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, 2020

OR

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

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

graphic

PROTECTIVE INSURANCE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Indiana
  
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 each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Class A Common Stock, No Par Value
  
PTVCA
  
The Nasdaq Stock Market LLC
Class B Common Stock, No Par Value
  
PTVCB
  
The Nasdaq Stock Market LLC

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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

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 30, 2020, based on the closing trade prices on that date, was approximately $149,681,000.

The number of shares outstanding of each of the issuer's classes of common stock as of March 8, 2021:

Common Stock, No Par Value:
Class A (voting)
2,603,350
  
 
Class B (nonvoting)
11,552,801
  
   
14,156,151
  

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 2021 are incorporated by reference into Part III of this Annual Report on Form 10-K.


Table of Contents

PROTECTIVE INSURANCE CORPORATION

Form 10-K
For the Fiscal Year Ended December 31, 2020
 
TABLE OF CONTENTS

    
Page
Part I
Item 1.
Business
4
       
 
Item 1A.
Risk Factors
17
       
 
Item 1B.
Unresolved Staff Comments
23
       
 
Item 2.
Properties
23
       
 
Item 3.
Legal Proceedings
23
       
 
Item 4.
Mine Safety Disclosures
23
       
   
Information About our Executive Officers
24
       
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
25
       
 
Item 6.
Selected Financial Data
27
       
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
       
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
43
       
 
Item 8.
Financial Statements and Supplementary Data
46
       
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
82
       
 
Item 9A.
Controls and Procedures
82
       
 
Item 9B.
Other Information
84
       
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
84
       
 
Item 11.
Executive Compensation
85
       
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
85
       
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
85
       
 
Item 14.
Principal Accountant Fees and Services
85
       
Part IV
Item 15.
Exhibits and Financial Statement Schedules
85
       
 
Item 16.
Form 10-K Summary
87
       
 
Signatures
  
97
2

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

●
the risks related to our proposed merger with The Progressive Corporation (“Progressive”), and Carnation Merger Sub Inc. (“Merger Sub”) described under “Proposed Merger with The Progressive Corporation” in Part I, Item 1, “Business” hereof, including:
•
the inability to complete the proposed transaction due to the failure to obtain approval by our Class A shareholders of the proposed transaction or the failure to satisfy any of the other conditions to completion of the proposed transaction, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction;
•
uncertainty as to the timing of completion of the proposed transaction;
•
the occurrence of any event, change or other circumstances that could give rise to the termination of the agreement and plan of merger;
•
risks related to disruption of management’s attention from our ongoing business operations due to the proposed transaction;
•
the effect of the announcement of the proposed transaction on our relationships with our clients, operating results and business generally; and
•
the outcome of any legal proceedings to the extent initiated against us, Progressive or others following the announcement of the proposed transaction;

●
the effects of the novel coronavirus ("COVID-19") pandemic and associated government actions on our operating and financial performance;

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

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

●
other changes in the markets for our insurance products;

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

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

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

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

●
technology or network security disruptions or breaches;

●
adequacy of insurance reserves;

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

●
our ability to attract and retain qualified employees;

●
tax law and accounting changes; and

●
legal actions brought against us.

Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Part 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.
3

PART I

Item 1.  BUSINESS

Protective Insurance Corporation (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.

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 2020, the Insurance Subsidiaries primarily served the commercial automobile market, although the Insurance Subsidiaries continue to support previously written policies in markets for which the Company has discontinued writing business, and these operations are in run-off.  The Company expects targeted growth to continue in its core business of commercial automobile and workers' compensation.

The Company operates as one reportable property and casualty insurance segment based on how its operating results are regularly reviewed by its chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance.

Proposed Merger with The Progressive Corporation

Merger Agreement

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

4
Protective’s Board of Directors (the “Board”), at the unanimous recommendation of the Special Committee of the Board, unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and fair to, and in the best interests of, Protective and its shareholders, and approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby. The Merger is expected to close prior to the end of the third quarter of 2021.  At the effective time of the Merger, each issued and outstanding share of common stock, without par value, of Protective (other than each share of Protective’s common stock that is owned by Protective as treasury stock or by any subsidiary of Protective and each share of Protective’s common stock owned by Progressive, Merger Sub or any other subsidiary of Progressive immediately prior to the effective time of the Merger) will be automatically canceled and converted into the right to receive $23.30 in cash, without interest, for a total transaction value of approximately $338 million.

The Merger Agreement contains various customary representations and warranties from each of Protective, Progressive and Merger Sub.  Protective has also agreed to various customary covenants, including but not limited to conducting its business in the ordinary course and not engaging in certain types of transactions during the period between the execution of the Merger Agreement and the closing of the Merger.  However, the Merger Agreement permits Protective to continue to pay regular quarterly dividends not to exceed $0.10 per share of its common stock. The consummation of the Merger is subject to certain conditions, including approval of the Merger by Protective’s Class A shareholders, legal and regulatory approvals including from the Indiana Department of Insurance and the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as other customary closing conditions.

