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 ~~September 30, 2020~~March 31, 2021

☐	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

PROTECTIVE INSURANCE CORPORATION

(Exact name of registrant as specified in its charter)

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) 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 Value	PTVCA	The Nasdaq Stock Market LLC
Class B Common Stock, No Par Value	PTVCB	The 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 ~~November 3, 2020:~~May 4, 2021:

Common Stock, No Par Value:	Class A (voting)	2,603,350
	Class B (non-voting)	~~11,662,517~~11,552,801
		~~14,265,867~~14,156,151

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Protective Insurance Corporation and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share data)

	September 30 2020		December 31 2019		March 31 2021		December 31 2020
Assets
Investments:
Fixed income securities	$	851,937	$	795,538
Fixed income securities (less allowance for credit losses of $825 and $1,035)					$	914,949	$	919,692
Equity securities		48,417		76,812		67,015		58,169
Limited partnerships		7,455		23,292		7,476		7,214
Commercial mortgage loans		11,087		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
		919,896		908,424		1,001,306		996,677

Cash and cash equivalents		90,425		67,851		95,566		58,301
Restricted cash and cash equivalents		10,117		21,037		11,538		12,128
Accounts receivable		94,820		111,762
Reinsurance recoverable		429,544		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		91,109		86,306		91,839		90,256
Current federal income taxes recoverable		3,102		4,878
Deferred federal income taxes		5,810		2,035		10,764		8,980
Total Assets	$	1,644,823	$	1,634,360	$	1,762,675	$	1,722,827

Liabilities and shareholders' equity
Reserves for losses and loss expenses	$	1,054,457	$	988,305	$	1,108,132	$	1,089,669
Reserves for unearned premiums		63,553		74,810		59,049		63,731
Reinsurance payable		53,202		65,835		75,898		76,617
Short-term borrowings		20,000		20,000		20,000		20,000
Accounts payable and other liabilities		108,947		121,094		129,367		108,962
Current federal income taxes payable						3,551		766
Total Liabilities		1,300,159		1,270,044		1,395,997		1,359,745

Shareholders' equity:
Common stock-0 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 - 11,650,004; 2019 - 11,675,956		498		499
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		54,160		53,349		55,645		54,571
Accumulated other comprehensive income		14,185		9,369		12,766		21,759
Retained earnings		275,710		300,988		297,657		286,143
Total Shareholders' Equity		344,664		364,316		366,678		363,082
Total Liabilities and Shareholders' Equity	$	1,644,823	$	1,634,360	$	1,762,675	$	1,722,827

See notes to condensed consolidated financial statements.

Protective Insurance Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share data)

	Three Months Ended September 30						Nine Months Ended September 30						Three Months Ended March 31
	2020			2019			2020			2019			2021			2020
Revenues
Net premiums earned	$	117,853		$	110,288		$	325,242		$	335,931		$	122,853		$	109,659
Net investment income		5,486			6,703			19,102			19,434			5,306			7,236
Commissions and other income		1,469			2,716			5,020			6,761			1,858			1,663
Net realized gains (losses) on investments, excluding impairment losses		(39	)		1,199			(8,924	)		1,872			2,339			(4,787	)
Impairment losses on investments		(588	)		(58	)		(1,046	)		(404	)		(82	)		(40	)
Net unrealized gains (losses) on equity securities and limited partnership investments		771			(1,016	)		(7,026	)		7,573			8,252			(22,929	)
Net realized and unrealized gains (losses) on investments		144			125			(16,996	)		9,041			10,509			(27,756	)
		124,952			119,832			332,368			371,167			140,526			90,802

Expenses
Losses and loss expenses incurred		84,673			84,781			234,713			262,336			82,318			81,831
Other operating expenses		36,952			36,070			105,259			104,386			41,855			34,110
		121,625			120,851			339,972			366,722			124,173			115,941
Income (loss) before federal income tax expense (benefit)		3,327			(1,019	)		(7,604	)		4,445			16,353			(25,139	)
Federal income tax expense (benefit)		46			(312	)		(96	)		869			3,415			(2,983	)
Net income (loss)	$	3,281		$	(707	)	$	(7,508	)	$	3,576		$	12,938		$	(22,156	)

Net income (loss) per share:
Basic	$	0.23		$	(0.05	)	$	(0.53	)	$	0.24		$	0.91		$	(1.56	)
Diluted	$	0.23		$	(0.05	)	$	(0.53	)	$	0.24		$	0.90		$	(1.56	)

Weighted average number of shares outstanding:
Basic		14,132			14,361			14,139			14,607			14,153			14,169
Dilutive effect of share equivalents		169			n/a			n/a			77			154			n/a
Diluted		14,301			14,361			14,139			14,684			14,307			14,169

See notes to condensed consolidated financial statements.

Protective Insurance Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Three Months Ended September 30					Nine Months Ended September 30					Three Months Ended March 31
	2020		2019			2020			2019		2021			2020
Net income (loss)	$	3,281	$	(707	)	$	(7,508	)	$	3,576	$	12,938		$	(22,156	)

Other comprehensive income, net of tax:
Unrealized net gains on fixed income securities		6,133		1,566			5,123			16,539
Other comprehensive loss, net of tax:
Net unrealized losses on fixed income securities												(9,081	)		(20,861	)

Foreign currency translation adjustments		159		(189	)		(307	)		402		88			(687	)

Other comprehensive income		6,292		1,377			4,816			16,941
Other comprehensive loss												(8,993	)		(21,548	)

Comprehensive income (loss)	$	9,573	$	670		$	(2,692	)	$	20,517	$	3,945		$	(43,704	)

See notes to condensed consolidated financial statements.

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 – 0 – 0 0 0 (12,281 ) (12,281 )
Net loss – 0 – 0 0 0 (7,508 ) (7,508 )
Foreign currency translation adjustment, net of tax – 0 – 0 0 (307 ) 0 (307 )
Change in unrealized gain (loss) on investments, net of tax – 0 – 0 0 5,123 0 5,123
Common stock dividends – 0 – 0 0 0 (4,275 ) (4,275 )
Repurchase of common shares 0 0 (127 ) (5 ) (563 ) 0 (1,214 ) (1,782 )
Restricted stock grants 0 0 101 4 1,374 0 0 1,378
Balance at September 30, 2020 2,603 $ 111 11,650 $ 498 $ 54,160 $ 14,185 $ 275,710 $ 344,664

	Common Stock								Additional		Accumulated Other
	Class A				Class B				Paid-in		Comprehensive			Retained			Total
Description	Shares		Amount		Shares		Amount		Capital		Income (Loss)			Earnings			Equity
Balance at December 31, 2020		2,603	$	111		11,675	$	498	$	54,571	$	21,759		$	286,143		$	363,082
Net income		–		0		–		0		0		0			12,938			12,938
Foreign currency translation adjustment, net of tax		–		0		–		0		0		88			0			88
Change in unrealized gains (losses) on investments, net of tax		–		0		–		0		0		(9,081	)		0			(9,081	)
Common stock dividends		–		0		–		0		0		0			(1,424	)		(1,424	)
Restricted stock grants		0		0		30		1		1,074		0			0			1,075
Balance at March 31, 2021		2,603	$	111		11,705	$	499	$	55,645	$	12,766		$	297,657		$	366,678

Common Stock Additional Accumulated Other
Class A Class B Paid-in Comprehensive Retained Total
Description Shares Amount Shares Amount Capital Income (Loss) Earnings Equity
Balance at June 30, 2020 2,603 $ 111 11,610 $ 496 $ 53,692 $ 7,893 $ 273,846 $ 336,038
Net income – 0 – 0 0 0 3,281 3,281
Foreign currency translation adjustment, net of tax – 0 – 0 0 159 0 159
Change in unrealized gain (loss) on investments, net of tax – 0 – 0 0 6,133 0 6,133
Common stock dividends – 0 – 0 0 0 (1,417 ) (1,417 )
Repurchase of common shares 0 0 0 0 0 0 0 0
Restricted stock grants 0 0 40 2 468 0 0 470
Balance at September 30, 2020 2,603 $ 111 11,650 $ 498 $ 54,160 $ 14,185 $ 275,710 $ 344,664

	Common Stock										Additional			Accumulated Other
	Class A				Class B						Paid-in			Comprehensive			Retained			Total
Description	Shares		Amount		Shares			Amount			Capital			Income (Loss)			Earnings			Equity
Balance at December 31, 2019		2,603	$	111		11,676		$	499		$	53,349		$	9,369		$	300,988		$	364,316
Cumulative effect of the adoption of updated accounting guidance for credit losses, net of tax		0		0		0			0			0			0			(12,281	)		(12,281	)
Net loss		–		0		–			0			0			0			(22,156	)		(22,156	)
Foreign currency translation adjustment, net of tax		–		0		–			0			0			(687	)		0			(687	)
Change in unrealized gains (losses) on investments, net of tax		–		0		–			0			0			(20,861	)		0			(20,861	)
Common stock dividends		–		0		–			0			0			0			(1,426	)		(1,426	)
Repurchase of common stock		0		0		(127	)		(5	)		(563	)		0			(1,214	)		(1,782	)
Restricted stock grants		0		0		31			1			259			0			0			260
Balance at March 31, 2020		2,603	$	111		11,580		$	495		$	53,045		$	(12,179	)	$	263,911		$	305,383

See notes to condensed consolidated financial statements.

