10-K 1 form10k.htm FORM 10-K  

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2018

OR

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

For the transition period from ______ to ______
Commission file number: 0-5534


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 No.)
     
111 Congressional Boulevard, Carmel, Indiana
 
46032
(Address of Principal Executive Offices)
 
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
(Title of class)
 
Name of Each Exchange on which Registered
Class A Common Stock, No Par Value
 
The Nasdaq Stock Market LLC
Class B Common Stock, No Par Value
 
The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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

The aggregate market value of Class A and Class B Common Stock held by non-affiliates of the Registrant as of June 29, 2018, based on the closing trade prices on that date, was approximately $265,014,000.

The number of shares outstanding of each of the issuer's classes of common stock as of March 1, 2019:

Common Stock, No Par Value:
Class A (voting)
2,615,339
 
 
Class B (nonvoting)
12,234,130
 
   
14,849,469
 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2019 are incorporated by reference into Part III of this Annual Report on Form 10-K.



FORWARD-LOOKING STATEMENTS

The disclosures in this Form 10-K 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 Form 10-K 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 hereof and our reports filed with the U.S. Securities and Exchange Commission, or SEC, from time to time. 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.

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

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

our ability to obtain adequate premium rates and manage our 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 and to successfully complete our Chief Executive Officer transition;

tax law and accounting changes; and

legal actions brought against us.

Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.  You should read that information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and related notes in Part II, Item 8 of this Annual Report on Form 10-K.

- 2 -


PART I

Item 1.  BUSINESS

Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (referred to herein as "Protective") was incorporated under the laws of the State of Indiana in 1930.  Through its subsidiaries, Protective engages 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.  In addition, Protective offers workers' compensation coverage for a variety of operations outside the transportation industry.

Protective’s principal subsidiaries are:

1.
Protective Insurance Company (referred to herein as "Protective Insurance Co."), which is licensed by insurance authorities in all 50 states, the District of Columbia, all Canadian provinces and Puerto Rico;

2.
Protective Specialty Insurance Company (referred to herein as "Protective Specialty"), which is currently approved for excess and surplus lines business by insurance authorities in 48 states and the District of Columbia and licensed in Indiana;

3.
Sagamore Insurance Company (referred to herein as "Sagamore"), which is licensed by insurance authorities in 49 states and the District of Columbia and approved for excess and surplus lines business in one additional state;

4.
B&L Brokerage Services, Inc. (referred to herein as "BLBS"), an Indiana-domiciled insurance broker licensed in all 50 states and the District of Columbia; and

5.
B&L Insurance, Ltd. (referred to herein as "BLI"), which is domiciled and licensed in Bermuda.

Protective Insurance Co., Protective Specialty, Sagamore and BLI are collectively referred to herein as the "Insurance Subsidiaries."  The "Company", "we", "us" and "our", as used herein, refer to Protective and all of its subsidiaries unless the context clearly indicates otherwise.

As is a common practice in the property and casualty insurance industry, the Insurance Subsidiaries share or "cede" portions of their gross premiums written with several non-affiliated reinsurers under excess of loss and quota-share treaties covering predetermined groups of risks and by facultative (individual policy-by-policy) placements.  Reinsurance is ceded to spread the risk of loss from individual claims or groups of claims among several reinsurers and is an integral part of the Company's business.

In 2018, the Insurance Subsidiaries primarily served the commercial automobile market, although the Insurance Subsidiaries continue to support previously written policies in specialty markets for which the Company has discontinued writing business and these operations are in run-off.  The Company expects targeted growth to occur in its core business of commercial automobile and workers' compensation.

The Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017.  During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance.  The Company moved to a single reportable segment based on how its operating results are regularly reviewed by its chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance.

Product Lines

Commercial Automobile

The Insurance Subsidiaries provide coverage for larger companies in the motor carrier industry that retain substantial amounts of self-insurance, for independent contractors utilized by trucking companies, for medium-sized and small trucking companies on a first dollar or deductible basis, and for public livery concerns, principally covering fleets of commercial buses and taxis.  This group of products is collectively referred to as commercial automobile.  Large fleet trucking products are marketed both directly to commercial automobile clients and also through relationships with non-affiliated brokers and specialized agents.  Products for small and intermediate fleets and independent contractors are marketed through relationships with non-affiliated brokers and specialized agents.  In some cases, the Insurance Subsidiaries will provide customized product offerings to specific markets through partnerships with brokers or program administrators.  In most cases, the Company's commercial automobile policies are written on an "occurrence" basis.  This means that the Company may be liable for claims that occurred when its policy was in place with an insured, regardless of when those claims are reported to the Company, and it may take months or even years for claims to be reported to the Company.


- 3 -


The principal types of commercial automobile insurance marketed by the Insurance Subsidiaries are:

Commercial motor vehicle liability, physical damage and general liability insurance;
Workers' compensation insurance;
Specialized accident (medical and indemnity) insurance for independent contractors in the trucking industry;
Non-trucking motor vehicle liability insurance for independent contractors;
Fidelity and surety bonds; and
Inland Marine insurance consisting principally of cargo insurance.

The Insurance Subsidiaries also perform a variety of additional services, primarily for the Company's insureds, including risk surveys and analyses, safety program design and monitoring, government compliance assistance, loss control and cost studies and research, development, and consultation in connection with new insurance programs, including development of systems to assist customers in monitoring their accident data.  The Company also provides claims handling services, primarily to excess clients with self-insurance programs.

Workers' Compensation

The Insurance Subsidiaries provide workers' compensation insurance for the commercial automobile industry, primarily to employees of motor carriers or independent contractors providing services in the transportation industry.  In 2017, the Company began marketing workers' compensation coverage beyond commercial automobile clients to a variety of non-transportation operations, such as light manufacturing, restaurants, retailers, and professional services on both a first-dollar and deductible basis.  Non-transportation workers' compensation insurance is marketed through relationships with non-affiliated brokers and specialized agents.  In addition, the Company has developed customized non-transportation workers' compensation programs, which are marketed through non-affiliated agent partners.  In most cases, the Company's workers' compensation policies are written on an "occurrence" basis.  This means that the Company may be liable for claims that occurred when its policy was in place with an insured, regardless of when those claims are reported to the Company, and it may take months or even years for claims to be reported to the Company.

Discontinued Products

Reinsurance Assumptions

In the first quarter of 2016, the Company discontinued its reinsurance assumed professional liability line of products.  These products are in run-off but continued earning premiums in 2017 and 2018.  Prior to that, the Company accepted cessions and retrocessions from selected insurance and reinsurance companies, providing reinsurance coverage for both property and casualty events.  Participation in reinsurance markets fluctuated based on market conditions for these products.  The Company's reinsurance assumed policies were written on both an "occurrence" basis and a "claims-made" basis.  Under claims-made policies, the Company was generally only liable for claims when a policy was in place with its insured; however, the Company was potentially liable for claims reported to it, even if the claim event occurred before it had a policy in place with the insured.

Professional Liability

In the fourth quarter of 2016, the Company discontinued its professional liability line of products.  Prior to that, the Company marketed a variety of professional liability products through wholesale and retail agents on both an admitted and surplus lines basis throughout the United States, specializing in smaller insureds.  In most cases, the Company's professional liability policies were written on a "claims-made" basis.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses incurred on average comprise approximately two-thirds of the Company's operating expenses.

The Company's consolidated balance sheets as of December 31, 2018 and 2017 set forth in Part II, Item 8 of this Annual Report on Form 10-K include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Insurance Subsidiaries before the application of reinsurance credits (gross reserves).  The liabilities for losses and LAE are determined using case basis evaluations and statistical projections and represent estimates of the Company's ultimate exposure for all unpaid losses and LAE incurred through December 31 of each year.  These estimates are subject to the effects of trends in claim severity and frequency and are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary.  Such adjustments, either positive or negative, are reflected in current operations as recorded.

- 4 -

The Company's reserves for losses and loss expenses are determined based on evaluations of individual reported claims and by actuarial estimation processes using historical experience, current economic information and, when necessary, available industry statistics.  "Case basis" loss reserves are evaluated on an individual case-by-case basis by experienced claims adjusters using established Company guidelines and are monitored by claims management.  Additionally, "bulk" reserves are established for (1) those losses which have occurred but have not yet been reported to the Company ("incurred but not reported" claims), (2) provisions for any possible deficiencies in the case reserving process and (3) the expected external and internal costs to fully settle each claim, also referred to as LAE.  Common actuarial methods are employed in the establishment of bulk reserves using Company historical loss data, consideration of changes in the Company's business and study of current economic trends affecting ultimate claims costs.  LAE reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims.  Historical analyses of the ratio of LAE to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the LAE reserve needs relative to the established loss reserves.  Each of these reserve categories contains elements of uncertainty, which assures variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established.  For a more detailed discussion of the three categories of reserves, see "Loss and Loss Expense Reserves" under the caption, "Critical Accounting Policies" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K.

After giving effect to treaty and facultative reinsurance arrangements, the Company's maximum exposure to loss from a single occurrence for the vast majority of risks insured (those with policy limits of $5 million or less) is approximately:

$0.25 million to $1.3 million for policies written between July 3, 2016 and July 2, 2017, and
$0.8 million to $4.1 million for policies written on or after July 3, 2017.

However, for certain losses (those with policy limits up to $10 million) the maximum exposure could be as high as:

$2.5 million for policies written between July 3, 2016 and July 2, 2017, and
$8.0 million for policies written on or after July 3, 2017.

The change in the Company's single occurrence loss exposure described above (from a range of $0.25 million to $2.5 million in 2016, to a range of $0.8 million to $8.0 million in 2017) is offset by a change in the reinsurance structure for these risks.  As of July 3, 2017, the Company no longer utilizes sliding scale ceding premium provisions in its reinsurance arrangements for these risks, instead utilizing a flat ceding premium percentage.

The economic exposure from a single claim occurrence remains relatively consistent year-over-year; however, under the current flat ceding premium provision, more of the economic exposure will flow through loss expense moving forward, whereas in prior periods, utilizing the sliding scale ceding premium provisions, more of the economic exposure was reflected in lower net premiums earned.  For both periods discussed above, the Company has limited economic exposure for losses occurring in treaty years that have loss and allocated LAE ratios greater than approximately 83.0%.

The Company is a cedent under numerous reinsurance treaties covering its product lines.  Treaties are typically written on an annual basis, each with its own renewal date.  However, treaty terms may occasionally be agreed to for periods beyond one year.  Treaty renewals are expected to largely continue to occur annually in the foreseeable future.  Because losses from certain of the Company's products can experience delays in being reported and can take years to settle, losses reported to the Company in the current year may be covered by a number of older reinsurance treaties with higher or lower net loss exposures than those provided by current treaty provisions.

- 5 -

The table below sets forth a reconciliation of beginning and ending loss and LAE liability balances for 2018, 2017 and 2016.  This table includes reserves, net of reinsurance recoverable, to correspond with the presentation in the Company's consolidated statements of operations, but also includes a reconciliation of beginning and ending loss and LAE liability, gross of reinsurance recoverable, as presented in the Company's consolidated balance sheets.  All amounts are shown net of reinsurance, unless otherwise indicated.

   
2018
   
2017
   
2016
 
Reserves, gross of reinsurance recoverable, at the beginning of the year
 
$
680,274
   
$
576,330
   
$
513,596
 
Reinsurance recoverable on unpaid losses at the beginning of the year
   
308,143
     
251,563
     
211,843
 
Reserves at the beginning of the year
   
372,131
     
324,767
     
301,753
 
                         
Provision for losses and loss expenses:
                       
Claims occurring during the current year
   
329,078
     
228,303
     
172,645
 
Claims occurring during prior years
   
16,786
     
19,215
     
13,836
 
Total incurred losses and loss expenses
   
345,864
     
247,518
     
186,481
 
                         
Loss and loss expense payments:
                       
Claims occurring during the current year
   
84,738
     
67,234
     
54,239
 
Claims occurring during prior years
   
143,853
     
132,920
     
109,228
 
Total paid
   
228,591
     
200,154
     
163,467
 
Reserves at the end of the year
   
489,404
     
372,131
     
324,767
 
                         
Reinsurance recoverable on unpaid losses at the end of the year
   
375,935
     
308,143
     
251,563
 
Reserves, gross of reinsurance recoverable, at the end of the year
 
$
865,339
   
$
680,274
   
$
576,330
 

The reconciliation above shows the Company's estimate of net losses on 2017 and prior accident years is approximately $16.8 million higher at December 31, 2018 than was provided in loss reserves at December 31, 2017 (referred to as a "reserve deficiency").  This compares to a $19.2 million reserve deficiency on prior accident years in 2017 and a $13.8 million reserve deficiency reported in 2016 related to prior accident years.

The following table is a summary of the 2018 calendar year reserve deficiency by accident year (dollars in thousands):

Years in Which Losses Were Incurred
 
Reserve at
December 31, 2017
   
(Savings) Deficiency
Recorded During 2018 (1)
   
% (Savings) Deficiency
 
2017
 
$
161,069
   
$
(8,902
)
   
(5.5
)%
2016
   
66,652
     
4,259
     
6.4
%
2015
   
34,530
     
9,707
     
28.1
%
2014
   
30,129
     
11,970
     
39.7
%
2013
   
22,423
     
(1,382
)
   
(6.2
)%
2012 and prior
   
57,328
     
1,134
     
2.0
%
                         
   
$
372,131
   
$
16,786
     
4.5
%

(1)
Consists of development on cases known at December 31, 2017, losses reported which were previously unknown at December 31, 2017 (incurred but not reported), unallocated loss expense paid related to accident years 2017 and prior changes in the reserves for incurred but not reported losses and loss expenses.

The savings shown in accident year 2017 in the table above reflect favorable loss development in both short-tail lines of business, such as physical damage, and the Company's independent contractor products (including non-trucking liability, occupational accident and workers' compensation).  The deficiencies in accident years 2014-2016 are largely the result of several severe transportation losses.  The Company took action in all accident years to reflect new trends in loss development for commercial automobile products that have emerged over the last three years.  These actions included case reserving reviews, as well as actuarial product reviews, and resulted in the reserve strengthening noted during the last three years.

Bulk loss reserves are established to provide for potential future adverse development on cases known to the Company and for cases unknown at the reserve date.  Changes in the reserves for incurred but not reported losses and loss expenses occur based upon information received on known and newly reported cases during the current year and the effect of that development on the application of standard actuarial methods used by the Company.

- 6 -

The Company continues to incorporate more recent loss development data into its loss reserving formulae; however, the dynamic nature of losses associated with the commercial automobile business, as well as the timing of settlement of large claims, increases the likelihood of variability in loss developments from period to period.  While the Company's basic assumptions have remained consistent, the Company continues to update loss data to reflect changing trends, which can be expected to result in fluctuations in loss developments over time.

Management's goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible.  The Company constantly monitors changes in trends related to the number of claims incurred relative to correlative variances with premium volume, average settlement amounts, number of claims outstanding at period ends and the average value per claim outstanding and adjusts actuarial assumptions as necessary to accommodate observed trends.

Ten-Year Historical Development Tables:

The table below presents the development of U.S. generally accepted accounting principles ("GAAP") balance sheet insurance reserves for each year-end from 2008 through 2017, as of December 31, 2018, net of all reinsurance credits.

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)

   
Year Ended December 31
 
   
2008
   
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
Liability for Unpaid Losses and Loss Adjustment Expenses (1)
 
$
231,633
   
$
203,253
   
$
218,629
   
$
290,092
   
$
289,236
   
$
288,088
   
$
295,583
   
$
301,753
   
$
324,767
   
$
372,131
   
$
489,404
 
                                                                                         
Liability Reestimated as of: (2)
                                                                                       
One Year Later
   
222,049
     
194,430
     
208,933
     
280,217
     
283,673
     
277,734
     
285,521
     
315,589
     
343,982
     
388,917
         
Two Years Later
   
208,702
     
198,220
     
201,745
     
272,285
     
282,381
     
268,757
     
303,540
     
340,361
     
369,670
                 
Three Years Later
   
210,562
     
188,110
     
204,243
     
276,525
     
279,685
     
288,862
     
332,175
     
361,791
                         
Four Years Later
   
205,519
     
192,195
     
202,078
     
268,299
     
291,332
     
313,909
     
343,898
                                 
Five Years Later
   
208,398
     
187,792
     
198,518
     
275,517
     
298,861
     
313,662
                                         
Six Years Later
   
205,986
     
181,547
     
200,922
     
276,812
     
299,996
                                                 
Seven Years Later
   
200,460
     
181,998
     
203,692
     
279,598
                                                         
Eight Years Later
   
200,808
     
184,122
     
204,769
                                                                 
Nine Years Later
   
202,565
     
183,693
                                                                         
Ten Years Later
   
201,673
                                                                                 
                                                                                         
Cumulative Redundancy (Deficiency) (3)
 
$
29,960
   
$
19,560
   
$
13,860
   
$
10,494
   
$
(10,760
)
 
$
(25,574
)
 
$
(48,315
)
 
$
(60,038
)
 
$
(44,903
)
 
$
(16,786
)
       
                                                                                         
Cumulative Amount of Liability Paid Through: (4)
                                                                                       
One Year Later
 
$
84,777
   
$
74,182
   
$
72,393
   
$
94,003
   
$
103,941
   
$
92,275
   
$
92,870
   
$
109,228
   
$
132,920
   
$
143,853
         
Two Years Later
   
120,628
     
107,413
     
109,382
     
156,271
     
162,087
     
159,282
     
166,642
     
195,951
     
217,376
                 
Three Years Later
   
142,731
     
125,038
     
133,507
     
193,566
     
205,452
     
166,642
     
222,295
     
250,924
                         
Four Years Later
   
152,679
     
137,460
     
147,462
     
214,873
     
202,803
     
234,158
     
258,576
                                 
Five Years Later
   
161,834
     
143,461
     
158,172
     
227,359
     
241,533
     
251,696
                                         
Six Years Later
   
166,290
     
148,101
     
166,112
     
234,578
     
252,648
                                                 
Seven Years Later
   
170,126
     
152,375
     
168,524
     
241,383
                                                         
Eight Years Later
   
173,867
     
153,999
     
173,015
                                                                 
Nine Years Later
   
174,902
     
157,297
                                                                         
Ten Years Later
   
177,677
                                                                                 

(1)
Represents the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years.  This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the respective balance sheet date, including incurred but not reported ("IBNR") losses, to the Company.

(2)
Represents the re-estimated amount of the previously recorded liability based on additional information available to the Company as of the end of each succeeding year.  The estimate is increased or decreased as more information becomes known about the frequency and severity of individual claims and as claims are settled and paid.

(3)
Represents the aggregate change in the estimates of each calendar year-end reserve through December 31, 2018.

(4)
Represents the cumulative amount paid with respect to the previously recorded calendar year-end liability as of the end of each succeeding year.  The payment patterns shown in this table demonstrate the "long-tail" nature of much of the Company's business, whereby portions of claims, principally in workers' compensation coverages, do not fully pay out for more than ten years.


- 7 -

Reserve developments for all years ended in the period 1985 through 2011 have produced redundancies as of December 31, 2018, with deficiencies developing for periods from 2012 forward.  The $16.8 million deficiency developed through one year on the 2017 reserve position reflects action taken by management to respond to higher than expected adverse case development, as previously noted.  The deficiencies that have developed in the chart from 2012 through 2017 have been largely attributable to two main themes.  First, the Company engaged in new markets between 2008 and 2013, including professional liability and property coverages concentrated in the state of Florida.  These products (now discontinued) experienced significant adverse loss development in calendar years 2016 and 2017 as more information emerged and was therefore considered in the reserving process.  Second, the Company has experienced increased severity in losses related to its transportation offerings.  The Company is currently addressing the rate adequacy and customer segmentation practices of this product in response to the most recent adverse loss trends.

Readers should note the table above does not present accident or policy year development data, which they may be more accustomed to analyzing.  Rather, this table is intended to present an evaluation of the Company's ability to establish its liability for losses and loss expenses at a given balance sheet date.  In reviewing this information, it is important to understand that this method of presentation causes some development experience to be duplicated.  For example, the amount of any redundancy or deficiency related to losses settled in 2011, but incurred in 2008, will be included in the cumulative development amount for each of the years ending December 31, 2008, 2009, and 2010.  It is also important to note that conditions and trends that have affected development of the liability in the past may not necessarily occur in the future.  Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.

The table presented below presents loss development data on a gross (before consideration of reinsurance) basis for the same ten year period December 31, 2008 through December 31, 2017, as of December 31, 2018, with a reconciliation of the data to the net amounts shown in the table above.

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)

   
Year Ended December 31
 
   
2008
   
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
Direct and Assumed:
                                                                 
Liability for Unpaid Losses and Loss Adjustment Expenses
 
$
389,558
   
$
359,030
   
$
344,520
   
$
421,556
   
$
455,454
   
$
474,470
   
$
506,102
   
$
513,596
   
$
576,330
   
$
680,274
   
$
865,339
 
                                                                                         
Liability Reestimated as of December 31, 2018
   
312,965
     
289,679
     
301,700
     
395,271
     
450,713
     
519,189
     
599,457
     
633,660
     
647,807
     
709,523
         
                                                                                         
Cumulative Redundancy (Deficiency)
 
$
76,593
   
$
69,351
   
$
42,820
   
$
26,285
   
$
4,741
   
$
(44,719
)
 
$
(93,355
)
 
$
(120,064
)
 
$
(71,477
)
 
$
(29,249
)
       
                                                                                         
Ceded:
                                                                                       
Liability for Unpaid Losses and Loss Adjustment Expenses
 
$
157,925
   
$
155,777
   
$
125,891
   
$
131,464
   
$
166,218
   
$
186,382
   
$
210,519
   
$
211,843
   
$
251,563
   
$
308,143
   
$
375,935
 
                                                                                         
Liability Reestimated as of December 31, 2018
   
111,292
     
105,986
     
96,931
     
115,673
     
150,717
     
205,527
     
255,559
     
271,869
     
278,137
     
320,606
         
                                                                                         
Cumulative Redundancy (Deficiency)
 
$
46,633
   
$
49,791
   
$
28,960
   
$
15,791
   
$
15,501
   
$
(19,145
)
 
$
(45,040
)
 
$
(60,026
)
 
$
(26,574
)
 
$
(12,463
)
       
                                                                                         
Net:
                                                                                       
Liability for Unpaid Losses and Loss Adjustment Expenses
 
$
231,633
   
$
203,253
   
$
218,629
   
$
290,092
   
$
289,236
   
$
288,088
   
$
295,583
   
$
301,753
   
$
324,767
   
$
372,131
   
$
489,404
 
                                                                                         
Liability Reestimated as of December 31, 2018
   
201,673
     
183,693
     
204,769
     
279,598
     
299,996
     
313,662
     
343,898
     
361,791
     
369,670
     
388,917
         
                                                                                         
Cumulative Redundancy (Deficiency)
 
$
29,960
   
$
19,560
   
$
13,860
   
$
10,494
   
$
(10,760
)
 
$
(25,574
)
 
$
(48,315
)
 
$
(60,038
)
 
$
(44,903
)
 
$
(16,786
)
       


- 8 -

Readers are reminded the gross data presented above requires significantly more subjectivity in the estimation of IBNR and loss expense reserves because of the high limits provided by the Company to its commercial automobile and workers' compensation customers, some of which has been covered by excess of loss and facultative reinsurance.  This is particularly true of excess of loss treaties in which the Company retains risk in only the lower, more predictable, layers of coverage.  Accordingly, one would generally expect more variability in development on a gross basis than on a net basis.  The Company's consolidated financial statements reflect its financial results net of reinsurance.

Environmental Matters:

Given that one of the Company's core businesses is insuring commercial automobile companies, on occasion claims involving a commercial automobile accident which has resulted in the spill of a pollutant are made.  Certain of the Company's policies may cover these situations on the basis that they were caused by an accident that resulted in the immediate and isolated spill of a pollutant.  These claims are typically reported, evaluated and fully resolved within a short period of time.

In general, establishing reserves for environmental claims, other than those associated with "sudden and accidental" losses, is subject to uncertainties that are greater than those represented by other types of claims.  Factors contributing to those uncertainties include a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, and the extent and timing of any such contractual liability.  Courts have reached different and sometimes inconsistent conclusions as to when the loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether cleanup costs represent insured property damage.

Very few environmental claims have historically been reported to the Company.  In addition, a review of the businesses of the Company's past and current insureds indicates that exposure to claims of an environmental nature is limited because the vast majority of the Company's accounts are not currently, and have not in the past been, involved in the hauling of hazardous substances.  Also, the revision of the pollution exclusion in the Company's policies since 1986 has, and is expected to, further limit exposure to such claims from that point forward.

The Company does not expect to have any significant environmental claims relating to asbestos exposure.

The Company's reserves for unpaid losses and loss expenses at December 31, 2018 did not include significant amounts for liability related to environmental damage claims.  The Company does not foresee significant future exposure to environmental damage claims and accordingly has established no reserve for IBNR environmental losses at December 31, 2018.