For additional information regarding the risks associated with the Merger, please see Part I, Item 1A, "Risk Factors," of this Annual Report on Form 10-K.

Voting and Support Agreement

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

COVID-19 Impacts

Beginning in March 2020 and continuing through the date of this Annual Report on Form 10-K, the global pandemic associated with COVID-19 and related economic conditions have impacted the global economy and the Company’s results of operations.  For the year ended December 31, 2020, net premiums earned within the Company’s commercial automobile products, specifically public transportation, were negatively impacted due to a reduction in miles driven, which is the basis for premiums the Company receives, as well as an overall reduction in public transportation units insured.  The declines in public transportation persisted throughout the year and have continued into 2021, but we saw a recovery in the third and fourth quarters within our commercial automobile products that has continued through the date of this Annual Report on Form 10-K.  However, losses and loss expenses incurred during the same period reflected favorable impacts within all commercial automobile products as a result of declines in accident frequency due to lower traffic density.  In addition to these impacts on the Company’s underwriting loss, as defined below, the Company incurred net realized and unrealized losses on investments of $9.2 million for the year ended December 31, 2020, primarily due to investment losses realized as a result of the significant declines in the global financial markets experienced during the first and second quarters due to the COVID-19 pandemic.  As of December 31, 2020, both the Company’s fixed income and equity security investments have recovered to a net gain position.  Additionally, insurance departments throughout the country have issued bulletins and regulations urging or requiring insurers to extend grace periods for the payment of policy premiums and to refrain from canceling or non-renewing policies for the non-payment of policy premiums for policyholders adversely affected by COVID-19; however, the Company has not seen a material decrease or slowdown in premium collection to date.  Our liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during 2020. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company’s results, see Part I, Item 1A, "Risk Factors," and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
5

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.  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.

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 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.  In 2019, the Company took actions to reduce exposure to workers’ compensation coverage for non-transportation risks.  While the Company has continued to underwrite select non-transportation risks, the Company’s primary focus is underwriting workers’ compensation coverage for transportation risks.  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.

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, 2020 and 2019 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.

6

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.

Beginning in early 2019, the Company began strategically buying facultative reinsurance on policies with $5.0 million limits, specifically in our excess automobile and public transportation books of business.  This reinsurance coverage has served to lower the loss limit on a significant portion of the Company’s commercial automobile liability policies to $2.0 million for a single occurrence.  This action, coupled with the renewal of our annual aggregate deductible treaty at a 35% quota share rate, whereby once the aggregate stop-loss level is reached the Company is responsible for its 65% retention, has significantly reduced the Company’s exposure and volatility to large commercial automobile liability losses.  In 2020, due to continued rate achievement in commercial automobile, improvements in the Company's mix of business and reductions to the Company's average policy loss limits, the Company decided to non-renew the annual aggregate deductible treaty for policies written on and after July 3, 2020.

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.

The table below sets forth a reconciliation of beginning and ending loss and LAE liability balances for 2020, 2019 and 2018.  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.

(dollars in thousands)
  
2020
    
2019
    
2018
  
Reserves, gross of reinsurance recoverable, at the beginning of the year
  
$
988,305
    
$
865,339
    
$
680,274
  
Reinsurance recoverable on unpaid losses at the beginning of the year
    
398,305
      
375,935
      
308,143
  
Reserves at the beginning of the year
    
590,000
      
489,404
      
372,131
  
                         
Provision for losses and loss expenses:
                        
Claims occurring during the current year
    
319,269
      
349,018
      
329,078
  
Claims occurring during prior years
    
(311
)
    
(550
)
    
16,786
  
Total incurred losses and loss expenses
    
318,958
      
348,468
      
345,864
  
                         
Loss and loss expense payments:
                        
Claims occurring during the current year
    
77,880
      
90,364
      
84,738
  
Claims occurring during prior years
    
165,777
      
157,508
      
143,853
  
Total paid
    
243,657
      
247,872
      
228,591
  
Reserves at the end of the year
    
665,301
      
590,000
      
489,404
  
                         
Reinsurance recoverable on unpaid losses at the end of the year
    
424,368
      
398,305
      
375,935
  
Reserves, gross of reinsurance recoverable, at the end of the year
  
$
1,089,669
    
$
988,305
    
$
865,339
  

7

The reconciliation above shows the Company's estimate of net losses on 2019 and prior accident years is approximately $0.3 million lower at December 31, 2020 than was provided in loss reserves at December 31, 2019 (referred to as a "reserve savings").  This compares to a reserve savings of $0.6 million on prior accident years in 2019 and a $16.8 million reserve deficiency reported in 2018 related to prior accident years.

