UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
OR
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-5534
PROTECTIVE INSURANCE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Indiana
(State or Other Jurisdiction of Incorporation or Organization)
35-0160330
(I.R.S. Employer Identification No.)
111 Congressional Boulevard, Carmel, Indiana
(Address of Principal Executive Offices)
46032
(Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
Securities registered pursuant to Section 12(b) of the Act:
(Title of class)
Class A Common Stock, No Par Value
Class B Common Stock, No Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange on which Registered
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒
No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2
of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The aggregate market value of Class A and Class B Common Stock held by non-affiliates of the Registrant as of June 29, 2018, based on the closing trade prices
on that date, was approximately $265,014,000.
The number of shares outstanding of each of the issuer's classes of common stock as of March 1, 2019:
Common Stock, No Par Value:
Class A (voting)
Class B (nonvoting)
2,615,339
12,234,130
14,849,469
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2019 are incorporated by reference into Part III of this Annual
Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
The disclosures in this Form 10-K contain "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995). All
statements, trend analyses and other information contained in this Form 10-K relative to markets for our products and trends in our operations or financial results,
as well as other statements including words such as "may," "target," "anticipate," "believe," "plan," "estimate," "expect," "intend," "project," and other similar
expressions, constitute forward-looking statements.
Investors are cautioned that such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that
could cause actual results to differ materially from such forward-looking statements, many of which are difficult to predict and generally beyond our control.
Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Investors are also urged to carefully
review and consider the various disclosures made by us, which attempt to advise interested parties of the factors that affect our business, including " Risk
Factors
"
set forth in Part I, Item 1A hereof and our reports filed with the U.S. Securities and Exchange Commission, or SEC, from time to time. Except to the extent
otherwise required by federal securities laws, we do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances
after the date hereof.
Factors that could contribute to these differences include, among other things:
●
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general economic conditions, including weakness of the financial markets, prevailing interest rate levels and stock and credit market performance, which
may affect or continue to affect (among other things) our ability to sell our products and to collect amounts due to us, our ability to access capital
resources and the costs associated with such access to capital and the market value of our investments;
our ability to obtain adequate premium rates and manage our growth strategy;
increasing competition in the sale of our insurance products and services resulting from the entrance of new competitors into, or the expansion of the
operations of existing competitors in, our markets and our ability to retain existing customers;
other changes in the markets for our insurance products;
the impact of technological advances, including those specific to the transportation industry;
changes in the legal or regulatory environment, which may affect the manner in which claims are adjusted or litigated, including loss and loss adjustment
expense;
legal or regulatory changes or actions, including those relating to the regulation of the sale, underwriting and pricing of insurance products and services
and capital requirements;
the impact of a downgrade in our financial strength rating;
technology or network security disruptions or breaches;
adequacy of insurance reserves;
availability of reinsurance and ability of reinsurers to pay their obligations;
our ability to attract and retain qualified employees and to successfully complete our Chief Executive Officer transition;
tax law and accounting changes; and
legal actions brought against us.
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in
Part I, Item 1A, " Risk
Factors
" of this Annual Report on Form 10-K. You should read that information in conjunction with " Management's
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations"
in Part II, Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and
related notes in Part II, Item 8 of this Annual Report on Form 10-K.
- 2 -
Item 1. BUSINESS
PART I
Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (referred to herein as "Protective") was incorporated under the laws of the State of Indiana in
1930. Through its subsidiaries, Protective engages in marketing and underwriting property, liability and workers' compensation coverage for trucking and public
transportation fleets, as well as coverage for trucking industry independent contractors. In addition, Protective offers workers' compensation coverage for a variety
of operations outside the transportation industry.