Marketing

Historically, the Insurance Subsidiaries have primarily focused their commercial automobile marketing efforts on large and medium trucking fleets, with their biggest market share in larger trucking fleets (over 150 power units).  The largest of these fleets (over 250 power units) generally self-insure a significant portion of their risk, and self-insured retention plans are a specialty of the Company.  The indemnity contract provided to such customers is designed to cover all aspects of commercial automobile liability, including third-party liability, property damage, physical damage and cargo, whether arising from vehicular accident or other casualty loss.  The self-insured program is supplemented with large deductible workers' compensation policies in states which do not allow for self-insurance of this coverage.  Fleets with fewer than 250 power units typically purchase full insurance coverage or retain deductibles on each claim.  The Company's commercial automobile offerings also include public livery risks, principally large and medium-sized operators of bus fleets and taxis, work-related accident insurance, on a group or individual basis, to independent contractors under contract to a fleet sponsor, as well as workers' compensation coverage to employees of independent contractor fleet owners.  Large fleet trucking products are marketed both directly to commercial automobile clients and also through relationships with non-affiliated brokers and specialized independent agents.

In addition, the Company offers a program of coverages for "small fleet" trucking concerns (owner-operators generally with one to six power units) and "medium fleet" trucking concerns (7 to 150 power units). Products for small and medium fleets, independent contractors, and non-trucking entities are marketed through relationships with non-affiliated brokers and specialized agents.

In some cases, the Company will provide specific product offerings to specialized markets through partnerships with brokers and program administrators.  As the Company grows, its distribution strategy has moved toward utilization of non-affiliated agents and brokers to place new business for small and intermediate commercial automobile (including independent contractor products) and non-transportation workers' compensation.  In addition, the Company has developed customized commercial automobile liability and workers' compensation programs, which are marketed through non-affiliated agent partners.  These customized programs can include a suite of products selected for its targeted customer base, including commercial automobile liability, general liability, non-trucking liability, cargo, occupational accident, or workers' compensation coverages.


- 9 -

Investments

The Company's investment portfolio is notionally divided between (1) funds which are considered necessary to support insurance underwriting activities and (2) excess capital funds.  Management believes the funds invested in fixed income and short-term securities are more than sufficient to cover underwriting operations while equity securities and limited partnerships are utilized to invest excess capital funds to achieve higher long-term returns.  The following discussion will concentrate on the different investment strategies for these two major categories.

At December 31, 2018, the market value of the Company's consolidated investment portfolio was approximately $878.6 million, consisting of fixed income securities, equity securities, investments in limited partnerships, commercial mortgage loans and short-term and other investments and includes $156.9 million of short-term funds classified as cash equivalents.

A comparison of the allocation of assets within the Company's consolidated investment portfolio, using market value as a basis, is as follows as of December 31:

   
2018
   
2017
 
Fixed income securities
   
67.5
%
   
61.1
%
Short-term
   
0.1
     
0.1
 
Cash equivalents
   
17.8
     
6.9
 
Total fixed income securities and short-term
   
85.4
     
68.1
 
                 
Limited partnerships (equity basis)
   
6.3
     
8.3
 
Commercial mortgage loans (amortized cost basis)
   
0.8
     
0.0
 
Equity securities
   
7.5
     
23.6
 
     
100.0
%
   
100.0
%

Fixed Income and Short-Term Investments

Fixed income and short-term securities comprised 85.4% of the market value of the Company's consolidated investment portfolio of $878.6 million at December 31, 2018.  The fixed income portfolio is widely diversified with no concentrations in any single industry, geographic location or municipality.  The largest amount invested in any single issuer was $3.5 million (0.4% of the Company's consolidated investment portfolio).  The Company's fixed income portfolio has a short duration compared to the duration of its insurance liabilities and, accordingly, the Company does not actively trade fixed income securities but typically holds such investments until maturity.  Exceptions exist in instances where the underlying credit for a specific issue is deemed to be diminished.  In such cases, the security will be considered for disposal prior to maturity.  In addition, fixed income securities may be sold when realignment of the portfolio is considered beneficial (e.g., moving from taxable to non-taxable issues) or when valuations are considered excessive compared to alternative investments.

Approximately $54.2 million of the Company's fixed income investments (6.2% of the Company's consolidated investment portfolio) consisted of non-rated bonds and bonds rated as less than investment grade by the National Association of Insurance Commissioners ("NAIC") at year-end.  These investments included a diversified portfolio of over 40 issuers and had a $5.2 million aggregate net unrealized loss position at December 31, 2018.

The market value of the consolidated fixed income portfolio included $7.9 million of net unrealized losses at December 31, 2018 compared to $0.8 million of net unrealized gains at December 31, 2017.  The Company analyzes fixed income securities for other-than-temporary impairment ("OTTI") in accordance with the Financial Accounting Standards Board OTTI guidance.  As has been the Company's consistent policy, OTTI is considered for any individual issue which has sustained a decline in current market value of at least 20% below original or adjusted cost, and the decline is ongoing for more than six months, regardless of the evaluation of the creditworthiness of the issuer or the specific issue.  Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration of the Company's 20% threshold.  The current net unrealized loss on fixed income securities consists of $10.8 million of gross unrealized losses and $2.9 million of gross unrealized gains.  The gross unrealized losses equal approximately 1.8% of the cost of all fixed income securities.  See also "Critical Accounting Policies" in Part II, Item 7 of this Annual Report on Form 10-K for additional details of the Company's investment valuation.

- 10 -

Equity Securities

Because of the large amount of high-quality fixed income investments owned, relative to the Company's loss and loss expense reserves (net of reinsurance recoverables) and other liabilities, amounts invested in equity securities are not needed to fund current operations and, accordingly, can be committed for longer periods of time.  Equity securities comprised 7.5% of the market value of the Company's consolidated investment portfolio of $878.6 million at December 31, 2018.  The Company's equity securities portfolio consists of various securities with diversification from large to small capitalization issuers and among several industries.  The largest single-equity issue owned had a market value of $3.2 million at December 31, 2018 (0.4% of the Company's consolidated investment portfolio).

An individual equity security will be disposed of when it is determined by the Company's external investment managers or the Board of Directors' Investment Committee that there is little potential for future appreciation or to reallocate from equity to fixed income securities.  Securities are disposed of only when market conditions dictate, regardless of the impact, positively or negatively, on current period earnings.

As of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 changed the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income.  Previously, the Company's equity securities were classified as available-for-sale and changes in fair value were recognized in accumulated other comprehensive income (loss) as a component of shareholders' equity.

During 2018, the Company's external investment managers and the Board of Directors' Investment Committee determined that reallocation of the Company's equity portfolio would be beneficial and sold $149.2 million of its equity portfolio, resulting in a gain on sale of $51.9 million. The majority of these gains were included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, were reclassified to retained earnings as of January 1, 2018 and were therefore not recognized in the consolidated statement of operations for the year ended December 31, 2018.  These equity sales further solidified the conservative nature of its high quality, short-duration investment portfolio; opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and were accretive to income, given the increase in yields at the shorter end of the yield curve.  Realized losses related to the sale of equity securities during 2018 recognized in the consolidated statement of operations for the year ended December 31, 2018 were $3.1 million before taxes. Net unrealized losses on equity securities held at December 31, 2018 included in the consolidated statement of operations for the year ended December 31, 2018 were $9.7 million.

Limited Partnerships

The Company invests in various limited partnerships engaged in long-short equities, private equity, country-focused funds and real estate development as an alternative to direct equity investments.  The funds used for these investments are part of the Company's excess capital strategy.  At December 31, 2018, the aggregate carrying value was $55.0 million, comprising 6.3% of the market value of the Company's consolidated investment portfolio.

As a group, these investments decreased in value during 2018, with the aggregate of the Company's share of such losses reported by the limited partnerships totaling approximately $9.3 million.

The Company follows the equity method of accounting for its limited partnership investments and, accordingly, records the total change in value as a component of net unrealized gains (losses) on equity securities and limited partnership investments.  Readers are cautioned that reported increases and decreases in equity value of the Company's limited partnerships can change quickly as a result of volatile market conditions.  Limited partnerships also are highly illiquid investments, and the Company's ability to withdraw funds is generally subject to significant restrictions.

Investment Yields

Pre-tax net investment income increased $3.9 million, or 22%, during 2018, reflecting higher interest rates for shorter duration securities, increased dividends and increased invested assets from continuing positive cash flow from operations.  A comparison of consolidated investment yields, before consideration of investment management expenses, is as follows:

   
2018
   
2017
 
Before federal tax:
           
Investment income
   
3.0
%
   
3.2
%
Investment income plus investment gains (losses)
   
(0.1
)
   
6.2
 
                 
After federal tax:
               
Investment income
   
2.7
     
2.3
 
Investment income plus investment gains (losses)
   
(0.6
)
   
5.4
 

See also "Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K for additional details of the Company's investment operations.

- 11 -

Regulatory Framework

The Insurance Subsidiaries are currently subject to insurance industry regulation by each of the jurisdictions in which they are licensed.  In addition, minor portions of the Insurance Subsidiaries' business are subject to regulation by Bermudian and Canadian federal and provincial authorities.  As an insurance holding company, Protective is also subject to oversight from the Indiana Department of Insurance.  There can be no assurance that laws and regulations will not be changed by one or more of these regulatory bodies in ways that will require the Company to modify its business models and objectives.  In particular, the United States federal government continuously reviews the regulation and supervision of financial institutions, including insurance companies, as well as tax laws and regulation, which could impact the Company's operations and performance.

Additionally, changes in laws and regulations governing the insurance industry could have an impact on the Company's ability to generate historical levels of income from its insurance operations.  The Company is obligated to comply with numerous complex and varied governmental regulations in order to maintain its authority to write insurance business.  While the Company has continuously maintained each of its licenses without exception, failure to maintain compliance could result in governmental regulators temporarily preventing the Company from writing new business, thus having a detrimental effect on the Company.  Also, the ability of the Insurance Subsidiaries to modify certain insurance rates, specifically workers' compensation rates, is heavily regulated and such rate increases are often denied or delayed for substantial periods by regulators.

Investments made by the Company's domestic Insurance Subsidiaries are regulated by guidelines promulgated by the NAIC, which are designed to provide protection for both policyholders and shareholders.  The statutory capital of each of the Insurance Subsidiaries substantially exceeds the minimum risk-based capital requirements set by the NAIC.  State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for each insurance company to remain authorized.  These computations are referred to as risk-based capital requirements and are based on a number of complex factors, taking into consideration the quality and nature of assets, the historical adequacy of recorded liabilities and the specific nature of business conducted.  At December 31, 2018, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $117.4 million.  Actual consolidated statutory capital and surplus at December 31, 2018 exceeded this requirement by $278.5 million.

Employees

As of December 31, 2018, the Company had 535 employees, an increase of 7 employees from the prior year-end.

Revenue Concentration

The Company derives a significant percentage of its direct premium volume from certain FedEx Corporation subsidiaries and operating companies ("FedEx"), and from insurance coverage provided to FedEx's contracted service providers.  FedEx represented approximately $16.2 million, $18.5 million and $18.3 million of the Company's consolidated gross premiums written in 2018, 2017 and 2016, respectively.  An additional $174.7 million, $189.4 million and $202.2 million in 2018, 2017 and 2016, respectively, was placed with the Company by a non-affiliated broker on behalf of contracted service providers of FedEx, but this additional business was not dependent upon the Company's direct business with FedEx.

Competition

Insurance underwriting is highly competitive.  The Insurance Subsidiaries compete with other stock and mutual companies and inter-insurance exchanges (reciprocals).  There are numerous insurance companies offering the lines of insurance which are currently written or may in the future be written by the Insurance Subsidiaries.  Many of these companies have been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines of insurance coverage and have significantly greater financial resources than the Company.  In many cases, competitors are willing to provide coverage for rates lower than those charged by the Insurance Subsidiaries.  Many potential clients self-insure workers' compensation and other risks for which the Company offers coverage, and some have organized "captive" insurance companies as subsidiaries through which they insure their own operations.  Some states have workers' compensation funds that preclude private companies from writing this business in those states.  Federal law also authorizes the creation of "Risk Retention Groups," which may write insurance coverages similar to those offered by the Company.

The Company believes it has a competitive advantage in its major lines of business as the result of its management and staff, its service and products, its willingness to custom build insurance programs for its customers, its centralized location with ready access to skilled employees, its proprietary databases and the use of technology with respect to its insureds.  Accordingly, should competitors determine to "buy" market share with unprofitable rates, the Insurance Subsidiaries will generally experience a decline in business until pricing returns to profitable levels.

- 12 -

Availability of Documents

The Company is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is required, pursuant to Item 101 of Regulation S-K, to provide certain information regarding its website and the availability of certain documents filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). The Company's Internet website is www.protectiveinsurance.com. The Company has included its Internet website address throughout this Annual Report on Form 10-K as a textual reference only. The information contained on, or accessible through, the Company's Internet website is not incorporated by reference into this Annual Report on Form 10-K.

The Company makes available, free of charge, by mail or through its Internet website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with or furnishes it to the SEC. The Company also includes on its Internet website its Code of Business Conduct and the charter of each permanent committee of its Board of Directors (the "Board"). In addition, the Company intends to disclose on its Internet website any amendments to, or waivers from, its Code of Business Conduct that are required to be publicly disclosed pursuant to rules of the SEC and the Nasdaq Stock Market, LLC ("Nasdaq").

Shareholders may obtain, without charge, a copy of this Annual Report on Form 10-K, including the consolidated financial statements and schedules thereto, without the accompanying exhibits, upon written request to Protective Insurance Corporation, 111 Congressional Boulevard, Carmel, Indiana 46032, Attention:  Investor Relations. A list of exhibits is included in this Annual Report on Form 10-K, and exhibits are available from the Company upon payment to the Company of the cost of furnishing the exhibits.



- 13 -

Item 1A.  RISK FACTORS

The following is a description of the risk factors that could cause our actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time.  Such factors may have a material adverse effect on our business, financial condition and results of operations, and you should carefully consider them before deciding to invest in, or retain, shares of our common stock.  These risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. 

We compete with a large number of companies in the insurance industry for underwriting revenues.
We compete with a large number of other companies in our selected lines of business. During periods of intense competition for premium, we are vulnerable to the actions of other companies who may seek to write business without what we believe to be an appropriate regard for ultimate profitability. During these times, it is very difficult to grow or maintain premium volume without sacrificing underwriting discipline and income.
Insurance underwriting is highly competitive.  We compete with other stock and mutual companies and inter-insurance exchanges (reciprocals).  There are numerous insurance companies offering the lines of insurance which are currently written or may in the future be written by us.  Many of these companies have been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines of insurance coverage and have significantly greater financial resources than us.  In many cases, competitors are willing to provide coverage for rates lower than those charged by us.  Many potential clients self-insure workers' compensation and other risks for which we offer coverage, and some have organized "captive" insurance companies as subsidiaries through which they insure their own operations.  Some states have workers' compensation funds that preclude private companies from writing this business in those states.  Federal law also authorizes the creation of "Risk Retention Groups," which may write insurance coverages similar to those offered by us.
We may incur increased costs in competing for underwriting revenues as we seek to expand our business.  Increased costs associated with attracting and writing new clients may negatively impact underwriting revenue.  If we are unable to compete effectively, our underwriting revenues may decline, as well as our overall business results.
New competition could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our coverages at attractive rates and thereby adversely affect our underwriting results.

Changes in laws and regulations governing the insurance industry could have a negative impact on our ability to generate income from our insurance operations.
One or more of our Insurance Subsidiaries are regulated and/or licensed in all 50 of the United States, the District of Columbia, all Canadian provinces, Puerto Rico and Bermuda.  We are obligated to comply with numerous complex and varied governmental regulations in order to maintain our authority to write insurance business.  Failure to maintain compliance could result in governmental regulators preventing us from writing new business, which would have a material adverse impact on us, our results of operations and our financial condition.  Further, the ability of our Insurance Subsidiaries to adjust insurance rates and other product offerings is regulated for significant portions of our business and needed rate adjustments can be denied or delayed for substantial periods by regulators, which could have a material adverse effect on our results of operations and our financial condition.

A material decline in our financial strength rating could adversely affect our position in the insurance market and cause a significant reduction in our premiums and earnings.
Our main insurance subsidiary, Protective Insurance Co., currently has a financial strength rating of “A” (Excellent) with a negative outlook by A.M. Best, which represents a downgrade from the “A+” (Superior) financial strength rating with a negative outlook Protective Insurance Co. had prior to November 20, 2018.  Financial ratings are an important factor influencing the competitive position of insurance companies. A.M. Best ratings, which are commonly used in the insurance industry, currently range from “A++” (Superior) to “F” (In Liquidation).  The objective of A.M. Best’s rating system is to provide potential policyholders and other interested parties with an expert independent opinion of an insurer’s financial strength and ability to meet ongoing obligations, including paying claims.  This rating is subject to periodic review and may be revised downward, upward or revoked at the sole discretion of A.M. Best.  A future downgrade by A.M. Best could result in the loss of a number of insurance contracts we write and in a substantial loss of business to other competitors, which would have a material adverse effect on our results of operations.

- 14 -

We have two classes of common stock with unequal voting rights that are effectively controlled by our principal shareholders and management, which limits other shareholders’ ability to influence our operations.
Our principal shareholders, directors and executive officers and their affiliates control approximately 50% of the outstanding shares of voting Class A Common Stock and approximately 23% of the outstanding shares of non-voting Class B Common Stock.  These parties effectively control us, direct our affairs, and exert significant influence in the election of directors and approval of significant corporate transactions.  The interests of these shareholders may conflict with those of other shareholders, and this concentration of voting power may limit the marketability of our stock and has the potential to delay, defer or prevent a change in control that other shareholders may believe to be in their best interests.

We are subject to credit risk relating to our ability to recover amounts due from reinsurers.
We limit our risk of loss from policies of insurance issued by our Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance companies.  Such reinsurance does not relieve us of our responsibility to policyholders should the reinsurers be unable to meet their obligations to us under the terms of the underlying reinsurance agreements.  While we have not experienced any significant reinsurance losses for over 25 years, in the past, a small number of our less significant reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies, and provisions for potential uncollectible balances from these reinsurers have been established.  If we are unable to collect the amounts due to us from reinsurers, any unreserved credit losses could adversely affect our results of operations, equity, business and insurer financial strength rating.

We may incur additional losses if our loss reserves are inadequate.
A large portion of our provision for losses recorded is composed of estimates of future loss payments to be made.  Such estimates of future loss payments may prove to be inadequate.  Loss and loss expense reserves represent our best estimate at a given point in time but are not an exact calculation of ultimate liability.  Rather, they are complex estimates derived by utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement.  Many of these uncertainties are not precisely quantifiable and require significant judgment on our part.  As trends in underlying claims develop, particularly in so-called “long tail” lines in which the adjudication of claims can take many years and which have seen an increase in claim severity, management is sometimes required to revise reserves.  This results in a charge to our earnings in the amount of the adjusted reserves, recorded in the period the change in estimate is made.  These charges can be substantial and can potentially have a material impact, either positively or negatively, on results of operations and shareholders’ equity.

The loss of our major customer could severely impact our revenue and earnings potential and A.M. Best rating.
We derive a significant percentage of our direct premium volume from FedEx, and from insurance coverage provided to FedEx’s contracted service providers.  The loss of this major customer would likely materially adversely impact our revenue and earnings potential, as well as our A.M. Best rating.  Insurance programs provided to FedEx and programs provided to the contracted service providers are not necessarily dependent upon one another.

Our collateral held may prove to be insufficient.
We require collateral from our large insureds covering the insureds’ obligations for self-insured retentions or deductibles related to policies of insurance provided.  Should we, as surety, become responsible for such insured obligations, the collateral held may prove to be insufficient.  In this regard, FedEx utilizes significant self-insured retentions and deductibles under policies of insurance provided by us.  In the case of FedEx, we have determined that the financial strength of the customer is sufficient to allow for holding only partial collateral at this time.  Should we become responsible for this customer’s entire self-insured retention and deductible obligations, the collateral held would be insufficient, and we would sustain a significant operating loss.

A material drop in interest rates, or disruption in the fixed income markets, could have an adverse impact on our earnings and, potentially, our financial position.
Given our significant interest-bearing investment portfolio, if interest rates materially drop or the fixed income markets are otherwise disrupted, our income from these investments could be materially reduced, which would reduce our results of operations, equity, business and insurer financial strength rating.  The functioning of the fixed income markets, the values of the investments we hold and our ability to liquidate them may be adversely affected if those markets are disrupted by a change in interest rates or otherwise affected by significant negative factors, including, without limitation: local, national, or international events, such as regulatory changes, wars, or terrorist attacks; a recession, depression, or other adverse developments in either the U.S. or other economies that adversely affects the value of securities held in our portfolio; financial weakness or failure of one or more financial institutions that play a prominent role in securities markets or act as a counterparty for various financial instruments, which could further disrupt the markets; inactive markets for specific kinds of securities, or for the securities of certain issuers or in certain sectors, which could result in decreased valuations and impact our ability to sell a specific security or a group of securities at a reasonable price when desired; a significant change in inflation expectations; or the onset of deflation or stagflation.

- 15 -

Our investment portfolio is subject to market and credit risks, which could affect our financial results and ability to conduct business.
We have a large portfolio of securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions.  A decline in the aggregate value of the securities and limited partnership investments would result in a commensurate decline in our shareholders’ equity, either through the income statement or directly to equity.  The resultant decline could, at least temporarily, materially adversely affect our results of operations, equity, business and insurer financial strength ratings.

Technological advances, including those specific to the transportation industry, could present us with added competitive risks.
An increase in accident prevention technologies and the growth of autonomous or partially autonomous vehicles could reduce the amount of accidents over time and shift the liability from the owner of the vehicle to the manufacturer, which would cause automobile insurance to become a smaller portion of our overall property and casualty insurance book of business.  Innovations in telematics and the increase in usage-based information have become more important and will likely change the way premiums are determined in the future.  These advances in technology could materially change the way products in the transportation industry are designed, priced and underwritten, and if we fail to adjust to these changes in a timely manner, our business and results of operations could be materially adversely affected.

The failure of our information technology systems and other operational systems to operate properly or disruptions or breaches of our information systems could adversely affect our business, results of operations and financial condition.
We rely upon complex and expensive information technology systems and other operational systems and on the integrity and timeliness of our data to run our businesses, service our customers and interact with policyholders, brokers and employers.  The pace at which information systems must be upgraded is continually increasing, requiring an ongoing commitment of significant resources to maintain or upgrade to current standards.  Our success may be impacted if we are not able to develop and expand the effectiveness of existing systems and to continue to enhance information systems that support our operations in a cost-effective manner.  Our networking infrastructure and related assets may also be subject to employee errors or other unforeseen activities that could result in the disruption of business processes, network degradation and system downtime.  To the extent that such disruptions occur, our business, results of operations and financial condition could be materially and adversely affected, resulting in a possible loss of business.
In addition, our daily business operations require us to retain sensitive data such as proprietary business information and data related to customers, claimants and business partners within our network infrastructure.  Cybersecurity attacks and intrusion efforts are continuous and evolving.  The scope and severity of risks that cyber threats present have increased dramatically, and include, but are not limited to, disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data.  Our information technology and other systems could be subject to physical or electronic break-ins; attempts to gain unauthorized access to data from our employees, vendors or third parties; unauthorized tampering; exploitation of weaknesses related to our vendors or other third parties; denials of service; computer viruses and other malicious software; or other cybersecurity attacks or breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers and business partners, or in the theft of intellectual property or proprietary information.
In September 2018, we learned of suspicious activity occurring within two employee email accounts. In response, we launched an investigation and began working with third-party forensic experts to determine the full nature and scope of this incident. A review of the impacted email accounts determined that certain types of personal information may have been accessible for a small number of individuals, although no assurance can be given that we will not identify additional information that was accessed or obtained.  We are working with the impacted clients and are in the process of notifying the individuals, and any implicated state regulators, pursuant to applicable law. We cannot ensure that we will be able to identify, prevent or contain the effects of any additional cyber attacks or other cybersecurity incidents in the future that bypass our security measures or disrupt our information technology systems or business. Any failure to maintain proper security, confidentiality or privacy of sensitive data residing on our information technology and other operational systems could delay or disrupt our ability to do business and service clients, harm our reputation, require us to incur significant remediation costs, subject us to litigation, regulatory fines, a loss of customers and revenues or otherwise have a material adverse effect on our business, results of operations and financial condition.

Changes in current accounting practices and future pronouncements may materially impact our reported financial results.

Developments in accounting practices may require us to incur considerable additional expenses to comply with such developments, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively.  The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, net equity and other historical financial statement line items that are important to users of our financial statements.  Changes could also introduce significant volatility in our results of operations, equity, business and insurer financial strength rating.

We may be unable to attract and retain qualified employees and successfully execute our Chief Executive Officer transition.
We depend on our ability to attract and retain qualified executive officers, experienced underwriters, claims professionals and other skilled employees who are knowledgeable about our specialty lines of business. If we are unable to attract and retain such individuals, we may be unable to maintain our current competitive position in the specialty markets in which we operate and may be unable to achieve our growth strategy.
Effective October 17, 2018, our Board of Directors appointed John D. “Jay” Nichols as our Interim Chief Executive Officer and Chairman of our Board of Directors and commenced a search process to identify a permanent chief executive officer as a result of the resignation of W. Randall Birchfield as our Chief Executive Officer, President and Chief Operating Officer and as a member of our Board of Directors.  If we are unable to appoint a permanent chief executive officer with the desired level of experience and expertise in a timely manner, or if we encounter difficulties in this transition, our strategic planning and execution could be hindered or delayed, and our ability to attract and retain other key members of senior management could be adversely affected.  Any such disruptions or uncertainties could have a material adverse effect on our results of operations, financial condition and the market price of our common stock.