The following table is a summary of the 2020 calendar year reserve savings by accident year (dollars in thousands):

Years in Which Losses Were Incurred
  
Reserve at
December 31,
2019
    
(Savings)
Deficiency
Recorded
During 2020 (1)
    
% (Savings)
Deficiency
  
2019
  
$
258,655
    
$
(1,743
)
    
(.7
)%
2018
    
158,311
      
4,017
      
2.5
%
2017
    
65,516
      
(3,997
)
    
(6.1
)%
2016
    
21,374
      
392
      
1.8
%
2015
    
16,377
      
858
      
5.2
%
2014 and prior
    
69,767
      
162
      
.2
%
   
$
590,000
    
$
(311
)
    
(.1
)%

(1)
Consists of development on cases known at December 31, 2019, losses reported which were previously unknown at December 31, 2019 (incurred but not reported), unallocated loss expense paid related to accident years 2019 and prior and changes in the reserves for incurred but not reported losses and loss expenses.

The savings shown in accident year 2019 in the table above reflects favorable loss development in short-tail lines of business, such as physical damage and occupational accident.  The deficiency shown in accident year 2018 represents deficiencies in the Company's commercial automobile business, specifically excess automobile and public transportation lines of business.  The Company took and continues to take action in all accident years to reflect new trends in loss development for commercial automobile products that have emerged over the last several years.  These actions include case reserving reviews, as well as continued actuarial product reviews, and resulted in the small reserve strengthening noted in accident years 2018 and prior.

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.

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.

8

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 2010 through 2019, as of December 31, 2020, net of all reinsurance credits.

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

  
Year Ended December 31
  
   
2010
    
2011
    
2012
    
2013
    
2014
    
2015
    
2016
    
2017
    
2018
    
2019
    
2020
  
Liability for Unpaid Losses and Loss Adjustment Expenses (1)
  
$
218,629
    
$
290,092
    
$
289,236
    
$
288,088
    
$
295,583
    
$
301,753
    
$
324,767
    
$
372,131
    
$
489,404
    
$
590,000
    
$
665,301
  
                                                                                         
Liability Reestimated as of: (2)
                                                                                        
One Year Later
  
$
208,933
      
280,217
      
283,673
      
277,734
      
285,521
      
315,589
      
343,982
      
388,917
      
488,853
      
589,689
          
Two Years Later
    
201,745
      
272,285
      
282,381
      
268,757
      
303,540
      
340,361
      
369,670
      
393,536
      
490,320
                  
Three Years Later
    
204,243
      
276,525
      
279,685
      
288,862
      
332,175
      
361,791
      
382,982
      
390,951
                          
Four Years Later
    
202,078
      
268,299
      
291,332
      
313,909
      
343,898
      
373,454
      
384,394
                                  
Five Years Later
    
198,518
      
275,517
      
298,861
      
313,662
      
352,873
      
374,475
                                          
Six Years Later
    
200,922
      
276,812
      
299,996
      
317,621
      
353,036
                                                  
Seven Years Later
    
203,692
      
279,598
      
300,450
      
316,504
                                                          
Eight Years Later
    
204,769
      
279,926
      
299,830
                                                                  
Nine Years Later
    
205,047
      
278,192
                                                                          
Ten Years Later
    
202,278
                                                                                  
                                                                                         
Cumulative Redundancy (Deficiency) (3)
  
$
16,351
    
$
11,900
    
$
(10,594
)
  
$
(28,416
)
  
$
(57,453
)
  
$
(72,722
)
  
$
(59,627
)
  
$
(18,820
)
  
$
(916
)
  
$
311
          
Cumulative Amount of Liability Paid Through: (4)
                                                                                        
One Year Later
  
$
72,393
    
$
94,003
    
$
103,941
    
$
92,275
    
$
92,870
    
$
109,228
    
$
132,920
    
$
143,853
    
$
157,508
    
$
165,776
          
Two Years Later
    
109,382
      
156,271
      
162,087
      
159,282
      
166,642
      
195,951
      
217,376
      
220,502
      
243,766
                  
Three Years Later
    
133,507
      
193,566
      
205,452
      
166,642
      
222,295
      
250,924
      
275,464
      
260,136
                          
Four Years Later
    
147,462
      
214,873
      
202,803
      
234,158
      
258,576
      
287,311
      
295,576
                                  
Five Years Later
    
158,172
      
227,359
      
241,533
      
251,696
      
283,107
      
301,159
                                          
Six Years Later
    
166,112
      
234,578
      
252,648
      
263,194
      
292,069
                                                  
Seven Years Later
    
168,524
      
241,383
      
258,630
      
269,206
                                                          
Eight Years Later
    
173,015
      
246,052
      
262,371
                                                                  
Nine Years Later
    
176,204
      
248,812
                                                                          
Ten Years Later
    
178,577
                                                                                  

(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, 2020.

(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.