Protective Insurance Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of ~~Shareholders' Equity~~Cash Flows

(in thousands)

Common Stock Additional Accumulated Other
Class A Class B Paid-in Comprehensive Retained Total
Description Shares Amount Shares Amount Capital Income (Loss) Earnings Equity
Balance at December 31, 2018 2,615 $ 112 12,254 $ 522 $ 54,720 $ (7,347 ) $ 308,075 $ 356,082
Net income – 0 – 0 0 0 3,576 3,576
Foreign currency translation adjustment, net of tax – 0 – 0 0 402 0 402
Change in unrealized gain (loss) on investments, net of tax – 0 – 0 0 16,539 0 16,539
Common stock dividends – 0 – 0 0 0 (4,429 ) (4,429 )
Repurchase of common shares (6 ) 0 (595 ) (24 ) (2,590 ) 0 (7,669 ) (10,283 )
Restricted stock grants 0 0 80 3 1,540 0 0 1,543
Balance at September 30, 2019 2,609 $ 112 11,739 $ 501 $ 53,670 $ 9,594 $ 299,553 $ 363,430

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 June 30, 2019 2,612 $ 112 11,932 $ 509 $ 54,065 $ 8,217 $ 304,513 $ 367,416
Net loss – 0 – 0 0 0 (707 ) (707 )
Foreign currency translation adjustment, net of tax – 0 – 0 0 (189 ) 0 (189 )
Change in unrealized gain (loss) on investments, net of tax – 0 – 0 0 1,566 0 1,566
Common stock dividends – 0 – 0 0 0 (1,442 ) (1,442 )
Repurchase of common shares (3 ) 0 (224 ) (9 ) (976 ) 0 (2,811 ) (3,796 )
Restricted stock grants 0 0 31 1 581 0 0 582
Balance at September 30, 2019 2,609 $ 112 11,739 $ 501 $ 53,670 $ 9,594 $ 299,553 $ 363,430

	Three Months Ended March 31
	2021			2020
Operating activities
Net income (loss)	$	12,938		$	(22,156	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities		7,973			20,844
Net cash provided by (used in) operating activities		20,911			(1,312	)

Investing activities
Purchases of fixed income and equity securities		(92,719	)		(82,641	)
Distributions from limited partnerships		186			14,636
Proceeds from maturities of fixed income securities		64,453			31,088
Proceeds from sales of fixed income securities		44,427			48,552
Proceeds from sales of equity securities		2,064			5,480
Purchase of commercial mortgage loans		(319	)		(368	)
Proceeds from commercial mortgage loans		54			72
Purchases of property and equipment		(1,046	)		(369	)
Net cash provided by investing activities		17,100			16,450

Financing activities
Dividends paid to shareholders		(1,424	)		(1,426	)
Repurchase of common stock		0			(1,782	)
Net cash used in financing activities		(1,424	)		(3,208	)

Effect of foreign exchange rates on cash and cash equivalents		88			(687	)

Increase in cash, cash equivalents and restricted cash and cash equivalents		36,675			11,243
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period		70,429			88,888
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$	107,104		$	100,131

See notes to condensed consolidated financial statements.

~~Protective Insurance Corporation and Subsidiaries~~

~~Unaudited Condensed Consolidated Statements of Cash Flows~~

~~(in thousands)~~

Nine Months Ended
September 30

2020 2019
Operating activities
Net income (loss) $ (7,508 ) $ 3,576
Adjustments to reconcile net income (loss) to net cash provided by operating activities 50,599 58,746
Net cash provided by operating activities 43,091 62,322

Investing activities
Purchases of fixed income and equity securities (271,741 ) (342,299 )
Distributions from limited partnerships 14,636 33,395
Proceeds from maturities 95,454 64,536
Proceeds from sales of fixed income securities 89,746 118,725
Proceeds from sales of equity securities 47,171 19,408
Purchase of commercial mortgage loans (410 ) (2,746 )
Proceeds from commercial mortgage loans 909 0
Purchases of property and equipment (838 ) (1,659 )
Proceeds from disposals of property and equipment 0 4
Net cash used in investing activities (25,073 ) (110,636 )

Financing activities
Dividends paid to shareholders (4,275 ) (4,429 )
Repurchase of common shares (1,782 ) (10,283 )
Net cash used in financing activities (6,057 ) (14,712 )

Effect of foreign exchange rates on cash and cash equivalents (307 ) 402

Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents 11,654 (62,624 )
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period 88,888 170,811
Cash, cash equivalents and restricted cash and cash equivalents at end of period $ 100,542 $ 108,187

~~See notes to condensed consolidated financial statements.~~

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 1 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.

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, ~~2020~~2021 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 ~~September 30, 2020 in conjunction with the adoption of the new credit losses accounting standard discussed below.~~ March 31, 2021 and December 31, 2020.

The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership's net income. To the extent 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 gains (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 gains (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 gains (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 ~~September 30,~~March 31, 2021 or December 31, 2020.

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 (Topic 326): 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.

For a fixed income security that the Company does not intend to sell ~~or in cases~~and 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 gains (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 gains (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 ~~September 30, 2020,~~March 31, 2021, the Company recorded an allowance for expected credit losses of $16,500 ($13,035, net of tax). See Note 10 – Litigation, Commitments and Contingencies for further discussion.

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 September 30, 2020, each of approximately $145, 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 had the same effective date and transition requirements as ASU 2016-13. The Company adopted the guidance using a modified retrospective approach as of January 1, 2020 and recognized a cumulative effect adjustment of $15,545 ($12,281, net of tax), to the opening balance of retained earnings. The adjustment was primarily related to estimating credit losses on the Company’s accounts receivable balances, reinsurance recoverable balances and commercial mortgage loans at the date of adoption with $15,000 ($11,850, net of tax) attributed to the ongoing litigation with Personnel Staffing Group ("PSG") discussed in Note 10 - Litigation, Commitments and Contingencies.

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:~~ 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 ~~simplify~~simplified the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under ~~current~~previous guidance, an entity ~~may~~could 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, ~~current~~previous guidance ~~provides~~provided an exception that when a loss in an interim period ~~exceeds~~exceeded 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 ~~removes~~removed this exception and ~~provides~~provided that in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate. ASU 2019-12 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 evaluating~~on January 1, 2021 and did not have a material effect on the ~~effects the adoption of ASU 2019-12 will have on its~~Company's condensed consolidated financial ~~statements.~~statements.

(2) Investments:

The following is a summary of available-for-sale securities at ~~September 30, 2020~~March 31, 2021 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)
September 30, 2020
March 31, 2021
Fixed income securities
Agency collateralized mortgage obligations	$	10,106	$	9,992	$	401	$	(287	)	$	114		$	11,821	$	11,405	$	0		$	485	$	(69	)	$	416
Agency mortgage-backed securities		98,651		95,597		3,079		(25	)		3,054			114,822		113,228		0			2,254		(660	)		1,594
Asset-backed securities		102,193		104,985		579		(3,371	)		(2,792	)		102,638		102,799		0			540		(701	)		(161	)
Bank loans		8,580		9,605		0		(1,025	)		(1,025	)		12,073		11,998		0			130		(55	)		75
Certificates of deposit		520		520		0		0			0
Collateralized mortgage obligations		6,034		6,167		56		(189	)		(133	)		6,167		6,027		0			240		(100	)		140
Corporate securities		324,116		310,689		14,579		(1,152	)		13,427			362,442		353,462		0			11,149		(2,169	)		8,980
Mortgage-backed securities		43,233		47,780		1,051		(5,598	)		(4,547	)		38,612		39,967		(825	)		490		(1,020	)		(530	)
Municipal obligations		43,920		42,266		1,694		(40	)		1,654			46,464		45,358		0			1,184		(78	)		1,106
Non-U.S. government obligations		29,718		28,896		822		0			822			30,648		30,083		0			574		(9	)		565
U.S. government obligations		184,866		176,464		8,422		(20	)		8,402			189,262		186,682		0			3,738		(1,158	)		2,580
Total fixed income securities	$	851,937	$	832,961	$	30,683	$	(11,707	)	$	18,976		$	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	$	0		$	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		0		0			0
Collateralized mortgage obligations		5,616		5,123		493		0			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		0			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 ~~September 30, 2020~~March 31, 2021 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.

	September 30, 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		155	$	149,489	$	(8,214	)		88	$	108,387	$	(2,452	)		174	$	275,685	$	(4,448	)		100	$	120,630	$	(3,405	)
Greater than 12 months		25		28,495		(3,493	)		69		66,860		(1,100	)		31		51,441		(1,571	)		24		33,065		(1,333	)
Total fixed income securities		180	$	177,984	$	(11,707	)		157	$	175,247	$	(3,552	)		205	$	327,126	$	(6,019	)		124	$	153,695	$	(4,738	)

The fair value and the cost or amortized costs of fixed income investments at ~~September 30, 2020,~~March 31, 2021, organized by contractual maturity, are shown below. Actual maturities may ultimately differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.

