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Section 1: 10-Q


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

  ☒
 QUARTERLY REPORT PRUSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2018
OR
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______ to ______   

Commission file number: 0-5534
 

 

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

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

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

Baldwin & Lyons, Inc.
(Former name, if changed since last report)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes           No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer", "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 ____ (Do not check if a smaller reporting company)
Smaller reporting company ____   Emerging growth company ____
 

 

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 1, 2018:

Common Stock, No Par Value:                  Class A (voting)                            2,622,809
                                                            Class B (non-voting)                   12,371,188
                                                                                                                    14,993,997




PART I – FINANCIAL INFORMATION


Protective Insurance Corporation and Subsidiaries
           
Unaudited Condensed Consolidated Balance Sheets
           
(in thousands, except share data)
           
             
   
June 30
   
December 31
 
   
2018
   
2017
 
Assets
           
Investments:
           
   Fixed maturities
 
$
576,388
   
$
521,853
 
   Equity securities
   
125,407
     
201,763
 
   Limited partnerships
   
65,442
     
70,806
 
   Short-term and other
   
1,000
     
1,000
 
     
768,237
     
795,422
 
                 
Cash and cash equivalents
   
75,952
     
64,680
 
Restricted cash and cash equivalents
   
6,853
     
4,033
 
Accounts receivable
   
108,145
     
87,551
 
Reinsurance recoverable
   
326,346
     
318,331
 
Other assets
   
102,736
     
80,061
 
Current federal income taxes recoverable
   
1,626
     
6,938
 
   
$
1,389,895
   
$
1,357,016
 
                 
Liabilities and shareholders' equity
               
Reserves for losses and loss expenses
 
$
716,281
   
$
680,274
 
Reserves for unearned premiums
   
65,535
     
53,085
 
Short-term borrowings
   
20,000
     
20,000
 
Accounts payable and other liabilities
   
178,612
     
170,488
 
Deferred federal income taxes
   
2,232
     
14,358
 
     
982,660
     
938,205
 
Shareholders' equity:
               
   Common stock-no par value:
               
   Class A voting -- authorized 3,000,000 shares;
               
      outstanding -- 2018 - 2,622,809; 2017 - 2,623,109
   
112
     
112
 
   Class B non-voting -- authorized 20,000,000 shares;
               
      outstanding -- 2018 - 12,379,561; 2017 - 12,423,518
   
528
     
530
 
   Additional paid-in capital
   
55,745
     
55,078
 
   Unrealized net gains (losses) on investments
   
(4,487
)
   
46,700
 
   Foreign exchange adjustment
   
(720
)
   
(309
)
   Retained earnings
   
356,057
     
316,700
 
     
407,235
     
418,811
 
   
$
1,389,895
   
$
1,357,016
 



See notes to condensed consolidated financial statements.
- 3 -



Protective Insurance Corporation and Subsidiaries
                       
Unaudited Condensed Consolidated Statements of Operations
                       
(in thousands, except per share data)
                       
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2018
   
2017
   
2018
   
2017
 
Revenues
                       
Net premiums earned
 
$
111,940
   
$
67,996
   
$
217,402
   
$
141,971
 
Net investment income
   
5,796
     
4,716
     
10,432
     
8,408
 
Commissions and other income
   
2,263
     
1,400
     
4,076
     
2,380
 
Net realized gains on investments, excluding impairment losses
   
915
     
2,565
     
1,290
     
3,573
 
Other-than-temporary impairment losses on investments
   
-
     
-
     
-
     
-
 
Net unrealized gains (losses) on equity securities and limited partnership investments
   
(4,350
)
   
731
     
(9,258
)
   
6,017
 
Net realized and unrealized gains (losses) on investments
   
(3,435
)
   
3,296
     
(7,968
)
   
9,590
 
     
116,564
     
77,408
     
223,942
     
162,349
 
                                 
Expenses
                               
Losses and loss expenses incurred
   
77,488
     
71,754
     
149,787
     
120,353
 
Other operating expenses
   
36,019
     
26,834
     
70,784
     
52,998
 
     
113,507
     
98,588
     
220,571
     
173,351
 
Income (loss) before federal income tax expense (benefit)
   
3,057
     
(21,180
)
   
3,371
     
(11,002
)
Federal income tax expense (benefit)
   
570
     
(8,837
)
   
554
     
(5,414
)
Net income (loss)
 
$
2,487
   
$
(12,343
)
 
$
2,817
   
$
(5,588
)
                                 
Per share data:
                               
Basic and diluted earnings (loss)
 
$
.17
   
$
(.82
)
 
$
.19
   
$
(.37
)
                                 
    Dividends paid to shareholders
 
$
.28
   
$
.27
   
$
.56
   
$
.54
 
                                 
Reconciliation of shares outstanding:
                               
   Average shares outstanding - basic
   
15,014
     
15,122
     
15,012
     
15,122
 
   Dilutive effect of share equivalents
   
9
     
-
     
9
     
-
 
   Average shares outstanding - diluted
   
15,023
     
15,122
     
15,021
     
15,122
 


See notes to condensed consolidated financial statements.
 
- 4 -


Protective Insurance Corporation and Subsidiaries
                       
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
             
(in thousands)
                       
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2018
   
2017
   
2018
   
2017
 
                         
Net income (loss)
 
$
2,487
   
$
(12,343
)
 
$
2,817
   
$
(5,588
)
                                 
Other comprehensive income (loss), net of tax:
                               
Unrealized net gains (losses) on fixed income securities:
                               
Unrealized net gains (losses) arising during the period
   
(1,051
)
   
5,147
     
(4,050
)
   
11,137
 
Less: reclassification adjustment for net gains
                               
included in net income (loss)
   
975
     
1,667
     
1,097
     
2,322
 
     
(2,026
)
   
3,480
     
(5,147
)
   
8,815
 
                                 
Foreign currency translation adjustments
   
(188
)
   
388
     
(411
)
   
453
 
                                 
Other comprehensive income (loss)
   
(2,214
)
   
3,868
     
(5,558
)
   
9,268
 
                                 
Comprehensive income (loss)
 
$
273
   
$
(8,475
)
 
$
(2,741
)
 
$
3,680
 



See notes to condensed consolidated financial statements.

- 5 -

 

Protective Insurance Corporation and Subsidiaries
           
Unaudited Condensed Consolidated Statements of Cash Flows
           
(in thousands)
           
   
Six Months Ended
 
   
June 30
 
   
2018
   
2017
 
 
           
Operating activities
           
   Net income (loss)
 
$
2,817
   
$
(5,588
)
   Adjustments to reconcile net income to net cash provided by operating activities
   
21,857
     
28,752
 
Net cash provided by operating activities
   
24,674
     
23,164
 
                 
Investing activities
               
   Purchases of fixed maturities and equity securities
   
(215,226
)
   
(231,601
)
   Purchases of limited partnership interests
   
(450
)
   
-
 
   Distributions from limited partnerships
   
369
     
15,398
 
   Proceeds from maturities
   
37,590
     
83,484
 
   Proceeds from sales of fixed maturities
   
102,408
     
121,708
 
   Proceeds from sales of equity securities
   
87,557
     
16,626
 
   Purchase of insurance company-owned life insurance
   
(10,000
)
   
-
 
   Purchases of property and equipment
   
(2,691
)
   
(3,534
)
   Proceeds from disposals of property and equipment
   
8
     
580
 
Net cash provided by (used in) investing activities
   
(435
)
   
2,661
 
                 
Financing activities
               
   Dividends paid to shareholders
   
(8,456
)
   
(8,174
)
   Repurchase of common shares
   
(1,280
)
   
-
 
Net cash used in financing activities
   
(9,736
)
   
(8,174
)
                 
   Effect of foreign exchange rates on cash and cash equivalents
   
(411
)
   
453
 
                 
Increase in cash, cash equivalents and restricted cash
   
14,092
     
18,104
 
Cash, cash equivalents and restricted cash at beginning of period
   
68,713
     
62,976
 
Cash, cash equivalents and restricted cash at end of period
 
$
82,805
   
$
81,080
 
                 



 
See notes to condensed consolidated financial statements.
- 6 -

Notes to Unaudited Condensed Consolidated Financial Statements
(All dollar amounts presented in these notes are in thousands, except per share data)

(1) Summary of Significant Accounting Policies:

Description of Business:  Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (the "Company"), based in Carmel, Indiana, is a property-casualty insurer specializing in marketing and underwriting property, liability and workers compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors.  In addition, the Company offers workers' compensation coverage for a variety of operations outside the transportation industry.  The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

Effective August 1, 2018, the Company changed its name to Protective Insurance Corporation to better align its operational and market identities to reflect its position within the transportation and workers' compensation insurance industry.