Reserve developments for all years ended in the period 1985 through 2011 have produced redundancies as of December 31, 2020, with deficiencies developing for periods from 2012 to 2018.  The $0.3 million prior accident year savings that developed during 2020 related to favorable loss development in the Company's occupational accident business, partially offset by unfavorable loss development in commercial automobile coverages.  The deficiencies that developed in the chart from 2012 through 2018 have been largely attributable to two main factors.  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 commercial automobile transportation offerings.  During 2020, the Company continued to address the rate adequacy and customer segmentation practices of commercial automobile products in response to these adverse loss trends.

9
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 2012, but incurred in 2009, will be included in the cumulative development amount for each of the years ending December 31, 2010, 2011, and 2012.  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 below presents loss development data on a gross (before consideration of reinsurance) basis for the same ten-year period December 31, 2010 through December 31, 2019, as of December 31, 2020, 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
  
   
2010
    
2011
    
2012
    
2013
    
2014
    
2015
    
2016
    
2017
    
2018
    
2019
    
2020
  
Direct and Assumed:
                                                                  
Liability for Unpaid Losses and Loss Adjustment Expenses
  
$
344,520
    
$
421,556
    
$
455,454
    
$
474,470
    
$
506,102
    
$
513,596
    
$
576,330
    
$
680,274
    
$
865,339
    
$
988,305
    
$
1,089,669
  
                                                                                         
Liability Reestimated as of December 31, 2020
    
341,571
      
434,106
      
496,856
      
547,749
      
632,297
      
672,667
      
686,485
      
735,058
      
892,796
      
1,010,036
          
                                                                                         
Cumulative Redundancy (Deficiency)
  
$
2,949
    
$
(12,550
)
  
$
(41,402
)
  
$
(73,279
)
  
$
(126,195
)
  
$
(159,071
)
  
$
(110,155
)
  
$
(54,784
)
  
$
(27,457
)
  
$
(21,731
)
        
                                                                                         
Ceded:
                                                                                        
Liability for Unpaid Losses and Loss Adjustment Expenses
  
$
140,401
    
$
54,428
    
$
132,320
    
$
167,366
    
$
178,887
    
$
204,349
    
$
188,829
    
$
204,199
    
$
190,870
    
$
275,339
    
$
424,368
  
                                                                                         
Liability Reestimated as of December 31, 2020
    
153,803
      
78,878
      
163,128
      
212,229
      
247,629
      
290,699
      
239,357
      
240,163
      
217,410
      
297,381
          
                                                                                         
Cumulative Redundancy (Deficiency)
  
$
(13,402
)
  
$
(24,450
)
  
$
(30,808
)
  
$
(44,863
)
  
$
(68,742
)
  
$
(86,350
)
  
$
(50,528
)
  
$
(35,964
)
  
$
(26,540
)
  
$
(22,042
)
        
                                                                                         
Net:
                                                                                        
Liability for Unpaid Losses and Loss Adjustment Expenses
  
$
218,629
    
$
290,092
    
$
289,236
    
$
288,088
    
$
295,583
    
$
301,753
    
$
324,767
    
$
372,131
    
$
489,404
    
$
590,000
    
$
665,301
  
                                                                                         
Liability Reestimated as of December 31, 2020
    
202,278
      
278,192
      
299,830
      
316,504
      
353,036
      
374,475
      
384,394
      
390,951
      
490,320
      
589,689
          
                                                                                         
Cumulative Redundancy (Deficiency)
  
$
16,351
    
$
11,900
    
$
(10,594
)
  
$
(28,416
)
  
$
(57,453
)
  
$
(72,722
)
  
$
(59,627
)
  
$
(18,820
)
  
$
(916
)
  
$
311
          

10

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 typically 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 limits exposure to such claims.

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, 2020 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, 2020.

Marketing

Historically, the Insurance Subsidiaries have primarily focused their commercial automobile marketing efforts on large and medium-sized 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.  In 2020, the Company's commercial automobile offerings also include public livery risks, principally small operators of bus fleets, 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 with generally 5 to 25 power units.

In some cases, the Company will provide specific product offerings to specialized markets through partnerships with brokers and program administrators.  As the Company has grown, 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).  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.

11

Investments

The Company’s investment portfolio has been de-risked over the past three years primarily by reducing the equity and limited partnership investments as a percentage of the overall portfolio and increasing fixed income investments.  The Company’s investment strategy emphasizes preservation and growth of capital surplus.  Subject to achieving that objective, the Company pursues favorable risk adjusted returns.