	Fair Value		Cost or Amortized Cost		Fair Value		Cost or Amortized Cost
One year or less	$	92,882	$	92,080	$	96,999	$	96,057
Excess of one year to five years		337,419		324,886		368,593		358,662
Excess of five years to ten years		144,672		135,091		165,436		163,115
Excess of ten years		22,781		22,550		16,028		16,601
Contractual maturities		597,754		574,607		647,056		634,435
Asset-backed securities		254,183		258,354		267,893		266,574
Total	$	851,937	$	832,961	$	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 September 30						Nine Months Ended September 30						Three Months Ended March 31
	2020			2019			2020			2019			2021			2020
Gross gains on available-for-sale fixed income securities sold during the period	$	2,875		$	2,407		$	8,088		$	9,710
Gross losses on available-for-sale fixed income securities sold during the period		(2,662	)		(2,728	)		(7,552	)		(9,409	)

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		(588	)		(58	)		(1,046	)		(404	)		(82	)		(40	)

Change in value of limited partnership investments		62			278			(1,201	)		1,000			448			(676	)

Gains on equity securities:
Gains (losses) on equity securities:
Realized gains (losses) on equity securities sold during the period		(252	)		1,520			(9,460	)		1,571			153			(2,698	)
Unrealized gains (losses) on equity securities held at the end of the period		709			(1,294	)		(5,825	)		6,573			7,804			(22,253	)
Realized and unrealized gains (losses) on equity securities during the period		457			226			(15,285	)		8,144			7,957			(24,951	)

Net realized and unrealized gains (losses) on investments	$	144		$	125		$	(16,996	)	$	9,041		$	10,509		$	(27,756	)

~~As discussed in Note 1, the~~The 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 ~~relating~~related to credit losses through an allowance account on the balance sheet with a corresponding adjustment to earnings and ~~limiting~~limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. For those securities in an unrealized loss position throughout the period where the Company intended to sell ~~as of September 30, 2020,~~the security at the balance sheet date, a write down to earnings of ~~$588 and $1,046~~$82 was recorded during the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2021. The Company also analyzed securities in an unrealized loss position for credit losses and recorded an allowance for credit losses of $825 as of March 31, 2021, a reduction of $210 from the allowance of $1,035 recorded at December 31, 2020. The Company reviewed its remaining fixed income securities in an unrealized loss position as of ~~September 30, 2020~~March 31, 2021 and determined the losses were ~~primarily~~ the result of non-credit ~~factors, such as the increase in market volatility due to the disruption in global financial markets as a result of the novel coronavirus COVID-19 ("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 these available-for-sale fixed income securities under the new guidance in the first nine months of 2020.

Shareholders' equity at ~~September 30, 2020~~March 31, 2021 included approximately ~~$4,038,~~$4,201, net of federal income tax expense, of reported earnings that remain undistributed by limited partnerships.

(3) Reinsurance:

The following table summarizes the Company's transactions with reinsurers for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ comparative periods.

	2020		2019		2021		2020
Three months ended September 30:
Three months ended March 31:
Premiums ceded to reinsurers	$	26,825	$	29,957	$	26,886	$	28,467
Losses and loss expenses ceded to reinsurers		27,270		27,228		16,986		23,536
Commissions from reinsurers		7,206		7,820		6,867		7,528

2020 2019
Nine months ended September 30:
Premiums ceded to reinsurers $ 83,508 $ 92,556
Losses and loss expenses ceded to reinsurers 75,201 86,876
Commissions from reinsurers 21,785 23,229

(4) Loss and Loss Expense Reserves:

Activity in the reserves for losses and loss expenses for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ is summarized as follows. All amounts are shown net of reinsurance, unless otherwise indicated.

	Nine Months Ended						Three Months Ended
	September 30						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		234,718			263,925			83,143			81,839
Claims occurring during prior periods		(5	)		(1,589	)		(825	)		(8	)
Total incurred		234,713			262,336			82,318			81,831

Loss and loss expense payments:
Loss and loss expense payments, net:
Claims occurring during the current period		47,852			53,836			8,082			8,169
Claims occurring during prior periods		136,231			133,196			52,847			61,812
Total paid		184,083			187,032			60,929			69,981
Reserves at the end of the period		640,630			564,708
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		413,827			395,987			421,442			399,749
Reserves, gross of reinsurance recoverable, at the end of the period	$	1,054,457		$	960,695		$	1,108,132		$	1,001,599

The $5$825 prior accident year favorable development during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 was primarily due to favorable loss development in the Company's ~~occupational accident~~commercial automobile liability line of business for more recent accident years ~~2018 and 2019, mostly offset by unfavorable~~due to better than expected reported loss ~~development in excess automobile liability and public transportation primarily for accident year 2018.~~development. This savings compares to ~~a prior accident year savings of $1,589~~flat loss development for the ~~nine~~three months ended ~~September 30, 2019, which related to favorable loss development in workers' compensation and independent contractor coverages.~~March 31, 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 1one 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.

The following table summarizes segment revenues for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

	Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended March 31
	2020		2019		2020			2019		2021		2020
Revenues:
Net premiums earned	$	117,853	$	110,288	$	325,242		$	335,931	$	122,853	$	109,659
Net investment income		5,486		6,703		19,102			19,434		5,306		7,236
Net realized and unrealized gains (losses) on investments		144		125		(16,996	)		9,041		10,509		(27,756	)
Commissions and other income		1,469		2,716		5,020			6,761		1,858		1,663
Total revenues	$	124,952	$	119,832	$	332,368		$	371,167	$	140,526	$	90,802

(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 ~~September 30, 2020.~~March 31, 2021. At ~~September 30, 2020,~~March 31, 2021, the effective interest rate was ~~1.26%~~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 2 financial covenants, each of which were met as of ~~September 30, 2020.~~March 31, 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 ~~September 30, 2020~~March 31, 2021 was ~~1.4%~~20.9% compared to ~~30.6%~~11.9% on consolidated loss for the three months ended ~~September 30, 2019.~~March 31, 2020. The ~~effective federal tax rate on consolidated~~pre-tax loss for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 ~~was 1.3% compared to 19.6% on consolidated income for the nine months ended September 30, 2019. Pre-tax losses in the periods presented make~~makes these interim period effective tax rates less comparable 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 ~~adjustments~~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 our~~Company'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. As of March 31, 2021 and December 31, 2020, the Company had 0 valuation allowance.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), was signed into law on March 27, 2020, to provide national emergency economic relief measures. The CARES Act, among other things, permits net operating loss (“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 ~~considered several factors when analyzing~~has evaluated the ~~need for~~impact of the CARES Act and has determined it did not have a ~~valuation allowance, including~~material impact on the Company's ~~current three year cumulative loss through~~ ~~September 30, 2020, the increase in deferred tax assets due to the adoption~~results of CECL at January 1, 2020 discussed in Note 1, 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 the Company's ability to use projected income beyond 2020 in the analysis. Based on this analysis, the Company concluded that a valuation allowance was necessary for its deferred tax assets not supported by either carryback availability or future reversals of existing taxable temporary differences. The Company's valuation allowance was $~~1,535~~ ~~as of~~ ~~September 30, 2020, all of which was recorded in the condensed consolidated statement of operations for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2020. This represented an $853~~ ~~reduction to the valuation allowance of $2,388~~ ~~recorded for the six months ended June 30, 2020. Of this reduction, $641~~ ~~was recorded in the condensed consolidated statement of operations for the three months ended~~ ~~September 30, 2020~~ ~~and the balance was recorded in shareholders' equity within accumulated other comprehensive income as of~~ ~~September 30, 2020~~.operations.

As of ~~September 30, 2020,~~March 31, 2021, the Company's calendar years 2020, 2019, 2018 ~~2017~~ and ~~2016~~2017 remain subject to examination by the Internal Revenue Service.