Protective’s principal subsidiaries are:
1. Protective Insurance Company (referred to herein as "Protective Insurance Co."), which is licensed by insurance authorities in all 50 states, the District of
Columbia, all Canadian provinces and Puerto Rico;
2. Protective Specialty Insurance Company (referred to herein as "Protective Specialty"), which is currently approved for excess and surplus lines business
by insurance authorities in 48 states and the District of Columbia and licensed in Indiana;
3. Sagamore Insurance Company (referred to herein as "Sagamore"), which is licensed by insurance authorities in 49 states and the District of Columbia and
approved for excess and surplus lines business in one additional state;
4. B&L Brokerage Services, Inc. (referred to herein as "BLBS"), an Indiana-domiciled insurance broker licensed in all 50 states and the District of
Columbia; and
5. B&L Insurance, Ltd. (referred to herein as "BLI"), which is domiciled and licensed in Bermuda.
Protective Insurance Co., Protective Specialty, Sagamore and BLI are collectively referred to herein as the "Insurance Subsidiaries." The "Company", "we", "us"
and "our", as used herein, refer to Protective and all of its subsidiaries unless the context clearly indicates otherwise.
As is a common practice in the property and casualty insurance industry, the Insurance Subsidiaries share or "cede" portions of their gross premiums written with
several non-affiliated reinsurers under excess of loss and quota-share treaties covering predetermined groups of risks and by facultative (individual policy-by-
policy) placements. Reinsurance is ceded to spread the risk of loss from individual claims or groups of claims among several reinsurers and is an integral part of
the Company's business.
In 2018, the Insurance Subsidiaries primarily served the commercial automobile market, although the Insurance Subsidiaries continue to support previously written
policies in specialty markets for which the Company has discontinued writing business and these operations are in run-off. The Company expects targeted growth
to occur in its core business of commercial automobile and workers' compensation.
The Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017. During 2016 and prior years,
the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a single reportable segment based on how
its operating results are regularly reviewed by its chief operating decision maker when making decisions about how resources are to be allocated to the segment
and assessing its performance.
Product Lines
Commercial
Automobile
The Insurance Subsidiaries provide coverage for larger companies in the motor carrier industry that retain substantial amounts of self-insurance, for independent
contractors utilized by trucking companies, for medium-sized and small trucking companies on a first dollar or deductible basis, and for public livery concerns,
principally covering fleets of commercial buses and taxis. This group of products is collectively referred to as commercial automobile. Large fleet trucking
products are marketed both directly to commercial automobile clients and also through relationships with non-affiliated brokers and specialized agents. Products
for small and intermediate fleets and independent contractors are marketed through relationships with non-affiliated brokers and specialized agents. In some cases,
the Insurance Subsidiaries will provide customized product offerings to specific markets through partnerships with brokers or program administrators. In most
cases, the Company's commercial automobile policies are written on an "occurrence" basis. This means that the Company may be liable for claims that occurred
when its policy was in place with an insured, regardless of when those claims are reported to the Company, and it may take months or even years for claims to be
reported to the Company.
- 3 -
The principal types of commercial automobile insurance marketed by the Insurance Subsidiaries are:
Specialized accident (medical and indemnity) insurance for independent contractors in the trucking industry;
● Commercial motor vehicle liability, physical damage and general liability insurance;
● Workers' compensation insurance;
●
● Non-trucking motor vehicle liability insurance for independent contractors;
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●
Fidelity and surety bonds; and
Inland Marine insurance consisting principally of cargo insurance.
The Insurance Subsidiaries also perform a variety of additional services, primarily for the Company's insureds, including risk surveys and analyses, safety program
design and monitoring, government compliance assistance, loss control and cost studies and research, development, and consultation in connection with new
insurance programs, including development of systems to assist customers in monitoring their accident data. The Company also provides claims handling services,
primarily to excess clients with self-insurance programs.