At December 31, 2020, the market value of the Company's consolidated investment portfolio was approximately $1,043.7 million, consisting of fixed income securities, equity securities, investments in limited partnerships, commercial mortgage loans and short-term and other investments and included $47.0 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:

  
2020
    
2019
  
Fixed income securities
    
88.1
%
    
82.2
%
Short-term
    
0.1
      
0.1
  
Cash equivalents
    
4.5
      
6.2
  
Total fixed income and short-term securities
    
92.7
      
88.5
  
                 
Limited partnerships (equity basis)
    
0.7
      
2.4
  
Commercial mortgage loans (amortized cost basis)
    
1.0
      
1.2
  
Equity securities
    
5.6
      
7.9
  
     
100.0
%
    
100.0
%

Fixed Income and Short-Term Investments

Fixed income and short-term securities comprised 92.7% of the market value of the Company's consolidated investment portfolio of $1,043.7 million at December 31, 2020.  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 $4.0 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 $63.7 million of the Company's fixed income investments (6.1% of the Company's consolidated investment portfolio, which includes money market instruments classified as cash equivalents) 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 had a $2.2 million aggregate net unrealized gain position at December 31, 2020.

The market value of the consolidated fixed income portfolio included $26.3 million of net unrealized gains at December 31, 2020 compared to $12.5 million of net unrealized gains at December 31, 2019.  The current net unrealized gain on fixed income securities consisted of $4.7 million of gross unrealized losses and $31.0 million of gross unrealized gains at December 31, 2020.  The gross unrealized losses equal approximately 0.5% of the cost of all fixed income securities.  See also "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 for additional details regarding the Company's investment valuation.

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 5.6% of the market value of the Company's consolidated investment portfolio of $1,043.7 million at December 31, 2020.  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 $3.5 million at December 31, 2020 (0.3% of the Company's consolidated investment portfolio).
12

Realized losses related to the sale of equity securities during 2020 recognized in the consolidated statement of operations for the year ended December 31, 2020 were $8.1 million before taxes. Net unrealized gains on equity securities held at December 31, 2020 included in the consolidated statement of operations for the year ended December 31, 2020 were $1.9 million.

An individual equity security will be disposed of when it is determined 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 ("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.

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.  At December 31, 2020, the aggregate carrying value was $7.2 million, comprising 0.7% of the market value of the Company's consolidated investment portfolio.

As a group, these investments decreased in value during 2020, with the aggregate of the Company's share of such losses reported by the limited partnerships totaling approximately $1.4 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 decreased $0.8 million, or 3.2%, during 2020, reflecting lower interest rates earned on cash and cash equivalent balances for the year, partially offset by an increase in average funds invested resulting from positive cash flow from operations, as well as the continued reallocation from equity investments in limited partnerships and cash and cash equivalent investments into short-duration, high-quality bonds.  A comparison of consolidated investment yields, before consideration of investment management expenses, is as follows:

  
2020
    
2019
  
Before federal tax:
            
Investment income
    
2.9
%
    
3.3
%
                 
After federal tax:
                
Investment income
    
2.8
      
3.3
  

See also "Results of Operations" 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 for additional details of the Company's investment operations.

13
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, 2020, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $136.5 million.  Actual consolidated statutory capital and surplus at December 31, 2020 exceeded this requirement by $210.9 million.

Human Capital Management

Protective is committed to attracting, developing and retaining top talent in order to drive its continued success and achieve its business goals.  The Company strives for a diverse and inclusive culture, which rewards performance, provides growth and development opportunities and supports employees through competitive compensation, benefits and numerous volunteer and charitable giving opportunities.

As of December 31, 2020, the Company had approximately 490 employees working full-time.

COVID-19, Employee Safety and Wellness
Employee health and safety are top priorities.  In response to the COVID-19 pandemic, the Company adopted numerous health and safety measures in accordance with best-practice safe hygiene guidelines issued by recognized health experts such as the U.S. Centers for Disease Control and Prevention (CDC) and the World Health Organization (WHO), as well as government mandates.

The Company has provided for work-from-home arrangements for employees where possible, including providing employees with the necessary equipment to effectively work from home, provides regular communication updates to its employees on COVID-19 related matters, has implemented office sanitization protocols and requires mask usage at the office and temperature and health screening prior to entering the Company's facilities.

Diversity and Inclusion
Protective is committed to fostering a work environment that values and promotes diversity and inclusion.  During 2020, several Employee Resource Groups (ERGs) were created and staffed by employees with diverse backgrounds, experiences or characteristics who share a common interest in professional development, improving corporate culture and delivering sustained business results.  The Company provides equal access to and participation in programs and services without regard to race, religion, color, national origin, disability, sex, sexual orientation, gender identify, stereotypes or assumptions based thereon.

14
Employee Engagement, Development and Training
Protective invests resources in professional development and growth as a means to encourage employee performance, motivation and retention.  The Company encourages and supports the growth and development of its employees, and wherever possible, seeks to fill positions by promotion or transfer from within the organization.   The Company promotes continuous learning and career development through ongoing performance and development discussions and evaluations, training programs, succession and talent pipeline planning and educational reimbursement programs.  The Company provides employees with the opportunity to provide regular feedback through surveys, meetings with management and CEO-led discussions.  Employees are also eligible to participate in a departmental rotation program to gain experience and knowledge about the organization.