(8) Fair Value:

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

As of ~~September 30, 2020:~~March 31, 2021:

Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Fixed income securities:
Agency collateralized mortgage obligations	$	10,106	$	0	$	10,106	$	0	$	11,821	$	0	$	11,821	$	0
Agency mortgage-backed securities		98,651		0		98,651		0		114,822		0		114,822		0
Asset-backed securities		102,193		0		102,193		0		102,638		0		102,638		0
Bank loans		8,580		0		8,580		0		12,073		0		12,073		0
Certificates of deposit		520		520		0		0
Collateralized mortgage obligations		6,034		0		6,034		0		6,167		0		6,167		0
Corporate securities		318,874		0		318,874		0		351,511		0		351,511		0
Options embedded in convertible securities		5,242		0		5,242		0		10,931		0		10,931		0
Mortgage-backed securities		43,233		0		43,233		0		38,612		0		38,612		0
Municipal obligations		43,920		0		43,920		0		46,464		0		46,464		0
Non-U.S. government obligations		29,718		0		29,718		0		30,648		0		30,648		0
U.S. government obligations		184,866		0		184,866		0		189,262		0		189,262		0
Total fixed income securities		851,937		520		851,417		0		914,949		0		914,949		0
Equity securities:
Consumer		11,220		11,220		0		0		12,373		12,373		0		0
Energy		1,059		1,059		0		0		1,661		1,661		0		0
Financial		22,357		22,357		0		0		34,108		34,108		0		0
Industrial		4,072		4,072		0		0		5,978		5,978		0		0
Technology		2,481		2,481		0		0		3,669		3,669		0		0
Funds (e.g., mutual funds, closed end funds, ETFs)		0		0		0		0
Other		7,228		7,228		0		0		9,226		9,226		0		0
Total equity securities		48,417		48,417		0		0		67,015		67,015		0		0
Short-term investments		1,000		1,000		0		0		1,000		1,000		0		0
Cash equivalents		78,401		0		78,401		0		86,961		0		86,961		0
Total	$	979,755	$	49,937	$	929,818	$	0	$	1,069,925	$	68,015	$	1,001,910	$	0

1415

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	$	0	$	12,093	$	0	$	11,931	$	0	$	11,931	$	0
Agency mortgage-backed securities		56,280		0		56,280		0		102,107		0		102,107		0
Asset-backed securities		106,397		0		106,397		0		107,696		0		107,696		0
Bank loans		14,568		0		14,568		0		11,361		0		11,361		0
Certificates of deposit		2,835		2,835		0		0
Collateralized mortgage obligations		5,616		0		5,616		0		5,118		0		5,118		0
Corporate securities		276,087		0		276,087		0		352,837		0		352,837		0
Options embedded in convertible securities		5,294		0		5,294		0		7,404		0		7,404		0
Mortgage-backed securities		47,463		0		47,463		0		38,056		0		38,056		0
Municipal obligations		36,286		0		36,286		0		45,143		0		45,143		0
Non-U.S. government obligations		24,179		0		24,179		0		30,600		0		30,600		0
U.S. government obligations		208,440		0		208,440		0		207,439		0		207,439		0
Total fixed income securities		795,538		2,835		792,703		0		919,692		0		919,692		0
Equity securities:
Consumer		16,707		16,707		0		0		11,598		11,598		0		0
Energy		3,074		3,074		0		0		1,227		1,227		0		0
Financial		31,577		31,577		0		0		29,064		29,064		0		0
Industrial		4,927		4,927		0		0		5,180		5,180		0		0
Technology		2,817		2,817		0		0		2,851		2,851		0		0
Funds (e.g., mutual funds, closed end funds, ETFs)		9,460		9,460		0		0
Other		8,250		8,250		0		0		8,249		8,249		0		0
Total equity securities		76,812		76,812		0		0		58,169		58,169		0		0
Short-term investments		1,000		1,000		0		0		1,000		1,000		0		0
Cash equivalents		59,780		0		59,780		0		47,026		0		47,026		0
Total	$	933,130	$	80,647	$	852,483	$	0	$	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 ~~not~~0t have any Level 3 assets carried at ~~September 30, 2020~~fair value at March 31, 2021 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 nine months ended September 30, 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:

1516

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 these~~These 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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 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
September 30, 2020
March 31, 2021
Assets:
Limited partnerships	$	7,455	$	0	$	0	$	7,455	$	7,455	$	7,476	$	0	$	0	$	7,476	$	7,476
Commercial mortgage loans		11,087		0		0		11,707		11,707		10,866		0		0		11,688		11,688
Liabilities:
Short-term borrowings		20,000		0		20,000		0		20,000		20,000		0		20,000		0		20,000

December 31, 2019
December 31, 2020
Assets:
Limited partnerships	$	23,292	$	0	$	0	$	23,292	$	23,292	$	7,214	$	0	$	0	$	7,214	$	7,214
Commercial mortgage loans		11,782		0		0		12,068		12,068		10,602		0		0		11,425		11,425
Liabilities:
Short-term borrowings		20,000		0		20,000		0		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 vested and were 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 also vested and were distributed on May 7, 2020. The table below provides detail of the restricted stock issuances to directors for ~~2019~~2020 and ~~2020:~~2021:

Grant Date	Number of Shares Issued	Vesting Date	Service 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	5/8/2019	7/1/2018 - 6/30/2019	$	23.05

5/7/2019	29,536	5/7/2020	7/1/2019 - 6/30/2020	$	16.25	29,536	5/7/2020	7/1/2019 - 6/30/2020	$	16.25

5/17/2019	3,591	5/7/2020	7/1/2019 - 6/30/2020	$	16.25	3,591	5/7/2020	7/1/2019 - 6/30/2020	$	16.25

5/22/2019	3,541	5/7/2020	7/1/2019 - 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	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.

1617

In March 2018, the Company's Compensation Committee, now known as the Compensation and Human Capital Committee (the "Committee"), granted equity-based awards pursuant to the Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan"). Certain participants under the Long-Term Incentive Plan were granted equity awards (the "2018 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 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.~~NaN~~ ~~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 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 ~~are~~were performance-based equity awards that ~~will~~could 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 ~~are~~were earned ~~will be~~would 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. NaN shares ~~are eligible to be issued~~were earned under the 2018 VCIP Awards ~~as of September 30,~~for the three-year performance period ended December 31, 2020.

On November 13, 2018, the Company entered into an employment agreement with its Interim Chief Executive Officer, John D. Nichols, Jr. Pursuant to the terms of this employment agreement, on November 13, 2018, Mr. Nichols was granted 85,000 restricted shares of the Company's Class B Common Stock (the "Nichols Stock Grant"), of which 42,500 shares vested as of October 17, 2019; 21,250 shares vested as of October 17, 2020, and 21,250 shares will vest as of October 17, 2021. The Company incurred ~~$131~~$183 of expense during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 related to the Nichols Stock Grant.

In March 2019, the Committee granted equity-based awards pursuant to the Long-Term Incentive Plan. Certain participants under the Long-Term Incentive Plan were granted equity awards (the "2019 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a corporate performance component as well as a personal performance component. The corporate performance component of the 2019 LTIP Awards was determined based on the Company's achievement of 2019 underwriting income compared to the plan target. The Company's underwriting income was calculated as income (loss) before federal income tax expense (benefit), less net realized and unrealized gains (losses) on investments, less net investment income. The personal performance component of the 2019 LTIP Awards was determined based on the achievement of personal goals that aligned with departmental and corporate objectives for 2019. 2019 LTIP Awards earned were paid in shares of restricted Class B Common Stock in early 2020. One-third of such shares will vest annually over the three-year period beginning one year from the date of issue. The Company incurred $7530 of expense during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 related to the 2019 LTIP Awards.

On May 22, 2019, the Company entered into an employment agreement with its new Chief Executive Officer, Jeremy D. Edgecliffe-Johnson. Pursuant to the terms of this employment agreement, on May 22, 2019, Mr. Edgecliffe-Johnson was granted 70,000 restricted shares of the Company's Class B Common Stock (the "Edgecliffe-Johnson Stock Grant"), of which 35,000 shares will vest as of June 1, 2022, 21,000 shares will vest as of June 1, 2023, and 14,000 shares will vest as of June 1, 2024. The Company incurred ~~$157~~$399 of expense during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 related to the Edgecliffe-Johnson Stock Grant.

On November 5, 2019, the Board of the Company, upon the recommendation of the Committee, approved equity compensation awards to be granted to 7 members of senior management as of November 12, 2019 under the Long-Term Incentive Plan. The Board approved a total of $1,100 in grants of restricted shares of the Company’s Class B Common Stock, which will vest on January 1, 2023, subject to the recipient’s continued employment with the Company through the vesting date. The Company incurred ~~$264~~$52 of expense during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 related to this grant.

On July 6, 2020, the Committee granted a total of 101,400 restricted shares of the Company's Class B Common Stock to certain members of senior management under the Long-Term Incentive Plan. These 101,400 restricted shares will vest on July 1, 2023, subject to the recipient’s continued employment with the Company through the vesting date. The Company incurred ~~$104~~$328 of expense during the ~~nine~~three months ended ~~September 30, 2020~~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.

1718

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. NaN specific damages were included in the complaint. In August 2019, Protective filed a motion to dismiss or stay the action. On April 28, 2020, Protective's motion to dismiss the California Action was granted without prejudice on grounds that Indiana is the more appropriate forum. On May 4, 2020, PSG filed a notice of appeal in the 9^th Circuit Court of Appeals, challenging the order of dismissal in the California Action. On April 15, 2021, the 9^th 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.

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 in the 9~~^th ~~Circuit Court of Appeals, challenging 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, which was denied on September 23, 2020. On December 22, 2020, ~~pending resolution~~Protective moved for reconsideration of ~~PSG's 9~~^th ~~Circuit appeal.~~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 ~~September 30, 2020,~~March 31, 2021, Protective had approximately ~~$19,400~~$24,068 in receivables on claims arising under PSG’s workers’ compensation policies and had exhausted all collateral provided by PSG. Protective continues to pay claims settlements under the policies without reimbursement from PSG. For the past six months, the average monthly invoices have been approximately ~~$786.~~$778. PSG’s estimated ultimate obligation under the agreements is approximately ~~$46,730~~$47,000 as of ~~September 30, 2020~~March 31, 2021 (inclusive of the ~~$19,400~~$24,068 in receivables noted above). At ~~September 30, 2020,~~March 31, 2021, based on the Company's assessment that PSG will continue to operate as a business and that the terms of the agreement with PSG will be legally enforceable, the Company believes that it will fully collect all current and future amounts due from PSG relating to this matter.

