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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

 

 

(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

(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:

                                                            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.

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.

 

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.

 

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.

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.

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.

 

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.

 

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.

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

 

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

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.

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.

 

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.

 

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			$	-

 

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.

 

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.

 

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.

 

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.

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

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	)