Opportunities for continuous learning and development are available to employees through internal and external training resources, conferences and seminars.  Protective offers internal online training opportunities on topics such as diversity and inclusion, health and safety, personal development, computer skills and management training courses.

Compensation and Benefits
Protective is committed to providing its employees with a competitive compensation package, which rewards performance and achievement of desired business results and personal goal attainment.  The Company's compensation package consists of base pay and an incentive program in which all employees are eligible to participate, health and welfare benefits and retirement contributions.  The Company analyzes its compensation and benefits programs regularly to ensure they remain competitive with the market.

Health and wellness programs are provided and contribute to a productive workforce by empowering our employees to take personal responsibility for their health, safety and well-being.  Employees are offered the opportunity to participate in healthcare and insurance benefits, disability insurance, health savings and flexible spending accounts, paid time off, parental leave and various wellness programs.

Community Involvement
The Company and its employees provide multi-faceted support for its communities to address needs where its employees work and live.  Corporate sponsorships and employee volunteer opportunities support a wide range of non-profits, including those that address children and youth programs, education, safety, human trafficking, housing, abuse, joblessness, blood donations and many others.

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 $4.7 million, $4.7 million and $16.2 million of the Company's consolidated gross premiums written in 2020, 2019 and 2018, respectively.  The decrease in 2019 is related to the non-renewal of certain excess coverage policies in late 2018.  An additional $207.6 million, $172.8 million and $174.7 million in  2020, 2019 and 2018, 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.

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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.  However, 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.

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, 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.
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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.

OPERATIONAL RISKS

The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity.

Beginning in March 2020, the global pandemic related to COVID-19 and related economic conditions began to impact the global economy and our results of operations.  A discussion of the impact of the COVID-19 pandemic on our business to date can be found in Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K.  Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 include the following:

•
Net premiums earned. We experienced an effect on our net premiums earned in the second and third quarters of 2020 primarily due to the reduction in miles driven during that time, which is the basis of premiums we receive, by our commercial automobile insureds, as well as an overall reduction in public transportation units insured.  During the fourth quarter of 2020, we saw a partial recovery of premium volume when miles driven increased as a result of increased shipping around the holidays.

•
Losses and loss expenses incurred.  We saw a favorable impact on our losses and loss expenses incurred in commercial automobile during 2020 as a result of declines in accident frequency due to lower traffic density, but in the future we may incur higher claim and claim adjustment expenses in certain lines of business as a result of COVID-19 due to increases in frequency and/or severity of claims.  For example, we may experience elevated frequency and severity in our workers’ compensation lines related to compensable claims by workers who demonstrate that the injury or illness arose both out of and in the course of their employment.  We may also experience elevated frequency and severity in our liability coverages as a result of plaintiffs’ lawyers seeking to generate COVID-19-related claim activity against our insureds.  Additionally, the anticipated and unknown risks related to COVID-19 may cause additional uncertainty in the process of estimating claims and claim adjustment expense reserves. For example, the behavior of claimants and policyholders may change in unexpected ways, the disruption to the court system may impact the timing and amounts of claims settlements and the actions taken by governmental bodies, both legislative and regulatory, in reaction to COVID-19 and their related impacts are hard to predict. As a result, our estimated level of claims and claim adjustment expense reserves may change. We are also subject to credit risk in our insurance operations, which may be exacerbated in times of economic distress.

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

•
Liquidity. Collection of premiums, deductibles or self-insured retentions from our policyholders and reinsurance recoverables from our reinsurers may become increasingly difficult.  At the state level, insurance departments throughout the country have issued bulletins and regulations urging or requiring insurers to extend grace periods for the payment of policy premiums and to refrain from canceling or non-renewing policies for the non-payment of policy premiums for policyholders adversely affected by COVID-19. It is uncertain what impact these government mandates may have on our ability to recover unpaid premiums on the affected policies or what our obligations may be for the payment of claims made under policies for which we have not received premium payments.
17

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

•
Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or outsourcing providers are unable to continue to work because of illness, government directives or otherwise.  In addition, the interruption of our or their system capabilities could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions.    Having shifted to primarily remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities.  To date, we have not experienced any such operational interruptions or cybersecurity disruptions during this time.

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.

The loss of our major sponsor program could severely impact our revenue and earnings potential.

We derive a significant percentage of our direct premium volume from insurance coverage provided to FedEx Ground's contracted service providers through a FedEx Ground sponsored program.  The loss of this would likely materially adversely impact our revenue and earnings potential.

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.

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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 have been, and in the future 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.  We evaluate the adequacy of our third-party service providers’ cybersecurity measures through periodic due diligence and contractual obligations.  Despite these safeguards, disruptions to and breaches of our information technology systems or providers’ are possible and may negatively impact our business.