The Company ~~included~~considered this matter in its assessment of measuring credit losses under the ~~impact of adopting ASU 2016-13, the new~~CECL 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~~$15,000 ($11,850,, net of tax) as a reduction to equity. During the third quarter of 2020, the Company performed an update to its CECL allowance calculation related to the PSG matter. As noted above, there have been further delays in the litigation process, which have extended the estimated cash flow timing. As a result of these delays and an increase in the estimated ultimate obligation, the Company recorded an additional allowance of $~~1,500~~$1,500 ($1,185,, net of tax) within other operating expenses in the condensed consolidated statement of operations ~~for~~during the ~~three and nine months ended September 30,~~third quarter of 2020. No additional allowance was recorded in the fourth quarter of 2020 or the first quarter of 2021. In the event of a situation that results in no recovery from PSG, the Company would incur an estimated charge to the ~~condensed~~ consolidated statement of operations of $~~30,230~~$30,500 ($~~23,882~~,24,095, net of tax), which represents the estimated ultimate obligation discussed above less the CECL allowance.

(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. 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 ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the Company ~~paid $1,782 to~~did 0t repurchase ~~126,764~~any shares ~~of Class B Common Stock~~ under the share repurchase program. No share repurchases have been made since March 20, 2020.

The following table illustrates changes in accumulated other comprehensive income (loss) by component for the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:

	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
Beginning balance at December 31, 2020								$	(245	)	$	22,004		$	21,759

Other comprehensive income (loss) before reclassifications		(307	)		4,678		4,371		88			(8,580	)		(8,492	)
Amounts reclassified from accumulated other comprehensive income (loss)		0			445		445		0			(501	)		(501	)

Net current-period other comprehensive income (loss)		(307	)		5,123		4,816		88			(9,081	)		(8,993	)

Ending balance at September 30, 2020	$	(801	)	$	14,986	$	14,185
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 ~~nine~~three months ended ~~September 30, 2019:~~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, 2018	$	(1,139	)	$	(6,208	)	$	(7,347	)
Beginning balance at December 31, 2019										$	(494	)	$	9,863		$	9,369

Other comprehensive income (loss) before reclassifications		402			16,588			16,990			(687	)		(20,256	)		(20,943	)
Amounts reclassified from accumulated other comprehensive income (loss)		0			(49	)		(49	)		0			(605	)		(605	)

Net current-period other comprehensive income (loss)		402			16,539			16,941			(687	)		(20,861	)		(21,548	)

Ending balance at September 30, 2019	$	(737	)	$	10,331		$	9,594
Ending balance at March 31, 2020										$	(1,181	)	$	(10,998	)	$	(12,179	)

(12) Related Parties:

The Company utilizes the services of an investment firm of which 1 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 ~~$6,805~~$8,857 at ~~September 30, 2020.~~March 31, 2021. Total commissions and net fees earned by this investment firm and its affiliates on these portfolios were ~~$103~~$8 and ~~$100~~$37 for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

(13) Subsequent Events:

On ~~November 3, 2020,~~May 4, 2021, the Company's Board of Directors declared a regular quarterly dividend of $0.10 per share on the Company's Class A and Class B Common Stock. The dividend per share will be payable ~~December~~June 1, ~~2020~~2021 to shareholders of record on ~~November 17, 2020.~~May 18, 2021.

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.

~~Impact of Stockholder Support~~Special Committee and Contingent Sale Agreement

On May 5, 2020, the Board of Directors (the “Board”) of Protective formed a special committee of independent directors (the “Special Committee”) to evaluate a Stockholder Support and Contingent Sale Agreement (the “Contingent Sale Agreement”) entered into by and among certain prospective third party purchasers (the “Offering Parties”), certain of Protective’s shareholders and the other parties thereto. ~~We received notice of the Contingent Sale Agreement on April 23, 2020, the date the Offering Parties filed amendments to Schedule 13Ds relating to our Class A Common Stock.~~ The Contingent Sale Agreement was amended and restated on August 17, 2020. Subject to the satisfaction of certain conditions under the Contingent Sale Agreement, the Offering Parties may commence a tender offer to purchase all of the outstanding shares of Protective’s Class A Common Stock.

In June 2020, Protective announced that the Board determined the transactions contemplated by the Contingent Sale Agreement ~~are~~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 ~~expects~~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 iswas exploring, with the assistance of its independent financial and legal advisors, strategic alternatives that may be available to Protective. ~~There can be no assurance that~~

Proposed Merger with The Progressive Corporation

Merger Agreement

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

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

The Merger Agreement contains various customary representations and warranties from each of Protective, Progressive and Merger Sub. Protective has also agreed to various customary covenants, including but not limited to conducting its business 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 Protective to continue to pay regular quarterly dividends not to exceed $0.10 per share of its common stock. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period expired April 5, 2021. In addition, at the special meeting of Protective’s shareholders held on May 5, 2021, Protective’s Class A shareholders approved the Merger Agreement, the Merger and 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.

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.

Voting and Support Agreement

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

During the ~~second and third quarters~~first quarter of ~~2020,~~2021, we incurred ~~an aggregate of $2.1~~$3.5 million ($~~1.7~~2.7 million, net of tax) of expenses in conjunction with the ~~Board’s review of the Contingent Sale Agreement and the~~ activities of the Special ~~Committee.~~

~~Expected Credit Losses Standard (CECL) Adoption~~

On January 1, 2020, we adopted the provisions of Accounting Standards Update ("ASU") No. 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. ~~We adopted 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),~~ 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 loans at the date of adoption with $15.0 million ($11.9 million, net of tax) attributed to our ongoing litigation with Personnel Staffing Group ("PSG") discussed in Note 10 - Litigation, Commitments and Contingencies. ~~During the third quarter of 2020, we performed an update to our CECL allowance calculation~~Committee related to the PSG matter and recorded an additional allowance of $1.5 million ($1.2 million, net of tax) within other operating expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020.

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 limiting 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. 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. For those securities we intended to sell as of September 30, 2020, we recorded a write down to earnings of $0.6 million and $1.0 million during the three and nine months ended September 30, 2020. We reviewed our remaining fixed income securities in an unrealized loss position as of September 30, 2020 and determined the losses were primarily the result of non-credit factors, such as the increase in market volatility due to the 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 these available-for-sale securities under the new guidance in the first nine months 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-19~~the novel coronavirus ("COVID-19") and related economic conditions have impacted the global economy and our results of operations. ~~For~~We saw improvements in net premiums earned during the ~~three~~third and ~~nine months ended September 30,~~fourth quarters of 2020 within our commercial automobile products that continued through the first quarter of 2021. However, net premiums earned within our ~~commercial automobile products, specifically~~ public transportation products were negatively impacted due to a reduction in miles driven, which is the basis for premiums we receive, as well as an overall reduction in public transportation units insured. Additionally, during the fourth quarter of 2020, given ongoing profitability challenges, we discontinued writing new public transportation business. However, losses and loss expenses incurred during ~~those same periods~~the three months ended March 31, 2021 reflected favorable impacts within all commercial automobile products as a result of declines in accident frequency due to lower traffic density. In addition to these impacts on our underwriting loss, as defined below, we experienced net realized and unrealized gains on investments of $0.1 million during the three months ended September 30, 2020, reflecting an improvement in the global financial markets during the quarter; however, we incurred net realized and unrealized losses on investments of $17.0 million for the nine months ended September 30, 2020 due to investment losses of $27.8 million during the three months ended March 31, 2020 as a result of the significant decline in the global financial markets experienced in that quarter due to the COVID-19 pandemic. These gains and losses were primarily driven by the impact of changes in the fair value of our equity investments as a result of the recent fluctuations in the global financial markets driven primarily by the COVID-19 pandemic. 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 hiring in most areas~~Our liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the first three months of ~~the company and reductions to discretionary spending in response to COVID-19.~~2021. ~~We expect this impact will persist for the remainder of 2020 and beyond, but the degree of the impact will depend on the extent and duration of the challenging economic circumstances.~~ For further discussion regarding the potential impacts of COVID-19 and related economic conditions on our results, see Part ~~II,~~I, Item 1A, "Risk Factors," of ~~this Quarterly~~our Annual Report on Form ~~10-Q.~~10-K for the year ended December 31, 2021.

Liquidity and Capital Resources

Our liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the first nine months of 2020. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions, see "Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q.

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 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. 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 ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we ~~paid $1.8 million to~~did not repurchase ~~126,764~~any shares ~~of Class B Common Stock~~ 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.