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Item 1B.  UNRESOLVED STAFF COMMENTS

None.

Item 2.  PROPERTIES

The Company owns its home office building and the adjacent real estate in Carmel, Indiana.  The home office building contains a total of 181,000 square feet of usable space, and the Company currently occupies approximately 74% of this space, with the remainder being leased to non-affiliated entities on short-term leases expiring through 2023.

The Company also owns a building and the adjacent real estate in Indianapolis, approximately nine miles from its main office in Carmel.  The building contains approximately 15,000 square feet of usable space, and is used primarily for off-site data storage and as a contingent back-up and disaster recovery site.

The Company's entire operations are conducted from these two facilities.  The current facilities are expected to be adequate for the Company's operations for the near future.

Item 3.  LEGAL PROCEEDINGS

In the ordinary, regular and routine course of its business, the Company is 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 or outside the ordinary course of business.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.

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PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

Shares of the Company's Class A and Class B Common Stock are traded on Nasdaq under the symbols PTVCA and PTVCB, respectively.  The Class A and Class B common shares have identical rights and privileges, except that Class B shares have no voting rights other than on matters for which Indiana law requires class voting.  As of February 28, 2019 there were approximately 400 record holders of Class A Common Stock and approximately 1,000 record holders of Class B Common Stock.

The Company has paid quarterly cash dividends continuously since 1974.  The Company paid a quarterly dividend of $.28 per share during 2018.  In the first quarter of 2019, the Company declared a dividend of $.10 per share.  The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions and are subject to regulatory restrictions.  At December 31, 2018, $117.4 million, or 33.0% of shareholders' equity, represented net assets of the Company's Insurance Subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to Protective because of minimum statutory capital requirements.  However, management believes that these restrictions do not currently pose any material dividend payment concerns for the Company.  The Board intends to address the subject of dividends at each of its future meetings and will consider the Company's earnings, returns on investments and its capital needs.

The following table presents information regarding the Company's repurchases of its Common Stock for the periods indicated:





Period
 



Total number of shares purchased
   



Average price paid per share
   
Total number of shares purchased as part of publicly announced plans or programs (1)
   
Maximum number of shares that may yet be purchased under the plans or programs (1)
 
October 1 - October 31, 2018
   
72,108
   
$
22.64
     
72,108
     
2,194,666
 
November 1 - November 30, 2018
   
15,085
     
22.79
     
15,085
     
2,179,581
 
December 1 - December 31, 2018
   
-
     
-
     
-
     
2,179,581
 
Total
   
87,193
             
87,193
         

(1) On August 31, 2017, the Company's Board of Directors authorized the reinstatement of the Company's share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B Common Stock.  On August 7, 2018, the Company's Board of Directors reaffirmed the Company's share repurchase program, but also provided that the aggregate dollar amount of shares of the Company's Common Stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25.0 million.  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.  Pursuant to this share repurchase program, the Company entered into a Rule 10b5-1 plan on September 24, 2018, which authorized the repurchase of up to $12.0 million of the Company's outstanding common shares at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act.  The Rule 10b5-1 plan expired on November 8, 2018.  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.  The Company has funded, and intends to continue to fund, the share repurchase program from cash on hand.


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Corporate Performance

The following graph shows a five-year comparison of cumulative total return for the Company's Class B Common Stock, the Russell 2000 Index and the Company's peer group as determined by management (the "PTVCB Peer Group").  The basis of comparison is a $100 investment at December 31, 2013, in each of (i) Protective, (ii) the Russell 2000 Index and (iii) the PTVCB Peer Group.  All dividends are assumed to be reinvested.



   
Year Ended December 31
 
Index
 
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
Protective Insurance Corporation
 
$
100.00
   
$
98.17
   
$
95.51
   
$
104.38
   
$
103.91
   
$
75.93
 
Russell 2000 Index
   
100.00
     
104.89
     
100.26
     
121.63
     
139.44
     
124.09
 
PTVCB Peer Group
   
100.00
     
104.36
     
113.12
     
136.57
     
148.11
     
154.20
 



PTVCB Peer Group
Amerisafe, Inc.
 
HCI Group, Inc.
Atlas Financial Holdings, Inc.
 
Heritage Insurance Holdings, Inc.
Donegal Group Inc.
 
James River Group Holdings, Ltd.
EMC Insurance Group Inc.
 
NMI Holdings, Inc.
Employers Holdings, Inc.
 
Safety Insurance Group, Inc.
FedNat Holding Company
 
United Insurance Holdings Corp.
Hallmark Financial Services, Inc.
 
Universal Insurance Holdings, Inc.
     


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Item 6.  SELECTED FINANCIAL DATA

The table below provides selected consolidated financial data of the Company.   The information has been derived from our consolidated financial statements for each of the years in the five-year period ended December 31, 2018.  You should read this selected consolidated financial data in conjunction with the audited consolidated financial statements and notes as of and for the year ended December 31, 2018 included in Part II, Item 8 "Financial Statements and Supplementary Data", and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K.

   
Year Ended December 31
 
   
2018
   
2017
   
2016
   
2015
   
2014
 
   
(Dollars in thousands, except per share data)
 
Gross premiums written
 
$
582,500
   
$
504,737
   
$
403,004
   
$
383,553
   
$
382,388
 
                                         
Net premiums earned
   
432,880
     
328,145
     
276,011
     
263,335
     
261,627
 
                                         
Net investment income
   
22,048
     
18,095
     
14,483
     
12,498
     
9,055
 
                                         
Net realized and unrealized gains (losses) on investments
   
(25,691
)
   
19,686
     
23,228
     
(1,261
)
   
14,930
 
                                         
Losses and loss expenses incurred
   
345,864
     
247,518
     
186,481
     
155,750
     
159,596
 
                                         
Net income (loss)
   
(34,075
)
   
18,323
     
28,945
     
23,283
     
29,717
 
                                         
Earnings (loss) per share -- net income (loss) (1)
   
(2.28
)
   
1.21
     
1.92
     
1.55
     
1.98
 
                                         
Cash dividends per share
   
1.12
     
1.08
     
1.04
     
1.00
     
1.00
 
                                         
Investment portfolio (2)
   
878,638
     
854,595
     
749,501
     
729,877
     
757,421
 
                                         
Total assets
   
1,490,131
     
1,357,016
     
1,154,137
     
1,085,771
     
1,144,247
 
                                         
Shareholders' equity
   
356,082
     
418,811
     
404,345
     
394,498
     
399,496
 
                                         
Book value per share
   
23.95
     
27.83
     
26.81
     
26.25
     
26.67
 

(1)
Earnings (loss) per share are adjusted for the dilutive effect of restricted stock outstanding for 2014-2017.

(2)
Includes money market instruments classified as cash equivalents in the consolidated balance sheets.

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Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) 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.  Additionally, we offer workers' compensation coverage for a variety of operations outside the transportation industry.  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 M&DA, 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.

Effective January 1, 2017, we determined that our business constituted one reportable property and casualty insurance segment.  During 2016, we had two reportable segments – property and casualty insurance and reinsurance.  We moved to a single reportable segment based on how our operating results are regularly reviewed by our chief operating decision maker when making decisions about how resources are to be allocated and assessing performance.

Effective August 1, 2018, we changed our name to Protective Insurance Corporation to better align our holding company's and Insurance Subsidiaries' identities and to reflect our position within the insurance industry.

Effective January 1, 2018, we adopted Accounting Standards Update ("ASU") 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, resulting in a cumulative-effect adjustment of $71.0 million ($46.2 million, net of tax).  This adjustment moved our historical unrealized gains and losses, net of tax, on our equity portfolio from accumulated other comprehensive income (loss) to retained earnings, but had no impact on overall shareholders' equity.  In addition, for 2018 and forward, the change in fair value for equity securities is required to be recognized in net earnings rather than in other comprehensive income (loss).  The impact to our consolidated statements of operations will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.

On December 22, 2017, the U.S. Tax Cut and Jobs Act of 2017 (the "U.S. Tax Act") was signed into law. The U.S. Tax Act lowered the U.S. corporate income rate from 35% to 21% effective January 1, 2018.  As a result, we recorded a tax benefit of $9.6 million related to the remeasurement of our deferred tax assets and liabilities during the fourth quarter of 2017.  As of December 31, 2017, the IRS had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while we had not completed our accounting for the tax effects, we made a reasonable estimate of the tax effects on our existing deferred tax balances at December 31, 2017. We finalized our accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded during 2018.

On July 13, 2018, A.M. Best Company, Inc. ("A.M. Best") affirmed our financial strength rating of "A+" (Superior). At the same time, A.M. Best revised its outlook to negative based on their monitoring of our growth strategy and the potential for adverse loss development in certain lines of business.

On November 20, 2018, A.M. Best downgraded our financial strength rating to "A" (Excellent) from "A+" (Superior), citing three consecutive years of material adverse loss development. A.M. Best continues to categorize our balance sheet as "very strong" and our operating performance as "adequate," but its outlook remains negative.


Liquidity and Capital Resources

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

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

- 21 -

On August 31, 2017, our Board of Directors authorized the reinstatement of our share repurchase program for up to 2,464,209 shares of our Class A or Class B Common Stock.  On August 7, 2018, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our common stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25.0 million.  The repurchases may be made in the open market or through privately negotiated transactions, from time-to-time, and in accordance with applicable laws, rules and regulations. On September 24, 2018, we entered into a stock repurchase plan for the purpose of repurchasing up to $12.0 million of shares of our common stock, at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Rule 10b5-1 Plan"). The Rule 10b5-1 Plan was established pursuant to, and as part of, our share repurchase program and permits shares to be repurchased in accordance with pre-determined criteria when repurchases would otherwise be prohibited, such as during self-imposed blackout periods, or under insider trading laws. The Rule 10b5-1 plan expired on November 8, 2018. 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 year ended December 31, 2018, we paid $4.6 million to repurchase 7,770 shares of Class A and 191,898 shares of 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 bonds at December 31, 2018 would be expected to fall by approximately 2.8%.  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 increased to 5.5 years at December 31, 2018 compared to 4.9 years at December 31, 2017.  The average duration of our fixed income portfolio remains much shorter than both the contractual maturity average and the duration of our liabilities.  We also remain an active participant in the equity securities market, allocating 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 flows from operations increased $3.0 million to $100.7 million for 2018 from $97.7 million in 2017.  The increase in operating cash flow was primarily related to higher premium volume in 2018 compared to 2017.  Net cash flows from operations increased $65.3 million to $97.7 million for 2017 compared to $32.4 million in 2016.  The 2017 increase in operating cash flows was related to higher premium volume in 2017 compared to 2016.

Net cash provided by investing activities was $23.7 million for 2018 compared to net cash used in investing activities of $74.3 million in 2017. The $98.0 million change was primarily related to higher proceeds from sales of fixed income and equity securities and lower purchases of equity securities and fixed income investments. These increases were partially offset by lower proceeds from maturities of our fixed income securities and lower distributions from limited partnerships during 2018, in addition to the purchase of $10.0 million of company-owned life insurance in the first quarter of 2018. Net cash used in investing activities was $74.3 million for 2017 compared to $27.4 million in 2016.  The increase of $46.9 million in cash used in investing activities was primarily related to higher purchases of equity securities and fixed income investments and lower proceeds from sales of equity and fixed income securities. These increases were partially offset by higher distributions from limited partnership investments and higher proceeds from maturities of fixed income securities in 2017.

Net cash used in financing activities for 2018 consisted of regular cash dividend payments to shareholders of $16.8 million ($1.12 per share) and $4.6 million to repurchase 199,668 shares of our common stock.  Financing activities for 2017 consisted of regular cash dividend payments to shareholders of $16.3 million ($1.08 per share) and $1.9 million to repurchase 84,960 shares of our Class B Common Stock. Financing activities for 2016 consisted solely of the regular cash dividend payments to shareholders of $15.8 million ($1.04 per share).

Our assets at December 31, 2018 included $156.9 million of investments included within cash and cash equivalents on the consolidated balance sheets that are readily convertible to cash without market penalty and an additional $45.9 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, the liquidity of our investment portfolio would permit us to continue paying 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 mitigate significant cash outlays that accompany large losses.

- 22 -

We previously maintained a revolving line of credit with a $40.0 million limit that had an expiration date of September 23, 2018.  Interest on this line of credit was referenced to the London Interbank Offered Rate ("LIBOR") and could be fixed for periods of up to one year at our option.  Outstanding drawings on this line of credit were $20.0 million at December 31, 2017.  On August 9, 2018, we entered into a credit agreement providing 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.  This credit agreement, which has an expiration date of August 9, 2022, replaced our line of credit that was to expire on September 23, 2018.  Interest on this credit facility is referenced to LIBOR 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 December 31, 2018.  At December 31, 2018, the effective interest rate was 3.61%, and we had $20.0 million remaining under the revolving credit facility.  The current outstanding borrowings were used to repay the previous line of credit.  Our revolving credit facility has two financial covenants, each of which were met as of December 31, 2018, requiring us to have a minimum U.S. Generally Accepted Accounting Principles ("GAAP") net worth and a maximum consolidated leverage ratio of 0.35 to 1.00.

Annualized net premiums written by our Insurance Subsidiaries for 2018 equaled approximately 112.3% of the combined statutory surplus of these Insurance Subsidiaries, a level consistent with higher premiums written.  Premium writings of 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities.  Further, the statutory capital of each of our Insurance Subsidiaries substantially exceeded minimum risk-based capital requirements set by the NAIC as of December 31, 2018.  Accordingly, we have the ability to significantly 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 December 31, 2018, $64.1 million may be transferred by dividend or loan to Protective without approval by, or prior notification to, regulatory authorities.  An additional $213.1 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 $15.2 million at December 31, 2018.

- 23 -

Non-GAAP Measures

We believe investors’ understanding of our performance is enhanced by our disclosure of underwriting income (loss), which is a measure that is not calculated in accordance with GAAP. Underwriting income (loss) represents the pre-tax profitability 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 2018, we also had a goodwill impairment charge, which has also been excluded from the calculation of underwriting income (loss).  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.  In addition, for 2018, the goodwill impairment charge has been excluded 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 that the exclusion of this goodwill impairment charge improves the comparability of our expense ratio and our combined ratio with our ratios in prior years.

   
2018
   
2017
   
2016
 
Income (loss) before federal income tax expense (benefit)
 
$
(43,872
)
 
$
10,122
   
$
43,054
 
Less: Net realized and unrealized gains (losses) on investments
   
(25,691
)
   
19,686
     
23,228
 
Less: Net investment income
   
22,048
     
18,095
     
14,483
 
Less: Goodwill impairment charge included in other operating expenses (see below)
   
(3,152
)
   
     
 
Underwriting income (loss)
 
$
(37,077
)
 
$
(27,659
)
 
$
5,343
 
                         
                         
Other operating expenses
 
$
137,177
   
$
113,594
   
$
89,462
 
Less: Goodwill impairment charge
   
3,152
     
     
 
Other operating expenses, excluding goodwill impairment charge
 
$
134,025
   
$
113,594
   
$
89,462
 
                         
                         
Ratios
                       
Losses and loss expenses incurred
 
$
345,864
   
$
247,518
   
$
186,481
 
Net premiums earned
   
432,880
     
328,145
     
276,011
 
Loss ratio
   
79.9
%
   
75.4
%
   
67.6
%
                         
Other operating expenses
 
$
137,177
   
$
113,594
   
$
89,462
 
Less: Commissions and other income
   
9,932
     
5,308
     
5,275
 
Other operating expenses, less commissions and other income
   
127,245
     
108,286
     
84,187
 
Net premiums earned
   
432,880
     
328,145
     
276,011
 
Expense ratio
   
29.4
%
   
33.0
%
   
30.5
%
                         
Impact of goodwill impairment charge
   
(0.7
)%
   
     
 
Expense ratio, excluding goodwill impairment charge
   
28.7
%
   
33.0
%
   
30.5
%
                         
Combined ratio
   
109.3
%
   
108.4
%
   
98.1
%
Combined ratio, excluding goodwill impairment charge
   
108.6
%
   
108.4
%
   
98.1
%


- 24 -

Results of Operations

2018 Compared to 2017

   
2018
   
2017
   
Change
   
% Change
 
Gross premiums written
 
$
582,500
   
$
504,737
   
$
77,763
     
15.4
%
Ceded premiums written
   
(138,102
)
   
(151,348
)
   
13,246
     
(8.8
)%
Net premiums written
 
$
444,398
   
$
353,389
   
$
91,009
     
25.8
%
                                 
Net premiums earned
 
$
432,880
   
$
328,145
   
$
104,735
     
31.9
%
Net investment income
   
22,048
     
18,095
     
3,953
     
21.8
%
Commissions and other income
   
9,932
     
5,308
     
4,624
     
87.1
%
Net realized and unrealized gains (losses) on investments
   
(25,691
)
   
19,686
     
(45,377
)
   
(230.5
)%
Total revenue
   
439,169
     
371,234
                 
Losses and loss expenses incurred
   
345,864
     
247,518
     
98,346
     
39.7
%
Other operating expenses
   
137,177
     
113,594
     
23,583
     
20.8
%
Total expenses
   
483,041
     
361,112
                 
Income (loss) before federal income tax benefit
   
(43,872
)
   
10,122
     
(53,994
)
       
Federal income tax benefit
   
(9,797
)
   
(8,201
)
   
(1,596
)
       
Net income (loss)
 
$
(34,075
)
 
$
18,323
   
$
(52,398
)
       
                                 

Gross premiums written for 2018 increased $77.8 million (15.4%), while net premiums earned increased $104.7 million (31.9%), as compared to 2017.  The higher gross premiums written and net premiums earned were the result of continued growth in our commercial automobile and workers' compensation products in both our retail and program distribution channels.  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 23.7% of gross premiums written for 2018 compared to 30.0% for 2017.  The percentage of premiums ceded to reinsurance decreased as a result of changes in our reinsurance structure.  In the third quarter of 2017, we lowered the quota share rate on our workers' compensation premiums to reflect growing profitability and confidence in this book of business.  We also restructured our commercial automobile reinsurance treaty, moving away from variable premium ceded rates (based on loss performance) to a flat ceding arrangement with no material changes to the economic risks taken for these products (i.e., ceded losses will decrease by a similar amount as ceded premiums).  The impact of these changes to our reinsurance structure was partially offset by reserve strengthening in 2018 that resulted in ceding an additional $17.3 million in premium from prior treaty years related to variable premium adjustment provisions in our historical reinsurance treaties.  Our historical commercial automobile reinsurance treaties cause an adjustment to premiums ceded when the ultimate loss estimate changes for a reinsurance treaty year.  Reserve strengthening in 2017 also resulted in ceding an additional $13.7 million in premium related to these variable premium adjustment provisions in 2017.

Losses and loss expenses incurred during 2018 increased $98.3 million (39.7%) to $345.9 million compared to $247.5 million in 2017.  The loss ratio also increased to 79.9% for 2018 compared to a loss ratio of 75.4% for 2017.  The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned.  The increased losses and loss expenses and loss ratio in 2018 reflected reserve adjustments of $16.8 million related to unfavorable prior accident year loss development in commercial automobile coverages. These unfavorable loss developments were the result of increased claim severity due to a more challenging litigation environment, as well as an unexpected increase in the time to settle claims leading to an unfavorable change in claim settlement patterns.  The 2018 loss ratio also reflected an increase in current accident year losses driven by severe commercial automobile losses, including continued emergence of severity.  The 2017 loss ratio also reflected a $19.2 million reserve strengthening related to prior accident year deficiencies that developed as a result of unfavorable loss development from commercial automobile coverages, particularly from severe transportation loss events that occurred primarily during the first six months of 2017 and higher than expected loss development for discontinued lines of business.

- 25 -

Commercial automobile products covered by our reinsurance treaties are subject to an aggregate stop-loss provision. Once this aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible only for our $25 retention.  The following table illustrates the financial impact of a further 5% or 10% increase in ultimate losses for the five most recent reinsurance treaty years (2013-2017) covering these commercial automobile products:

   
5% Increase in Ultimate Loss Ratio
   
10% Increase in Ultimate Loss Ratio
 
Gross loss expense from further strengthening current reserve position
 
$
34.3
   
$
68.7
 
Net financial loss
 
$
9.0
   
$
17.6
 
$/share (after tax)
 
$
0.48
   
$
0.94
 

Net investment income for 2018 increased 21.8% to $22.0 million compared to $18.1 million for 2017. The increase reflected an increase in average funds invested resulting from positive cash flow, as well as higher interest rates, which led to higher reinvestment yields for our short-duration fixed income portfolio.  After-tax investment income increased by 39.4% to $17.7 million during 2018, compared to $12.7 million during 2017, reflecting the aforementioned higher interest rates and reinvestment yield environment.

Net realized and unrealized losses on investments of $25.7 million during 2018 were driven by $9.7 million in unrealized losses on equity securities during the period, which are now recorded in the consolidated statements of operations in conjunction with our adoption of ASU 2016-01, a $9.3 million decrease in the value of our limited partnership investments and net realized losses on sales of fixed income and equity securities of $6.6 million.  During 2018, we sold $149.2 million in equity securities resulting in a gain on sale of $51.9 million.  The majority of this gain was included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, was reclassified to retained earnings as of January 1, 2018 and not recognized in the consolidated statements of operations for 2018.  These equity sales further solidified the conservative nature of our high quality, short-duration investment portfolio; opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and were accretive to income, given the increase in yields at the shorter end of the yield curve.  Comparative 2017 net realized investment gains were $19.7 million, consisting primarily of $12.5 million in gains reported from our investments in limited partnerships and $7.4 million in net realized gains from sales of securities.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

Other operating expenses for 2018 increased $23.6 million, or 20.8%, to $137.2 million compared to 2017.  The increase in other operating expenses was primarily due to increased commission expenses as a result of increased premiums written and higher salary and benefit expense and a non-cash impairment charge of $3.2 million recorded in the fourth quarter of 2018 to write off our entire goodwill balance.  See Note M for further discussion.  The ratio of consolidated other operating expenses less commissions and other income to net premiums earned (the "expense ratio") was 29.4% during 2018, or 28.7% excluding the impact of the goodwill impairment charge, compared to 33.0% for 2017. The decrease in the expense ratio was primarily related to the leveraging effect of higher net premiums earned in 2018 compared to 2017.

Federal income tax benefit was $9.8 million for 2018 compared to income tax benefit of $8.2 million in 2017.  The effective tax rate for 2018 was 22.3% compared to (81.0%) in 2017.  The effective federal income tax rate in 2018 differed only slightly from the normal statutory rate primarily as a result of tax-exempt investment income.  In the fourth quarter of 2017, we recorded a benefit of $9.6 million related to the remeasurement of deferred tax assets and liabilities pursuant to the U.S. Tax Act, which impacted our effective federal income tax rate for 2017.

As a result of the factors discussed above, net loss for 2018 was $34.1 million compared to net income of $18.3 million in 2017, a change of $52.4 million.

- 26 -

2017 Compared to 2016

   
2017
   
2016
   
Change
   
% Change
 
Gross premiums written
 
$
504,737
   
$
403,004
   
$
101,733
     
25.2
%
Ceded premiums written
   
(151,348
)
   
(131,252
)
   
(20,096
)
   
15.3
%
Net premiums written
 
$
353,389
   
$
271,752
   
$
81,637
     
30.0
%
                                 
Net premiums earned
 
$
328,145
   
$
276,011
   
$
52,134
     
18.9
%
Net investment income
   
18,095
     
14,483
     
3,612
     
24.9
%
Commissions and other income
   
5,308
     
5,275
     
33
     
0.6
%
Net realized and unrealized gains (losses) on investments
   
19,686
     
23,228
     
(3,542
)
   
(15.2
)%
Total revenue
   
371,234
     
318,997
                 
Losses and loss expenses incurred
   
247,518
     
186,481
     
61,037
     
32.7
%
Other operating expenses
   
113,594
     
89,462
     
24,132
     
27.0
%
Total expenses
   
361,112
     
275,943
                 
Income before federal income tax expense (benefit)
   
10,122
     
43,054
     
(32,932
)
       
Federal income tax expense (benefit)
   
(8,201
)
   
14,109
     
(22,310
)
       
Net income
 
$
18,323
   
$
28,945
   
$
(10,622
)
       
                                 

Gross premiums written for 2017 increased $101.7 million (25.2%), while net premiums earned increased $52.1 million (18.9%), as compared to 2016.  The increase in net premiums written and earned was primarily due to an increase of $60.8 million in net premiums earned related to commercial automobile products and $3.7 million in higher net premiums earned related to workers' compensation products, which were consistent with our growth strategy. These increases were partially offset by $8.1 million of lower premiums generated by reinsurance products, reflective of our decision to completely withdraw from the property catastrophe reinsurance and professional liability reinsurance markets, and a decrease of $3.9 million in premiums earned from personal automobile products. The difference in the percentage change for premiums written compared to earned is reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.

Premiums ceded to reinsurers averaged 30.0% of gross premiums written for 2017, compared to 32.6% for 2016. The percentage of premiums ceded to reinsurance decreased as a result of changes in our reinsurance structure in the third quarter of 2017.  The change in net premiums earned, compared to growth in gross premiums written, was a function of premium adjustment provisions in our historical commercial automobile reinsurance treaties.  This historical reinsurance structure, which was revised in the July 2017 reinsurance renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year.  This resulted in ceding an additional $13.7 million in premium in connection with our reserve strengthening in 2017.