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  Interim financial statements should be read in conjunction with the Company's annual audited financial statements and other disclosures included in the Company's most recent Annual Report on Form 10-K.  Operating results for interim periods are not necessarily indicative of results that may be expected for the year ending December 31, 2018 or any other future period.

Investments:  Carrying amounts for fixed maturity securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available.  Equity securities are carried at quoted market prices (fair value).  The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership's net income.  To the extent the limited partnerships include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its condensed consolidated statements of operations, its proportionate share of the investee's unrealized, as well as realized, investment gains or losses within net unrealized gains (losses) on equity securities and limited partnership investments.

Short-term and other investments are carried at cost, which approximates their fair values.

Realized gains and losses on disposals of investments are recorded on the trade date and are determined by the specific identification of the cost of investments sold and are included in income.
- 7 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
 
Fixed maturity securities are considered to be available-for-sale. The related unrealized net gains or losses (net of applicable tax effects) on fixed maturity securities are reflected directly in shareholders' equity. Included within available-for-sale fixed maturity securities are convertible debt securities.  A portion of the changes in the fair values of convertible debt securities is reflected as a component of net realized gains on investments, excluding impairment losses within the condensed consolidated statements of operations.  Equity securities are recorded at fair value, with unrealized net gains or losses reflected as a component of net unrealized gains (losses) on equity securities and limited partnership investments within the condensed consolidated statements of operations.

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

The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security.  The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the appropriate effective interest rate.

Revenue Recognition:  For our non-fully-insured contracts, we had no material contract assets, contract liabilities or deferred contract costs recorded on our condensed consolidated balance sheet at June 30, 2018. For the three and six months ended June 30, 2018, revenue recognized from performance obligations related to prior periods, such as due to changes in transaction price, was not material. For contracts that have an original expected duration of greater than one year, revenue expected to be recognized in future periods related to unfulfilled contractual performance obligations and contracts with variable consideration related to undelivered performance obligations is not material.

Recently Adopted Accounting Pronouncements:  In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's commission and fee income, other than that directly associated with insurance contracts, is subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the first quarter of 2018. The Company adopted the new guidance as of January 1, 2018. The adoption of the new guidance did not have a material impact on the Company's condensed consolidated financial statements.
 
- 8 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 changed the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income.  Previously, the Company's equity securities were classified as available-for-sale and changes in fair value were recognized in accumulated other comprehensive income (loss) as a component of shareholders' equity.  ASU 2016-01 became effective for interim and annual reporting periods beginning after December 15, 2017.  The Company adopted the new guidance as of January 1, 2018 using the modified retrospective approach and recorded a cumulative-effect adjustment to reclassify unrealized gains on equity securities of $71,012 ($46,157, net of tax) from other comprehensive income (loss) to retained earnings within the current period condensed consolidated balance sheet.  Going forward, unrealized gains or losses on equity securities will be recognized in the condensed consolidated statements of operations within net unrealized gains (losses) on equity securities and limited partnership investments.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. ASU 2016-15 became effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the new guidance as of January 1, 2018. The adoption of the new guidance did not have a material impact on the Company's condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update amends Accounting Standards Codification ("ASC") Topic 230 to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance was applied retrospectively and is effective for annual periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted the new guidance as of January 1, 2018 and reclassified $4.0 million of restricted cash as of December 31, 2017 to the beginning cash balance within the condensed consolidated statement of cash flows. The adoption of the new guidance did not have a material impact on the Company's condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU allows for the option to reclassify, from accumulated other comprehensive income (loss) to retained earnings, stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act"), which was enacted on December 22, 2017. The legislation included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.  The Company adopted the new guidance in the first quarter of 2018 and recorded a cumulative-effect adjustment to reclassify the tax effects on fixed maturity investments of $117 from other comprehensive income (loss) to retained earnings within the current period condensed consolidated balance sheet.
 
- 9 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Recently Issued Accounting Pronouncements:  In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02.  Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840, Leases.  Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis.  Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.  The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements.  The Company does not expect the adoption of ASU 2016-02 to have a material impact on the Company's consolidated financial statements.

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

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04.  This amendment removes Step 2 of the goodwill impairment test under current guidance.  The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value.  ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted.  The Company does not expect the guidance to have a material impact on its consolidated financial statements.

- 10 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(2) Investments:
The following is a summary of available-for-sale securities at June 30, 2018 and December 31, 2017:

 
                         
Net
 
 
       
Cost or
   
Gross
   
Gross
   
Unrealized
 
 
 
Fair
   
Amortized
   
Unrealized
   
Unrealized
   
Gains
 
 
 
Value
   
Cost
   
Gains
   
Losses
   
(Losses)
 
June 30, 2018 1
                             
Fixed maturities
                             
   Agency collateralized mortgage obligations
 
$
14,961
   
$
14,480
   
$
646
   
$
(165
)
 
$
481
 
   Agency mortgage-backed securities
   
33,708
     
34,459
     
12
     
(763
)
   
(751
)
   Asset-backed securities
   
51,454
     
50,994
     
689
     
(229
)
   
460
 
   Bank loans
   
20,202
     
20,127
     
204
     
(129
)
   
75
 
   Certificates of deposit
   
3,122
     
3,124
     
-
     
(2
)
   
(2
)
   Collateralized mortgage obligations
   
5,135
     
4,789
     
369
     
(23
)
   
346
 
   Corporate securities
   
212,059
     
216,496
     
716
     
(5,153
)
   
(4,437
)
   Mortgage-backed securities
   
30,954
     
30,475
     
940
     
(461
)
   
479
 
   Municipal obligations
   
48,327
     
48,468
     
296
     
(437
)
   
(141
)
   Non-U.S. government obligations
   
38,602
     
39,681
     
191
     
(1,270
)
   
(1,079
)
   U.S. government obligations
   
117,864
     
118,975
     
-
     
(1,111
)
   
(1,111
)
      Total fixed maturities
 
$
576,388
   
$
582,068
   
$
4,063
   
$
(9,743
)
 
$
(5,680
)


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

1 Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale.  Prior periods have not been restated to conform to the current presentation.  See Note 1 – Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements for further discussion.
 
- 11 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table summarizes, for available-for-sale fixed maturities in an unrealized loss position at June 30, 2018 and available-for-sale fixed maturities and equity securities in an unrealized loss position at December 31, 2017, respectively, the aggregate fair value and gross unrealized loss categorized by the duration individual securities have been continuously in an unrealized loss position.