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 ~~September 30, 2020~~March 31, 2021 would be expected to fall by approximately ~~2.7%~~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 6.8 years and 7.1 years ~~and 6.9 years~~ at ~~September 30, 2020~~March 31, 2021 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 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 provided by operating activities was ~~$43.1~~$20.9 million during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$62.3~~net cash used in operating activities of $1.3 million for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. The ~~decrease~~increase in operating cash flows during the ~~nine~~three months ended ~~September 30, 2020 reflected lower premium volume when~~March 31, 2021 compared to the same period of 2019. Net cash from operations for the nine months ended September 30, 2019 benefited from the impact of growth in premiums and the timing of related claims payments. The decrease in operating cash flows was primarily related to lower2020 reflected higher premium volume, ~~and~~partially offset by lower net investment ~~income from our fixed income securities during the nine months ended September 30, 2020 compared to the same period in 2019.~~income.

Net cash ~~used in~~provided by investing activities was ~~$25.1~~$17.1 million for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$110.6~~$16.5 million for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. The ~~$85.5 million change was primarily due to a decrease in the investment~~increase reflected higher proceeds from maturities and sales of ~~cash and cash equivalent investments into~~ fixed income ~~securities~~ and ~~an increase in net proceeds from sales of~~ equity securities, partially offset by ~~$18.8~~$14.4 million less in limited partnership distributions and $10.1 million higher purchases of fixed income and equity securities during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 when compared to the same period in ~~2019.~~2020.

Net cash used in financing activities for the ~~nine~~three months ended ~~September 30,~~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 ~~$4.3~~$1.4 million ($~~0.30~~0.10 per share) and $1.8 million to repurchase shares of our Class B Common Stock. Financing activities for the nine months ended September 30, 2019 consisted of regular cash dividend payments to shareholders of $4.4 million ($0.30 per share) and $10.3 million to repurchase shares of our Class A and B Common Stock.

Our assets at ~~September 30, 2020~~March 31, 2021 included ~~$78.4~~$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 ~~$92.9~~$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.~~

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 ~~September 30, 2020.~~March 31, 2021. At ~~September 30, 2020,~~March 31, 2021, the effective interest rate was ~~1.26%~~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 ~~September 30, 2020.~~March 31, 2021. These covenants require us to have a minimum U.S. generally accepted accounting principles ("GAAP") net worth and a maximum consolidated debt to equity ratio of 0.35.

Annualized net premiums written by our Insurance Subsidiaries for the ~~third~~first quarter of ~~2020~~2021 equaled approximately ~~127%~~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 ~~September 30, 2020.~~March 31, 2021. As a result, we have the ability to increase our business without seeking additional capital to meet regulatory guidelines.

Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of our Insurance Subsidiaries. As such, there are statutory restrictions on the transfer of substantial portions of this equity to Protective. At ~~September 30, 2020, $51.9~~March 31, 2021, $68.6 million may be transferred by dividend or loan to Protective during the remainder of ~~2020~~2021 without approval by, or prior notification to, regulatory authorities. An additional ~~$152.0~~$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 ~~$12.2~~$7.8 million at ~~September 30, 2020.~~March 31, 2021.

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 ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, we also excluded corporate charges incurred in conjunction with the Board's review of the ~~Contingent Sale~~Merger Agreement, ~~activities of~~ the ~~Special Committee as well as~~Voting Agreement and the ~~CECL allowance adjustment related to the PSG matter~~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 ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, we also excluded the corporate charges ~~and CECL allowance adjustment~~ 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						Nine Months Ended						Three Months Ended
	September 30						September 30						March 31
(dollars in thousands)	2020			2019			2020			2019			2021			2020
Income (loss) before federal income tax expense (benefit)	$	3,327		$	(1,019	)	$	(7,604	)	$	4,445		$	16,353		$	(25,139	)
Less: Net realized and unrealized gains (losses) on investments		144			125			(16,996	)		9,041			10,509			(27,756	)
Less: Net investment income		5,486			6,703			19,102			19,434			5,306			7,236
Less: Corporate charges and CECL allowance adjustment included in other operating expenses ¹		(1,939	)		-			(3,639	)		-
Underwriting loss	$	(364	)	$	(7,847	)	$	(6,071	)	$	(24,030	)
Less: Corporate charges included in other operating expenses ¹														(3,474	)		-
Underwriting income (loss)													$	4,012		$	(4,619	)

Other operating expenses		36,952			36,070			105,259			104,386			41,855			34,110
Less: Corporate charges and CECL allowance adjustment ¹		1,939			-			3,639			-
Other operating expenses, excluding corporate charges and CECL allowance adjustment		35,013			36,070			101,620			104,386
Less: Corporate charges ¹														3,474			-
Other operating expenses, excluding corporate charges														38,381			34,110

Ratios
Losses and loss expenses incurred	$	84,673		$	84,781		$	234,713		$	262,336		$	82,318		$	81,831
Net premiums earned		117,853			110,288			325,242			335,931			122,853			109,659
Loss ratio		71.8	%		76.9	%		72.2	%		78.1	%		67.0	%		74.6	%

Other operating expenses	$	36,952		$	36,070		$	105,259		$	104,386		$	41,855		$	34,110
Less: Commissions and other income		1,469			2,716			5,020			6,761			1,858			1,663
Other operating expenses, less commissions and other income		35,483			33,354			100,239			97,625			39,997			32,447
Net premiums earned		117,853			110,288			325,242			335,931			122,853			109,659
Expense ratio		30.1	%		30.2	%		30.8	%		29.1	%		32.6	%		29.6	%

Impact of corporate charges and CECL allowance adjustment		(1.7	)%		-			(1.1	)%		-
Expense ratio, excluding corporate charges and CECL allowance adjustment		28.4	%		30.2	%		29.7	%		29.1	%
Impact of corporate charges														(2.9	)%		-
Expense ratio, excluding corporate charges														29.7	%		29.6	%

Combined ratio		101.9	%		107.1	%		103.0	%		107.2	%		99.6	%		104.2	%
Combined ratio, excluding corporate charges and CECL allowance adjustment		100.2	%		107.1	%		101.9	%		107.2	%
Combined ratio, excluding corporate charges														96.7	%		104.2	%

¹ Represents the corporate charges incurred in conjunction with the ~~Board's review of the Contingent Sale Agreement,~~ activities of the Special Committee ~~and an adjustment to our CECL allowance~~ related to the ~~PSG litigation matter~~Merger with Progressive discussed above.

Results of Operations

Comparison of ~~Third~~First Quarter 2021 to First Quarter 2020 to ~~Third~~ ~~Quarter~~ ~~2019~~(in thousands)

	2020			2019			Change			% Change			2021			2020			Change			% Change
Gross premiums written	$	148,039		$	137,145		$	10,894			7.9	%	$	145,056		$	134,006		$	11,050			8.2	%
Ceded premiums written		(26,827	)		(27,853	)		1,026			(3.7	)%		(26,229	)		(24,772	)		(1,457	)		5.9	%
Net premiums written	$	121,212		$	109,292		$	11,920			10.9	%	$	118,827		$	109,234		$	9,593			8.8	%

Net premiums earned	$	117,853		$	110,288		$	7,565			6.9	%	$	122,853		$	109,659		$	13,194			12.0	%
Net investment income		5,486			6,703			(1,217	)		(18.2	)%		5,306			7,236			(1,930	)		(26.7	)%
Commissions and other income		1,469			2,716			(1,247	)		(45.9	)%		1,858			1,663			195			11.7	%
Net realized and unrealized gains on investments		144			125			19			15.2	%
Net realized and unrealized gains (losses) on investments														10,509			(27,756	)		38,265			(137.9	)%
Total revenue		124,952			119,832									140,526			90,802
Losses and loss expenses incurred		84,673			84,781			(108	)		(0.1	)%		82,318			81,831			487			0.6	%
Other operating expenses		36,952			36,070			882			2.4	%		41,855			34,110			7,745			22.7	%
Total expenses		121,625			120,851									124,173			115,941
Income (loss) before federal income tax expense (benefit)		3,327			(1,019	)		4,346						16,353			(25,139	)		41,492
Federal income tax expense (benefit)		46			(312	)		358						3,415			(2,983	)		6,398
Net income (loss)	$	3,281		$	(707	)	$	3,988					$	12,938		$	(22,156	)	$	35,094

Gross premiums written during the ~~third~~first quarter of ~~2020~~2021 increased ~~$10.9~~$11.1 million ~~(7.9%~~(8.2%), while net premiums earned increased ~~$7.6~~$13.2 million ~~(6.9%~~(12.0%), as compared to the ~~third~~first quarter of ~~2019.~~2020. The higher net premiums earned in the ~~third~~first quarter of ~~2020~~2021 were primarily the result of increased premiums related to rate increases, growth in existing business lines and new business policies sold primarily in our ~~independent contractor~~ commercial automobile ~~products.~~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 18.1% of gross premiums written for the ~~third~~first quarter of ~~2020~~2021 compared to ~~20.3%~~18.5% in the ~~third~~first quarter of ~~2019.~~2020. The decrease in the percentage of premiums ceded was the result of higher growth in ~~our commercial automobile~~certain products that are not reinsured and an increase in the percentage of premium earning in under the 2020 reinsurance treaty year which ~~carry a~~had lower ~~ceded reinsurance percentage when compared to~~ ceding ~~rates on our workers' compensation products.~~participation than the previous treaty.