We cannot ensure that we will be able to identify, prevent or contain the effects of any future cyber attacks or other cybersecurity incidents 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.

We may be unable to attract and retain qualified employees.

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.

RISKS RELATED TO OUR PROPOSED MERGER

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

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

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Consummation of the Merger is subject to various conditions, including (i) approval by our Class A shareholders of the Merger; (ii) the receipt of required regulatory approvals, including from the Indiana Department of Insurance and the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iii) the absence of any law, injunction or order preventing or prohibiting the consummation of the Merger; (iv) the accuracy of representations and warranties subject to applicable materiality standards; (v) compliance with all covenants under the Merger Agreement and (vi) the absence of a material adverse effect. There can be no assurance that approval of our Class A shareholders will be obtained, that the other conditions to the consummation of the Merger will be satisfied or waived or that other events or circumstances will not intervene to delay or result in the termination of the Merger. Subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated by November 14, 2021. If the Merger is not consummated, the price of our common stock may change to the extent that the current market price of our common stock may reflect an assumption that the Merger will be consummated.

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

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

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

•
 
the attention of our management and our employees may be directed to Merger-related considerations and may be diverted from the day-to-day operations of our business;
 
•
 
our employees may experience uncertainty about their future roles with us, which might adversely affect our ability to retain and recruit key employees;
 
•
 
customers, suppliers or other parties with whom we maintain business relationships may experience uncertainty about our future and seek alternative relationships with third parties or seek to alter their business relationships with us; and
 
•
 
legal proceedings may be instituted against us, our directors and/or our officers with respect to the Merger.
 
In addition, we have incurred, and will continue to incur, significant costs, fees and expenses for professional services and other costs related to the Merger Agreement and the Merger, and many of these costs, fees and expenses are payable by us regardless of whether or not the Merger is consummated.

FINANCIAL AND LIQUIDITY RISKS

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 Company, Inc. ("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.  In connection with the Merger announcement with Progressive, A.M. Best placed our financial strength rating under review with positive implications on February 16, 2021.  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.

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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.

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.

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.

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LEGAL, REGULATORY AND PUBLIC POLICY RISKS

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.

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 49% of the outstanding shares of voting Class A Common Stock and approximately 25% 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.

Legal and regulatory proceedings are unpredictable and could produce one or more unexpected verdicts against us that could materially and adversely affect our financial results for any given period.

We are currently, and from time to time have been, involved in lawsuits, regulatory inquiries and other legal proceedings arising out of the ordinary course of business. Some of these proceedings may involve matters particular to Protective or one or more of our Insurance Subsidiaries, while others may pertain to business practices in the industry in which we operate. These matters often raise difficult factual and legal issues and are subject to uncertainties and complexities. The outcomes of these matters are difficult to predict, and the amounts or ranges of potential loss at particular stages in the proceedings are in most cases difficult or impossible to ascertain. A further complication is that even where the possibility of an adverse outcome is remote under traditional legal analysis, juries sometimes substitute their subjective views in place of facts and established legal principles. Given the unpredictability of the legal and regulatory landscape in which we operate, there can be no assurance that one or more of these matters will not produce a result that could materially and adversely affect our financial results for any given period.

For information about our pending legal proceedings, see Note T, “Litigation, Commitments and Contingencies,” of the notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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.

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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 a portion of 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

The information required with respect to this item can be found in Note T, "Litigation, Commitments and Contingencies," of the notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K and is incorporated by reference into this Item 3.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.

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INFORMATION ABOUT OUR EXECUTIVE OFFICERS

The following summary sets forth certain information concerning the Company's executive officers as of March 8, 2020:

Name
  
Age
  
Title
  
Served in Such Capacity Since
Jeremy D. Edgecliffe-Johnson
  
50
  
Chief Executive Officer
  
2019 (1)
John R. Barnett
  
53
  
Chief Financial Officer
  
2019 (2)
Bahr D. Omidfar
  
60
  
Chief Information Officer
  
2019 (3)
Jeremy F. Goldstein
  
49
  
Executive Vice President
  
2017 (4)
Patrick S. Schmiedt
  
40
  
Chief Underwriting Officer
  
2018 (5)

(1)
Mr. Edgecliffe-Johnson joined the Company in May 2019 as Chief Executive Officer.  Prior to joining the Company, Mr. Edgecliffe-Johnson served as President, U.S. Commercial of American International Group, Inc. (“AIG”) from February 2016 to December 2017, with responsibility for underwriting, operations, claims and distribution in the U.S., Canada, Brazil, Mexico and Puerto Rico.  He served as Chief Executive Officer and President of Lexington Insurance Company, AIG’s excess and surplus lines unit, from February 2013 to December 2017.  Mr. Edgecliffe-Johnson served in various executive leadership roles at AIG between 2000 and 2013, including Specialty Product Line Executive, U.S. & Canada; President of Cat Excess Liability; U.S. Executive for Energy Excess Casualty; and Regional Vice President for the Mid-Atlantic territory. Prior to joining AIG, Mr. Edgecliffe-Johnson served as a broker for Sedgwick, Inc. and Marsh, Inc.