 
 
June 30, 2018
   
December 31, 2017
 
 
 
Number of Securities
   
Fair Value
   
Gross Unrealized Loss
   
Number of Securities
   
Fair Value
   
Gross Unrealized Loss
 
Fixed maturity securities:
                                   
12 months or less
   
542
   
$
419,376
   
$
(7,862
)
   
459
   
$
313,421
   
$
(2,683
)
Greater than 12 months
   
101
     
58,200
     
(1,881
)
   
112
     
75,638
     
(2,155
)
Total fixed maturities
   
643
     
477,576
     
(9,743
)
   
571
     
389,059
     
(4,838
)
 
                                               
Equity securities 1:
                                               
12 months or less
   
-
     
-
     
-
     
65
     
46,654
     
(2,218
)
Greater than 12 months
   
-
     
-
     
-
     
-
     
-
     
-
 
Total equity securities
   
-
     
-
     
-
     
65
     
46,654
     
(2,218
)
Total fixed maturity and equity securities
   
643
   
$
477,576
   
$
(9,743
)
   
636
   
$
435,713
   
$
(7,056
)


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

The fair value and the cost or amortized costs of fixed maturity investments at June 30, 2018, by contractual maturity, are shown below.  Actual maturities may ultimately differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.

   
Fair Value
   
Cost or Amortized Cost
 
             
One year or less
 
$
48,916
   
$
49,514
 
Excess of one year to five years
   
303,116
     
307,337
 
Excess of five years to ten years
   
87,208
     
89,044
 
Excess of ten years
   
2,531
     
2,590
 
   Contractual maturities
   
441,771
     
448,485
 
Asset-backed securities
   
134,617
     
133,583
 
Total
 
$
576,388
   
$
582,068
 


- 12 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Following is a summary of the components of net realized and unrealized gains (losses) on investments for the periods presented in the accompanying condensed consolidated statements of operations.


 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30
   
June 30
 
 
 
2018
   
2017
   
2018
   
2017
 
Gross gains on available-for-sale investments sold during the period:
                       
Fixed maturities
 
$
3,691
   
$
4,804
   
$
6,134
   
$
5,692
 
Equity securities1
   
-
     
2,892
     
-
     
4,498
 
Total gains
   
3,691
     
7,696
     
6,134
     
10,190
 
 
                               
Gross losses on available-for-sale investments sold during the period:
                               
Fixed maturities
 
$
(3,088
)
   
(4,776
)
 
$
(5,796
)
   
(6,149
)
Equity securities1
   
-
     
(355
)
   
-
     
(468
)
Total losses
   
(3,088
)
   
(5,131
)
   
(5,796
)
   
(6,617
)
 
                               
Other-than-temporary impairments
   
-
     
-
     
-
     
-
 
 
                               
Change in value of limited partnership investments
   
(2,842
)
   
731
     
(5,445
)
   
6,017
 
 
                               
Gains (losses) on equity securities:
                               
Realized gains on equity securities sold during the period 2
   
312
     
-
     
953
     
-
 
Unrealized losses on equity securities held at the end of the period
   
(1,508
)
   
-
     
(3,814
)
   
-
 
Realized and unrealized losses on equity securities held at the end of the period
   
(1,196
)
   
-
     
(2,861
)
   
-
 
 
                               
Net realized and unrealized gains (losses) on investments
 
$
(3,435
)
 
$
3,296
   
$
(7,968
)
 
$
9,590
 

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

2 During the three and six months ended June 30, 2018, the Company sold $27,800 and $87,557 in equity securities, resulting in a realized gain of $9,990 and $45,128, respectively.  The majority of this gain was included in unrealized gains within other comprehensive income at December 31, 2017 and, as a result of the adoption of ASU 2016-01, was reclassified to retained earnings as of January 1, 2018 and was therefore not recognized in the condensed consolidated statements of operations for the three and six months ended June 30, 2018.


Shareholders' equity at June 30, 2018 included approximately $35,635, net of federal income tax expense, of reported earnings, that remain undistributed by limited partnerships.


- 13 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(3) Reinsurance:
The following table summarizes the Company's transactions with reinsurers for the 2018 and 2017 comparative periods.

   
2018
   
2017
 
Three months ended June 30:
           
   Premiums ceded to reinsurers
 
$
28,800
   
$
45,791
 
   Losses and loss expenses
               
      ceded to reinsurers
   
21,975
     
52,396
 
   Commissions from reinsurers
   
6,443
     
6,387
 
                 
Six months ended June 30:
               
   Premiums ceded to reinsurers
 
$
61,241
   
$
77,099
 
   Losses and loss expenses
               
      ceded to reinsurers
   
48,636
     
71,870
 
   Commissions from reinsurers
   
14,323
     
13,795
 


(4) Loss and Loss Expense Reserves:
Activity in the reserves for losses and loss expenses for the six months ended June 30, 2018 and 2017 is summarized as follows.  All amounts are shown net of reinsurance, unless otherwise indicated.

   
2018
   
2017
 
Reserves, gross of reinsurance
           
    recoverable, at the beginning of the year
 
$
680,274
   
$
576,330
 
Reinsurance recoverable on unpaid losses at the beginning of the year
   
308,143
     
251,563
 
Reserves at the beginning of the year
   
372,131
     
324,767
 
                 
Provision for losses and loss expenses:
               
   Claims occurring during the current period
   
151,462
     
103,666
 
   Claims occurring during prior periods
   
(1,675
)
   
16,687
 
   Total incurred
   
149,787
     
120,353
 
                 
Loss and loss expense payments:
               
   Claims occurring during the current period
   
28,903
     
23,548
 
   Claims occurring during prior periods
   
88,965
     
84,628
 
   Total paid
   
117,868
     
108,176
 
Reserves at the end of the period
   
404,050
     
336,944
 
                 
Reinsurance recoverable on unpaid losses at the end of the period
   
312,231
     
290,781
 
Reserves, gross of reinsurance
               
    recoverable, at the end of the period
 
$
716,281
   
$
627,725
 


The table above shows a roll-forward of loss and loss expense reserves from the prior year end to the current balance sheet date with comparable prior year information.  Losses incurred from claims occurring during prior years reflect the development from prior accident years, composed of individual claim savings and deficiencies which, in the aggregate, have resulted from the settlement of claims at amounts higher or lower than previously reserved and from changes in estimates of losses incurred but not reported.

The $1,675 prior accident year savings that developed during the six months ended June 30, 2018 was largely due to favorable loss development in workers' compensation and independent contractor coverages.  This 2018 savings compares to a deficiency of $16,687 for the six months ended June 30, 2017 related to prior year reserve strengthening due to unfavorable development from prior year claims, particularly from infrequent, but severe loss events during the second quarter of 2017.
 
- 14 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(5) Segment Information:
The Company has one reportable business segment in its operations: Property and Casualty Insurance.  The property and casualty insurance segment provides multiple lines of insurance coverage primarily to fleet transportation companies as well as to independent contractors who contract with fleet transportation companies.  In addition, the Company provides workers' compensation coverage for a variety of classes outside the transportation industry.

The following table summarizes segment revenues for the three and six months ended June 30, 2018 and 2017:

   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2018
   
2017
   
2018
   
2017
 
                         
Revenues:
                       
Net premiums earned
 
$
111,940
   
$
67,996
   
$
217,402
   
$
141,971
 
Net investment income
   
5,796
     
4,716
     
10,432
     
8,408
 
Net realized and unrealized gains (losses) on investments
   
(3,435
)
   
3,296
     
(7,968
)
   
9,590
 
Commissions and other income
   
2,263
     
1,400
     
4,076
     
2,380
 
Total revenues
 
$
116,564
   
$
77,408
   
$
223,942
   
$
162,349
 


(6) Debt:
The Company maintains a revolving line of credit with a $40,000 limit and an expiration date of September 23, 2018.  Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company's option.  Outstanding drawings on this line of credit were $20,000 as of both June 30, 2018 and December 31, 2017.  At June 30, 2018, the effective interest rate was 3.18%.  The Company has $20,000 remaining and unused under the line of credit at June 30, 2018.  The current outstanding borrowings were used for general corporate purposes. 