Losses and loss expenses incurred during the ~~third~~first quarter of ~~2020 decreased $0.1~~2021 increased $0.5 million ~~(0.1%~~(0.6%) compared to the ~~third~~first quarter of ~~2019,~~2020, resulting in a loss ratio of ~~71.8%~~67.0% during the ~~third~~first quarter of ~~2020~~2021 compared to a loss ratio of ~~76.9%~~74.6% during the ~~third~~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 ~~third~~first quarter of ~~2020~~2021 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 ~~third~~first quarter of ~~2020~~2021 decreased ~~18.2%~~26.7% to ~~$5.5~~$5.3 million compared to ~~$6.7~~$7.2 million for the ~~third~~first quarter of ~~2019.~~2020. The decrease reflected lower interest rates earned on cash and cash equivalent balances and lower interest rates on reinvestment in the ~~current period,~~first quarter of 2021, partially offset by an increase in average funds invested resulting from positive cash flows from operations compared to the ~~third~~first quarter of ~~2019.~~2020.

Net realized and unrealized gains on investments of ~~$0.1~~$10.5 million during the ~~third~~first quarter of ~~2020~~2021 were primarily driven by ~~$0.7~~ $7.8million in unrealized gains on equity securities during the period and $2.3 million in realized gains on sales of securities as a result of ~~the~~continued improvement in the global financial ~~markets following sharp declines related to COVID-19 during~~markets. Additionally, we saw a $0.4 million increase in the value of our limited partnership investments in the first quarter of ~~2020.~~2021. These gains were partially offset by impairments on our fixed income securities of ~~$0.6~~$0.1 million recognized during the period. Comparative ~~third~~first quarter ~~2019~~2020 net realized and unrealized ~~gains~~losses on investments of ~~$0.1~~$27.8 million 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 ~~gains~~losses on sales of securities, excluding impairment losses, ~~of $1.2 million~~ and a ~~$0.3~~$0.7 million ~~increase~~decrease in the value of our limited partnership investments. These gains were partially offset by $1.3 million in unrealized losses on equity securities during the period and impairments on our fixed income securities of $0.1 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.

Other operating expenses for the ~~third~~first quarter of ~~2020~~2021 increased ~~$0.9~~$7.7 million, or ~~2.4%~~22.7%, to ~~$37.0~~$41.9 million compared to ~~$36.1~~$34.1 million for the ~~third~~first quarter of ~~2019.~~2020. The increase was driven primarily by a $1.5 million increase to our CECL allowance related to our ongoing litigation with PSG discussed above, higher commission expenses related to the mix of premium written during the third quarter of 2020, as well as an additional $0.4$3.5 million of corporate charges incurred during the ~~third~~first quarter of ~~2020 to~~2021 for third party advisors ofto the Special Committee in connection with the ~~Special Committee's review of the Contingent Sale Agreement as well as other strategic alternatives,~~Merger with Progressive, as discussed ~~above. T~~above, and higher variable costs related to the premiums earned during the first quarter of 2021.he The expense ratio was ~~30.1%~~32.6% during the ~~third~~first quarter of ~~2020,~~2021, or ~~28.4%~~29.7% excluding the corporate charges ~~and CECL allowance adjustment~~ discussed above, compared to ~~30.2%~~29.6% for the ~~third~~first quarter of ~~2019. The decrease in the expense ratio was primarily related to the increase in net premiums earned during the period.~~2020.

Federal income tax expense was ~~$0.05~~$3.4 million for the ~~third~~first quarter of ~~2020~~2021 compared to a ~~$0.3~~$3.0 million federal income tax benefit for the ~~third~~first quarter of ~~2019.~~2020. The effective tax rate on consolidated income for the ~~third~~first quarter of ~~2020~~2021 was ~~1.4%~~20.9% compared to ~~30.6%~~11.9% on consolidated loss for the ~~third~~first quarter of ~~2019. The pre-tax loss for the three months ended September 30, 2019 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 ~~a reduction~~the effects of tax-exempt investment income and the dividends received deduction. The effective tax rate for the first quarter of 2020 was impacted by the recording of a valuation allowance of $4.9 million on our deferred tax assets, ~~in the third quarter of 2020,~~ of which ~~$0.6~~$2.3 million was recorded in the condensed consolidated statement of operations and the ~~effects~~balance was recorded in shareholders' equity within accumulated other comprehensive income (loss) in the prior period. We did not record a valuation allowance on our deferred tax assets in the first quarter of ~~tax-exempt investment income and the dividends received deduction.~~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 increased ~~$4.0~~$35.1 million to ~~$3.3~~$12.9 million during the ~~third~~first quarter of ~~2020~~2021 compared to net loss of ~~$0.7~~$22.2 million during the ~~third~~first quarter of ~~2019.~~2020.

~~Comparison of Nine Months Ended September 30,~~ ~~2020~~ ~~to Nine Months Ended September 30,~~ ~~2019(in thousands)~~

2020 2019 Change % Change
Gross premiums written $ 397,494 $ 433,191 $ (35,697 ) (8.2 )%
Ceded premiums written (77,769 ) (92,882 ) 15,113 (16.3 )%
Net premiums written $ 319,725 $ 340,309 $ (20,584 ) (6.0 )%

Net premiums earned $ 325,242 $ 335,931 $ (10,689 ) (3.2 )%
Net investment income 19,102 19,434 (332 ) (1.7 )%
Commissions and other income 5,020 6,761 (1,741 ) (25.8 )%
Net realized and unrealized gains (losses) on investments (16,996 ) 9,041 (26,037 ) (288.0 )%
Total revenue 332,368 371,167
Losses and loss expenses incurred 234,713 262,336 (27,623 ) (10.5 )%
Other operating expenses 105,259 104,386 873 0.8 %
Total expenses 339,972 366,722
Income (loss) before federal income tax expense (benefit) (7,604 ) 4,445 (12,049 )
Federal income tax expense (benefit) (96 ) 869 (965 )
Net income (loss) $ (7,508 ) $ 3,576 $ (11,084 )

Gross premiums written during the nine months ended September 30, 2020 decreased $35.7 million (8.2%), while net premiums earned decreased $10.7 million (3.2%), as compared to the same period in 2019. The lower net premiums earned in 2020 were primarily the result of declines in premiums within our commercial automobile products, specifically public transportation, 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, we experienced reduced premiums associated with lower retention rates as we continue to take actions to improve profitability, including rate increases and non-renewal of certain risks. These decreases were partially offset by rate increases, growth in existing business lines and new business policies sold mainly in our commercial automobile products. 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 19.6% of gross premiums written for the nine months ended September 30, 2020 compared to 21.4% for the same period of 2019. The decrease in premiums ceded was the result of growth in our commercial automobile products, which carry a lower ceded reinsurance percentage when compared to ceding rates on our workers' compensation products.

Losses and loss expenses incurred during the nine months ended September 30, 2020 decreased $27.6 million (10.5%) compared to the same period of 2019, resulting in a loss ratio of 72.2% during the period. This compares to a loss ratio of 78.1% during the same period of 2019. 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 for the nine months ended September 30, 2020 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 all commercial automobile products as a result of declines in accident frequency due to lower traffic density.

Net investment income for the nine months ended September 30, 2020 decreased 1.7% to $19.1 million compared to $19.4 million for the same period of 2019. The decrease reflected lower interest rates earned on cash and cash equivalent balances in the current period, partially offset by an increase in average funds invested resulting from positive cash flow, as well as the continued reallocation from equity investments in limited partnerships and cash and cash equivalent investments into short-duration, high-quality bonds.

Net realized and unrealized losses on investments of $17.0 million during the nine months ended September 30, 2020 were primarily driven by $8.9 million in net realized losses on sales of securities, excluding impairment losses, $5.8 million in unrealized losses on equity securities, which were largely attributable to disruptions in the global financial markets related to COVID-19, a $1.2 million decrease in the value of our limited partnership investments and $1.0 million in impairments. Comparative nine months ended September 30, 2019 net realized and unrealized gains on investments of $9.0 million were primarily driven by $6.6 million in unrealized gains on equity securities during the period, net realized gains on sales of securities, excluding impairment losses, of $1.9 million and a $1.0 million increase in the value of our limited partnership investments, partially offset by impairments on our fixed income securities of $0.4 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.

Other operating expenses for the nine months ended September 30, 2020 increased $0.9 million, or 0.8%, to $105.3 million compared to $104.4 million for the same period of 2019. This increase was primarily due to the $2.1 million of corporate charges incurred during the second and third quarters of 2020 to third party advisors of the Special Committee in connection with the Special Committee's review of the Contingent Sale Agreement as well as other strategic alternatives, as discussed above, and the $1.5 million increase to the CECL allowance related to our ongoing litigation with PSG recorded in the third quarter of 2020, as discussed above, partially offset by lower salary and benefit expense. The expense ratio was 30.8% during the nine months ended September 30, 2020, or 29.7% excluding the corporate charges and CECL allowance adjustment discussed above, compared to 29.1% for the same period of 2019. The increase in the expense ratio was primarily related to the decrease in net premiums earned during the period.