Losses and loss expenses incurred during 2017 increased $61.0 million (32.7%) from $186.5 million in 2016 to $247.5 million in 2017, due primarily to adverse prior accident year development and growth in net premiums earned.  The 2017 loss ratio was 75.4%, compared to 67.6% for 2016.  The higher loss ratio during 2017 was the result of adverse loss development in our commercial automobile related liability coverages from prior accident years.  The prior year reserve deficiency in 2017 increased the loss ratio for 2017 by 5.9 percentage points compared to a 5.0 percentage point increase experienced in 2016 due to the prior year reserve deficiencies in 2016.  We had an overall reserve deficiency on prior year claims during 2017 of $19.2 million and a $13.8 million deficiency on prior year claims during 2016.

Net investment income for 2017 increased 24.9% to $18.1 million compared to $14.5 million for 2016, primarily due to higher interest rates leading to higher reinvestment yields for fixed income securities, increased dividends from equity securities and an increase in average funds invested resulting from positive cash flow.  After-tax investment income of $12.7 million increased 23.0% during 2017 compared to the prior year reflecting the above factors, as well as the mix between taxable and tax-exempt investment income.

Net realized and unrealized gains on investments totaled $19.7 million in 2017 compared to $23.2 million during 2016.  Direct trading gains during 2017 were $8.2 million lower compared to the prior year. Other-than-temporary impairment of $0.4 million, netted with gains of $1.6 million on previously impaired available-for-sale securities that were sold in 2017, are included in the net gains stated above. Investments in limited partnerships produced gains of $12.5 million in 2017, compared to gains of $2.5 million during 2016.  Limited partnership investments utilized by us are primarily engaged in long-short equities, private equity, country-focused funds and real estate development as an alternative to direct equity investments.  The aggregate of our share of gains and losses in these entities represented a 16.3% appreciation in value for 2017, compared to a 3.3% increase in value for 2016.

Other operating expenses for 2017 increased $24.1 million (27.0%) to $113.6 million from $89.5 million in 2016.  This increase was due primarily to an increase in commission expense as a result of the increase in premiums written and higher salary and salary-related expenses, reflective of our increased workforce in response to the continued expansion of our products and services.   Reinsurance ceded credits, included as an offset to other operating expenses, were 30.8% lower in 2017, resulting primarily from ceding a lower percentage of workers' compensation premium to reinsurers in our most recent reinsurance treaty.

- 27 -

Income tax benefit was $8.2 million for 2017 compared to income tax expense of $14.1 million in 2016.  We recorded a benefit of $9.6 million related to the remeasurement of deferred tax assets and liabilities in the fourth quarter of 2017 pursuant to the U.S. Tax Act.  Our effective federal tax rate for 2017 was (81.0%) as compared to 32.8% in 2016.  The effective tax rate for 2017 was affected primarily by the impact of the U.S. Tax Act discussed above.

As a result of the factors discussed above, net income for 2017 decreased $10.6 million to $18.3 million compared to $28.9 million in 2016.


Critical Accounting Policies

The Company's significant accounting policies that are material and/or subject to significant degrees of judgment are highlighted below.

Investment Valuation

All marketable securities are included in the Company's balance sheets at current fair market value.

Approximately 59% of the Company's assets are composed of investments at December 31, 2018.  Approximately 92% of these investments are publicly-traded, owned directly and have readily-ascertainable market values.  The remaining 8% of investments are composed primarily of minority interests in several limited partnerships.  These limited partnerships are engaged in long-short equities, private equity, country-focused funds and real estate development as an alternative to direct equity investments.  These partnerships do not have readily-determinable market values themselves.  Rather, the values recorded are those provided to the Company by the respective partnerships based on the underlying assets of the limited partnerships.  While a substantial portion of the underlying assets are publicly-traded securities, those which are not publicly-traded have been valued by the respective limited partnerships using their experience and judgment.

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

In conjunction with the adoption of ASU 2016-01, unrealized gains or losses on equity securities will be recognized in the consolidated statements of operations and are no longer evaluated for other-than-temporary declines.

It is important to note that all available-for-sale securities included in the Company's consolidated financial statements are valued at current fair market values.  The evaluation process for determination of other-than-temporary decline in value of investments, as described above, does not change these valuations but, rather, determines when a decline in value will be recognized in the consolidated statements of operations (other-than-temporary decline), as opposed to a charge to shareholders' equity (temporary decline).  This evaluation process is subject to risks and uncertainties because it is not always clear what has caused a decline in value of an individual security or because some declines may be associated with general market conditions or economic factors, which relate to an industry in general, but not necessarily to an individual issue.  The Company has attempted to minimize many of these uncertainties by adopting a largely objective evaluation process as described above.  However, to the extent that certain declines in value are reported as unrealized at December 31, 2018, it is possible that future earnings charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost.  At December 31, 2018, the total gross unrealized loss included in the Company's fixed income portfolio was approximately $10.8 million.  No individual issue constituted a material amount of this total.  Had this entire amount been considered other-than-temporary at December 31, 2018, there would have been no impact on total shareholders' equity or book value since the decline in value of these securities was previously recognized as a reduction to shareholders' equity.

- 28 -

Reinsurance Recoverable

Reinsurance ceded transactions were as follows for the years ended December 31 (dollars in thousands):

   
2018
   
2017
   
2016
 
Reinsurance recoverable
 
$
392,436
   
$
318,331
   
$
255,024
 
Premium ceded (reduction to premium earned)
   
131,080
     
145,201
     
130,012
 
Losses ceded (reduction to losses incurred)
   
148,285
     
128,086
     
108,656
 
Reinsurance ceded credits (reduction to operating expenses)
   
23,124
     
23,187
     
33,512
 

A discussion of the Company's reinsurance strategies is presented in Part I, Item 1, "Business", of this Annual Report on Form 10-K.

Amounts recoverable under the terms of reinsurance contracts comprised approximately 26% of total Company assets as of December 31, 2018.  In order to be able to provide the high limits required by the Company's insureds, the Company shares a significant amount of the insurance risk of the underlying contracts with various insurance entities through the use of reinsurance contracts.  Some reinsurance contracts provide that a loss will be shared among the Company and its reinsurers on a predetermined pro-rata basis ("quota-share"), while other contracts provide that the Company will keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount ("excess of loss").  Some risks are covered by a combination of quota-share and excess of loss contracts.  The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss and loss expense reserves, as described below.  Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts recorded as recoverable from reinsurers.  Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the Company.  Further, the high limits provided by certain of the Company's insurance policies for commercial automobile liability, workers' compensation and professional liability risks provide more variability in the estimation process than lines of business with lower coverage limits.

It should be noted, however, that a change in the estimate of amounts due from reinsurers on unpaid claims will not, in itself, result in charges or credits to losses incurred.  This is because any change in estimated recovery follows the estimate of the underlying loss.  Thus, it is the computation of the gross underlying loss that is critical.

As with any receivable, credit risk exists in the recoverability of reinsurance.  This may be even more pronounced than in normal receivable situations since recoverable amounts are not generally due until the loss is settled which, in some cases, may be many years after the contract was written.  If a reinsurer is unable, in the future, to meet its financial commitments under the terms of the contracts, the Company would be responsible to satisfy the reinsurer's portion of the loss.  The financial condition of each of the Company's reinsurers is vetted upon the execution of a given treaty, and only reinsurers with superior credit ratings are utilized.  However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in the interim period.  Reviews of the current financial strength of each reinsurer are made frequently and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company's additional liability.  Such charges are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit loss rather than a deficiency associated with the loss reserving process.

Loss and Loss Expense Reserves

The Company's reserves for losses and loss expenses ("reserves") are determined based on complex estimation processes using historical experience, current economic information and available industry statistics.  The Company's claims range from routine "fender benders" to the highly complex and costly third-party bodily injury claims involving large tractor-trailer rigs.  Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment.  The high limits provided in many of the Company's policies provide for greater volatility in the reserving process for more serious claims.  Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger claims.  The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.  Changes to previously established loss and loss expense reserve amounts are charged or credited to losses and loss expenses incurred in the accounting periods in which they are determined.  See Note C to the consolidated financial statements for additional information relating to loss and loss expense reserve development.

The Company's methods for determining loss and loss expense reserves are essentially identical for interim and annual reporting periods.

- 29 -

A detailed analysis and discussion for each of the above basic reserve categories follows:

Reserves for known losses (Case reserves)

Each known claim, regardless of complexity, is handled by a claims adjuster experienced with claims of a similar nature, and a "case" reserve appropriate for the individual loss occurrence is established.  For routine "short-tail" claims, such as physical damage, the Company records an initial reserve that is based upon historical loss settlements adjusted for current trends.  As information regarding the loss occurrence is gathered in the claim handling process, the initial reserve is adjusted to reflect the anticipated ultimate cost to settle the claim.  For more complex claims, which can tend toward being "long-tail" in nature, an experienced claims adjuster will review the facts and circumstances surrounding the loss occurrence to make a determination of the reserve to be established.  Many of the more complex claims involve litigation and necessitate an evaluation of potential jury awards, in addition to the factual information, to determine the value of each claim.  Each claim is frequently monitored and the recorded reserve is increased or decreased relative to information gathered during the settlement life cycle.

Reserves for incurred but not reported losses

The Company uses both standard actuarial techniques common to most insurance companies as well as proprietary techniques developed by the Company in connection with its specialty business products.  For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor methods.  The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to claim settlement trends and fluctuations in premium exposure for its short-tail lines.  A minimum of 12 running accident quarters is used to project the reserve necessary for incurred but not reported ("IBNR") losses for its short-tail lines.

The Company also uses the loss development factor approach for its long-tail lines of business.  A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for IBNR losses.  A minimum of 20 accident years is used for long-tail workers' compensation reserve projections.  Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.

For the Company's commercial automobile risks, which are covered by regularly changing reinsurance agreements and which contain wide-ranging self-insured retentions ("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company's exposures to loss.  In situations where the Company's reinsurance structure, the insured's SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses.  Therefore, the Company supplements the above-described actuarial methods with loss ratio reserving techniques developed from the Company's proprietary databases to arrive at the reserve for IBNR losses for the calendar/accident period under review.  As losses for a given calendar/accident period develop with the passage of time, management evaluates such development on a monthly and quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with regard to the anticipated ultimate incurred losses.  This process continues until all losses are settled for each period subject to this method.

Reserves for loss adjustment expenses

While certain of the Company's products involve case basis reserving for allocated loss adjustment expenses, the majority of such reserves are determined on a bulk basis.  The Company uses historical analysis of the ratios of allocated loss adjustment expenses paid to losses paid on closed claims to arrive at the expected ultimate incurred loss adjustment expense factors applicable to each affected product.  Once developed, the factors are applied to the expected ultimate incurred losses, including IBNR, on all open claims.  The resulting ultimate incurred allocated loss adjustment expense is then reduced by amounts paid to date on all open claims to arrive at the reserve for allocated loss adjustment expenses to be incurred in the future for the handling of specific claims.

For those loss adjustment expenses not specific to individual claims (general claims handling expenses referred to as unallocated loss adjustment expenses), the Company uses a variation of the standard industry loss adjustment expenses paid to losses paid (net of reinsurance) ratio analysis that equally weighs paid and incurred losses to establish the necessary reserves.  The selected factors are applied to 100% of IBNR reserves and to case reserves, with consideration given for that portion of loss adjustment expense already paid at the reserve measurement date.  Such factors are monitored and revised, as necessary, on a quarterly basis.


- 30 -

Sensitivity Analysis - Potential impact on reserve volatility from changes in key assumptions

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 Company's reserve selections are developed to be a "best estimate" of unpaid losses at a point in time and, due to the unique nature of its exposures, particularly in the large commercial automobile excess product, ranges of reserve estimates are not established during the reserving process.  However, basic assumptions that could potentially impact future volatility of the Company's valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:

Consistency in the individual case reserving processes;

The selection of loss development factors in the establishment of bulk reserves for incurred but not reported losses and loss expenses;

Projected future loss trend; and

Expected loss ratios for the current book of business, particularly the Company's commercial automobile products, where the number of accounts insured, selected SIRs, policy limits and reinsurance structures may vary widely from period to period.

Under reasonably possible scenarios, it is conceivable that the Company's selected loss estimates could be 10% or more redundant or deficient.  The majority of the Company's reserves for losses and loss expenses, on a net of reinsurance basis, relate to its commercial automobile products.  Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for the Company's commercial automobile products for policies subject to certain major reinsurance treaties.  The following table presents the approximate impacts on gross and net loss reserves of both a hypothetical 10 percentage point and a hypothetical 20 percentage point increase or decrease in the loss factors actually utilized in the Company's reserve determination at December 31, 2018 for the prior six treaty periods, which covers exposures earned on policies written between July 3, 2012 and December 31, 2018.  The Company's selection of the range of values presented should not be construed as the Company's prediction of future events, but rather simply an illustration of the impact of such events, should they occur.

The variation in impact from loss ratio increases and decreases is attributable to minimum and maximum premium rate factors included in the various reinsurance contracts.  In between the minimum and maximum ceded premium provisions within the treaty terms, net premiums earned can be increased or decreased based on a change in loss expectation.  The total impact to profitability in the same scenarios is shown below ($ in millions):

   
10% Loss Ratio Increase
   
10% Loss Ratio Decrease
   
20% Loss Ratio Increase
   
20% Loss Ratio Decrease
 
Gross Reserves
 
$
72.0
   
$
(72.0
)
 
$
144.1
   
$
(144.1
)
                                 
Net Reserves
 
$
18.0
   
$
(19.5
)
 
$
36.0
   
$
(49.5
)
Net premiums earned
 
$
(0.4
)
 
$
16.5
   
$
(0.4
)
 
$
41.1
 
Cumulative Net Underwriting Income (Loss)
 
$
(18.4
)
 
$
36.0
   
$
(36.4
)
 
$
90.6
 

Federal Income Tax Considerations

The liability method is used in accounting for federal income taxes.  Using this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  The provision for deferred federal income tax is based on items of income and expense that are reported in different years in the consolidated financial statements and tax returns and are measured at the tax rate in effect in the year the difference originated.

On December 22, 2017, the U.S. Tax Act was signed into law.  The U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.  GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted.  As a result of the U.S. Tax Act, the Company recorded a tax benefit of $9.6 million related to the remeasurement of its deferred tax assets and liabilities during the fourth quarter of 2017.  As of December 31, 2017, the IRS had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while the Company had not completed its accounting for the tax effects, it made a reasonable estimate of the tax effects on its existing deferred tax balances at December 31, 2017. The Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded in 2018.

- 31 -

Net deferred tax liabilities reported at December 31 are as follows (dollars in thousands):

   
2018
   
2017
 
Total deferred tax liabilities
 
$
(12,906
)
 
$
(23,836
)
Total deferred tax assets
   
19,168
     
9,478
 
Net deferred tax assets (liabilities)
 
$
6,262
   
$
(14,358
)

Deferred tax assets at December 31, 2018 included approximately $10.0 million related to the timing of deductibility of loss and loss expense reserves, the majority of which relate to policy liability discounts required by the Internal Revenue Code of 1986, as amended, which are perpetual in nature and, in the absence of the termination of the Company's business, will not, in the aggregate, reverse to a material degree in the foreseeable future. $3.5 million of deferred tax assets are related to the results of the Company's limited partnership investments. Unearned premiums discount and deferred ceding commissions represent $2.3 million and $1.2 million of deferred tax assets, respectively. An additional $0.6 million relates to impairment adjustments made to investments, as required by accounting regulations.  The unrealized gains in the Company's investment portfolios would allow for the recovery of this deferred tax at any time. The balance of deferred tax assets consists of various normal operating expense accruals and is not considered to be material.  As a result of its analysis, management has determined that no valuation allowance is necessary at December 31, 2018.

FASB provides guidance for recognizing and measuring uncertain tax positions and prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the consolidated financial statements. Based on this guidance, management regularly analyzes tax positions taken or expected to be taken in a tax return based on the threshold condition prescribed.  Tax positions that do not meet or exceed this threshold condition are considered uncertain tax positions.  Interest related to uncertain tax positions, if any, would be recognized in income tax expense.  Penalties, if any, related to uncertain tax positions would be recorded in income tax expense (benefit).

Impact of Inflation

To the extent possible, the Company attempts to recover the impact of inflation on loss costs and operating expenses by increasing the premiums it charges.  Within the commercial automobile business, a majority of the Company's accounts are charged as a percentage of an insured's gross revenue, mileage or payroll.  As these charging bases increase with inflation, premium revenues are immediately increased.  The remaining premium rates charged are adjustable only at periodic intervals and often require state regulatory approval.  Such periodic increases in premium rates may lag far behind cost increases.

To the extent inflation influences yields on investments, the Company is also affected.  The Company's short-term and fixed investment portfolios are structured in direct response to available interest rates over the yield curve.  As available market interest rates fluctuate in response to the presence or absence of inflation, the yields on the Company's investments are impacted.  Further, as inflation affects current market rates of return, previously committed investments might increase or decline in value depending on the type and maturity of investment. For additional information, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk", in this Annual Report on Form 10-K.

Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves, as portions of these reserves are expected to be paid over extended periods of time.  The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses.

- 32 -

Contractual Obligations

The table below sets forth the amounts of the Company's contractual obligations at December 31, 2018.

   
Payments Due by Period
 
   
Total
   
Less than 1 year
   
1 - 3 Years
   
3 - 5 Years
   
More Than 5 Years
 
   
(dollars in millions)
 
Loss and loss expense reserves
 
$
865.3
   
$
302.9
   
$
285.6
   
$
103.8
   
$
173.0
 
                                         
Investment commitment
   
1.3
     
1.3
     
     
     
 
                                         
Operating leases
   
0.5
     
0.4
     
0.1
     
     
 
                                         
Borrowings
   
20.0
     
20.0
     
     
     
 
                                         
Total
 
$
887.1
   
$
324.6
   
$
285.7
   
$
103.8
   
$
173.0
 

The Company's loss and loss expense reserves do not have contractual maturity dates, and the exact timing of the payment of claims cannot be predicted with certainty.  However, based upon historical payment patterns, the above table presents an estimate of when the Company might expect its direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid.  Timing of the collection of the related reinsurance recoverable, estimated to be $392.4 million at December 31, 2018, or 45% of the amounts presented in the above table, would approximate that of the above projected direct reserve payout but could lag behind such payments by several months in some instances.

The investment commitment in the above table relates to a maximum unfunded capital obligation for a limited partnership investment at December 31, 2018.  The actual call dates for such funding could vary from that presented.

Borrowings made under the Company's line of credit can be called by the lender, under certain circumstances, with short notice.  The Company entered into a new line of credit on August 9, 2018 with an expiration date of August 9, 2022.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

- 33 -

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company operates within the property and casualty insurance industry and, accordingly, has significant invested assets that are exposed to various market risks.  These market risks relate to interest rate fluctuations, credit risks, equity security market prices and, to a lesser extent, foreign currency rate fluctuations.  All of the Company's invested assets, with the exception of investments in limited partnerships and equity securities, are classified as available-for-sale.

Based on the structure of the Company's investment portfolio, one of the most significant of the four identified market risks relates to prices in the equity security market.  Although not the largest category of the Company's invested assets, equity securities and limited partnerships, which are predominately invested in equities, have a high potential for short-term price fluctuation.  The market value of the Company's equity and limited partnerships positions at December 31, 2018 was $121.5 million, or approximately:

14% of the Company's consolidated investment portfolio of $878.6 million; and
34% of the Company's shareholders' equity of $356.1 million.

Funds invested in the equities market are not considered to be assets necessary for the Company to conduct its daily operations and, therefore, can be committed for extended periods of time.  The long-term nature of the Company's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuations, is the primary focus.

Reference is made to the discussion of limited partnership investments in "Critical Accounting Policies" in Part II, Item 7 of this Annual Report on Form 10-K.  All of the market risks attendant to equity securities also apply to the underlying assets in these limited partnerships, and to a greater degree because of the generally more aggressive investment philosophies utilized by the limited partnerships. In addition, these investments are illiquid.  There is no primary or secondary market on which these limited partnerships trade and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and must seek approval from the general partner for any such disposal.  Distributions of earnings from these limited partnerships are largely at the sole discretion of the general partners, and distributions are generally not received by the Company for many years after the earnings have been reported.   Finally, through the application of the equity method of accounting, the Company's share of net income reported by the limited partnerships often includes significant amounts of unrealized appreciation on the underlying investments.

The Company's fixed income portfolio totaled $592.6 million at December 31, 2018.  Approximately 35% of this portfolio is made up of U.S. Government and municipal debt securities, and the average contractual maturity of the Company's fixed maturity investments is approximately 5.5 years with an average modified duration of approximately 2.6 years.  Although the Company is exposed to interest rate risk on its fixed income investments, given the anticipated duration of the Company's liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, even a 100 to 200 basis point increase in interest rates would not have a material impact on the Company's ability to conduct daily operations or to meet its obligations and would, in fact, result in significantly higher investment income in a relatively short period of time, as short-term investments and maturing bonds could be reinvested in the higher yielding securities.

There is an inverse relationship between interest rate fluctuations and the fair value of the Company's fixed income investments.  Additionally, the fair value of interest rate sensitive instruments may be affected by 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.  The Company monitors its sensitivity to interest rate risk by measuring the change in fair value of its fixed income investments relative to hypothetical changes in interest rates.

The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 that would result from an instantaneous change in yield rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on current fair value. The analysis presents the sensitivity of the fair value of the Company's financial instruments to selected changes in market rates and prices. The range of rates chosen reflects the Company's view of changes that the Company believes are reasonably possible over a one-year period.  The Company's selection of the range of values chosen to represent changes in interest rates should not be construed as the Company's prediction of future market events, but rather, as an illustration of the impact of such events, should they occur.  The equity portfolio was compared to the S&P 500 Index due to its correlation with the vast majority of the Company's current equity portfolio.  The limited partnership portfolio was compared to the S&P 500 Index and Indian BSE 500 Index due to their significant correlation with the vast majority of the Company's limited partnership portfolio.  As previously indicated, several other factors 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 below.


- 34 -

The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 due to an instantaneous increase in yield rates of 100 basis points and a 10% decline in the S&P 500 Index and the Indian BSE 500 Index (dollars in thousands).

         
Increase (Decrease)
 
   
Fair
Value
   
Interest
Rate Risk
   
Equity
Risk
 
2018
                 
Fixed income securities
                 
Agency collateralized mortgage obligations
 
$
10,687
   
$
(404
)
 
$
 
Agency mortgage-backed securities
   
37,385
     
(2,012
)
   
 
Asset-backed securities
   
64,422
     
(2,612
)
   
 
Bank loans
   
9,750
     
(49
)
   
 
Certificates of deposit
   
2,835
     
(48
)
   
 
Collateralized mortgage obligations
   
5,423
     
(176
)
   
 
Corporate securities
   
190,450
     
(5,417
)
   
 
Mortgage-backed securities
   
38,540
     
(1,270
)
   
 
Municipal obligations
   
29,155
     
(769
)
   
 
Non-U.S. government obligations
   
25,180
     
(549
)
   
 
U.S. government obligations
   
178,818
     
(5,864
)
   
 
Total fixed income securities
   
592,645
     
(19,170
)
   
 
Equity securities:
                       
Consumer
   
17,945
     
     
(1,795
)
Energy
   
3,179
     
     
(318
)
Financial
   
25,253
     
     
(2,525
)
Industrial
   
6,920
     
     
(692
)
Technology
   
2,303
     
     
(230
)
Funds (e.g. mutual funds, closed end funds, ETFs)
   
5,489
     
     
(549
)
Other
   
5,333
     
     
(533
)
Total equity securities
   
66,422
     
     
(6,642
)
Limited partnerships
   
55,044
     
     
(4,022
)
Short-term
   
1,000
     
     
 
Total
 
$
715,111
   
$
(19,170
)
 
$
(10,664
)
                         
2017
                       
Fixed income securities
                       
Agency collateralized mortgage obligations
 
$
16,586
   
$
(820
)
 
$
 
Agency mortgage-backed securities
   
27,075
     
(1,103
)
   
 
Asset-backed securities
   
43,469
     
(1,381
)
   
 
Bank loans
   
19,488
     
(794
)
   
 
Certificates of deposit
   
3,135
     
(83
)
   
 
Collateralized mortgage obligations
   
6,492
     
(200
)
   
 
Corporate securities
   
198,349
     
(5,126
)
   
 
Mortgage-backed securities
   
24,204
     
(772
)
   
 
Municipal obligations
   
96,650
     
(1,861
)
   
 
Non-U.S. government obligations
   
37,394
     
(959
)
   
 
U.S. government obligations
   
49,011
     
(886
)
   
 
Total fixed income securities
   
521,853
     
(13,985
)
   
 
Equity securities:
                       
Consumer
   
46,578
     
     
(4,658
)
Energy
   
10,278
     
     
(1,028
)
Financial
   
45,470
     
     
(4,547
)
Industrial
   
25,402
     
     
(2,540
)
Technology
   
13,061
     
     
(1,306
)
Funds (e.g. mutual funds, closed end funds, ETFs)
   
50,291
     
     
(5,029
)
Other
   
10,683
     
     
(1,068
)
Total equity securities
   
201,763
     
     
(20,176
)
Limited partnerships
   
70,806
     
     
(5,278
)
Short-term
   
1,000
     
     
 
Total
 
$
795,422
   
$
(13,985
)
 
$
(25,454
)


- 35 -

The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 due to an instantaneous increase in yield rates of 150 basis points and a 15% decline in the S&P 500 Index and the Indian BSE 500 Index (dollars in thousands).