(7) Taxes:
As of June 30, 2018, the Company's calendar years 2016, 2015 and 2014 remain subject to examination by the Internal Revenue Service.

The effective federal tax rate on consolidated income for the three months ended June 30, 2018 was 18.6% compared to 41.7% on consolidated loss for the three months ended June 30, 2017.  The effective federal tax rate on consolidated income for the six months ended June 30, 2018 was 16.4% compared to 49.2% on consolidated loss for the six months ended June 30, 2017.

The effective federal income tax rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.  The decrease also reflects the reduced federal corporate income tax rate as a result of the enactment of the U.S. Tax Act in December 2017.  The Company continues to analyze the different aspects of the U.S. Tax Act, which could potentially affect the provisional estimates that were recorded at December 31, 2017.

During the six months ended June 30, 2018, the Company paid $6,000 in cash taxes.
 
- 15 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

As of June 30, 2018:
                       
                         
Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Fixed maturities:
                       
Agency collateralized mortgage obligations
 
$
14,961
   
$
-
   
$
14,961
   
$
-
 
Agency mortgage-backed securities
   
33,708
     
-
     
33,708
     
-
 
Asset-backed securities
   
51,454
     
-
     
51,454
     
-
 
Bank loans
   
20,202
     
-
     
20,202
     
-
 
Certificates of deposit
   
3,122
     
3,122
     
-
     
-
 
Collateralized mortgage obligations
   
5,135
     
-
     
5,135
     
-
 
Corporate securities
   
206,291
     
-
     
206,291
     
-
 
Options embedded in convertible securities
   
5,768
     
-
     
5,768
     
-
 
Mortgage-backed securities
   
30,954
     
-
     
30,954
     
-
 
Municipal obligations
   
48,327
     
-
     
48,327
     
-
 
Non-U.S. government obligations
   
38,602
     
-
     
38,602
     
-
 
U.S. government obligations
   
117,864
     
-
     
117,864
     
-
 
      Total fixed maturities
   
576,388
     
3,122
     
573,266
     
-
 
Equity securities:
                               
Consumer
   
25,000
     
25,000
     
-
     
-
 
Energy
   
7,240
     
7,240
     
-
     
-
 
Financial
   
37,243
     
37,243
     
-
     
-
 
Industrial
   
13,144
     
13,144
     
-
     
-
 
Technology
   
4,129
     
4,129
     
-
     
-
 
Funds (e.g. mutual funds, closed end funds, ETFs)
   
27,908
     
22,873
     
5,035
     
-
 
Other
   
10,743
     
10,743
     
-
     
-
 
      Total equity securities
   
125,407
     
120,372
     
5,035
     
-
 
Short-term
   
1,000
     
1,000
     
-
     
-
 
Cash equivalents
   
73,600
     
-
     
73,600
     
-
 
Total
 
$
776,395
   
$
124,494
   
$
651,901
   
$
-
 


- 16 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
 
As of December 31, 2017:
                       
                         
Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Fixed maturities:
                       
Agency collateralized mortgage obligations
 
$
16,586
   
$
-
   
$
16,586
   
$
-
 
Agency mortgage-backed securities
   
27,075
     
-
     
27,075
     
-
 
Asset-backed securities
   
43,469
     
-
     
43,469
     
-
 
Bank loans
   
19,488
     
-
     
19,488
     
-
 
Certificates of deposit
   
3,135
     
3,135
     
-
     
-
 
Collateralized mortgage obligations
   
6,492
     
-
     
6,492
     
-
 
Corporate securities
   
193,058
     
-
     
193,058
     
-
 
Options embedded in convertible securities
   
5,291
     
-
     
5,291
     
-
 
Mortgage-backed securities
   
24,204
     
-
     
24,204
     
-
 
Municipal obligations
   
96,650
     
-
     
96,650
     
-
 
Non-U.S. government obligations
   
37,394
     
-
     
37,394
     
-
 
U.S. government obligations
   
49,011
     
-
     
49,011
     
-
 
      Total fixed maturities
   
521,853
     
3,135
     
518,718
     
-
 
Equity securities:
                               
Consumer
   
46,578
     
46,578
     
-
     
-
 
Energy
   
10,278
     
10,278
     
-
     
-
 
Financial
   
45,470
     
45,470
     
-
     
-
 
Industrial
   
25,402
     
25,402
     
-
     
-
 
Technology
   
13,061
     
13,061
     
-
     
-
 
Funds (e.g. mutual funds, closed end funds, ETFs)
   
50,291
     
45,276
     
5,015
     
-
 
Other
   
10,683
     
10,683
     
-
     
-
 
      Total equity securities
   
201,763
     
196,748
     
5,015
     
-
 
Short-term
   
1,000
     
1,000
     
-
     
-
 
Cash equivalents
   
59,173
     
-
     
59,173
     
-
 
Total
 
$
783,789
   
$
200,883
   
$
582,906
   
$
-
 


Level inputs, as defined by the FASB guidance, are as follows:

Level Input:
  
Input Definition:
     
Level 1
  
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
     
Level 2
  
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
     
Level 3
  
Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.


 
- 17 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The Company does not have any Level 3 fair value assets at June 30, 2018.  A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the six months ended June 30, 2018 and for the year ended December 31, 2017:

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


Quoted market prices are obtained whenever possible.  Where quoted market prices are not available, fair values are estimated using broker/dealer quotes for specific securities.  These techniques are significantly affected by the Company's assumptions, including discount rates and estimates of future cash flows.  Potential taxes and other transaction costs have not been considered in estimating fair values.
Transfers between levels, if any, are recorded as of the beginning of the reporting period.  There were no significant transfers of assets between Level 1 and Level 2 during the six months ended June 30, 2018 and 2017.
In addition to the preceding disclosures on assets recorded at fair value in the condensed consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the condensed consolidated balance sheets.
Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures.  Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value of the Company.  The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument.

Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to carry the investment at its proportionate share of the limited partnership's equity.   The underlying assets of the Company's investments in limited partnerships are carried primarily at fair value, and, therefore, the Company's carrying value of limited partnerships approximates fair value.  As these investments are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level 3.
 
- 18 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's condensed consolidated balance sheets at June 30, 2018 and December 31, 2017 is as follows:

   
Carrying
   
Fair Value
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                               
June 30, 2018
                             
Assets:   Limited partnerships
 
$
65,442
   
$
-
   
$
-
   
$
65,442
   
$
65,442
 
Liabilities:   Short-term borrowings
   
20,000
     
-
     
20,000
     
-
     
20,000
 
                                         
December 31, 2017
                                       
Assets:   Limited partnerships
   
70,806
     
-
     
-
     
70,806
     
70,806
 
Liabilities:   Short-term borrowings
   
20,000
     
-
     
20,000
     
-
     
20,000
 


(9) Stock Based Compensation:
The Company issues shares of restricted Class B common stock to the Company's outside directors, which serve as the annual retainer compensation for the outside directors.  The shares are distributed to the outside directors on the vesting date, which, with the exception of pro-rated annual retainers granted to outside directors, is one year following the date of grant.  The table below provides detail of the restricted stock issuances to directors for 2017 and 2018:

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

Compensation expense related to the above stock grants is recognized over the period in which the directors render services.
 
