuation allowance in the current period on our deferred tax assets, in addition to the effects of tax-exempt investment income and the dividends received deduction.  In assessingThe effective tax rate for the valuationfirst quarter of deferred tax assets, we considered whether it is more likely than not that some portion or all2020 was impacted by the recording of the deferred 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 period in which those temporary differences become deductible.  We considered several factors when analyzing the need for a valuation allowance including our current three year cumulative loss through March 31, 2020, the increase in deferred tax assets due to the adoption of CECL at January 1, 2020 discussed above, the change in unrealized gains and losses and the loss of a high taxable income year from the carryback period.  The three year cumulative loss limits our ability to use projected income beyond 2020 in the analysis.  Based on this analysis, we have concluded that a valuation allowance is necessary for our deferred tax assets not supported by either carryback availability or future reversals of existing taxable temporary differences and recorded a valuation allowance of $4.9 million for the three months ended March 31, 2020,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 recognized thisdid not record a valuation allowance entirelyon our deferred tax assets in the first quarter of 2020 as it relates to realized and unrealized capital losses during the quarter that are treated as a discrete item.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, net income decreased $24.9increased $35.1 million to a$12.9 million during the first quarter of 2021 compared to net loss of $22.2 million during the first quarter of 2020 compared to net income of $2.7 million during the first quarter of 2019.2020.




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 JuneJuly 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 responsible for our $25 retention. 

Commercial automobile products covered by our reinsurance treaty from July 3, 2019 through JuneJuly 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 combination of (1) a decreased need for stop-loss reinsurance protection resulting from a significant decrease in our commercial automobile subject limits profile, (2) a higher cost for this covercoverage 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


The disclosures in this Quarterly Report on Form 10-Q contain "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 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.


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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, many of which are difficult to predict and generally beyond our control.  Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.  Investors are also urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the factors that affect our business, including "Risk Factors" set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 and in Part II, Item 1A of this Quarterly Report on Form 10-Q and our reports filed with the U.S. Securities and Exchange Commission from time to time.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 weaknessvolatility 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;


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

●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 fiscal year ended December 31, 2019.2020.  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 Management’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2019. Changes in 2020 to2020.  As of March 31, 2021, our significantcritical accounting policies which are dependent uponand estimates and assumptions, include the adoption of new accounting guidance for the recognition of credit losses.  For discussion of the new guidance and the related changes tohave not changed from those described in our accounting policy, see Accounting Policies within Note 1 - Summary of Significant Accounting Policies of this QuarterlyAnnual Report on Form 10-Q.10-K for the year ended December 31, 2020.


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Concentrations of Credit Risk


Our 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 March 31, 2020,2021, amounts due from reinsurers on paid and unpaid losses were estimated to total approximately $400$421 million.  Because of the large policy limits reinsured by us, the ultimate amount of incurred but not reported losses and loss adjustment expenses attributable to reinsurers could vary significantly from this estimate; provided, however, absent the inability to collect from reinsurers, such variance would not result in changes in net claim losses incurred by us.




Off-Balance Sheet Arrangements


We have no off-balance sheet arrangements.


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28

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Other 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, 2019.2020.


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, 20202021 to selected hypothetical changes in interest rates (dollars in thousands).


 Fair Value  
Estimated Change
in Fair Value
  Fair Value  
Estimated Change
in Fair Value
 
200 basis point increase
 
$
707,311
  
$
(39,545
)
 $860,539  $(54,410)
100 basis point increase
 
727,083
  
(19,773
)
  887,744   (27,205)
Current fair value
 
746,856
  
–
   914,949   – 
100 basis point decrease
 
766,629
  
19,773
   942,154   27,205 
200 basis point decrease
 
786,401
  
39,545
   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 March 31, 20202021 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 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 is: (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, its internal control over financial reporting.

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29

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, 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, 2019.2020. 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, 20192020 other than as described below.

The following risk factor has been added:


The impact of COVID-19 and related risksWe may not consummate our proposed merger with Progressive within the timeframe or in the manner we anticipate, or at all, which could materiallynegatively 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 position and/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 liquidity.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


Beginning in March 2020, the global pandemicpending legal proceedings instituted against us and the members of our Board of Directors related to the novel coronavirus COVID-19Merger, 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 economic conditions began to impact the global economyMerger Agreement and our resultsthe Merger, and many of operations. Becausethese costs, fees and expenses are payable by us regardless of whether or not the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 include the following:Merger is consummated.



30
●
Net premiums earned. We expect the impact of COVID-19 on general economic activity may negatively impact our premium volumes.  We did not experience a material effect in the first quarter of 2020, but the impact could be more significant in the second quarter of 2020 based on changes in the operations of our insureds including, but not limited to, the reduction in hours worked by insureds with workers' compensation coverages as well as the reduction in miles driven by commercial automobile insureds, which are the basis of premiums we receive.  This impact could further persist for the remainder of 2020 and beyond, but the degree of the impact will depend on the extent and duration of the economic contraction. 