         
Increase (Decrease)
 
   
Fair
Value
   
Interest
Rate Risk
   
Equity
Risk
 
2018
                 
Fixed income securities
                 
Agency collateralized mortgage obligations
 
$
10,687
   
$
(607
)
 
$
 
Agency mortgage-backed securities
   
37,385
     
(3,021
)
   
 
Asset-backed securities
   
64,422
     
(3,917
)
   
 
Bank loans
   
9,750
     
(73
)
   
 
Certificates of deposit
   
2,835
     
(71
)
   
 
Collateralized mortgage obligations
   
5,423
     
(263
)
   
 
Corporate securities
   
190,450
     
(8,125
)
   
 
Mortgage-backed securities
   
38,540
     
(1,904
)
   
 
Municipal obligations
   
29,155
     
(1,154
)
   
 
Non-U.S. government obligations
   
25,180
     
(824
)
   
 
U.S. government obligations
   
178,818
     
(8,794
)
   
 
Total fixed income securities
   
592,645
     
(28,753
)
   
 
Equity securities:
                       
Consumer
   
17,945
     
     
(2,692
)
Energy
   
3,179
     
     
(477
)
Financial
   
25,253
     
     
(3,788
)
Industrial
   
6,920
     
     
(1,038
)
Technology
   
2,303
     
     
(345
)
Funds (e.g. mutual funds, closed end funds, ETFs)
   
5,489
     
     
(823
)
Other
   
5,333
     
     
(800
)
Total equity securities
   
66,422
     
     
(9,963
)
Limited partnerships
   
55,044
     
     
(6,034
)
Short-term
   
1,000
     
     
 
Total
 
$
715,111
   
$
(28,753
)
 
$
(15,997
)
                         
2017
                       
Fixed income securities
                       
Agency collateralized mortgage obligations
 
$
16,586
   
$
(1,229
)
 
$
 
Agency mortgage-backed securities
   
27,075
     
(1,657
)
   
 
Asset-backed securities
   
43,469
     
(2,072
)
   
 
Bank loans
   
19,488
     
(1,192
)
   
 
Certificates of deposit
   
3,135
     
(125
)
   
 
Collateralized mortgage obligations
   
6,492
     
(299
)
   
 
Corporate securities
   
198,349
     
(7,690
)
   
 
Mortgage-backed securities
   
24,204
     
(1,158
)
   
 
Municipal obligations
   
96,650
     
(2,791
)
   
 
Non-U.S. government obligations
   
37,394
     
(1,438
)
   
 
U.S. government obligations
   
49,011
     
(1,329
)
   
 
Total fixed income securities
   
521,853
     
(20,980
)
   
 
Equity securities:
                       
Consumer
   
46,578
     
     
(6,987
)
Energy
   
10,278
     
     
(1,542
)
Financial
   
45,470
     
     
(6,821
)
Industrial
   
25,402
     
     
(3,810
)
Technology
   
13,061
     
     
(1,959
)
Funds (e.g. mutual funds, closed end funds, ETFs)
   
50,291
     
     
(7,544
)
Other
   
10,683
     
     
(1,602
)
Total equity securities
   
201,763
     
     
(30,265
)
Limited partnerships
   
70,806
     
     
(7,916
)
Short-term
   
1,000
     
     
 
Total
 
$
795,422
   
$
(20,980
)
 
$
(38,181
)
- 36 -


ANNUAL REPORT ON FORM 10-K


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


YEAR ENDED DECEMBER 31, 2018

PROTECTIVE INSURANCE CORPORATION

CARMEL, INDIANA


- 37 -


 
Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Protective Insurance Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Protective Insurance Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a)  (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 7, 2019 expressed an unqualified opinion thereon.

Adoption of ASU No. 2016-01

As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for the recognition and measurement of certain financial instruments in 2018 due to the adoption of ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.




/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 1970.

Indianapolis, Indiana
March 7, 2019
- 38 -


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

   
December 31
 
   
2018
   
2017
 
Assets
           
Investments:
           
Fixed income securities (Amortized cost: 2018, $600,504; 2017, $521,017)
 
$
592,645
   
$
521,853
 
Equity securities
   
66,422
     
201,763
 
Limited partnerships (Affiliated: 2018, $32,028; 2017, $43,586)
   
55,044
     
70,806
 
Commercial mortgage loans
   
6,672
     
 
Short-term and other
   
1,000
     
1,000
 
     
721,783
     
795,422
 
                 
Cash and cash equivalents
   
163,996
     
64,680
 
Restricted cash and cash equivalents
   
6,815
     
4,033
 
Accounts receivable--less allowance (2018, $403; 2017, $484)
   
102,972
     
87,551
 
Accrued investment income
   
4,358
     
4,159
 
Reinsurance recoverable
   
392,436
     
318,331
 
Prepaid reinsurance premiums
   
6,095
     
4,578
 
Deferred policy acquisition costs
   
6,568
     
5,608
 
Property and equipment--less accumulated depreciation (2018, $19,531; 2017, $16,614)
   
46,645
     
47,317
 
Other assets
   
24,760
     
18,399
 
Current federal income taxes recoverable
   
7,441
     
6,938
 
Deferred federal income taxes
   
6,262
     
 
   
$
1,490,131
   
$
1,357,016
 
                 
Liabilities and Shareholders' Equity
               
Reserves:
               
Losses and loss expenses
 
$
865,339
   
$
680,274
 
Unearned premiums
   
71,625
     
53,085
 
     
936,964
     
733,359
 
                 
Reinsurance payable
   
66,632
     
62,308
 
Short-term borrowings
   
20,000
     
20,000
 
Depository liabilities
   
173
     
3,050
 
Accounts payable and other liabilities
   
110,280
     
105,130
 
Deferred federal income taxes
   
     
14,358
 
     
1,134,049
     
938,205
 
Shareholders' equity:
               
Common stock:
               
Class A voting -- authorized 3,000,000 shares; outstanding -- 2018 - 2,615,339; 2017 - 2,623,109 shares
   
112
     
112
 
Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2018 - 12,253,922; 2017 - 12,423,518 shares
   
522
     
530
 
Additional paid-in capital
   
54,720
     
55,078
 
Accumulated other comprehensive income (loss)
   
(7,347
)
   
46,391
 
Retained earnings
   
308,075
     
316,700
 
     
356,082
     
418,811
 
   
$
1,490,131
   
$
1,357,016
 

See notes to consolidated financial statements.

- 39 -


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

   
Year Ended December 31
 
   
2018
   
2017
   
2016
 
Revenue:
                 
Net premiums earned
 
$
432,880
   
$
328,145
   
$
276,011
 
Net investment income
   
22,048
     
18,095
     
14,483
 
Commissions and other income
   
9,932
     
5,308
     
5,275
 
Net realized gains (losses) on investments, excluding impairment losses
   
(6,632
)
   
7,366
     
26,498
 
Other-than-temporary impairment losses on investments
   
(19
)
   
(149
)
   
(5,743
)
Net unrealized gains (losses) on equity securities and limited partnership investments
   
(19,040
)
   
12,469
     
2,473
 
Net realized and unrealized gains (losses) on investments
   
(25,691
)
   
19,686
     
23,228
 
     
439,169
     
371,234
     
318,997
 
Expenses:
                       
Losses and loss expenses incurred
   
345,864
     
247,518
     
186,481
 
Other operating expenses
   
137,177
     
113,594
     
89,462
 
     
483,041
     
361,112
     
275,943
 
Income (loss) before federal income tax expense (benefit)
   
(43,872
)
   
10,122
     
43,054
 
                         
Federal income tax expense (benefit)
   
(9,797
)
   
(8,201
)
   
14,109
 
Net income (loss)
 
$
(34,075
)
 
$
18,323
   
$
28,945
 
                         
Per share data:
                       
Basic and diluted earnings (loss)
 
$
(2.28
)
 
$
1.21
   
$
1.92
 
                         
Dividends paid to shareholders
 
$
$ 1.12
   
$
$ 1.08
   
$
$ 1.04
 

See notes to consolidated financial statements.

- 40 -


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

   
Year Ended December 31
 
   
2018
   
2017
   
2016
 
Net income (loss)
 
$
(34,075
)
 
$
18,323
   
$
28,945
 
                         
Other comprehensive income (loss), net of tax:
                       
Unrealized net gains (losses) on fixed income securities:
                       
Unrealized net gains (losses) arising during the period
   
(9,680
)
   
17,340
     
8,618
 
Less: reclassification adjustment for net gains (losses) included in net income (loss)
   
(2,812
)
   
4,691
     
13,491
 
     
(6,868
)
   
12,649
     
(4,873
)
                         
Foreign currency translation adjustments
   
(830
)
   
522
     
235
 
                         
Other comprehensive income (loss)
   
(7,698
)
   
13,171
     
(4,638
)
                         
Comprehensive income (loss)
 
$
(41,773
)
 
$
31,494
   
$
24,307
 

See notes to consolidated financial statements.

- 41 -


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

   
Common Stock
   
Additional
   
Accumulated
Other
             
   
Class A
   
Class B
   
Paid-In
   
Comprehensive
   
Retained
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Earnings
   
Equity
 
Balance at  January 1, 2016
   
2,623
   
$
112
     
12,403
   
$
529
   
$
52,946
   
$
37,858
   
$
303,053
   
$
394,498
 
Net income
   
     
     
     
     
     
     
28,945
     
28,945
 
Foreign currency translation adjustment, net of tax
   
     
     
     
     
     
235
     
     
235
 
Change in unrealized gain (loss) on investments, net of tax
   
     
     
     
     
     
(4,873
)
   
     
(4,873
)
Common stock dividends
   
     
     
     
     
     
     
(15,803
)
   
(15,803
)
Repurchase of common stock
   
     
     
     
     
     
     
     
 
Restricted stock grants
   
     
     
58
     
3
     
1,340
     
     
     
1,343
 
Balance at  December 31, 2016
   
2,623
     
112
     
12,461
     
532
     
54,286
     
33,220
     
316,195
     
404,345
 
Net income
   
     
     
     
     
     
     
18,323
     
18,323
 
Foreign currency translation adjustment, net of tax
   
     
     
     
     
     
522
     
     
522
 
Change in unrealized gain (loss) on investments, net of tax
   
     
     
     
     
     
12,649
     
     
12,649
 
Common stock dividends
   
     
     
     
     
     
     
(16,302
)
   
(16,302
)
Repurchase of common stock
   
     
     
(85
)
   
(4
)
   
(360
)
   
     
(1,516
)
   
(1,880
)
Restricted stock grants
   
     
     
48
     
2
     
1,152
     
     
     
1,154
 
Balance at  December 31, 2017
   
2,623
     
112
     
12,424
     
530
     
55,078
     
46,391
     
316,700
     
418,811
 
Cumulative effect of adoption of ASU 2016-01, net of tax
   
     
     
     
     
     
(46,157
)
   
46,157
     
 
Cumulative effect of adoption of ASU 2018-02
   
     
     
     
     
     
117
     
(117
)
   
 
Net loss
   
     
     
     
     
     
     
(34,075
)
   
(34,075
)
Foreign currency translation adjustment, net of tax
   
     
     
     
     
     
(830
)
   
     
(830
)
Change in unrealized gain (loss) on investments, net of tax
   
     
     
     
     
     
(6,868
)
   
     
(6,868
)
Common stock dividends
   
     
     
     
     
     
     
(16,835
)
   
(16,835
)
Repurchase of common stock
   
(8
)
   
     
(192
)
   
(9
)
   
(832
)
   
     
(3,755
)
   
(4,596
)
Restricted stock grants
   
     
     
22
     
1
     
474
     
     
     
475
 
Balance at  December 31, 2018
   
2,615
   
$
112
     
12,254
   
$
522
   
$
54,720
   
$
(7,347
)
 
$
308,075
   
$
356,082
 

See notes to consolidated financial statements.

- 42 -


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

   
Year Ended December 31
 
   
2018
   
2017
   
2016
 
Operating activities
                 
Net income (loss)
 
$
(34,075
)
 
$
18,323
   
$
28,945
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Change in accounts receivable and unearned premium
   
(3,904
)
   
2,678
     
(2,721
)
Change in accrued investment income
   
(199
)
   
(278
)
   
108
 
Change in reinsurance recoverable on paid losses
   
956
     
(446
)
   
692
 
Change in losses and loss expenses reserves, net of reinsurance
   
117,027
     
47,229
     
23,568
 
Change in other assets, other liabilities and current income taxes
   
8,204
     
49,221
     
(8,063
)
Amortization of net policy acquisition costs
   
54,981
     
47,387
     
18,085
 
Net policy acquisition costs deferred
   
(55,940
)
   
(51,824
)
   
(17,813
)
Provision for deferred income tax expense (benefit)
   
(18,794
)
   
(3,866
)
   
2,838
 
Bond amortization
   
184
     
1,865
     
3,030
 
Loss on sale of property and equipment
   
     
235
     
63
 
Depreciation
   
6,102
     
5,752
     
5,521
 
Net realized (gains) losses on investments
   
25,691
     
(19,686
)
   
(23,228
)
Compensation expense related to restricted stock
   
475
     
1,154
     
1,343
 
Net cash provided by operating activities
   
100,708
     
97,744
     
32,368
 
                         
Investing activities
                       
Purchases of fixed maturities and equity securities
   
(415,326
)
   
(436,932
)
   
(400,670
)
Purchases of limited partnership interests
   
(450
)
   
(1,097
)
   
 
Distributions from limited partnerships
   
6,869
     
19,230
     
1,462
 
Proceeds from maturities
   
64,035
     
131,623
     
78,691
 
Proceeds from sales of fixed maturities
   
241,429
     
148,652
     
199,790
 
Proceeds from sales of equity securities
   
149,195
     
69,756
     
88,773
 
Net sales of short-term investments
   
     
500
     
11,258
 
Purchase of insurance company-owned life insurance
   
(10,000
)
   
     
 
Purchase of commercial mortgage loans
   
(6,672
)
   
     
 
Purchases of property and equipment
   
(5,439
)
   
(6,661
)
   
(7,725
)
Proceeds from disposals of property and equipment
   
10
     
582
     
1,059
 
Net cash provided by (used in) investing activities
   
23,651
     
(74,347
)
   
(27,362
)
                         
Financing activities
                       
Dividends paid to shareholders
   
(16,835
)
   
(16,302
)
   
(15,803
)
Repurchase of common shares
   
(4,596
)
   
(1,880
)
   
 
Net cash used in financing activities
   
(21,431
)
   
(18,182
)
   
(15,803
)
                         
Effect of foreign exchange rates on cash and cash equivalents
   
(830
)
   
522
     
235
 
                         
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents
   
102,098
     
5,737
     
(10,562
)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of year
   
68,713
     
62,976
     
73,538
 
Cash, cash equivalents and restricted cash and cash equivalents at end of year
 
$
170,811
   
$
68,713
   
$
62,976
 
                         
Supplemental Disclosures of Cash Flow Information
                       
Cash paid for income taxes, net of refunds
 
$
9,500
   
$
   
$
10,173
 
Cash paid for interest
 
$
504
   
$
456
   
$
309
 

See notes to consolidated financial statements.

- 43 -


Notes to Consolidated Financial Statements
Protective Insurance Corporation and Subsidiaries
(All dollars amounts presented in these notes are in thousands, except share and per share data)

Note A - Summary of Significant Accounting Policies

Description of Business:  Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (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.  In addition, the Company offers workers' compensation coverage for a variety of operations outside the transportation industry.  The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

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

Effective August 1, 2018, the Company changed its name to Protective Insurance Corporation to better align its holding company's and Insurance Subsidiaries' identities and to reflect its position within the insurance industry.

Effective January 1, 2017, the Company determined that its business constituted one reportable property and casualty insurance segment.  During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance.  The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are allocated and assessing performance.

Basis of Presentation:  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  Inter-company transactions and accounts have been eliminated in consolidation.

Use of Estimates:  Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results will differ from those estimates.

Cash and Cash Equivalents:  The Company considers investments in money market funds to be cash equivalents.  Carrying amounts for these instruments approximate their fair values.

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 a valuation allowance for losses when necessary. These investments represent interests in commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans. There was no valuation allowance on the Company's commercial mortgage loans as of December 31, 2018.  

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 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 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 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.

Effective January 1, 2018, 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 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.  Prior to adoption of the new accounting guidance, unrealized gains and losses related to equity securities were reflected directly in shareholders’ equity unless a decline in value was determined to be other-than-temporary, in which case the loss was charged to income.

- 44 -

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

The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed 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.

Property and Equipment: Property and equipment are carried at cost, less accumulated depreciation.  Depreciation is computed principally by the straight-line method.

Goodwill and Other Intangible Assets: Goodwill is not amortized.  Rather, it is tested for impairment in accordance with FASB guidance, at the reporting-unit level.  Goodwill is tested annually (during the fourth quarter) or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment.  As a result of the impairment analysis conducted by the Company in the fourth quarter of 2018, the Company concluded the entire goodwill balance was impaired, resulting in an impairment loss of $3,152.  See Note M for further discussion.  This impairment charge is included within other operating expenses in the consolidated statements of operations.  Intangible assets determined to have finite lives, such as customer relationships and employment agreements, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset.  In addition, impairment testing is performed on these amortizing intangible assets if impairment indicators are noted.

Reserves for Losses and Loss Expenses:  The reserves for losses and loss expenses are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year-end.  These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled.  While actual results will differ from such estimates, management believes that the reserves for losses and loss expenses are adequate.  The estimates are continually reviewed, and as adjustments to these reserves become necessary, such adjustments are reflected in current operations.

Recognition of Revenue and Costs:  Premiums are earned over the period for which insurance protection is provided.  A reserve for unearned premiums, computed by the daily pro-rata method, is established to reflect amounts applicable 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 premium.  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 consolidated balance sheet at December 31, 2018.

Reinsurance:  Reinsurance premiums, commissions, expense reimbursements and reserves related to the Company's reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.  Premiums ceded to other insurers have been reported as a reduction of premium earned.  Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as reinsurance recoverable assets.  Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the reinsurer over prescribed periods.  Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date, as well as projected loss experience applicable to the various contract periods.  Estimates of reinstatement premiums on reinsurance contracts covering catastrophic events are, to the extent reasonably determinable, recorded concurrently with the related loss.

Should impairment in the ability of a reinsurer to satisfy its obligations to the Company be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company's additional liability.  Such charges, when incurred, are included in other operating expenses, rather than losses and loss expenses incurred, because the inability of the Company to collect from reinsurers is a credit risk rather than a deficiency associated with the loss reserving process.

- 45 -

Deferred Taxes:  Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities based on enacted tax rates and laws.  The deferred tax benefits of the deferred tax assets are recognized to the extent realization of such benefits is more likely than not.  Deferred income tax expense or benefit generally represents the net change in deferred income tax assets and liabilities during the year.  Current income tax expense represents the tax liability associated with revenues and expenses currently taxable or deductible on various income tax returns for the year reported.

Restricted Stock:  Shares of restricted stock vest over the vesting period from the date of grant and certain shares of restricted stock are accelerated for retirement-eligible recipients in accordance with the non-substantive, post-grant date vesting clause of Accounting Standards Codification ("ASC") Topic 715, Compensation—Retirement Benefits.  Restricted stock is valued based on the closing price of the Company's Class B Common Stock on the day the award is granted.  Non-vested shares of restricted stock will be forfeited should an executive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee (the "Compensation Committee") of the Board of Directors (the "Board") of the Company.

Earnings (Loss) Per Share:  Diluted earnings (loss) per share of common stock are based on the average number of shares of Class A and Class B Common Stock outstanding during the year, adjusted for the dilutive effect, if any, of restricted stock awards outstanding.  Basic earnings (loss) per share are presented exclusive of the effect of share-based awards outstanding.

Comprehensive Income (Loss): The Company records accumulated other comprehensive income (loss) from unrealized gains and losses on available-for-sale securities and from foreign exchange adjustments as a separate component of shareholders' equity.  A reclassification adjustment to other comprehensive income (loss) is made for gains or losses during the period included in net income (loss).

Fair Value Measurements: The Company provides disclosures related to recurring and non-recurring fair value measurements with separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, separate disclosures are provided for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements as well as additional clarification for both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.

Insurance Company-Owned Life Insurance:   Included within other assets on the consolidated balance sheet at December 31, 2018 is $10,000 of insurance company-owned life insurance. The carrying value of the company-owned life insurance policies represents the cash surrender value as reported by the respective insurer, which approximates fair value.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's commission and fee income, other than that directly associated with insurance contracts, is subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the first quarter of 2018. The Company adopted the new guidance as of January 1, 2018. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.  The Company had no material contract assets, contract liabilities, or deferred contract costs recorded on its consolidated balance sheet at December 31, 2018.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 changed the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income.  Previously, the Company's equity securities were classified as available-for-sale and changes in fair value were recognized in accumulated other comprehensive income (loss) as a component of shareholders' equity.  The Company adopted ASU 2016-01 as of January 1, 2018 using the modified retrospective approach and recorded a cumulative-effect adjustment to reclassify unrealized gains on equity securities of $71,012 ($46,157, net of tax) from other comprehensive income (loss) to retained earnings within the consolidated balance sheet as of December 31, 2018.  Going forward, unrealized gains or losses on equity securities will be recognized in the consolidated statements of operations within net unrealized gains (losses) on equity securities and limited partnership investments.

- 46 -

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. The Company adopted ASU 2016-15 as of January 1, 2018. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update amends ASC Topic 230 to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance was applied retrospectively.  The Company adopted the new guidance as of January 1, 2018 and made an adjustment within net cash provided by operating activities on the consolidated statement of cash flows for the year ended December 31, 2017 to reflect $4,000 of restricted cash, which was classified within restricted cash and short-term investments on the December 31, 2017 consolidated balance sheet. The Company also changed the presentation of restricted cash and cash equivalents on its consolidated balance sheets to reflect this amount on a separate line. The adoption of the new guidance did not have an impact on the Company's consolidated statements of operations.

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

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04.  This amendment removes Step 2 of the goodwill impairment test under current guidance.  The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the carrying amount of goodwill.  ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company adopted the new guidance in the fourth quarter of 2018 and recognized an impairment charge of $3,152 related to the impairment of goodwill.  See Note M for further discussion.

Recently Issued Accounting Pronouncements 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 superseded the current lease guidance in ASC Topic 840, Leases.  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 guidance provides for a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements.  In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided adopters an additional transition method by allowing entities to initially apply ASU 2016-02, and subsequent related standards, at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.   The Company adopted the new guidance on January 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information will not be adjusted for the effects of the new guidance. No cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. The Company has substantially completed an assessment of the new standard’s impact and determined the new standard will not have a material impact on the Company's consolidated statements of operations or cash flows; however, the estimated impact of adopting the new guidance will result in a right-of-use asset and lease liability being recorded on the consolidated balance sheets subsequent to December 31, 2018 of approximately $400 based on the lease portfolio existing as of the date of this Annual Report on Form 10-K. 

- 47 -

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This update introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the effects the adoption of ASU 2016-13 will have on its consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. This update provides clarification, corrects errors in and makes minor improvements to various ASC topics. Many of the amendments in this update have transition guidance with effective dates for annual periods beginning after December 15, 2018 and some amendments in this update do not require transition guidance and were effective upon issuance of this update. The Company will adopt amendments as they become applicable. The Company has determined that the impact of these improvements will not be material to its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the effects the adoption of ASU 2018-13 will have on its consolidated financial statements.


- 48 -

Note B - Investments

The following is a summary of available-for-sale securities at December 31:

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

   
Fair
Value
   
Cost or
Amortized Cost
   
Gross
Unrealized Gains
   
Gross
Unrealized Losses
   
Net Unrealized
Gains (Losses)
 
December 31, 2017
                             
Fixed income securities
                             
Agency collateralized mortgage obligations
 
$
16,586
   
$
15,839
   
$
818
   
$
(71
)
 
$
747
 
Agency mortgage-backed securities
   
27,075
     
27,180
     
47
     
(152
)
   
(105
)
Asset-backed securities
   
43,469
     
42,861
     
749
     
(141
)
   
608
 
Bank loans
   
19,488
     
19,271
     
266
     
(49
)
   
217
 
Certificates of deposit
   
3,135
     
3,124
     
11
     
     
11
 
Collateralized mortgage obligations
   
6,492
     
6,079
     
451
     
(38
)
   
413
 
Corporate securities
   
198,349
     
198,419
     
1,602
     
(1,672
)
   
(70
)
Mortgage-backed securities
   
24,204
     
23,656
     
933
     
(385
)
   
548
 
Municipal obligations
   
96,650
     
97,059
     
322
     
(731
)
   
(409
)
Non-U.S. government obligations
   
37,394
     
37,971
     
475
     
(1,052
)
   
(577
)
U.S. government obligations
   
49,011
     
49,558
     
     
(547
)
   
(547
)
Total fixed income securities
   
521,853
     
521,017
     
5,674
     
(4,838
)
   
836
 
Equity securities:
                                       
Consumer
   
46,578
     
23,565
     
24,031
     
(1,018
)
   
23,013
 
Energy
   
10,278
     
6,763
     
3,602
     
(87
)
   
3,515
 
Financial
   
45,470
     
31,859
     
13,937
     
(326
)
   
13,611
 
Industrial
   
25,402
     
8,949
     
16,793
     
(340
)
   
16,453
 
Technology
   
13,061
     
5,768
     
7,401
     
(108
)
   
7,293
 
Funds (e.g. mutual funds, closed end funds, ETFs)
   
50,291
     
46,177
     
4,153
     
(39
)
   
4,114
 
Other
   
10,683
     
7,670
     
3,313
     
(300
)
   
3,013
 
Total equity securities
   
201,763
     
130,751
     
73,230
     
(2,218
)
   
71,012
 
                                         
Total
 
$
723,616
   
$
651,768
   
$
78,904
   
$
(7,056
)
 
$
71,848
 

(1)
Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale.  Prior periods have not been restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements for further discussion.