- 19 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In May 2017, the Company's Compensation Committee granted equity-based awards pursuant to the Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan"), which was approved by the Company's shareholders at the 2017 Annual Meeting of Shareholders.  Certain participants under the Long-Term Incentive Plan were granted performance-based equity awards (the "2017 LTIP Awards"), with the number of shares of Class B common stock earned pursuant to such award determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 2017 growth in net premiums earned and the Company's 2017 combined ratio.  The combined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating expenses, less commission and other income to (B) net premiums earned.  No 2017 LTIP Awards were earned based on the Company's performance in 2017, and therefore no shares were issued pursuant to the 2017 LTIP Awards.  In addition to the 2017 LTIP Awards, in May 2017 the Company's Compensation Committee also granted Value Creation Incentive Plan awards (the "2017 VCIP Awards") to certain participants under the Long-Term Incentive Plan.  The 2017 VCIP Awards are performance-based equity awards that will be earned based on the Company's cumulative operating income over a three-year performance period from January 1, 2017 through December 31, 2019 relative to an operating income goal for the period set by the Compensation Committee in March 2017.  For the purpose of the 2017 VCIP Awards, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments.  Any 2017 VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B common stock at the end of the three-year performance period, but no later than March 15, 2020.  No shares are eligible to be issued under the 2017 VCIP Awards as of June 30, 2018.

In March 2018, the Company's Compensation Committee granted equity-based awards pursuant to the Company's Long-Term Incentive Plan.  Certain participants under the Long-Term Incentive Plan were granted equity awards (the "2018 LTIP Awards"), with the number of shares of Class B common stock earned pursuant to such award determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 2018 growth in gross premiums earned and the Company's 2018 combined ratio, as defined above.  Any 2018 LTIP Awards earned by the Company's named executive officers ("NEOs") will be paid in shares of restricted Class B common stock at the end of the 2018 annual performance period and will vest one year from the date of issue.  Any 2018 LTIP Awards earned by non-NEOs will be paid in shares of restricted Class B common stock at the end of the 2018 annual performance period and will vest ratably over a three-year period from the date of issue.  In addition to the 2018 LTIP Awards, in March 2018 the Company's Compensation Committee also granted Value Creation Incentive Plan awards (the "2018 VCIP Awards") to certain participants under the Long-Term Incentive Plan.  The 2018 VCIP Awards are performance-based equity awards that will be earned based on the Company's cumulative operating income, as defined above, over a three-year performance period from January 1, 2018 through December 31, 2020 relative to an operating income goal for the period set by the Compensation Committee in March 2018.  Any 2018 VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B common stock at the end of the three-year performance period, but no later than March 15, 2021.  The Company recorded $657 of expense related to these awards during the six months ended June 30, 2018.

(10) Litigation, Commitments and Contingencies:
In the ordinary, regular and routine course of their business, the Company and its insurance subsidiaries are frequently involved in various matters of litigation relating principally to claims for insurance coverage provided.  No currently pending matter is deemed by management to be material to the Company.

- 20 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(11) Shareholders' Equity:
Changes in common stock outstanding and additional paid-in-capital are as follows:


                             
Additional
 
       
Class A
         
Class B
       
Paid-in
 
   
Shares
     
Amount
   
Shares
   
Amount
   
Capital
 
Balance at December 31, 2017
   
2,623,109
 
 
 
$
112
     
12,423,518
 
 
$
530
   
$
55,078
 
   Restricted stock grants
   
-
 
 
   
-
     
10,128
 
   
-
     
901
 
   Repurchase of common shares
   
(300
)
     
-
     
(54,085
   
(2
)
   
(234
)
Balance at June 30, 2018
   
2,622,809
     
$
112
     
12,379,561
   
$
528
   
$
55,745
 


During the six months ended June 30, 2018, the Company paid $1,280 to repurchase 300 shares of Class A and 54,085 shares of Class B common stock under a share repurchase program approved by its Board of Directors on August 31, 2017.

The change in equity for the six months ended June 30, 2018 was as follows:


   
Total equity
 
Balance at December 31, 2017
 
$
418,811
 
Net income
   
2,817
 
Other comprehensive loss
   
(5,558
)
Cash dividends paid to shareholders
   
(8,456
)
Restricted stock grants
   
901
 
Repurchase of common shares
   
(1,280
)
Balance at June 30, 2018
 
$
407,235
 


The change in equity for the six months ended June 30, 2017 was as follows:


   
Total equity
 
Balance at December 31, 2016
 
$
404,345
 
Net income
   
(5,588
)
Other comprehensive income
   
9,268
 
Cash dividends paid to shareholders
   
(8,174
)
Restricted stock grants
   
920
 
Balance at June 30, 2017
 
$
400,771
 



- 21 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table illustrates changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2018:

         
Unrealized
       
         
holding gains on
       
   
Foreign
   
available-for-sale
       
   
Currency
   
securities
   
Total
 
                   
Beginning balance at December 31, 2017
 
$
(309
)
 
$
46,700
   
$
46,391
 
                         
Cumulative effect of adoption of
                       
      ASU 2016-01, net of tax
   
-
     
(46,157
)
   
(46,157
)
                         
Balance at January 1, 2018
   
(309
)
   
543
     
234
 
                         
Cumulative effect of adoption of
                       
      ASU 2018-02
   
-
     
117
     
117
 
   Other comprehensive loss
                       
      before reclassifications
   
(411
)
   
(4,050
)
   
(4,461
)
   Amounts reclassified from
                       
      accumulated other
                       
      comprehensive income (loss)
   
-
     
(1,097
)
   
(1,097
)
                         
Net current-period other
                       
   comprehensive loss
   
(411
)
   
(5,147
)
   
(5,558
)
                         
Ending balance at June 30, 2018
 
$
(720
)
 
$
(4,487
)
 
$
(5,207
)


The following table illustrates changes in accumulated other comprehensive income by component for the six months ended June 30, 2017:

         
Unrealized
       
         
holding gains on
       
   
Foreign
   
available-for-sale
       
   
Currency
   
securities
   
Total
 
                   
Beginning balance
 
$
(831
)
 
$
34,051
   
$
33,220
 
                         
   Other comprehensive income
                       
      before reclassifications
   
453
     
11,137
     
11,590
 
                         
   Amounts reclassified from
                       
      accumulated other
                       
      comprehensive income (loss)
   
-
     
(2,322
)
   
(2,322
)
                         
Net current-period other
                       
   comprehensive income
   
453
     
8,815
     
9,268
 
                         
Ending balance
 
$
(378
)
 
$
42,866
   
$
42,488
 



- 22 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(12) Related Parties:
 
The Company has invested in three limited partnerships with an aggregate estimated value of $40,508 at June 30, 2018 that are managed by organizations in which one director of the Company is an executive officer and owner.  The Company's ownership interest in these limited partnerships at June 30, 2018 was 6% for New Vernon India Fund, 37% for New Vernon Global Opportunity Fund and 27% for New Vernon Global Opportunity Fund II.  For the six months ended June 30, 2018 and 2017 the Company recorded $372 and $363 of fees related to the management of these limited partnership investments.

The Company utilizes the services of an investment firm of which one director of the Company is a partial owner.  These investment firms manage equity securities and fixed maturity portfolios with an aggregate market value of approximately $23,880 at June 30, 2018.  Total commissions and net fees earned by the investment firms and affiliates on these portfolios were $54 and $44 for the six months ended June 30, 2018 and 2017.

(13) Subsequent Events:
On August 7, 2018, the Board of Directors of Protective Insurance Corporation declared a regular quarterly dividend of $0.28 per share on the Company's Class A and Class B Common Stock.  The dividend per share will be payable September 4, 2018 to shareholders of record on August 21, 2018.

Effective August 1, 2018, the Company changed its name to Protective Insurance Corporation to better align its operational and market identities to reflect its position within the transportation and workers' compensation insurance industry.


- 23 -

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

Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) ("Protective," "we," "us" or "the Company") is a property-casualty insurer specializing in marketing and underwriting property, liability and workers compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors.  Additionally, we offer workers' compensation coverage for a variety of operations outside the transportation industry.  We operate as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

Effective August 1, 2018, we changed our name to Protective Insurance Corporation to better align our operational and market identities to reflect our position within the transportation and workers' compensation insurance industry.