Federal income tax benefit was $0.1 million for the nine months ended September 30, 2020 compared to federal income tax expense of $0.9 million for the same period of 2019. The effective tax rate on consolidated loss for the nine months ended September 30, 2020 was 1.3% compared to 19.6% on consolidated income in the same period of 2019. The pre-tax loss for the nine months ended September 30, 2020 makes these interim period effective tax rates less comparable year-over-year. 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 assessing the valuation of deferred tax assets, we considered 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 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 September 30, 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 concluded that a valuation allowance was necessary for our deferred tax assets not supported by either carryback availability or future reversals of existing taxable temporary differences. Our valuation allowance was $1.5 million as of September 30, 2020, all of which was recorded in the condensed consolidated statement of operations for the nine months ended September 30, 2020. 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 $11.1 million to a loss of $7.5 million during the nine months ended September 30, 2020 compared to net income of $3.6 million during the same period of 2019.

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 ~~June~~July 2, 2019 are subject to an unlimited aggregate stop-loss provision. Currently, each of these treaty years is reserved at or above the attachment level of these treaties. For every $100 of additional loss, we are responsible only ~~responsible~~ for our $25 retention.

Commercial automobile products covered by our reinsurance treaty from July 3, 2019 through ~~September~~July 2, 2020 are also subject to an unlimited aggregate stop-loss provision. Once the aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible for our $65 retention. This increase in our retention compared to recent years reflects the 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 ~~cover~~coverage and (3) our confidence in profitability improvements given the limit reductions and rate increases on our commercial automobile products. In 2020, due to continued rate achievement in our commercial automobile products, improvements in our mix of business and reductions to our average policy loss limits, we decided to non-renew the annual aggregate deductible treaty for policies written on and after July 3, 2020.

Forward-Looking Information

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.

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, ~~2019~~2020~~, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020,~~ and in Part II, Item 1A of this Quarterly Report on Form ~~10-Q and in our other 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.

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

●

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

●

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

our inability to complete the proposed Merger due to the failure to satisfy any of the conditions to completion of the proposed Merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the Merger;

• uncertainty as to the timing of completion of the proposed Merger;

the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

risks related to disruption of management’s attention from our ongoing business operations due to the proposed Merger;

the effect of the announcement of the proposed Merger on our relationships with our clients, operating results and business generally; and

the outcome of the pending legal proceedings initiated against us and the members of our Board of Directors related to the proposed Merger and the outcome of any other legal proceedings initiated against us, Progressive or others related to the proposed Merger;

●

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

●

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

●

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

●

other changes in the markets for our insurance products;

●

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

●

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

●

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

●

the impact of a downgrade in our financial strength rating;

●

technology or network security disruptions or breaches;

●

adequacy of insurance reserves;

●

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

●

our ability to attract and retain qualified employees;

●

tax law and accounting changes; and

●

legal actions brought against us.

Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and ~~of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, 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.

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 to~~2020. As of March 31, 2021, our ~~significant~~critical accounting policies ~~which are dependent upon~~and 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 to~~have not changed from those described in our ~~accounting policy, see "Accounting Policies" within Note 1 - Summary of Significant Accounting Policies in Part I, Item 1 of this Quarterly~~Annual Report on Form ~~10-Q.~~10-K for the year ended December 31, 2020.

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 ~~September 30, 2020~~March 31, 2021, amounts due from reinsurers on ~~paid and~~ unpaid losses were estimated to total approximately ~~$414~~$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.

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 ~~September 30, 2020~~March 31, 2021 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	$	803,764	$	(48,173	)	$	860,539	$	(54,410	)
100 basis point increase		827,851		(24,086	)		887,744		(27,205	)
Current fair value		851,937		–			914,949		–
100 basis point decrease		876,023		24,086			942,154		27,205
200 basis point decrease		900,110		48,173			969,359		54,410

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

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation as of ~~September 30, 2020~~March 31, 2021 under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the "Exchange ~~Act".~~Act." Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded 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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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 ~~from~~to the risk factors ~~previously~~ disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 ~~and in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020,~~ other than as described below.

~~The following risk factor included~~

We may not consummate our proposed merger with Progressive within the timeframe or in the ~~Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 has been updated as follows:~~manner we anticipate, or at all, which could negatively affect our business and our stock price.

On February 14, 2021, we entered into the Merger Agreement with Progressive and Merger Sub. The ~~impact~~Merger Agreement provides for, subject to the satisfaction or waiver of ~~COVID-19~~specified conditions, the merger of Merger Sub with and ~~related risks~~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 ~~materially affect our~~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 ~~financial position and/or liquidity.~~and cash flows could be adversely impacted as a result of the proposed Merger, regardless of whether it is consummated.

~~Beginning in March 2020,~~The Merger may cause disruptions to our business or business relationships, which could have an adverse impact on our financial condition, results of operations and cash flows, regardless of whether the ~~global pandemic~~Merger is consummated. For example:

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

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

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

the pending legal proceedings instituted against us and the members of our Board of Directors related to the ~~novel coronavirus COVID-19~~Merger, and any other legal proceedings instituted against us, our directors and/or our officers with respect to the proposed Merger, will require us to devote [substantial] resources and executive time to defend.

In addition, we have incurred, and will continue to incur, significant costs, fees and expenses for professional services and other costs related ~~economic conditions began~~ to ~~impact~~ the ~~global economy~~Merger Agreement and ~~our results~~the Merger, and many of ~~operations. A discussion~~these costs, fees and expenses are payable by us regardless of whether or not the impact of the COVID-19 pandemic on our business to date can be found in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q. Because of 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.

•

~~Net premiums earned~~. We expect the impact of COVID-19 on general economic activity will continue to negatively impact our premium volumes. We did not experience a material effect on our net premiums earned in the first quarter of 2020, but saw a more significant impact in the second and third quarters of 2020 primarily due to the reduction in miles driven, which is the basis of premiums we receive, by our commercial automobile insureds, as well as an overall reduction in public transportation units insured. 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.

•

~~Losses and loss expenses incurred~~. We have seen a favorable impact on our losses and loss expenses incurred in commercial automobile during the first nine months of 2020 as a result of declines in accident frequency due to lower traffic density, but in the future 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.

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

Issuer Purchases of Equity Securities

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⁾

~~Investments. The volatility~~Amounts represent shares withheld by the Company in connection with employee payroll tax withholding upon the vesting of stock awards. Stock amounts in the ~~global financial markets related to COVID-19 has contributed to~~condensed consolidated statements of shareholders’ equity are shown net ~~realized and unrealized investment losses, primarily due to the impact~~ of ~~changes in fair value on our equity investments. Our corporate fixed income portfolio may be 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 money market investments have been impacted by lower interest rates and may continue to be impacted by these lower rates. 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 volatility in the global financial markets due to the continuing impact of COVID-19 could result ~~in future 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.~~

•

~~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.

shares withheld.

•⁽²⁾

~~Adverse Legislative and/~~On August 31, 2017, our Board of Directors authorized the reinstatement of the Company’s share repurchase program for up to 2,464,209 shares of its Class A or ~~Regulatory Action. Federal, state~~Class B Common Stock. The repurchases may be made in the open market or through privately negotiated transactions, from time-to-time, and ~~local government actions~~in accordance with applicable laws, rules and regulations. The share repurchase program may be amended, suspended or discontinued at any time and does not commit the Company to ~~address~~repurchase any shares of its Common Stock. The Company has funded, 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 unableintends to continue to ~~work because~~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 ~~illness, government directives~~its Class A or ~~otherwise. In addition,~~Class B Common Stock under 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 primarily 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. We have not experienced any operational interruptions or cybersecurity disruptions during this time.repurchase program.

ITEM 6. EXHIBITS

INDEX TO EXHIBITS

Exhibit No.		Description

2.1		Agreement and Plan of Merger, dated as of February 14, 2021, by and among Protective Insurance Corporation, The Progressive Corporation and Carnation Merger Sub Inc., incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on February 16, 2021.

3.1		Amended and Restated Articles of Incorporation of Protective Insurance Corporation, incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed August 8, 2018.

3.2		Code of By-Laws of Protective Insurance Corporation, as amended through ~~May 14, 2020,~~January 3, 2021, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on ~~May 14, 2020.~~January 4, 2021.

10.1		~~Form~~Voting and Support Agreement, dated as of ~~Long-Term Incentive Plan Award Agreement, effective July 6, 2020,~~February 14, 2021, by and ~~between~~among Protective Insurance Corporation, The Progressive Corporation and ~~certain Executives, dated as of July 6, 2020,~~the Company's shareholders listed therein, incorporated by reference to Exhibit ~~10.3~~10.1 to the Company's ~~Quarterly~~Current Report on Form ~~10-Q~~8-K filed ~~August 5, 2020.~~on February 16, 2021.

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials from Protective Insurance Corporation's Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2020~~March 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (Loss), (4) the Condensed Consolidated Statements of Shareholders' Equity, (5) the Condensed Consolidated Statements of Cash Flows, and (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)

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 ~~November 4, 2020~~May 6, 2021

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

Date ~~November 4, 2020~~May 6, 2021

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

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	2020		2019
Nine months ended September 30:
Premiums ceded to reinsurers	$	83,508	$	92,556
Losses and loss expenses ceded to reinsurers		75,201		86,876
Commissions from reinsurers		21,785		23,229