- 49 -

The following table summarizes, for available-for-sale fixed maturities in an unrealized loss position at December 31, 2018 and available-for-sale fixed maturities and equity securities in an unrealized loss position at December 31, 2017, respectively, the aggregate fair value and gross unrealized loss categorized by the duration individual securities have been continuously in an unrealized loss position.

   
2018
   
2017
 
   
Number of
Securities
   
Fair
Value
   
Gross
Unrealized Loss
   
Number of
Securities
   
Fair
Value
   
Gross
Unrealized Loss
 
Fixed income securities:
                                   
12 months or less
   
275
   
$
282,646
   
$
(7,296
)
   
459
   
$
313,421
   
$
(2,683
)
Greater than 12 months
   
217
     
131,001
     
(3,497
)
   
112
     
75,638
     
(2,155
)
Total fixed income securities
   
492
     
413,647
     
(10,793
)
   
571
     
389,059
     
(4,838
)
Equity securities (1):
                                               
12 months or less
   
     
     
     
65
     
46,654
     
(2,218
)
Greater than 12 months
   
     
     
     
     
     
 
Total equity securities
   
     
     
     
65
     
46,654
     
(2,218
)
Total
   
492
   
$
413,647
   
$
(10,793
)
   
636
   
$
435,713
   
$
(7,056
)

(1)
Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale.  Prior periods have not been restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements for further discussion.

Unrealized losses in the Company's fixed income portfolio are generally the result of interest rate or foreign currency fluctuations.  The Company does not intend to sell any fixed income securities in an unrealized loss position at December 31, 2018, and it is not more likely than not that the Company will have to sell any such fixed income security before recovery of its amortized cost basis.  Accordingly, the Company does not believe any unrealized losses represent other-than-temporary impairments as of December 31, 2018.

The fair value and the cost or amortized cost of fixed income investments at December 31, 2018, organized by contractual maturity, are shown below.  Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties.  Pre-refunded municipal bonds are classified based on their pre-refunded call dates.

   
Fair Value
   
Cost or Amortized Cost
 
One year or less
 
$
45,858
     
7.7
%
 
$
46,150
     
7.7
%
Excess of one year to five years
   
287,506
     
48.5
     
290,743
     
48.4
 
Excess of five years to ten years
   
101,605
     
17.1
     
104,571
     
17.4
 
Excess of ten years
   
6,641
     
1.2
     
6,410
     
1.1
 
Total contractual maturities
   
441,610
     
74.5
     
447,874
     
74.6
 
Asset-backed securities
   
151,035
     
25.5
     
152,630
     
25.4
 
 Total
 
$
592,645
     
100.0
%
 
$
600,504
     
100.0
 

Major categories of investment income for the years ended December 31, are summarized as follows:

   
2018
   
2017
   
2016
 
Interest on fixed income securities
 
$
19,092
   
$
15,340
   
$
13,254
 
Dividends on equity securities
   
4,380
     
4,611
     
3,598
 
Money market funds, Short-term and other
   
1,529
     
471
     
128
 
     
25,001
     
20,422
     
16,980
 
Investment expenses
   
(2,953
)
   
(2,327
)
   
(2,497
)
Net investment income
 
$
22,048
   
$
18,095
   
$
14,483
 


- 50 -

Gains and losses on investments, including equity method earnings from limited partnerships, for the years ended December 31 are summarized below:

   
2018
   
2017
   
2016
 
Gross gains on available-for-sale investments sold during the period:
                 
Fixed income securities
 
$
10,807
   
$
9,135
   
$
11,628
 
Equity securities (1)
   
     
10,481
     
28,742
 
Total gains
   
10,807
     
19,616
     
40,370
 
                         
Gross losses on available-for-sale investments sold during the period:
                       
Fixed income securities
   
(14,367
)
   
(9,882
)
   
(10,940
)
Equity securities (1)
   
     
(2,368
)
   
(2,932
)
Total losses
   
(14,367
)
   
(12,250
)
   
(13,872
)
                         
Other-than-temporary impairments
   
(19
)
   
(149
)
   
(5,743
)
                         
Change in value of limited partnership investments
   
(9,343
)
   
12,469
     
2,473
 
                         
Losses on equity securities:
                       
Realized losses on equity securities sold during the period (2)
   
(3,072
)
   
     
 
   Unrealized losses on equity securities held at the end of the period
   
(9,697
)
   
     
 
Realized and unrealized losses on equity securities held at the end of the period
   
(12,769
)
   
     
 
                         
Net realized and unrealized gains (losses) on investments
 
$
(25,691
)
 
$
19,686
   
$
23,228
 

(1)
Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale.  Prior periods have not been restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements for further discussion.

(2)
During 2018, the Company sold $149,195 in equity securities, resulting in a gain on sale of $51,900.  The majority of these gains were included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, were reclassified to retained earnings as of January 1, 2018 and were therefore not recognized in the consolidated statements of operations for the year ended December 31, 2018.

Gain and loss activity for fixed income and equity security investments, as shown in the previous table, includes adjustments for other-than-temporary impairment for the years ended December 31 summarized as follows:

   
2018
   
2017
   
2016
 
Cumulative charges to income at beginning of year
 
$
4,209
   
$
5,650
   
$
10,513
 
                         
Writedowns based on objective and subjective criteria
   
19
     
149
     
5,743
 
Recovery of prior writedowns upon sale or disposal
   
(3,298
)
   
(1,590
)
   
(10,606
)
Net pre-tax realized gain
   
3,279
     
1,441
     
4,863
 
                         
Cumulative charges to income at end of year
 
$
930
   
$
4,209
   
$
5,650
 

There is no primary market and only a limited secondary market for the Company's investments in limited partnerships and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and generally must seek approval from the applicable general partner for any such disposal.  Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported.  The Company has a commitment to contribute up to an additional $1,317 to a limited partnership as of December 31, 2018.

- 51 -

The Company's limited partnerships include one investment which primarily invests in public and private equity markets in India.  This limited partnership investment's value as of December 31, 2018 and 2017 was $26,344 and $29,817, respectively.  At December 31, 2018, the Company's estimated ownership interest in this limited partnership investment was approximately 6%.  The Company's share of income (losses), from both realized and unrealized appreciation (losses) from this limited partnership investment was ($3,473), $7,665 and ($1,117) in 2018, 2017 and 2016, respectively.  The summarized financial information of this limited partnership investment as of and for the years ended December 31 is as follows:


   
2018
   
2017
   
2016
 
Investment income (loss)
 
$
4,298
   
$
623
   
$
(5
)
Partnership expenses
   
6,874
     
2,206
     
2,426
 
Net investment loss
   
(2,576
)
   
(1,583
)
   
(2,431
)
                         
Realized gain on investments
   
12,314
     
8,723
     
7,754
 
                         
Unrealized appreciation (depreciation) on investments
   
(65,250
)
   
133,807
     
(21,002
)
                         
Net increase (decrease) in partners' capital resulting from operations
 
$
(55,512
)
 
$
140,947
   
$
(15,679
)
                         
Total assets
 
$
462,058
   
$
566,629
   
$
448,263
 
Total liabilities
   
45,483
     
30,976
     
39,988
 
Total partners' capital
   
416,575
     
535,653
     
408,275
 

The Company's limited partnerships include an additional investment which primarily invests in public equity and fixed income markets.  This limited partnership investment's value as of December 31, 2018 and 2017 was $14,975 and $19,380, respectively.  At December 31, 2018, the Company's estimated ownership interest in this limited partnership investment was approximately 5%.  The Company's share of income (losses) from both realized and unrealized appreciation (losses) from this limited partnership investment was ($4,404), $1,452 and $2,662 in 2018, 2017 and 2016, respectively.  The summarized financial information of this limited partnership investment as of and for the years ended December 31 is as follows:

   
2018
   
2017
   
2016
 
Investment income
 
$
19,507
   
$
14,524
   
$
13,534
 
Partnership expenses
   
9,132
     
12,861
     
10,628
 
Net investment income
   
10,375
     
1,663
     
2,906
 
                         
Realized gain (loss) on investments
   
(37,143
)
   
(15,073
)
   
830
 
                         
Unrealized appreciation (depreciation) on investments
   
(48,132
)
   
49,847
     
46,685
 
                         
Net increase (decrease) in partners' capital resulting from operations
 
$
(74,900
)
 
$
36,437
   
$
50,421
 
                         
Total assets
 
$
241,174
   
$
354,709
   
$
464,184
 
Total liabilities
   
20,020
     
2,000
     
14,555
 
Total partners' capital
   
221,154
     
352,709
     
449,629
 

The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $87,981 and $86,335 at December 31, 2018 and 2017, respectively.

Short-term investments at December 31, 2018 included $1,000 in certificates of deposit issued by a Bermuda bank.

The Company's fixed income securities are over 90% invested in investment grade fixed income investments.  The Company has no fixed income investments that were originally issued with guarantees by a third-party insurance company nor does the Company have any direct exposure to any guarantor at December 31, 2018.

Approximately $54,233 of fixed income investments (6.2% of the Company's consolidated investment portfolio, which includes money market instruments classified as cash equivalents) consists of non-rated bonds and bonds rated as less than investment grade at year-end.  These investments include a diversified portfolio of over 40 issuers and have a $5,202 aggregate net unrealized loss position at December 31, 2018.

- 52 -

Note C - Loss and Loss Expense Reserves

Activity in the reserves for losses and loss expenses for the years ended December 31 is summarized as follows.  All amounts are shown net of reinsurance, unless otherwise indicated.

   
2018
   
2017
   
2016
 
                   
Reserves, gross of reinsurance recoverable, at the beginning of the year
 
$
680,274
   
$
576,330
   
$
513,596
 
Reinsurance recoverable on unpaid losses at the beginning of the year
   
308,143
     
251,563
     
211,843
 
Reserves at the beginning of the year
   
372,131
     
324,767
     
301,753
 
                         
Provision for losses and loss expenses:
                       
Claims occurring during the current year
   
329,078
     
228,303
     
172,645
 
Claims occurring during prior years
   
16,786
     
19,215
     
13,836
 
Total incurred losses and loss expenses
   
345,864
     
247,518
     
186,481
 
                         
Loss and loss expense payments:
                       
Claims occurring during the current year
   
84,738
     
67,234
     
54,239
 
Claims occurring during prior years
   
143,853
     
132,920
     
109,228
 
Total paid
   
228,591
     
200,154
     
163,467
 
Reserves at the end of the year
   
489,404
     
372,131
     
324,767
 
                         
Reinsurance recoverable on unpaid losses at the end of the year
   
375,935
     
308,143
     
251,563
 
                         
Reserves, gross of reinsurance recoverable, at the end of the year
 
$
865,339
   
$
680,274
   
$
576,330
 

The table above shows that a reserve deficiency of $16,786 developed during 2018 in the settlement of claims occurring on or before December 31, 2017, compared to reserve deficiencies of $19,215 in 2017 and $13,836 in 2016. The developments for each year are 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.

The $16,786 prior accident year deficiency that developed during 2018 primarily related to unfavorable loss development in commercial automobile coverages.  This unfavorable loss development was the result of increased claim severity due to a more challenging litigation environment, as well as an unexpected increase in the time to settle claims leading to an unfavorable change in claim settlement patterns.  This 2018 deficiency compares to a deficiency of $19,215 for 2017, also related to unfavorable loss development from commercial automobile coverages, particularly from severe transportation loss events that occurred primarily during the first six months of 2017 and higher than expected loss development for discontinued lines of business.

Losses and loss expenses for 2018 also reflected an increase in current accident year losses caused by severe commercial automobile losses, including continued emergence of severity.

Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $7,545 and $7,559 at December 31, 2018 and 2017, respectively.

The following is information about incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurredbutnotreported liabilities plus expected development on reported claims included within the net incurred claims amounts.


- 53 -


Workers' Compensation

         
As of December 31, 2018
 
   
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
   
Total of
Incurred-but-Not-
Reported Liabilities Plus
Expected Development
on Reported Claims
   
Number of
Reported
Claims
Per Year
 
Accident Year
 
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
 
 
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
2009
 
$
17,270
   
$
20,931
   
$
21,447
   
$
21,261
   
$
21,268
   
$
20,767
   
$
20,641
   
$
20,817
   
$
20,946
   
$
21,153
   
$
985
     
3,784
 
2010
           
20,644
     
20,111
     
19,400
     
19,300
     
18,849
     
18,344
     
19,195
     
19,541
     
19,819
     
1,098
     
4,223
 
2011
                   
26,057
     
26,628
     
26,958
     
26,767
     
25,515
     
27,293
     
26,617
     
26,631
     
2,179
     
4,546
 
2012
                           
23,965
     
25,544
     
24,887
     
24,485
     
25,616
     
27,020
     
26,775
     
2,824
     
4,481
 
2013
                                   
27,619
     
30,638
     
29,913
     
32,121
     
32,553
     
31,131
     
3,780
     
5,275
 
2014
                                           
36,768
     
36,968
     
34,009
     
33,427
     
31,031
     
4,482
     
5,406
 
2015
                                                   
26,277
     
23,115
     
25,889
     
24,948
     
5,328
     
6,308
 
2016
                                                           
35,240
     
29,757
     
29,317
     
6,740
     
6,059
 
2017
                                                                   
42,387
     
37,731
     
13,918
     
16,106
 
2018
                                                                           
62,973
     
36,250
     
12,893
 
Total
   
$
311,509
   
$
77,584
         

   
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
       
   
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
       
Accident Year
 
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
2009
 
$
4,186
   
$
10,073
   
$
13,343
   
$
15,576
   
$
16,592
   
$
17,448
   
$
18,028
   
$
18,514
   
$
18,982
   
$
19,261
 
2010
           
3,974
     
9,134
     
11,963
     
13,845
     
14,966
     
15,835
     
16,590
     
16,789
     
17,062
 
2011
                   
4,916
     
11,912
     
15,973
     
18,884
     
20,617
     
21,622
     
22,569
     
22,991
 
2012
                           
4,597
     
11,004
     
14,834
     
17,415
     
18,946
     
20,276
     
21,157
 
2013
                                   
4,880
     
12,792
     
18,065
     
21,655
     
23,643
     
24,968
 
2014
                                           
5,328
     
13,665
     
19,075
     
22,387
     
23,968
 
2015
                                                   
2,918
     
10,128
     
15,020
     
17,487
 
2016
                                                           
5,784
     
13,377
     
18,461
 
2017
                                                                   
6,150
     
15,811
 
2018
                                                                           
10,987
 
Total
   
$
192,153
 
Outstanding liabilities prior to 2009 net of reinsurance
     
12,640
 
Liabilities for claims and claims adjustment expenses, net of reinsurance
   
$
131,996
 


- 54 -


Commercial Liability

         
As of December 31, 2018
 
   
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
   
Total of
Incurred-but-Not-
Reported Liabilities Plus
Expected Development
on Reported Claims
   
Number of
Reported
Claims
Per Year
 
   
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
 
Accident Year
 
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
2009
 
$
29,707
   
$
30,406
   
$
30,203
   
$
26,280
   
$
27,259
   
$
25,872
   
$
25,373
   
$
25,320
   
$
25,485
   
$
25,761
   
$
190
     
899
 
2010
           
31,124
     
22,161
     
21,899
     
19,139
     
20,300
     
19,764
     
19,377
     
19,081
     
19,985
     
112
     
2,403
 
2011
                   
46,829
     
43,832
     
31,633
     
36,894
     
35,805
     
37,122
     
36,076
     
37,852
     
131
     
2,901
 
2012
                           
49,743
     
54,269
     
49,743
     
51,367
     
48,708
     
51,475
     
51,648
     
135
     
3,130
 
2013
                                   
53,817
     
39,143
     
37,701
     
36,371
     
46,690
     
48,857
     
663
     
3,749
 
2014
                                           
49,971
     
52,254
     
52,483
     
52,964
     
64,372
     
307
     
3,320
 
2015
                                                   
61,420
     
70,174
     
64,323
     
71,088
     
2,785
     
3,185
 
2016
                                                           
61,638
     
68,974
     
77,362
     
7,048
     
3,707
 
2017
                                                                   
103,126
     
103,611
     
25,527
     
5,261
 
2018
                                                                           
179,589
     
70,070
     
6,870
 
Total
   
$
680,125
   
$
106,968
         

   
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
 
   
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
 
Accident Year
 
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
2009
 
$
928
   
$
17,880
   
$
19,718
   
$
23,521
   
$
24,866
   
$
25,066
   
$
25,114
   
$
25,125
   
$
25,199
   
$
25,391
 
2010
           
1,649
     
7,166
     
11,635
     
16,052
     
18,627
     
18,517
     
18,866
     
18,662
     
18,791
 
2011
                   
1,809
     
11,350
     
23,615
     
30,795
     
33,255
     
34,009
     
35,561
     
36,400
 
2012
                           
3,086
     
23,252
     
32,942
     
45,303
     
47,601
     
50,036
     
50,750
 
2013
                                   
5,167
     
15,772
     
25,270
     
34,481
     
44,865
     
46,084
 
2014
                                           
4,023
     
9,046
     
28,393
     
45,075
     
57,692
 
2015
                                                   
10,923
     
27,582
     
49,267
     
63,133
 
2016
                                                           
6,843
     
30,377
     
52,764
 
2017
                                                                   
11,415
     
46,529
 
2018
                                                                           
18,689
 
Total
   
$
416,223
 
Outstanding liabilities prior to 2009 net of reinsurance
     
4,621
 
Liabilities for claims and claims adjustment expenses, net of reinsurance
   
$
268,523
 


- 55 -


Professional Liability Reinsurance Assumed (in runoff)

         
As of December 31, 2018
 
   
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
   
Total of
Incurred-but-Not-
Reported Liabilities Plus
Expected Development
on Reported Claims
   
Number of
Reported
Claims
Per Year
 
Accident Year
 
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
 
 
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
2009
 
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
     
N/A
 
2010
           
2,196
     
4,277
     
7,827
     
7,946
     
9,733
     
10,740
     
11,689
     
11,893
     
11,677
     
24
     
N/A
 
2011
                   
10,492
     
8,314
     
9,017
     
9,859
     
10,779
     
12,735
     
12,744
     
12,725
     
116
     
N/A
 
2012
                           
10,041
     
9,276
     
5,569
     
10,157
     
14,605
     
16,555
     
14,949
     
706
     
N/A
 
2013
                                   
14,370
     
13,034
     
11,618
     
17,694
     
23,256
     
22,213
     
1,847
     
N/A
 
2014
                                           
12,675
     
8,825
     
7,259
     
9,837
     
12,749
     
2,297
     
N/A
 
2015
                                                   
11,638
     
7,859
     
7,147
     
10,422
     
5,422
     
N/A
 
2016
                                                           
6,368
     
2,482
     
1,522
     
1,035
     
N/A
 
2017
                                                                   
     
     
     
N/A
 
2018
                                                                           
     
     
N/A
 
Total
   
$
86,257
   
$
11,447
         

   
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
 
   
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
 
Accident Year
 
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
2009
 
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
 
2010
           
41
     
729
     
3,505
     
5,844
     
7,758
     
9,904
     
11,132
     
11,334
     
11,334
 
2011
                   
50
     
637
     
2,061
     
4,983
     
8,104
     
10,404
     
11,679
     
12,280
 
2012
                           
103
     
992
     
2,388
     
5,077
     
8,355
     
11,239
     
13,091
 
2013
                                   
123
     
1,135
     
5,088
     
10,988
     
14,779
     
18,229
 
2014
                                           
723
     
761
     
2,241
     
3,999
     
6,627
 
2015
                                                   
10
     
390
     
1,899
     
3,207
 
2016
                                                           
     
5
     
99
 
2017
                                                                   
     
 
2018
                                                                           
 
Total
   
$
64,867
 
Outstanding liabilities prior to 2009 net of reinsurance
     
 
Liabilities for claims and claims adjustment expenses, net of reinsurance
   
$
21,390
 


- 56 -


Physical Damage (1)

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
   
As of December 31, 2018
 
For the Years Ended December 31 (2016-2017 is Supplementary Information and Unaudited)
   
Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims
   
Number of Reported Claims Per Year
 
Accident Year
 
2016
   
2017
   
2018
             
2016 and prior
 
$
40,651
   
$
39,477
   
$
39,658
   
$
5
     
9,619
 
2017
           
48,440
     
47,193
     
512
     
10,517
 
2018
                   
53,726
     
4,221
     
10,186
 
           
Total
   
$
140,577
   
$
4,738
         


Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
 
For the Years Ended December 31 (2016-2017 is Supplementary Information and Unaudited)
 
Accident Year
 
2016
   
2017
   
2018
 
2016 and prior
 
$
34,114
   
$
39,354
   
$
39,073
 
2017
           
39,517
     
46,554
 
2018
                   
41,631
 
           
Total
   
$
127,258
 
Outstanding liabilities prior to 2016 net of reinsurance
     
10
 
Liabilities for claims and claims adjustment expenses, net of reinsurance
   
$
13,329
 

(1) The majority of physical damage claims settle within a two-year period.  The triangles above have been abbreviated to reflect the short-tail nature of this business.


- 57 -

The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance sheet at December 31 is as follows.

   
2018
   
2017
 
Net outstanding liabilities
           
Commercial Liability
 
$
268,523
   
$
162,581
 
Workers' Compensation
   
131,996
     
113,751
 
Physical Damage
   
13,329
     
9,087
 
Professional Liability Assumed
   
21,390
     
28,980
 
Other short-duration insurance lines
   
33,716
     
39,883
 
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance
   
468,954
     
354,282
 
                 
Reinsurance recoverable on unpaid claims
               
Commercial Liability
   
194,483
     
124,695
 
Workers' Compensation
   
172,869
     
170,394
 
Physical Damage
   
1,851
     
51
 
Other short-duration insurance lines
   
6,732
     
13,002
 
Reinsurance recoverable on unpaid losses at the end of the year
   
375,935
     
308,142
 
                 
Unallocated claims adjustment expenses
   
20,450
     
17,850
 
                 
Total gross liability for unpaid claims and claims adjustment expense
 
$
865,339
   
$
680,274
 

The following is supplementary information about average historical claims duration as of December 31, 2018:

   
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
(Supplementary Information and Unaudited)
 
Years
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
     
9
     
10
 
Commercial Liability
   
8.5
%
   
30.5
%
   
23.7
%
   
20.6
%
   
9.9
%
   
1.9
%
   
1.9
%
   
0.5
%
   
0.5
%
   
0.7
%
Workers' Compensation
   
17.3
%
   
26.3
%
   
16.3
%
   
10.4
%
   
5.7
%
   
4.3
%
   
3.3
%
   
1.6
%
   
1.8
%
   
1.3
%
Physical Damage
   
80.6
%
   
14.1
%
   
2.0
%
   
N/A
     
N/A
     
N/A
     
N/A
     
N/A
     
N/A
     
N/A
 
Professional Liability Assumed
   
1.1
%
   
3.6
%
   
13.5
%
   
19.0
%
   
18.3
%
   
17.8
%
   
11.0
%
   
1.7
%
   
     
N/A
 

Reserve methodologies for incurred but not reported losses

The Company uses both standard actuarial techniques common to most insurance companies as well as proprietary techniques developed by the Company in connection with its specialty business products.  For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor methods.  The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to claim settlement trends and fluctuations in premium exposure for its short-tail lines.  A minimum of 12 running accident quarters is used to project the reserve necessary for incurred but not reported losses for its short-tail lines.

The Company also uses the loss development factor approach for its long-tail lines of business, including workers' compensation.  A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses.  Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.

For the Company's commercial automobile risks, which are covered by regularly updated reinsurance agreements and which contain wide-ranging self-insured retentions ("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company's exposures to loss.  In situations where the Company's reinsurance structure, the insured's SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses.  Therefore, the Company supplements the above-described actuarial methods with loss ratio reserving techniques developed from the Company's proprietary databases to arrive at the reserve for incurred but not reported losses for the calendar/accident period under review.  As losses for a given calendar/accident period develop with the passage of time, management evaluates such development on a monthly and quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with regard to the anticipated ultimate incurred losses.  This process continues until all losses are settled for each period subject to this method.