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

On December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act lowered the U.S. corporate income rate from 35% to 21% effective January 1, 2018.

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


Liquidity and Capital Resources

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

We generally experience positive cash flow from operations.  Premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims.  Operating costs of our property/casualty insurance subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, average less than one-third of net premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided and the timing of the claim payments. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues.  Our cash flow relating to premiums is significantly affected by reinsurance programs in effect, whereby the Company cedes both premium and risk to other insurance and reinsurance companies.  These programs vary significantly among products and certain contracts call for reinsurance payment patterns, which do not coincide with the collection of premiums by us from our insureds.
 
- 24 -


On August 31, 2017, our Board of Directors authorized the reinstatement of our share repurchase program for up to 2,464,209 shares of our Class A or Class B common stock.  The repurchases may be made in the open market or through privately negotiated transactions, from time-to-time, and in accordance with applicable laws, rules and regulations. On June 18, 2018, we entered into a stock repurchase plan for the purpose of repurchasing up to $17.0 million of shares of our common stock, at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Rule 10b5-1 Plan"). The Rule 10b5-1 Plan was established pursuant to, and as part of, our share repurchase program and permits shares to be repurchased in accordance with pre-determined criteria when repurchases would otherwise be prohibited, such as during self-imposed blackout periods, or under insider trading laws. The Rule 10b5-1 plan expires on August 9, 2018. The share repurchase program may be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on hand. The actual number and value of the shares to be purchased will depend on the performance of our stock price, market volume and other market conditions.  During the six months ended June 30, 2018, we paid $1.3 million to repurchase 300 shares of Class A and 54,085 shares of Class B common stock under the share repurchase program.

For several years, our investment philosophy has emphasized the purchase of short-term bonds with high quality and liquidity.  Our fixed income investment portfolio continues to emphasize shorter-duration instruments. If there was a hypothetical increase in interest rates of 100 basis points, the price of our bonds at June 30, 2018 would be expected to fall by approximately 2.6%.  The credit quality of our fixed income securities remains high with a weighted average rating of A+, including cash.  The average contractual life of our fixed maturity and short-term investment portfolio increased slightly to 5.1 years at June 30, 2018 compared to 4.9 years at December 31, 2017.  The average duration of our fixed maturity portfolio remains much shorter than both the contractual maturity average and the duration of our liabilities.  We also remain an active participant in the equity securities market using capital in excess of amounts considered necessary to fund our current operations.  The long-term horizon for our equity investments allows us to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus.  Investments made by our domestic property/casualty insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners (the "NAIC"), which are designed to provide protection for both policyholders and shareholders.
Net cash flows from operations increased $1.5 million to $24.7 million during the six months ended June 30, 2018 compared to net cash flows from operations of $23.2 million for the six months ended June 30, 2017.  The increase in operating cash flow was mainly due to higher premium volume during the six months ended June 30, 2018.
 
- 25 -


Net cash used in investing activities was $0.4 million for the six months ended June 30, 2018 compared to net cash provided by investing activities of $2.7 million for the six months ended June 30, 2017.  The $3.1 million change was primarily the result of lower distributions from limited partnerships and lower proceeds from maturities and sales of our fixed income securities during the six months ended June 30, 2018 and the purchase of $10.0 million of company-owned life insurance in the first quarter of 2018, partially offset by higher proceeds from sales of our equity investments and lower purchases of fixed maturities and equity securities.

Net cash used in financing activities for the six months ended June 30, 2018 consisted of regular cash dividend payments to shareholders of $8.5 million ($0.56 per share) and $1.3 million to repurchase shares of our Class A and B common stock. Financing activities for the six months ended June 30, 2017 consisted solely of the regular cash dividend payments to shareholders of $8.2 million ($0.54 per share).

Our assets at June 30, 2018 included $73.6 million of investments included within cash and cash equivalents on the condensed consolidated balance sheets that are readily convertible to cash without market penalty and an additional $48.9 million of fixed maturity investments maturing in less than one year.  We believe these liquid investments, plus the expected cash flow from premium collections, are more than sufficient to provide for projected claim payments and operating cost demands.  In the event competitive conditions produce inadequate premium rates and we choose to further restrict volume, the liquidity of our investment portfolio would permit us to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time.  In addition, our reinsurance program is structured to avoid significant cash outlays that accompany large losses.

We maintain a revolving line of credit with a $40.0 million limit and an expiration date of September 23, 2018.  Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at our option.  Outstanding drawings on this line of credit were $20.0 million as of both June 30, 2018 and December 31, 2017.  At June 30, 2018, the effective interest rate was 3.18%, and we had $20.0 million remaining under the line of credit as of June 30, 2018.  Our revolving line of credit has three financial covenants, each of which were met as of June 30, 2018.  The three financial covenants relate to a minimum Generally Accepted Accounting Principles ("GAAP") net worth, a minimum statutory surplus and a minimum A.M. Best rating.

Annualized net premiums written by our insurance subsidiaries for the second quarter of 2018 equaled approximately 106% of the combined statutory surplus of these subsidiaries, a level consistent with higher premiums written.  Premium writings of up to 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities.  Further, the statutory capital of each of our insurance subsidiaries substantially exceeded minimum risk based capital requirements set by the NAIC as of June 30, 2018.  Accordingly, we have the ability to significantly increase our business without seeking additional capital to meet regulatory guidelines.

Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of our insurance subsidiaries.  As such, there are statutory restrictions on the transfer of substantial portions of this equity to the parent company.  At June 30, 2018, $69.1 million may be transferred by dividend or loan to the parent company during the remainder of 2018 without approval by, or prior notification to, regulatory authorities.  An additional $254.3 million of shareholders' equity of our insurance subsidiaries could be advanced or loaned to the parent company with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical.  We believe these restrictions pose no material liquidity concerns to us.  We also believe the financial strength and stability of our insurance subsidiaries would permit access by the parent company to short-term and long-term sources of credit when needed.  The parent company had cash and marketable securities valued at $6.3 million at June 30, 2018.


- 26 -

Results of Operations

Comparison of Second Quarter 2018 to Second Quarter 2017

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


   
2018
   
2017
   
Change
 
                   
Gross Premiums Written
 
$
142,270
   
$
119,007
   
$
23,263
 
Net Premiums Written
   
114,254
     
72,707
     
41,547
 
Net Premiums Earned
   
111,940
     
67,996
     
43,944
 


Gross premiums written during the second quarter of 2018 increased $23.3 million (19.5%), while net premiums earned increased $43.9 million (64.6%), as compared to the second quarter of 2017.  The higher gross premiums written and net premiums earned were the result of continued growth in our commercial automobile and workers' compensation products in both our retail and program distribution channels.  The difference in the percentage change for premiums written compared to earned is reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.
 
Premiums ceded to reinsurers on our insurance business averaged 19.7% of gross premiums written for the second quarter of 2018 compared to 38.9% in the second quarter of 2017.  The percentage of premiums ceded decreased as a result of changes in our reinsurance structure. In the third quarter of 2017, management lowered the quota share rate on the Company's Workers Compensation premiums to reflect growing profitability and confidence in this book of business. The Company also restructured its Commercial Auto reinsurance treaty, moving away from variable premium ceded rates (based on loss performance), to a flat ceding arrangement with no material changes to the economic risks taken for these products (i.e. ceded losses will decrease by a similar amount as ceded premiums).
 
- 27 -


The outsized change in net premiums earned, compared to growth in gross premiums written, was also impacted by variable premium adjustment provisions in our historical commercial automobile reinsurance treaties.  Our historical reinsurance structure, which was revised in the past two reinsurance renewals, causes an adjustment to premiums ceded when the ultimate loss estimate changes for a reinsurance treaty year. During the second quarter of 2017, the Company had reserve strengthening that resulted in the Company ceding additional premium from prior treaty years.