(2)
Mr. Barnett joined the Company in September 2019 as Chief Financial Officer.  Prior to joining the Company, Mr. Barnett served as Chief Financial Officer and Executive Vice President of First Acceptance Corporation, a non-standard auto insurance underwriter (“First Acceptance”), since October 2018 and served as Senior Vice President, Finance of First Acceptance from May 2007 to March 2013.   Mr. Barnett’s responsibilities at First Acceptance included financial reporting, accounting, planning and analysis, investments, actuarial, and treasury operations.   From March 2013 to October 2018, Mr. Barnett served as Vice President, Finance of Broadcast Music, Inc., a music rights management company. Prior to his time at First Acceptance, Mr. Barnett served in various management and manufacturing roles during his career, including as Senior Manager, Planning and Analysis of Anheuser-Busch Companies from 1999 to 2007.

(3)
Mr. Omidfar joined the Company in September 2019 as Chief Information Officer.  Prior to joining the Company, Mr. Omidfar most recently served as Chief Technology Officer at CNA Financial Corporation from January 2018 to April 2019, where he developed, executed and led various initiatives, including the implementation of a new operating model; led strategic partnerships; and created a technology strategy and roadmap for the enterprise.  Mr. Omidfar served in various Senior Vice President roles with Fidelity Investments, Inc. from August 2013 until January 2018, including SVP, Technology and Software Security from May 2015 to January 2018, SVP, Quality Assurance Testing and Software Security from October 2014 to April 2015 and SVP, Quality Assurance and Testing from August 2013 to September 2014.  Mr. Omidfar also held roles at Rockwell Automation, Inc., Raytheon Company, Motorola, Inc., Deloitte LLP and Northrop Grumman Corporation and holds multiple certifications, including a Six Sigma Black Belt.

(4)
Mr. Goldstein was appointed 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 appointed 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.
24

PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES 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 March 8, 2021, there were approximately 28 record holders of Class A Common Stock and approximately 42 record holders of Class B Common Stock.

The Company has paid quarterly cash dividends continuously since 1974.  The Company paid a quarterly dividend of $0.10 per share during 2020.  In the first quarter of 2021, the Company declared a dividend of $0.10 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, 2020, $136.5 million, or 37.6% 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.

Period
  
Total number of
shares purchased (1)
    
Average price
paid per share
    
Total number of shares
purchased as part of publicly
announced plans or programs (2)
    
Maximum number of shares
that may yet be purchased
under the plans or programs (2)
  
October 1 - October 31, 2020
    
8,737
    
$
14.17
      
-
      
1,375,729
  
November 1 - November 30, 2020
    
-
              
-
      
1,375,729
  
December 1 - December 31, 2020
    
4,921
      
13.71
      
-
      
1,375,729
  
Total
    
13,658
              
-
          

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

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

25

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, 2015, in each of (i) Protective, (ii) the Russell 2000 Index and (iii) the PTVCB Peer Group.  All dividends are assumed to be reinvested.

graphic


  
Year Ended December 31
  
Index
  
2015
    
2016
    
2017
    
2018
    
2019
    
2020
  
Protective Insurance Corporation
  
$
100.00
    
$
109.25
    
$
108.82
    
$
79.54
    
$
78.68
    
$
68.98
  
Russell 2000 Index
    
100.00
      
121.31
      
139.08
      
123.76
      
155.35
      
186.36
  
PTVCB Peer Group
    
100.00
      
120.65
      
131.77
      
136.11
      
152.67
      
123.13
  

PTVCB Peer Group
Amerisafe, Inc.
  
Heritage Insurance Holdings, Inc.
Atlas Financial Holdings, Inc.
  
James River Group Holdings, Ltd.
Donegal 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.
HCI Group, Inc.
    

26

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, 2020.  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, 2020 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
  
   
2020
    
2019
    
2018
    
2017
    
2016
  
   
(Dollars in thousands, except per share data)
  
Gross premiums written
  
$
547,561
    
$
574,918
    
$
582,500
    
$
504,737
    
$
403,004
  
                                         
Net premiums earned
    
445,515
      
447,288
      
432,880
      
328,145
      
276,011
  
                                         
Net investment income
    
25,422
      
26,249
      
22,048
      
18,095
      
14,483
  
                                         
Net realized and unrealized gains (losses) on investments
    
(9,236
)
    
12,889
      
(25,691
)
    
19,686
      
23,228
  
                                         
Losses and loss expenses incurred
    
318,958
      
348,468
      
345,864
      
247,518
      
186,481
  
                                         
Net income (loss)
    
4,463
      
7,347
      
(34,075
)
    
18,323
      
28,945