●
Loss and loss expenses incurred.  We have not seen a material impact on our loss and loss expenses incurred in the first quarter of 2020, but we may incur higher claim and claim adjustment expenses in certain lines of business as a result of COVID-19 due to increases in frequency and/or severity of claims.  For example, we may experience elevated frequency and severity in our workers’ compensation lines related to compensable claims by workers who demonstrate that the injury or illness arose both out of and in the course of their employment.  We may also experience elevated frequency and severity in our liability coverages as a result of plaintiffs’ lawyers seeking to generate COVID-19-related claim activity against our insureds.  Additionally, the anticipated and unknown risks related to COVID-19 may cause additional uncertainty in the process of estimating claims and claim adjustment expense reserves. For example, the behavior of claimants and policyholders may change in unexpected ways, the disruption to the court system may impact the timing and amounts of claims settlements and the actions taken by governmental bodies, both legislative and regulatory, in reaction to COVID-19 and their related impacts are hard to predict. As a result, our estimated level of claims and claim adjustment expense reserves may change. We are also subject to credit risk in our insurance operations which may be exacerbated in times of economic distress.


●
Investments. The disruption in the financial markets related to COVID-19 has contributed to net realized and unrealized investment losses, primarily due to the impact of changes in fair value on our equity and fixed income investments. Our corporate fixed income portfolio may be further adversely impacted by ratings downgrades, increased bankruptcies and credit spread widening in distressed industries, such as energy, gaming, lodging and leisure, autos, airlines and retail. Our investment portfolio also includes commercial mortgage-backed securities, which could be adversely impacted by declines in real estate valuations and/or financial market disruption. Further disruptions in global financial markets due to the continuing impact of COVID-19 could result in additional net realized and unrealized investment losses, including potential impairments in our fixed income portfolio. In addition, declines in fixed income yields would result in decreases in net investment income from future investment activity, including re-investments.

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●
Liquidity. Collection of premiums, deductibles or self-insured retentions from our policyholders and reinsurance recoverables from our reinsurers may become increasingly difficult.  At the state level, 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. It is uncertain what impact these government mandates may have on our ability to recover unpaid premiums on the affected policies or what our obligations may be for the payment of claims made under policies for which we have not received premium payments.


●
Adverse Legislative and/or Regulatory Action. Federal, state and local government actions to address and contain the impact of COVID-19 may adversely affect us. A number of states have instituted, and other states are considering instituting, changes designed to effectively expand workers' compensation coverage by creating presumptions of compensability of claims for certain types of workers. Regulatory restrictions or requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums.


●
Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or outsourcing providers are unable to continue to work because of illness, government directives or otherwise. In addition, the interruption of our or their system capabilities could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Having shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities.


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


Issuer Purchases of Equity Securities

  
Total Number of
Shares Purchased
  
Average Price
Paid per Share
  
Total Number of
Shares Purchased
Under the Program (1)
  
Remaining Shares
Available to be Purchased
Under the Program (1)
 
January 1 – January 31
  
29,990
  
$
16.05
   
29,990
   
1,472,503
 
February 1 – February 29
  
9,200
   
14.87
   
9,200
   
1,463,303
 
March 1 – March 31
  
87,574
   
13.30
   
87,574
   
1,375,729
 
Total  
126,764
       
126,764
     


The following table presents information related to our repurchases of common stock for the 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 ourthe Company’s share repurchase program for up to 2,464,209 shares of ourits Class A or Class B Common Stock.  On August 6, 2019, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our common stock thatThe repurchases may be repurchased undermade in the share repurchase program between August 6, 2019open market or through privately negotiated transactions, from time-to-time, and August 6, 2020 may not exceed $25.0 million, including a limit of up to $6.25 million per quarter.  No duration has been placed on our share repurchase program,in accordance with applicable laws, rules and we reserve the right to amend, suspend or discontinue it at any time.regulations.  The share repurchase program may be amended, suspended or discontinued at any time and does not commit usthe Company to repurchase any shares of our common stock.  We haveits Common Stock. The Company has funded, and intendintends 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.


ITEM 5. OTHER INFORMATION

On May 5, 2020, the Board of Directors (the “Board”) of Protective Insurance Corporation (the “Company”) approved a form of indemnification agreement (the “Indemnification Agreement”) between the Company and the individuals who serve or may serve from time to time as directors of the Company (each such person, an “Indemnitee”). Under the Indemnification Agreement, the Company agrees to indemnify the Indemnitees against certain liabilities, including those arising out of, relating to, or in connection with the fact that Indemnitee is or was a director or member of any committee of the Board. The Indemnification Agreement also provides for the advancement of expenses relating to the indemnification obligations. On May 5, 2020, the Company entered into such Indemnification Agreements with each of its directors.

The foregoing summary of the Indemnification Agreement is qualified by reference to the full text of the Indemnification Agreement, a copy of which is filed herewith as Exhibit 10.2 and incorporated herein by reference.


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31
ITEM 6. EXHIBITS


INDEX TO EXHIBITS


Exhibit No. Description
   
3.12.1
 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 effective April 14, 2020,through January 3, 2021, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on April 20, 2020.
Code of By-Laws of Protective Insurance Corporation, as amended effective May 5, 2020, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on May 6, 2020.
January 4, 2021.
   
10.1
 
Amendment to the EmploymentVoting and Support Agreement, effectivedated as of May 22, 2019,February 14, 2021, by and betweenamong Protective Insurance Corporation, and Jeremy D. Edgecliffe-Johnson, dated as of March 31, 2020
Form of Indemnification Agreement, by and between Protective InsuranceThe Progressive Corporation and members of its Board of Directors, dated as of May 5, 2020
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
 
   
31.2
 
   
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 Protective Insurance Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020,2021, 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 (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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32


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, 20202021


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





Date May 6, 20202021


By:
/s/ John R. Barnett
 
 
John R. Barnett
 
 
Chief Financial Officer
 


33


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