Net investment income for the second quarter of 2018 increased 22.9% to $5.8 million compared to $4.7 million for the second quarter of 2017. The increase reflected higher interest rates, which lead to higher reinvestment yields for our short-duration fixed income portfolio and an increase in average funds invested resulting from positive cash flow.  After-tax investment income increased by 38.2% to $4.7 million during the second quarter of 2018, compared to $3.4 million during the 2017 second quarter, reflecting the aforementioned higher interest rates and reinvestment yield environment in addition to the lower tax rate as a result of the U.S. Tax Act.

Net realized and unrealized losses on investments of $3.4 million during the second quarter of 2018 were primarily driven by a $2.8 million decrease in the value of our limited partnership investments and $1.5 million in unrealized losses on equity securities during the period, which are now recorded in the condensed consolidated statements of operations in conjunction with our adoption of ASU 2016-01.  These losses were partially offset by net realized gains on sales of securities of $0.9 million.  During the second quarter of 2018, we sold $27.8 million in equity securities resulting in a realized gain of $10.0 million.  The majority of this gain was included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, was reclassified to retained earnings as of January 1, 2018 and not recognized in the condensed consolidated statements of operations for the second quarter of 2018.  These equity sales further solidified the conservative nature of our high quality, short-duration investment portfolio; opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and were accretive to income, given the increase in yields at the shorter end of the yield curve.  Comparative second quarter 2017 net realized investment gains were $3.3 million, consisting primarily of $2.6 million in net realized gains from sales of securities and $0.7 million in gains reported from our investments in limited partnerships.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

Losses and loss expenses incurred during the second quarter of 2018 increased $5.7 million (8.0%) compared to the second quarter of 2017. The loss ratio, however, decreased to 69.2% during the second quarter of 2018 compared to a loss ratio of 105.5% during the second quarter of 2017 as a result of higher net earned premiums in the current period and significant reserve strengthening in the second quarter of 2017 that did not recur. The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned.  The second quarter of 2017 loss ratio reflected significant unfavorable loss experience as well as $16.6 million in prior year reserve strengthening due to unfavorable development from prior year claims, particularly from infrequent, but severe loss events during the second quarter of 2017.
 
- 28 -


Other operating expenses for the second quarter of 2018 increased $9.2 million, or 34.2%, from the second quarter of 2017.  The increase in other operating expenses was primarily due to increased commission expenses as a result of increased premiums written and higher salary and benefit expense.  The ratio of consolidated other operating expenses less commissions and other income to net premiums earned was 30.2% during the second quarter of 2018 compared to 37.4% for the 2017 second quarter. The decrease in the ratio was primarily related to higher net premiums earned in the second quarter of 2018 compared to the second quarter of 2017, in addition to reinsurance impacts in the second quarter of 2017 as discussed above.

Income tax expense was $0.6 million for the second quarter of 2018 compared to an income tax benefit of $8.8 million for the second quarter of 2017. The effective tax rate for the second quarter of 2018 was 18.6%. The effective federal income tax rate in the current year differed from the normal statutory rate primarily as a result of tax-exempt investment income.  The decrease also reflects the reduced federal corporate income tax rate as a result of the enactment of the U.S. Tax Act in December 2017.  We continue to analyze the different aspects of the U.S. Tax Act, which could potentially affect the provisional estimates that were recorded at December 31, 2017.

As a result of the factors mentioned above, and primarily the increase in net premiums earned in the second quarter of 2018 and the reserve strengthening in the second quarter of 2017 that did not recur in the second quarter of 2018, net income increased $14.8 million during the second quarter of 2018 as compared to the second quarter of 2017.


Comparison of Six Months Ended June 30, 2018 to Six Months Ended June 30, 2017

The following table provides information regarding premiums written and earned for the six months ended June 30 (dollars in thousands):


   
2018
   
2017
   
Change
 
                   
Gross Premiums Written
 
$
291,093
   
$
229,035
   
$
62,058
 
Net Premiums Written
   
227,688
     
150,237
     
77,451
 
Net Premiums Earned
   
217,402
     
141,971
     
75,431
 


Gross premiums written during the six months ended June 30, 2018 increased $62.1 million (27.1%), while net premiums earned increased $75.4 million (53.1%), as compared to the same period in 2017.  The higher gross premiums written and net premiums earned were the result of continued growth in our commercial automobile and workers' compensation products in both our retail and program distribution channels.  The difference in the percentage change for premiums written compared to earned was reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.
 
- 29 -

 
Premiums ceded to reinsurers on our insurance business averaged 21.8% of gross premiums written for the six months ended June 30, 2018 compared to 34.4% for the same period of 2017. The percentage of premiums ceded to reinsurance decreased as a result of changes in the Company's reinsurance structure.  In the third quarter of 2017, management lowered the quota share rate on our Workers Compensation premiums to reflect growing profitability and confidence in this book of business. We also restructured our Commercial Auto reinsurance treaty, moving away from variable premium ceded rates (based on loss performance), to a flat ceding arrangement with no material changes to the economic risks taken for these products (i.e. ceded losses will decrease by a similar amount as ceded premiums).

The outsized change in net premiums earned, compared to growth in gross premiums written, was also impacted by variable premium adjustment provisions in our historical commercial automobile reinsurance treaties.  Our historical reinsurance structure, which was revised in the past two reinsurance renewals, causes an adjustment to premiums ceded when the ultimate loss estimate changes for a reinsurance treaty year.  During the six months ended June 30, 2017, the Company had reserve strengthening that resulted in the Company ceding additional premium from prior treaty years.

Net investment income for the six months ended June 30, 2018 increased 24.1% to $10.4 million compared to $8.4 million in the same period of 2017. The increase reflects higher interest rates, leading to higher reinvestment yields for our short-duration fixed income portfolio and an increase in average funds invested resulting from positive cash flow.  After-tax investment income increased by 40.0% to $8.4 million during the six months ended June 30, 2018, compared to $6.0 million during the same period of 2017, reflecting the aforementioned higher interest rates and reinvestment yield environment.  

Net realized and unrealized losses on investments of $8.0 million during the six months ended June 30, 2018 were driven by a $5.4 million decrease in the value of our limited partnership investments and $3.8 million in unrealized losses on equity securities during the period, which are now recorded in the condensed consolidated statements of operations in conjunction with our adoption of ASU 2016-01. These losses were partially offset by net realized gains on sales of fixed income and equity securities of $1.2 million during the six months ended June 30, 2018.  During the six months ended June 30, 2018, we sold $87.6 million in equity securities resulting in a realized gain of $45.1 million.  The majority of this gain was included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, was reclassified to retained earnings as of January 1, 2018 and not recognized in the condensed consolidated statements of operations for the six months ended June 30, 2018.  Comparative six months ended June 30, 2017 net realized investment gains were $9.6 million, consisting primarily of $6.0 million in gains reported from our investments in limited partnerships and $3.6 million in net realized gains from sales of securities.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

Losses and loss expenses incurred during the six months ended June 30, 2018 increased $29.4 million (24.5%) compared to the same period of 2017. The loss ratio, however, decreased to 68.9% for the six months ended June 30, 2018, compared to a loss ratio of 84.8% during the same period of 2017 as a result of higher net earned premiums in the current period and significant reserve strengthening in the 2017 period that did not recur. The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned.  The six months ended June 30, 2017 loss ratio reflected significant unfavorable loss experience as well as $16.7 million in prior year reserve strengthening due to unfavorable development from prior year claims, particularly from infrequent, but severe loss events in addition to a number of severe public transportation losses.
 