Workers'
Compensation
The Insurance Subsidiaries provide workers' compensation insurance for the commercial automobile industry, primarily to employees of motor carriers or
independent contractors providing services in the transportation industry. In 2017, the Company began marketing workers' compensation coverage beyond
commercial automobile clients to a variety of non-transportation operations, such as light manufacturing, restaurants, retailers, and professional services on both a
first-dollar and deductible basis. Non-transportation workers' compensation insurance is marketed through relationships with non-affiliated brokers and specialized
agents. In addition, the Company has developed customized non-transportation workers' compensation programs, which are marketed through non-affiliated agent
partners. In most cases, the Company's workers' compensation policies are written on an "occurrence" basis. This means that the Company may be liable for
claims that occurred when its policy was in place with an insured, regardless of when those claims are reported to the Company, and it may take months or even
years for claims to be reported to the Company.
Discontinued
Products
●
Reinsurance
Assumptions
In the first quarter of 2016, the Company discontinued its reinsurance assumed professional liability line of products. These products are in run-off but
continued earning premiums in 2017 and 2018 . Prior to that, the Company accepted cessions and retrocessions from selected insurance and reinsurance
companies, providing reinsurance coverage for both property and casualty events. Participation in reinsurance markets fluctuated based on market
conditions for these products. The Company's reinsurance assumed policies were written on both an "occurrence" basis and a "claims-made" basis.
Under claims-made policies, the Company was generally only liable for claims when a policy was in place with its insured; however, the Company was
potentially liable for claims reported to it, even if the claim event occurred before it had a policy in place with the insured.
●
Professional
Liability
In the fourth quarter of 2016, the Company discontinued its professional liability line of products. Prior to that, the Company marketed a variety of
professional liability products through wholesale and retail agents on both an admitted and surplus lines basis throughout the United States, specializing in
smaller insureds. In most cases, the Company's professional liability policies were written on a "claims-made" basis.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses incurred on average comprise approximately two-thirds of the Company's operating expenses.
The Company's consolidated balance sheets as of December 31, 2018 and 2017 set forth in Part II, Item 8 of this Annual Report on Form 10-K include the
estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Insurance Subsidiaries before the application of reinsurance credits (gross
reserves). The liabilities for losses and LAE are determined using case basis evaluations and statistical projections and represent estimates of the Company's
ultimate exposure for all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effects of trends in claim severity
and frequency and are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary. Such
adjustments, either positive or negative, are reflected in current operations as recorded.
- 4 -
The Company's reserves for losses and loss expenses are determined based on evaluations of individual reported claims and by actuarial estimation processes using
historical experience, current economic information and, when necessary, available industry statistics. "Case basis" loss reserves are evaluated on an individual
case-by-case basis by experienced claims adjusters using established Company guidelines and are monitored by claims management. Additionally, "bulk" reserves
are established for (1) those losses which have occurred but have not yet been reported to the Company ("incurred but not reported" claims), (2) provisions for any
possible deficiencies in the case reserving process and (3) the expected external and internal costs to fully settle each claim, also referred to as LAE. Common
actuarial methods are employed in the establishment of bulk reserves using Company historical loss data, consideration of changes in the Company's business and
study of current economic trends affecting ultimate claims costs. LAE reserves include amounts ultimately allocable to individual claims as well as amounts
required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. Historical analyses of the ratio of LAE to
losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the LAE reserve needs relative to the
established loss reserves. Each of these reserve categories contains elements of uncertainty, which assures variability when compared to the ultimate costs to settle
the underlying claims for which the reserves are established. For a more detailed discussion of the three categories of reserves, see "Loss and Loss Expense
Reserves" under the caption, " Critical
Accounting
Policies
" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," of this Annual Report on Form 10-K.
After giving effect to treaty and facultative reinsurance arrangements, the Company's maximum exposure to loss from a single occurrence for the vast majority of
risks insured (those with policy limits of $5 million or less) is approximately:
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$0.25 million to $1.3 million for policies written between July 3, 2016 and July 2, 2017, and
$0.8 million to $4.1 million for policies written on or after July 3, 2017.