- 58 -

Claim count methodology

The Company uses a claim event and coverage combination to estimate frequency.  For example, a single claim event involving loss for physical damage of a vehicle and personal injury to a claimant would be considered two claims for purposes of the calculation of frequency.  A single claim event causing personal injury to two claimants would be considered a single claim under the methodology.  Due to the number of reinsurance assumed treaties entered into (and the varying structures: both quota share and excess of loss) the Company deems it impractical to collect claim frequency information related to this business and this information has not been made available to the Company.


Note D – Reinsurance

The Insurance Subsidiaries cede portions of their gross premiums written to certain other insurers under excess of loss and quota share treaties and by facultative placements.  Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis ("quota-share"), while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount ("excess of loss").  Reinsurance treaties with other companies permit the recovery of a portion of related direct losses.  Management determines the amount of net exposure it is willing to accept generally on a product-line basis.  Certain historical treaties covering commercial automobile risks include annual deductibles which must be exceeded before the Company can recover under the terms of the treaty.  The Company retains a higher percentage of the direct premium in consideration of these deductible provisions.  The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.

The Company also serves as an assuming reinsurer on treaties with direct writing insurance companies and, prior to June 30, 2015, under retrocessions from other reinsurers for catastrophic property coverages.  Accordingly, for periods prior to that date, the occurrence of catastrophic events could have had a significant impact on the Company's operations.  In addition, the Insurance Subsidiaries participate in certain mandatory residual market pools, which require insurance companies to provide coverages on assigned risks.  The assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level.  Historically, the operation of these assigned risk pools has resulted in net losses being allocated to the Company, although such losses have not been material in relation to the Company's operations.

The following table summarizes the impact of reinsurance ceded and assumed on the Company's net premiums written and earned for the most recent three years:

   
Premiums Written
   
Premiums Earned
 
   
2018
   
2017
   
2016
   
2018
   
2017
   
2016
 
Direct
 
$
581,070
   
$
504,033
   
$
395,625
   
$
562,364
   
$
470,158
   
$
394,679
 
Ceded on direct
   
(138,102
)
   
(151,348
)
   
(131,166
)
   
(131,080
)
   
(145,201
)
   
(129,926
)
Net direct
   
442,968
     
352,685
     
264,459
     
431,284
     
324,957
     
264,753
 
                                                 
Assumed
   
1,430
     
704
     
7,379
     
1,596
     
3,188
     
11,344
 
Ceded on assumed
   
     
     
(86
)
   
     
     
(86
)
Net assumed
   
1,430
     
704
     
7,293
     
1,596
     
3,188
     
11,258
 
                                                 
Net
 
$
444,398
   
$
353,389
   
$
271,752
   
$
432,880
   
$
328,145
   
$
276,011
 

Net losses and loss expenses incurred for 2018, 2017 and 2016 have been reduced by ceded reinsurance recoveries of approximately $148,173, $128,086 and $108,656, respectively.  Ceded reinsurance premiums and loss recoveries for the purchase of catastrophe reinsurance coverage on the Company's net direct business were not material.

Net losses and loss expenses incurred include a savings of $1,300 for 2018 and expenses of $5,223 and $14,746 for 2017 and 2016, relating to reinsurance assumed from non-affiliated insurance or reinsurance companies.

Components of reinsurance recoverable at December 31, are as follows:

   
2018
   
2017
 
Case unpaid losses, net of valuation allowance
 
$
163,011
   
$
119,615
 
Incurred but not reported unpaid losses and loss expenses
   
211,805
     
187,163
 
Paid losses and loss expenses
   
1,250
     
2,206
 
Unearned premiums
   
16,370
     
9,347
 
   
$
392,436
   
$
318,331
 

- 59 -

Note E - Income Taxes

On December 22, 2017, the U.S. Tax Act was signed into law, which lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.  As a result, the Company recorded a tax benefit of $9,572 related to the remeasurement of its deferred tax assets and liabilities at December 31, 2017.  As of December 31, 2017, the Internal Revenue Service ("IRS") had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while the Company had not completed its accounting for the tax effects, it made a reasonable estimate of the tax effects on its existing deferred tax balances at December 31, 2017.  The Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded during 2018.

The U.S. Tax Act provides for a change in the methodology employed to calculate reserves for tax purposes.  Beginning January 1, 2018, a higher interest rate assumption and longer payout patterns are used to discount these reserves.  In addition, companies are no longer able to elect to use their own experience to discount reserves, but instead are required to use the industry-based tables published by the IRS annually.  During 2017, the Company estimated the provisional tax impacts related to the change in methodology as $1,696.  During 2018, the IRS published the discount factor tables and the Company calculated the tax impact of the methodology change and recorded an updated amount for deferred tax assets and an offsetting deferred tax liability of $2,262 at December 31, 2018.  The deferred tax liability was amortized into income in the amount of $323 during 2018 in accordance with the 8-year inclusion described in the U.S. Tax Act.

Deferred income taxes are calculated to account for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:

   
2018
   
2017
 
Deferred tax liabilities:
           
Unrealized gain on fixed income and equity security investments
 
$
4,572
   
$
15,086
 
Deferred acquisition costs
   
2,552
     
1,804
 
Loss and loss expense reserves
   
3,583
     
2,623
 
Limited partnership investments
   
     
3,826
 
Accelerated depreciation
   
690
     
492
 
Other
   
1,509
     
1,791
 
Total deferred tax liabilities
   
12,906
     
25,622
 
                 
Deferred tax assets:
               
Loss and loss expense reserves
   
9,999
     
6,761
 
Limited partnership investments
   
3,498
     
 
Unearned premiums discount
   
2,321
     
1,837
 
Other-than-temporary investment declines
   
625
     
815
 
Deferred compensation
   
580
     
885
 
Deferred ceding commission
   
1,173
     
627
 
Other
   
972
     
339
 
Total deferred tax assets
   
19,168
     
11,264
 
                 
Net deferred tax (assets) liabilities
 
$
(6,262
)
 
$
14,358
 

A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements as of December 31 is as follows:

   
2018
   
2017
   
2016
 
                   
Statutory federal income rate applied to pre-tax income (loss)
 
$
(9,213
)
 
$
3,543
   
$
15,069
 
Tax effect of (deduction):
                       
Tax-exempt investment income
   
(253
)
   
(968
)
   
(938
)
Change in enacted tax rates
   
     
(9,572
)
   
 
Other
   
(331
)
   
(1,204
)
   
(22
)
Federal income tax expense (benefit)
 
$
(9,797
)
 
$
(8,201
)
 
$
14,109
 


- 60 -

Federal income tax expense (benefit) as of December 31 consists of the following:

   
2018
   
2017
   
2016
 
Tax expense (benefit) on pre-tax income (loss):
                 
Current
 
$
8,997
   
$
(4,335
)
 
$
11,271
 
Deferred
   
(18,794
)
   
(3,866
)
   
2,838
 
   
$
(9,797
)
 
$
(8,201
)
 
$
14,109
 

The provision for deferred federal income taxes as of December 31 consists of the following:

   
2018
   
2017
   
2016
 
Limited partnerships
 
$
(2,383
)
 
$
4,099
   
$
503
 
Discounts of loss and loss expense reserves
   
(2,704
)
   
1,315
     
(114
)
Reserves - salvage and subrogation and other
   
427
     
56
     
(1,110
)
Unearned premium discount
   
(484
)
   
(1,767
)
   
298
 
Deferred compensation
   
305
     
(168
)
   
595
 
Other-than-temporary investment declines
   
695
     
(127
)
   
2,320
 
Deferred acquisitions costs and ceding commission
   
201
     
1,553
     
(95
)
Change in enacted tax rates
   
     
(9,572
)
   
 
Unrealized gains / losses
   
(13,876
)
   
     
 
Other
   
(975
)
   
745
     
441
 
Provision for deferred federal income taxes
 
$
(18,794
)
 
$
(3,866
)
 
$
2,838
 

The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized.  Management has determined that no such valuation allowance is necessary at December 31, 2018 or 2017.  As of December 31, 2018, calendar years 2017, 2016 and 2015 remain subject to examination by the IRS.

The Company has no uncertain tax positions as of December 31, 2018 or 2017.  The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit) and changes in such accruals would impact the Company's effective tax rate.  There were no amounts accrued for the payment of interest at December 31, 2018, 2017 and 2016.


Note F - Shareholders' Equity

The Company's Class A and Class B Common Stock has a stated value of approximately $.04 per share.  The Company paid a total of $16,835, or $1.12 per share, in dividends during 2018, $16,302, or $1.08 per share, during 2017 and $15,803, or $1.04 per share, during 2016.

On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B Common Stock.  On August 7, 2018, the Company's Board of Directors reaffirmed its share repurchase program, but also provided that the aggregate dollar amount of shares of the Company's Common Stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25,000.  Pursuant to this share repurchase program, the Company entered into a Rule 10b5-1 plan on September 24, 2018, which authorized the repurchase of up to $12,000 of the Company's outstanding common shares at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934.  The Rule 10b5-1 plan expired on November 8, 2018. 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 year ended December 31, 2018, the Company paid $4,596 to repurchase 7,770 shares of Class A Common Stock at an average share price of $21.58 and 191,898 shares of Class B Common Stock at an average share price of $23.07 under the share repurchase program.

- 61 -

Accumulated Other Comprehensive Income (Loss)

A reconciliation of the components of accumulated other comprehensive income (loss) at December 31 is as follows:

   
2018
   
2017
 
Investments:
           
Total unrealized gain (loss) before federal income tax expense (benefit)
 
$
(7,859
)
 
$
71,848
 
Deferred tax benefit (liability)
   
1,651
     
(25,148
)
Net unrealized gains (losses) on investments
   
(6,208
)
   
46,700
 
                 
Foreign exchange adjustment:
               
Total unrealized losses
   
(1,442
)
   
(475
)
Deferred tax benefit
   
303
     
166
 
Net unrealized losses on foreign exchange adjustment
   
(1,139
)
   
(309
)
                 
Accumulated other comprehensive income (loss)
 
$
(7,347
)
 
$
46,391
 

Details of changes in net unrealized gains (losses) on investments for the years ended December 31 are as follows:

   
2018
   
2017
   
2016
 
Investments:
                 
Pre-tax holding gains (losses) on debt and equity securities arising during period (1)
 
$
(12,253
)
 
$
26,677
   
$
13,259
 
Less: applicable federal income tax expense (benefit)
   
(2,573
)
   
9,337
     
4,641
 
     
(9,680
)
   
17,340
     
8,618
 
                         
Pre-tax gains (losses) on debt and equity securities included in net income (loss) during period (1)
   
(3,560
)
   
7,217
     
20,755
 
Less: applicable federal income tax expense (benefit)
   
(748
)
   
2,526
     
7,264
 
     
(2,812
)
   
4,691
     
13,491
 
                         
Change in unrealized gains (losses) on investments
 
$
(6,868
)
 
$
12,649
   
$
(4,873
)

(1) Effective January 1, 2018, the Company adopted ASU 2016-01 and unrealized gains (losses) related to equity securities are no longer reflected in accumulated other comprehensive income (loss).  Prior periods have not been restated to conform to the current presentation.


Note G - Other Operating Expenses

Details of other operating expenses for the years ended December 31:

   
2018
   
2017
   
2016
 
Amortization of gross deferred policy acquisition costs
 
$
78,105
   
$
70,574
   
$
51,597
 
Other underwriting expenses
   
46,638
     
37,230
     
41,692
 
Reinsurance ceded credits
   
(23,124
)
   
(23,187
)
   
(33,512
)
Total underwriting expenses
   
101,619
     
84,617
     
59,777
 
                         
Operating expenses of non-insurance companies
   
32,406
     
28,977
     
29,685
 
Goodwill impairment charge
   
3,152
     
     
 
Total other operating expenses
 
$
137,177
   
$
113,594
   
$
89,462
 


Note H - Employee Benefit Plans

The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan (the "Plan") which covers nearly all employees.  The Company's contributions are based on a set percentage and the contributions to the Plan for 2018, 2017 and 2016 were $3,486, $2,797 and $2,449, respectively.

- 62 -

Note I - Stock Based Compensation

In accordance with the terms of the 1981 Stock Purchase Plan (the "1981 Plan"), the Company is obligated to repurchase shares issued under the 1981 Plan, at a price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase from one outside director.  A limited number of shares have ever been repurchased under the 1981 Plan.  At December 31, 2018, there were 46,875 shares of Class A Common Stock and 187,500 shares of Class B Common Stock outstanding which remain eligible for repurchase by the Company.

Restricted Stock:

The Company issues shares of restricted Class B Common Stock to the Company's outside directors, which serve as the annual retainer compensation for the outside directors.  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.  The table below provides details of the restricted stock issuances to directors for 2018, 2017 and 2016:

 Grant Date
 
Number of
Shares Issued
 
Vesting Date
 Service Period
 
Grant Date Fair
Value Per Share
 
5/10/2016
   
17,677
 
5/10/2017
7/1/2016 - 6/30/2017
 
$
24.89
 
5/9/2017
   
18,183
 
5/9/2018
7/1/2017 - 6/30/2018
 
$
24.20
 
8/31/2017
   
1,257
 
5/9/2018
8/31/2017 - 6/30/2018
 
$
21.90
 
2/9/2018
   
408
 
5/9/2018
2/9/2018 - 6/30/2018
 
$
24.20
 
5/8/2018
   
19,085
 
5/8/2019
7/1/2018 - 6/30/2019
 
$
23.05
 

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

Director compensation expense associated with these restricted stock grants of $464, $454 and $460 was charged against income for the restricted stock awards granted in 2018, 2017 and 2016, respectively.

On February 8, 2017, the Company issued 20,181 shares of restricted Class B Common Stock to certain of the Company's executives under the Company's Restricted Stock Compensation Plan.  The shares of restricted stock represent a portion of the calendar year 2017 compensation earned by certain executives under the terms of the Company's Executive Incentive Bonus Plan.  The shares of restricted stock will vest over a three-year period from the date of grant.  The shares of restricted stock were valued based on the closing price of the Company's Class B Common Stock on February 8, 2017, the day the shares of restricted stock were granted.  Each share of restricted stock was valued at $23.80 per share, representing a total value of $480.  Non-vested shares of restricted stock will be forfeited should an executive's employment terminate for any reason other than death, disability or retirement, as defined by the Compensation Committee.

In May 2017, the Company's Compensation Committee granted equity-based awards pursuant to the Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan"), which was approved by the Company's shareholders at the 2017 Annual Meeting of Shareholders.  Certain participants under the Long-Term Incentive Plan were granted performance-based equity awards (the "2017 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such award determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 2017 growth in net premiums earned and the Company's 2017 combined ratio.  The combined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating expenses, less commission and other income to (B) net premiums earned.  No 2017 LTIP Awards were earned based on the Company's performance in 2017, and therefore no shares were issued pursuant to the 2017 LTIP Awards.  In addition to the 2017 LTIP Awards, in May 2017 the Company's Compensation Committee also granted Value Creation Incentive Plan awards (the "2017 VCIP Awards") to certain participants under the Long-Term Incentive Plan.  The 2017 VCIP Awards are performance-based equity awards that will be earned based on the Company's cumulative operating income over a three-year performance period from January 1, 2017 through December 31, 2019 relative to a cumulative operating income goal for the period set by the Compensation Committee in March 2017.  For the purpose of the 2017 VCIP Awards, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments.  Any 2017 VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B Common Stock at the end of the three-year performance period, but no later than March 15, 2020.  No shares are eligible to be issued under the 2017 VCIP Awards as of December 31, 2018.

- 63 -

In March 2018, the Company's Compensation Committee granted equity-based awards pursuant to the Long-Term Incentive Plan.  Certain participants under the Long-Term Incentive Plan were granted equity awards (the "2018 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such award 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, as defined above.  No 2018 LTIP Awards were earned based on the Company's performance in 2018, and therefore no shares were issued pursuant to the 2018 LTIP Awards.  In addition to the 2018 LTIP Awards, in March 2018 the Company's Compensation Committee also granted Value Creation Incentive Plan awards (the "2018 VCIP Awards") to certain participants under the Long-Term Incentive Plan.  The 2018 VCIP Awards are performance-based equity awards that will 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 earned will be paid in unrestricted shares of the Company's Class B Common Stock at the end of the three-year performance period, but no later than March 15, 2021.  No shares are eligible to be issued under the 2018 VCIP Awards as of December 31, 2018.

On November 13, 2018, the Company entered into an employment agreement (the "Agreement") with its Interim Chief Executive Officer, John D. Nichols, Jr.  Pursuant to the terms of the Agreement, on November 13, 2018, Mr. Nichols was granted 85,000 restricted shares of the Company's Class B Common Stock (the "Stock Grant"), of which 42,500 shares will vest as of October 17, 2019; 21,250 shares will vest as of October 17, 2020, and 21,250 shares will vest as of October 17, 2021.  The Company recorded $140 in expense in the fourth quarter of 2018 related to the Stock Grant.


Note J – Segment Information

Effective January 1, 2017, the Company determined that its business constituted one reportable property and casualty insurance segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are allocated and assessing performance.  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.  In addition, the Company provides workers' compensation coverage for a variety of operations outside the transportation industry.

The following table summarizes segment revenues for the years ended December 31:

   
2018
   
2017
   
2016
 
Revenues:
                 
Net premiums earned
 
$
432,880
   
$
328,145
   
$
276,011
 
Net investment income
   
22,048
     
18,095
     
14,483
 
Net realized and unrealized gains (losses) on investments
   
(25,691
)
   
19,686
     
23,228
 
Commissions and other income
   
9,932
     
5,308
     
5,275
 
Total revenues
 
$
439,169
   
$
371,234
   
$
318,997
 


Note K - Earnings (Loss) Per Share

The following is a reconciliation of the denominators used in the calculation of basic and diluted earnings (loss) per share for the years ended December 31:

   
2018
   
2017
   
2016
 
Average shares outstanding for basic earnings (loss) per share
   
14,964,812
     
15,065,216
     
15,071,900
 
                         
Dilutive effect of share equivalents
   
     
42,220
     
12,108
 
                         
Average shares outstanding for diluted earnings (loss) per share
   
14,964,812
     
15,107,436
     
15,084,008
 


Note L - Concentrations of Credit Risk

The Company writes policies of excess insurance attaching above SIRs and also writes policies that contain per-claim deductibles. Those losses and claims that fall within the SIR limits are obligations of the insured; however, the Company writes surety bonds in favor of various regulatory agencies guaranteeing the insureds' payment of claims within the SIR.  Further, specified portions of losses and claims incurred under large deductible policies, while obligations of the Company, are contractually reimbursable to the Company from the insureds.  The Company requires collateral from its insureds to serve as a source of reimbursement if the Company is obligated to pay claims within the SIR by reason of an insured's default or if the insured fails to reimburse the Company for deductible amounts paid by the Company.

Acceptable collateral may be provided in the form of letters of credit on Company-approved banks, Company-approved marketable securities or cash.  At December 31, 2018, the Company held collateral in the aggregate amount of $333,188.

- 64 -

The amount of collateral required of an insured is determined by the financial condition of the insured, the type of obligations guaranteed by the Company, estimated reserves for incurred losses within the SIR or deductible that have been reported to the insured or the Company, estimated incurred but not reported losses, and estimated losses that are expected to occur within the SIR or deductible prior to the next collateral adjustment date.  In general, the Company attempts to hold collateral equal to 100% of the ultimate losses that would be paid by or due the Company in the event of an insured's default.  Periodic audits are conducted by the Company to evaluate its exposure and the collateral required.  If a deficiency in collateral is noted as the result of an audit, additional collateral is requested immediately.  Because collateral amounts contain numerous estimates of the Company's exposure, are adjusted only periodically and are sometimes reduced based on the superior financial condition of the insured, the amount of collateral held by the Company at a given point in time may not be sufficient to fully reimburse the Company for all of its guarantees or amounts due in the event of an insured's default.  In that regard, the Company is not fully collateralized for the guarantees made for, or the deductible amounts that may be due from, FedEx Corporation and certain of its subsidiaries and related entities ("FedEx"), and in the event of their default, such default may have a material adverse impact on the Company.  The Company estimates its uncollateralized exposure related to FedEx to be as much as 70% (after-tax) of shareholders' equity at December 31, 2018.

The Company's balance sheet includes paid and estimated unpaid amounts recoverable from reinsurers under various agreements.  These recoverables are only partially collateralized.  The largest amount due from an individual reinsurer, net of collateral and offsets, was $48,473 at December 31, 2018.


Note M – Acquisition and Related Goodwill and Intangibles

On October 31, 2008, the Company purchased a commercial lines specialty insurance agency for a cash purchase price of $3,500.  As part of the purchase, the Company recorded goodwill of $3,152 and intangible assets of $179.  Accumulated amortization of intangible assets was $179 as of both December 31, 2018 and 2017.

During the fourth quarter of 2018, the Company conducted its annual impairment review.  Based on the results of that review, the Company concluded that its entire goodwill balance was impaired, resulting in an impairment loss of $3,152.  The Company utilized a market approach, which considered revenue and earnings multiples of its own and comparable company information. In the analysis, the Company considered the significant decline in its stock price and the decline in overall financial performance during 2018, particularly in more recent periods, as well as the downgrade to its A.M. Best rating in late 2018.


- 65 -

Note N – Fair Value

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, accounts payable and accrued expenses, income taxes payable, short-term borrowings and unearned premiums approximate fair value because of the short-term nature of these items. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:

As of December 31, 2018:

Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Fixed income securities:
                       
Agency collateralized mortgage obligations
 
$
10,687
   
$
   
$
10,687
   
$
 
Agency mortgage-backed securities
   
37,385
     
     
37,385
     
 
Asset-backed securities
   
64,422
     
     
64,422
     
 
Bank loans
   
9,750
     
     
9,750
     
 
Certificates of deposit
   
2,835
     
2,835
     
     
 
Collateralized mortgage obligations
   
5,423
     
     
5,423
     
 
Corporate securities
   
186,651
     
     
186,651
     
 
Options embedded in convertible securities
   
3,799
     
     
3,799
     
 
Mortgage-backed securities
   
38,540
     
     
38,540
     
 
Municipal obligations
   
29,155
     
     
29,155
     
 
Non-U.S. government obligations
   
25,180
     
     
25,180
     
 
U.S. government obligations
   
178,818
     
     
178,818
     
 
Total fixed income securities
   
592,645
     
2,835
     
589,810
     
 
Equity securities:
                               
Consumer
   
17,945
     
17,945
     
     
 
Energy
   
3,179
     
3,179
     
     
 
Financial
   
25,253
     
25,253
     
     
 
Industrial
   
6,920
     
6,920
     
     
 
Technology
   
2,303
     
2,303
     
     
 
Funds (e.g. mutual funds, closed end funds, ETFs)
   
5,489
     
5,489
     
     
 
Other
   
5,333
     
5,333
     
     
 
Total equity securities
   
66,422
     
66,422
     
     
 
Short-term
   
1,000
     
1,000
     
     
 
Cash equivalents
   
156,855
     
     
156,855
     
 
Total
 
$
816,922
   
$
70,257
   
$
746,665
   
$
 


- 66 -


As of December 31, 2017:

Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Fixed income securities:
                       
Agency collateralized mortgage obligations
 
$
16,586
   
$
   
$
16,586
   
$
 
Agency mortgage-backed securities
   
27,075
     
     
27,075
     
 
Asset-backed securities
   
43,469
     
     
43,469
     
 
Bank loans
   
19,488
     
     
19,488
     
 
Certificates of deposit
   
3,135
     
3,135
     
     
 
Collateralized mortgage obligations
   
6,492
     
     
6,492
     
 
Corporate securities
   
193,058
     
     
193,058
     
 
Options embedded in convertible securities
   
5,291
     
     
5,291
     
 
Mortgage-backed securities
   
24,204
     
     
24,204
     
 
Municipal obligations
   
96,650
     
     
96,650
     
 
Non-U.S. government obligations
   
37,394
     
     
37,394
     
 
U.S. government obligations
   
49,011
     
     
49,011
     
 
Total fixed income securities
   
521,853
     
3,135
     
518,718
     
 
Equity securities:
                               
Consumer
   
46,578
     
46,578
     
     
 
Energy
   
10,278
     
10,278
     
     
 
Financial
   
45,470
     
45,470
     
     
 
Industrial
   
25,402
     
25,402
     
     
 
Technology
   
13,061
     
13,061
     
     
 
Funds (e.g. mutual funds, closed end funds, ETFs)
   
50,291
     
45,276
     
5,015
     
 
Other
   
10,683
     
10,683
     
     
 
Total equity securities
   
201,763
     
196,748
     
5,015
     
 
Short-term
   
1,000
     
1,000
     
     
 
Cash equivalents
   
59,173
     
     
59,173
     
 
Total
 
$
783,789
   
$
200,883
   
$
582,906
   
$
 

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 have any Level 3 assets at December 31, 2018 or 2017. Level 3 assets, when present, are valued using various unobservable inputs including extrapolated data, proprietary models and indicative quotes.  A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the years ended December 31:

   
2018
   
2017
 
Beginning of period balance
 
$
   
$
25,218
 
Total gains or losses (realized) included in income
   
     
406
 
Purchases
   
     
81
 
Settlements
   
     
(9,123
)
Transfers into Level 3
   
     
144
 
Transfers out of Level 3
   
     
(16,726
)
End of period balance
 
$
   
$
 

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 2018.