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Other operating expenses for the six months ended June 30, 2018 increased $17.8 million, or 33.6%, compared to the same period of 2017.  The increase in other operating expenses was primarily due to increased commission expenses as a result of increased premiums written and higher salary and benefit expense.  The ratio of consolidated other operating expenses less commissions and other income to net premiums earned was 30.7% during the six months ended June 30, 2018 compared to 35.7% for the same period of 2017. The decrease in the ratio was primarily related to higher net premiums earned in the six months ended June 30, 2018 compared to the same period of 2017, in addition to reinsurance impacts in the six months ended June 30, 2017 as discussed above.

Income tax expense was $0.6 million for the six months ended June 30, 2018 compared to an income tax benefit of $5.4 million for the same period of 2017. The effective tax rate for the six months ended June 30, 2018 was 16.4%. The effective federal income tax rate in the current year differed from the normal statutory rate primarily as a result of tax-exempt investment income. The decrease also reflects the reduced federal corporate income tax rate as a result of the enactment of the U.S. Tax Act in December 2017.  We continue to analyze the different aspects of the U.S. Tax Act, which could potentially affect the provisional estimates that were recorded at December 31, 2017.

As a result of the factors mentioned above, and primarily the increase in net premiums earned in the six months ended June 30, 2018 and the reserve strengthening in the six months ended June 30, 2017 that did not recur in the six months ended June 30, 2018, net income increased $8.4 million during the six months ended June 30, 2018 as compared to the same period of 2017.


Forward-Looking Information

The disclosures in this Form 10-Q contain "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995). All statements, trend analyses and other information contained in this Form 10-Q relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "may," "target," "anticipate," "believe," "plan," "estimate," "expect," "intend," "project," and other similar expressions, constitute forward-looking statements.

Investors are cautioned that such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements, many of which are difficult to predict and generally beyond our control.  Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.  Investors are also urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the factors that affect our business, including "Risk Factors" set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and our reports filed with the U.S. Securities and Exchange Commission 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.
 
- 31 -


Factors that could contribute to these differences include, among other things:
general economic conditions, including weakness of the financial markets, prevailing interest rate levels and stock and credit market performance, which may affect or continue to affect (among other things) our ability to sell our products and to collect amounts due to us, our ability to access capital resources and the costs associated with such access to capital and the market value of our investments;
our ability to obtain adequate premium rates and manage our growth strategy;
increasing competition in the sale of our insurance products and services resulting from the entrance of new competitors into, or the expansion of the operations of existing competitors in, our markets and our ability to retain existing customers;
other changes in the markets for our insurance products;
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;
technology or network security disruptions;
adequacy of insurance reserves;
availability of reinsurance and ability of reinsurers to pay their obligations;
our ability to attract and retain qualified employees;
tax law and accounting changes; and
legal actions brought against us.
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  You should read that information in conjunction with this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q.


Critical Accounting Policies

There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2017.


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Concentrations of Credit Risk

Our insurance subsidiaries cede portions of their gross premiums to numerous reinsurers under quota share and excess of loss treaties as well as facultative placements.  These reinsurers assume commensurate portions of the risk of loss covered by the contracts.  As losses are reported and reserved, portions of the gross losses attributable to reinsurers are established as receivable assets and losses incurred are reduced.  At June 30, 2018, amounts due from reinsurers on paid and unpaid losses were estimated to total approximately $312 million.  Because of the large policy limits reinsured by us, the ultimate amount of incurred but not reported losses and loss adjustment expenses attributable to reinsurers could vary significantly from the estimate provided; however, absent the inability to collect from reinsurers, such variance would not result in changes in net claim losses incurred by us.


Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.


 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other than as set forth below, there have been no material changes in the Company's exposure to market risk since the disclosure in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Interest Rate Risk
We are exposed to interest rate risk on our fixed maturity investments. Given the anticipated duration of our liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, a 100 to 200 basis point increase in interest rates would not have a material impact on our ability to conduct daily operations or to meet our obligations and could result in significantly higher investment income in a relatively short period of time, as short-term investments and maturing bonds could be reinvested in higher yielding securities very quickly.


- 33 -


The table below summarizes our interest rate risk by illustrating the sensitivity of the fair value of our securities as of June 30, 2018 to selected hypothetical changes in interest rates.

 
 
Fair Value
   
Estimated Change in Fair Value
 
 
 
in thousands
 
200 basis point increase
 
$
542,965
   
$
(33,423
)
100 basis point increase
   
559,677
     
(16,711
)
Current fair value
   
576,388
     
-
 
100 basis point decrease
   
592,886
     
16,498
 
200 basis point decrease
   
609,251
     
32,863
 

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

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation as of June 30, 2018 under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the "Exchange Act". Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded the disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms; and (b) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company noted no change in its internal control over financial reporting that occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
- 34 -


PART II – OTHER INFORMATION


ITEM 1A. RISK FACTORS

In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of the Company's common stock, you should carefully review and consider the information contained in the Company's other reports and periodic filings that it makes with the Securities and Exchange Commission, including, without limitation, the information contained under the caption Part I, Item 1A "Risk Factors" in its Annual Report on Form 10-K for the year ended December 31, 2017. Those risk factors could materially affect the Company's business, financial condition and results of operations. There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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


Issuer Purchases of Equity Securities

   
Total number of shares purchased
   
Average price paid per share
   
Total number of shares purchased under the program (1)
   
Remaining shares available to be purchased under the program (1)
 
April 1 – April 30
   
-
   
$
-
     
-
     
2,368,749
 
May 1 – May 31
   
15,234
     
23.11
     
15,234
     
2,353,515
 
June 1 – June 30
   
28,651
     
24.16
     
28,651
     
2,324,864
 
Total
   
43,885
             
43,885
         

(1) On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B common stock.  Pursuant to this share repurchase program, the Company entered into a Rule 10b5-1 plan on June 18, 2018, which authorizes the repurchase of up to $17.0 million of the Company's outstanding common shares, at various pricing thresholds.  No duration has been placed on the Company's share repurchase program, and the Company reserves the right to discontinue it at any time.

 
ITEM 5.  OTHER INFORMATION.

On August 7, 2018, the Company filed Amended and Restated Articles of Incorporation with the Indiana Secretary of State, which combined into one document the Company's Amended Articles of Incorporation and all amendments to such Amended Articles of Incorporation approved by the Board of Directors and the Company's shareholders as of such date. A copy of the Amended and Restated Articles of Incorporation are filed with this Quarterly Report on Form 10-Q as Exhibit 3.1.



- 35 -

ITEM 6 (a)  EXHIBITS

INDEX TO EXHIBITS

Table of Regulation of S-K Item 601
 
 
 
Exhibit No.
Amended and Restated Articles of Incorporation of Protective Insurance Corporation
 
 
 
EXHIBIT 3.1
Filed herewith
 
 
Severance, Confidentiality, Non-competition and Non-solicitation Agreement, dated May 10, 2018, by and between the Company and W. Randall Birchfield
 
 
EXHIBIT 10.1
Filed herewith
 
 
Severance, Confidentiality, Non-competition and Non-solicitation Agreement, dated June 22, 2018, by and between the Company and Matthew A. Thompson
 
 
EXHIBIT 10.2
Filed herewith
 
 
Severance Pay Release and Waiver of Rights, dated February 15, 2018, by and between the Company and Michael J. Case
 
 
 
EXHIBIT 10.3
Filed herewith
 
 
Certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
EXHIBIT 31.1
Certification of CEO
 
 
Certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
EXHIBIT 31.2
Certification of CFO
 
 
Certification of CEO and CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
EXHIBIT 32
Certification of CEO and CFO
 
 
(101)
The following materials from Protective Insurance Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (Loss), (4) the Condensed Consolidated Statements of Cash Flows, and (5) the Notes to Unaudited Condensed Consolidated Financial Statements.
 


- 36 -

 
SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.