- 67 -

In addition to the preceding disclosures on assets recorded at fair value in the 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 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:

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

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 consolidated balance sheets at December 31, 2018 and 2017 is as follows:

2018:
 
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Limited partnerships
 
$
55,044
   
$
   
$
   
$
55,044
   
$
55,044
 
Commercial mortgage loans
   
6,672
     
     
     
6,672
     
6,672
 
Liabilities:
                                       
Short-term borrowings
   
20,000
     
     
20,000
     
     
20,000
 
                                         
2017:
             
Assets:
                                       
Limited partnerships
 
$
70,806
   
$
   
$
   
$
70,806
   
$
70,806
 
Commercial mortgage loans
   
     
     
     
     
 
Liabilities:
                                       
Short-term borrowings
   
20,000
     
     
20,000
     
     
20,000
 


Note O - Quarterly Results of Operations (Unaudited)

Quarterly results of operations are as follows:

   
2018
   
2017
 
   
1st
   
2nd
   
3rd
   
4th
   
1st
   
2nd
   
3rd
   
4th
 
                                                 
Net premiums earned
 
$
105,462
   
$
111,940
   
$
96,807
   
$
118,671
   
$
73,974
   
$
67,996
   
$
89,100
   
$
97,075
 
Net investment income
   
4,636
     
5,796
     
5,578
     
6,038
     
3,692
     
4,716
     
4,027
     
5,661
 
Net realized and unrealized gains (losses) on investments
   
(4,533
)
   
(3,435
)
   
2,373
     
(20,096
)
   
6,294
     
3,296
     
5,944
     
4,152
 
Losses and loss expenses incurred
   
72,298
     
77,488
     
94,540
     
101,537
     
48,599
     
71,754
     
60,673
     
66,492
 
                                                                 
Net income (loss)
   
330
     
2,487
     
(12,325
)
   
(24,567
)
   
6,756
     
(12,343
)
   
7,434
     
16,476
 
                                                                 
Net income (loss) per share
 
$
0.02
   
$
0.17
   
$
(0.82
)
 
$
(1.65
)
 
$
0.45
   
$
(0.82
)
 
$
0.49
   
$
1.10
 

- 68 -

Note P - Statutory

Net income of the Insurance Subsidiaries, all of which are wholly-owned, as determined in accordance with statutory accounting practices, was $36,236, $22,000 and $31,647 for 2018, 2017 and 2016, respectively.  Consolidated statutory capital and surplus for these Insurance Subsidiaries was $395,891 and $421,663 at December 31, 2018 and 2017, respectively, of which $64,134 may be transferred by dividend or loan to Protective during calendar year 2019 with proper notification to, but without approval from, regulatory authorities.

State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for each insurance company to remain authorized.  These computations are referred to as risk-based capital requirements and are based on a number of complex factors taking into consideration the quality and nature of assets, the historical adequacy of recorded liabilities and the specific nature of business conducted.  At December 31, 2018, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $117,426.  Actual consolidated statutory capital and surplus at December 31, 2018 exceeded this requirement by $278,464.


Note Q - Leases

The Company leases certain computer and related equipment using noncancelable operating leases.  Lease expense for 2018, 2017 and 2016 was $204, $417 and $157, respectively.  At December 31, 2018, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:

2019
 
$
342
 
2020
   
114
 
2021
   
15
 
2022 and thereafter
   
1
 
Total minimum payments required
 
$
472
 


Note R – 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, which has an expiration date of August 9, 2022, replaced the Company's revolving line of credit that was to expire on September 23, 2018.  Interest on this 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 December 31, 2018.  At December 31, 2018, the effective interest rate was 3.61%, and the Company had $20,000 remaining under the revolving credit facility.  The current outstanding borrowings were used to repay the previous line of credit.  The Company's revolving credit facility has two financial covenants, each of which were met as of December 31, 2018, requiring the Company to have a minimum U.S. generally accepted accounting principles net worth and a maximum consolidated leverage ratio of 0.35 to 1.00.


Note S - Related Parties

At December 31, 2018, the Company is invested in two limited partnerships with an aggregate estimated value of $32,028 that are managed by organizations in which one director of the Company is an executive officer and owner.  The Company’s ownership interest in these limited partnerships at December 31, 2018 was 6% for the New Vernon India Fund and 37% for the New Vernon Global Opportunity Fund.  During 2018, the Company withdrew $4,229 from the New Vernon Global Opportunity Fund II, which liquidated its investment in this limited partnership.  The Company also withdrew $2,271 from the New Vernon Global Opportunity Fund, which reduced its investment in this limited partnership.  These limited partnerships contributed to or (reduced) investment gains, net of fees, in 2018, 2017 and 2016 by ($5,059), $9,549 and ($971), respectively.

The Company utilizes the services of an investment firm of which one director of the Company is a partial owner.  These investment firms manage equity securities and fixed income portfolios with an aggregate market value of approximately $17,065 at December 31, 2018.  Total commissions and net fees earned by the investment firms and affiliates on these portfolios were $103, $97 and $207 for the years ended December 31, 2018, 2017 and 2016.


- 69 -

Note T – Subsequent Events

In January 2019, the Company withdrew $10,000 from the New Vernon India Fund limited partnership, which reduced the Company's investment in this limited partnership.  The Company also withdew $5,684 from the New Vernon Global Opportunity Fund limited partnership, which liquidated the Company's investment in this limited partnership.

On February 26, 2019, the Board of Directors of Protective Insurance Corporation declared a 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 March 26, 2019 to shareholders of record on March 12, 2019.


- 70 -

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No response to this item is required.

Item 9A.  CONTROLS AND PROCEDURES

The Company carried out an evaluation as of December 31, 2018, under the supervision and with the participation of management, including the Interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the "Exchange Act". Based upon that evaluation, the Interim Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act 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 Interim 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 three months ended December 31, 2018 that materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

Management's Responsibility for Financial Statements

Management is responsible for the preparation of the Company's consolidated financial statements and related information appearing in this Annual Report on Form 10-K.  Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company's financial position and results of operations in conformity with U.S. generally accepted accounting principles.  Management has included in the Company's financial statements amounts that are based upon estimates and judgments which it believes are reasonable under the circumstances.

The Audit Committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters.

Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with the participation of management, including the Interim Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework).  Based on the Company's evaluation under this framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018.  The effectiveness of the Company's internal control over financial reporting as of December 31, 2018 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

- 71 -

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Protective Insurance Corporation
 
Opinion on Internal Control over Financial Reporting
We have audited Protective Insurance Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Protective Insurance Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Protective Insurance Corporation and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”) and our report dated March 7, 2019 expressed an unqualified opinion thereon.
 
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
 
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
March 7, 2019
- 72 -

Item 9B.  OTHER INFORMATION

None.

PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item concerning the Company's directors and nominees for director, Audit Committee members and financial expert(s) and concerning disclosure of delinquent filers under Section 16(a) of the Exchange Act is incorporated herein by reference from the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year.

The executive officers of the Company are expected to serve until the next annual meeting of the Board of Directors or until their respective successors are elected and qualified.

The following summary sets forth certain information concerning the Company's executive officers as of February 28, 2019:

Name
 
Age
 
Title
 
Served in Such Capacity Since
John D. Nichols Jr.
 
58
 
Interim Chief Executive Officer and Chairman of the Board of Directors
 
2018 (1)
William C. Vens
 
47
 
Chief Financial Officer
 
2016 (2)
Matthew A. Thompson
 
54
 
Executive Vice President
 
2016 (3)
Jeremy F. Goldstein
 
47
 
Executive Vice President
 
2017 (4)
Patrick S. Schmiedt
 
38
 
Chief Underwriting Officer
 
2018 (5)

(1)
Mr. Nichols was appointed Interim Chief Executive Officer and elected Chairman of the Board of Directors in October 2018.  Mr. Nichols joined the Company's Board of Directors in May 2017, most recently serving as the Chairman of the Audit Committee from March 2017 until October 2018.  Mr. Nichols served as Chief Executive Officer of AXIS Re, a leading reinsurer to global property and casualty insurance companies, from 2012 until February 2017.  Prior to joining Axis Re, Mr. Nichols served as President of RenaissanceRe Ventures Ltd. from 2001 until 2010, where he was responsible for business development and management of joint venture and venture capital business.  Mr. Nichols is also a director of Delaware North Companies and National General Holdings Corp.

(2)
Mr. Vens was elected Chief Financial Officer in August 2016.  Mr. Vens joined the Company in June 2014 as Managing Director – Finance and after that served as Vice President of Strategy and Planning from June 2016 until August 2016.  Prior to joining the Company, Mr. Vens served as Chief Financial Officer of HighWave Energy, Inc. from 2011 to May 2014.

(3)
Mr. Thompson was elected Executive Vice President in November 2016.  He previously served as Senior Vice President of the Company from 2015 to 2016 and as Vice President of Sales from 2011 to 2015.

(4)
Mr. Goldstein was elected Executive Vice President in November 2017.  He previously served as Senior Vice President of the Company from 2015 to 2017, as Vice President from 2011 to 2015 and as Corporate Secretary from 2016 to 2018.

(5)
Mr. Schmiedt was elected Chief Underwriting Officer in October 2018.  He previously served as Senior Vice President of Underwriting from 2016 to 2018, as Vice President of Underwriting from 2015 to 2016 and as Assistant Vice President of Underwriting from 2013 to 2015.

Code of Conduct

The Board of Directors has adopted a Code of Business Conduct (the "Code") as our code of ethics document, which is applicable to all directors, officers at the vice president level and above, as well as certain other employees with control over accounting data.  The Code incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The Code also incorporates our expectations of our employees that enable us to comply with applicable laws, rules and regulations and to provide accurate and timely disclosure in our filings with the SEC and other public communications.

The Code is available on our website at www.protectiveinsurance.com. The Board of Directors reviews the Code annually and approves any amendments necessary to update the Code.  We intend to disclose on our website any amendments to, or waivers from, the Code that are required to be publicly disclosed pursuant to the rules of the SEC and Nasdaq.  Copies can also be obtained free of charge by contacting our Investor Relations department at investors@protectiveinsurance.com or by written request to Protective Insurance Corporation, Attention: Investor Relations, 111 Congressional Blvd., Suite 500, Carmel, Indiana 46032.

- 73 -

Item 11.  EXECUTIVE COMPENSATION *

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS *

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE *

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES *

* The information required by Items 11, 12, 13 and 14 is incorporated herein by reference from the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year.


PART IV

Item 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)   1.
List of Financial Statements--The following consolidated financial statements of the registrant and its subsidiaries (including the Report of Independent Registered Public Accounting Firm) are submitted in Item 8 of this Annual Report on Form 10-K.

Consolidated Balance Sheets - December 31, 2018 and 2017
Consolidated Statements of Operations - Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) – Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows - Years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements

      2.
List of Financial Statement Schedules--The following consolidated financial statement schedules of Protective Insurance Corporation and subsidiaries are included in this Annual Report on Form 10-K:

Pursuant to Article 7:
Schedule I     Summary of Investments--Other than Investments in Related Parties
Schedule II    Condensed Financial Information of Registrant
Schedule III   Supplementary Insurance Information
Schedule IV   Reinsurance
Schedule VI   Supplemental Information Concerning Property/Casualty Insurance Operations

All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.

- 74 -

3. Index to Exhibits:

INDEX TO EXHIBITS

Exhibit No.
 
Description
 
Amended and Restated Articles of Incorporation of Protective Insurance Corporation (Incorporated as an exhibit by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)
     
 
     
10.1
 
1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981) (SEC File No. 000-05534)*
     
 
Baldwin & Lyons, Inc. Restricted Stock Compensation Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement filed on April 1, 2010 for its Annual Meeting held May 4, 2010)(SEC File No. 000-05534)*
     
 
Baldwin & Lyons, Inc. Annual Incentive Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement filed on April 7, 2017 for its Annual Meeting held May 9, 2017)*
     
 
Baldwin & Lyons, Inc. Long-Term Incentive Plan (Incorporated as an exhibit by reference to Appendix B to the Company's definitive Proxy Statement filed on April 7, 2017 for its Annual Meeting held May 9, 2017)*
     
 
Severance, Confidentiality, Non-Competition and Non-Solicitation Agreement, dated May 10, 2018, by and between the Company and W. Randall Birchfield (Incorporated as an exhibit by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)*
     
 
Severance, Confidentiality, Non-Competition and Non-Solicitation Agreement, dated June 22, 2018, by and between the Company and Matthew A. Thompson (Incorporated as an exhibit by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)*
     
 
Severance Pay, Release and Waiver of Rights, dated February 15, 2018, by and between the Company and Michael J. Case (Incorporated as an exhibit by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)*
     
 
Employment Agreement, dated as of August 13, 2018, by and between the Company and W. Randall Birchfield (Incorporated as an exhibit by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 22, 2018)*
     
 
     
 
Employment Agreement, dated as of November 13, 2018, by and between the Company and John D. Nichols, Jr. (Incorporated as an exhibit by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on November 16, 2018)*
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
101
 
The following materials from Protective Insurance Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Operations, (3) the Consolidated Statements of Comprehensive Income (Loss), (4) the Consolidated Statements of Shareholders' Equity, (5) the Consolidated Statements of Cash Flows, and (6) the Notes to Consolidated Financial Statements.

* Indicates management contracts or compensatory plans or arrangements.

Item 16.  FORM 10-K SUMMARY

None.


- 75 -

SCHEDULE I

PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in thousands)
As of December 31, 2018

Type of Investment
 
Cost
   
Fair Value
   
Amount at
Which Shown in
the Consolidated Balance Sheet (1)
 
Fixed Income Securities:
                 
Bonds:
                 
Agency collateralized mortgage obligations
 
$
10,636
   
$
10,687
   
$
10,687
 
Agency mortgage-backed securities
   
37,168
     
37,385
     
37,385
 
Asset-backed securities
   
66,241
     
64,422
     
64,422
 
Bank loans
   
10,208
     
9,750
     
9,750
 
Certificates of deposit
   
2,835
     
2,835
     
2,835
 
Collateralized mortgage obligations
   
5,095
     
5,423
     
5,423
 
Corporate securities
   
196,925
     
190,450
     
190,450
 
Mortgage-backed securities
   
38,586
     
38,540
     
38,540
 
Municipal obligations
   
29,102
     
29,155
     
29,155
 
Non-U.S. government obligations
   
25,339
     
25,180
     
25,180
 
U.S. government obligations
   
178,369
     
178,818
     
178,818
 
Total fixed income securities
   
600,504
     
592,645
     
592,645
 
                         
Equity Securities:
                       
Common Stocks:
                       
Consumer
   
15,963
     
17,945
     
17,945
 
Energy
   
3,981
     
3,179
     
3,179
 
Financial
   
23,111
     
25,253
     
25,253
 
Industrial
   
3,287
     
6,920
     
6,920
 
Technology
   
1,259
     
2,303
     
2,303
 
Funds (e.g. mutual funds, closed end funds, ETFs)
   
6,797
     
5,489
     
5,489
 
Other
   
5,032
     
5,333
     
5,333
 
Total equity securities
   
59,430
     
66,422
     
66,422
 
                         
Commercial mortgage loans
   
6,672
     
6,672
     
6,672
 
Short-term:
                       
Certificates of deposit
   
1,000
     
1,000
     
1,000
 
Total short-term and other
   
1,000
     
1,000
     
1,000
 
                         
Total investments
 
$
667,606
   
$
666,739
   
$
666,739
 

(1)
Amounts presented above do not include investments of $156,855 classified as cash and cash equivalents in the consolidated balance sheet.


- 76 -

SCHEDULE II

PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
(in thousands)

   
December 31
 
   
2018
   
2017
 
Assets
           
Investment in subsidiaries
 
$
401,260
   
$
436,879
 
Due from affiliates
   
1,152
     
1,191
 
Investments other than subsidiaries:
               
Fixed income securities
   
22,302
     
22,306
 
Limited partnerships
   
215
     
222
 
     
22,517
     
22,528
 
Cash and cash equivalents
   
15,185
     
26,496
 
Accounts receivable
   
2,276
     
6,833
 
Other assets
   
28,794
     
24,772
 
Total assets
 
$
471,184
   
$
518,699
 
                 
Liabilities and shareholders' equity
               
                 
Liabilities:
               
Premiums payable
 
$
22,964
   
$
14,046
 
Deposits from insureds
   
58,748
     
60,893
 
Short-term borrowings
   
20,000
     
20,000
 
Other liabilities
   
13,390
     
4,949
 
     
115,102
     
99,888
 
Shareholders' equity:
               
Common stock:
               
Class A
   
112
     
112
 
Class B
   
522
     
530
 
Additional paid-in capital
   
54,720
     
55,078
 
Accumulated other comprehensive income (loss)
   
(7,347
)
   
46,391
 
Retained earnings
   
308,075
     
316,700
 
     
356,082
     
418,811
 
                 
Total liabilities and shareholders' equity
 
$
471,184
   
$
518,699
 

- 77 -


SCHEDULE II

PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME (LOSS) - PARENT COMPANY ONLY
(in thousands)

   
Year Ended December 31
 
   
2018
   
2017
   
2016
 
Revenue:
                 
Commissions and service fees
 
$
17,456
   
$
18,863
   
$
27,736
 
Cash dividends from subsidiaries
   
5,000
     
10,000
     
20,000
 
Net investment income
   
569
     
348
     
134
 
Net realized gains (losses) on investments
   
(192
)
   
308
     
(3
)
Other
   
51
     
(106
)
   
(24
)
     
22,884
     
29,413
     
47,843
 
Expenses:
                       
Salary and related items
   
20,158
     
18,140
     
17,462
 
Other
   
11,724
     
9,686
     
10,808
 
     
31,882
     
27,826
     
28,270
 
Income (loss) before federal income tax benefit and equity in undistributed income of subsidiaries
   
(8,998
)
   
1,587
     
19,573
 
Federal income tax benefit
   
(2,862
)
   
(2,971
)
   
(69
)
     
(6,136
)
   
4,558
     
19,642
 
Equity in undistributed income of subsidiaries
   
(27,939
)
   
13,765
     
9,303
 
                         
Net income (loss)
 
$
(34,075
)
 
$
18,323
   
$
28,945
 

- 78 -


SCHEDULE II

PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - PARENT COMPANY ONLY
(in thousands)

   
Year Ended December 31
 
   
2018
   
2017
   
2016
 
Net income (loss)
 
$
(34,075
)
 
$
18,323
   
$
28,945
 
                         
Other comprehensive income (loss), net of tax:
                       
Unrealized net gains (losses) on fixed income securities:
                       
Unrealized net gains (losses) arising during the period
   
(9,680
)
   
17,340
     
8,618
 
Less: reclassification adjustment for net gains (losses) included in net income (loss)
   
(2,812
)
   
4,691
     
13,491
 
     
(6,868
)
   
12,649
     
(4,873
)
                         
Foreign currency translation adjustments
   
(830
)
   
522
     
235
 
                         
Other comprehensive income (loss)
   
(7,698
)
   
13,171
     
(4,638
)
                         
Comprehensive income (loss)
 
$
(41,773
)
 
$
31,494
   
$
24,307
 

- 79 -


SCHEDULE II
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
(in thousands)

   
Year Ended December 31
 
   
2018
   
2017
   
2016
 
Net cash provided by operating activities
 
$
14,019
   
$
44,998
   
$
15,484
 
                         
Investing activities:
                       
Purchases of investments
   
(11,435
)
   
(21,365
)
   
(4,000
)
Sales or maturities of investments
   
11,213
     
9,146
     
3,493
 
Net sales of short-term investments
   
     
     
2,165
 
Distributions from limited partnerships
   
     
298
     
 
Net purchases of property and equipment
   
(3,677
)
   
(3,394
)
   
(4,278
)
Net cash used in investing activities
   
(3,899
)
   
(15,315
)
   
(2,620
)
                         
Financing activities:
                       
Dividends paid to shareholders
   
(16,835
)
   
(16,302
)
   
(15,803
)
Repurchase of common shares
   
(4,596
)
   
(1,880
)
   
 
Net cash used in financing activities
   
(21,431
)
   
(18,182
)
   
(15,803
)
                         
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents
   
(11,311
)
   
11,501
     
(2,939
)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of year
   
26,496
     
14,995
     
17,934
 
Cash, cash equivalents and restricted cash and cash equivalents at end of year
 
$
15,185
   
$
26,496
   
$
14,995
 

Note to Condensed Financial Statements -- Basis of Presentation

The Company's investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition.  The Company's share of net income of its subsidiaries is included in income using the equity method.  These financial statements should be read in conjunction with the Company's consolidated financial statements.

- 80 -


SCHEDULE III

PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)

   
As of December 31
   
Year Ended December 31
 
Segment
 
Deferred Policy
Acquisition Costs
   
Reserves for Unpaid
Claims and Claim
Adjustment Expenses
   
Unearned
Premiums
   
Other Policy
Claims and
Benefits Payable
   
Net
Premium
Earned
   
Net
Investment
Income
   
Benefits, Claims,
Losses and
Settlement Expenses
   
Amortization of
Deferred Policy
Acquisition Costs
   
Other
Operating
Expenses
   
Net
Premiums
Written
 
                                 
(A)
   
(A)
         
(A) (B)
       
Property/Casualty Insurance
                                                           
2018
 
$
6,568
   
$
865,339
   
$
71,625
     
   
$
432,880
   
$
22,048
   
$
345,864
   
$
78,105
   
$
23,514
   
$
444,398
 
                                                                                 
2017
   
5,608
     
680,274
     
53,085
     
     
328,145
     
18,095
     
247,518
     
70,574
     
14,043
     
353,389
 
                                                                                 
2016
   
1,172
     
576,330
     
21,694
     
     
276,011
     
14,483
     
186,481
     
51,597
     
8,180
     
271,752
 

(A)
Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates.  Results among these categories would change if different methods were applied.

(B)
Commission allowances relating to reinsurance ceded are offset against other operating expenses.

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SCHEDULE IV

PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
REINSURANCE
((in thousands)

   
Direct
Premiums
   
Ceded to
Other Companies
   
Assumed from
Other Companies
   
Net
Amount
   
% of Amount
Assumed to Net
 
Premiums Earned -
                             
Years Ended December 31:
                             
2018
 
$
562,364
   
$
131,080
   
$
1,596
   
$
432,880
     
0.4
%
                                         
2017
   
470,158
     
145,201
     
3,188
     
328,145
     
1.0
%
                                         
2016
   
394,679
     
130,012
     
11,344
     
276,011
     
4.1
%

Note:
Included in Ceded to Other Companies is $0, $0 and $86 for 2018, 2017 and 2016, respectively, relating to retrocessions associated with premiums assumed from other companies.  Percentage of Amount Assumed to Net above considers the impact of this retrocession.

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SCHEDULE VI

PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(in thousands)

   
As of December 31
   
Year Ended December 31
 
   
Deferred
Policy
   
Reserves for
Unpaid Claims
   
Discount,
if any Deducted
               
Net
   
Claims and Claim Adjustment
Expenses Incurred Related to
   
Amortization of
Deferred Policy
   
Paid Claims
and Claims
   
Net
 
Affiliation with Registrant
 
Acquisition
Costs
   
Adjustment
Expenses
   
from Reserves
   
Unearned
Premiums
   
Earned
Premiums
   
Investment
Income
   
Current
Year
   
Prior
Years
   
Acquisition
Costs
   
Adjustment
Expenses
   
Premiums
Written
 
Consolidated Property/Casualty Subsidiaries:
                                                                 
2018
 
$
6,568
   
$
865,339
   
$
   
$
71,625
   
$
432,880
   
$
22,048
   
$
329,078
   
$
16,786
   
$
78,105
   
$
228,591
   
$
444,398
 
2017
   
5,608
     
680,274
     
     
53,085
     
328,145
     
18,095
     
228,303
     
19,215
     
70,574
     
200,154
     
353,389
 
2016
   
1,172
     
576,330
     
     
21,694
     
276,011
     
14,483
     
172,645
     
13,836
     
51,597
     
163,467
     
271,752
 



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
     
March 7, 2019
By:
/s/ John D. Nichols, Jr.
   
John D. Nichols, Jr.
   
Interim Chief Executive Officer and Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures
 
Title
 
Date
         
/s/ John D. Nichols, Jr.
 
Interim Chief Executive Officer and Chairman of the Board of Directors
 
March 7, 2019
John D. Nichols, Jr.
 
(Principal Executive Officer)
   
         
/s/ William C. Vens
 
Chief Financial Officer
 
March 7, 2019
William C. Vens
 
(Principal Financial Officer and Principal Accounting Officer)
   
         
/s/ Steven J. Bensinger
 
Director
 
March 7, 2019
Steven J. Bensinger
       
         
/s/ Stuart D. Bilton
 
Director
 
March 7, 2019
Stuart D. Bilton
       
         
/s/ Otto N. Frenzel IV
 
Director
 
March 7, 2019
Otto N. Frenzel IV
       
         
/s/ LoriAnn Lowery-Biggers
 
Director
 
March 7, 2019
LoriAnn Lowery-Biggers
       
         
/s/ David W. Michelson
 
Director
 
March 7, 2019
David W. Michelson
       
         
/s/ James A. Porcari III
 
Director
 
March 7, 2019
James A. Porcari III
       
         
/s/ Nathan Shapiro
 
Director
 
March 7, 2019
Nathan Shapiro
       
         
/s/ Robert Shapiro
 
Director
 
March 7, 2019
Robert Shapiro
       


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