However, for certain losses (those with policy limits up to $10 million) the maximum exposure could be as high as:
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$2.5 million for policies written between July 3, 2016 and July 2, 2017, and
$8.0 million for policies written on or after July 3, 2017.
The change in the Company's single occurrence loss exposure described above (from a range of $0.25 million to $2.5 million in 2016, to a range of $0.8 million to
$8.0 million in 2017) is offset by a change in the reinsurance structure for these risks. As of July 3, 2017, the Company no longer utilizes sliding scale ceding
premium provisions in its reinsurance arrangements for these risks, instead utilizing a flat ceding premium percentage.
The economic exposure from a single claim occurrence remains relatively consistent year-over-year; however, under the current flat ceding premium provision,
more of the economic exposure will flow through loss expense moving forward, whereas in prior periods, utilizing the sliding scale ceding premium provisions,
more of the economic exposure was reflected in lower net premiums earned. For both periods discussed above, the Company has limited economic exposure for
losses occurring in treaty years that have loss and allocated LAE ratios greater than approximately 83.0%.
The Company is a cedent under numerous reinsurance treaties covering its product lines. Treaties are typically written on an annual basis, each with its own
renewal date. However, treaty terms may occasionally be agreed to for periods beyond one year. Treaty renewals are expected to largely continue to occur
annually in the foreseeable future. Because losses from certain of the Company's products can experience delays in being reported and can take years to settle,
losses reported to the Company in the current year may be covered by a number of older reinsurance treaties with higher or lower net loss exposures than those
provided by current treaty provisions.
- 5 -
The table below sets forth a reconciliation of beginning and ending loss and LAE liability balances for 2018, 2017 and 2016. This table includes reserves, net of
reinsurance recoverable, to correspond with the presentation in the Company's consolidated statements of operations, but also includes a reconciliation of
beginning and ending loss and LAE liability, gross of reinsurance recoverable, as presented in the Company's consolidated balance sheets. All amounts are shown
net of reinsurance, unless otherwise indicated.
2018
2017
2016
Reserves, gross of reinsurance recoverable, at the beginning of the year
Reinsurance recoverable on unpaid losses at the beginning of the year
Reserves at the beginning of the year
$
$
680,274
308,143
372,131
$
576,330
251,563
324,767
Provision for losses and loss expenses:
Claims occurring during the current year
Claims occurring during prior years
Total incurred losses and loss expenses
Loss and loss expense payments:
Claims occurring during the current year
Claims occurring during prior years
Total paid
Reserves at the end of the year
329,078
16,786
345,864
84,738
143,853
228,591
489,404
228,303
19,215
247,518
67,234
132,920
200,154
372,131
Reinsurance recoverable on unpaid losses at the end of the year
Reserves, gross of reinsurance recoverable, at the end of the year
375,935
865,339
$
308,143
680,274
$
$
513,596
211,843
301,753
172,645
13,836
186,481
54,239
109,228
163,467
324,767
251,563
576,330
The reconciliation above shows the Company's estimate of net losses on 2017 and prior accident years is approximately $16.8 million higher at December 31, 2018
than was provided in loss reserves at December 31, 2017 (referred to as a "reserve deficiency"). This compares to a $19.2 million reserve deficiency on prior
accident years in 2017 and a $13.8 million reserve deficiency reported in 2016 related to prior accident years.
The following table is a summary of the 2018 calendar year reserve deficiency by accident year (dollars in thousands):
Years in Which Losses Were Incurred
2017
2016
2015
2014
2013
2012 and prior
Reserve at
December 31,
2017
(Savings)
Deficiency
Recorded
During 2018
(1)
$
161,069 $
66,652
34,530
30,129
22,423
57,328
(8,902)
4,259
9,707
11,970
(1,382)
1,134
% (Savings)
Deficiency
(5.5)%
6.4%
28.1%
39.7%
(6.2)%
2.0%
$
372,131 $
16,786
4.5%
(1) Consists of development on cases known at December 31, 2017, losses reported which were previously unknown at December 31, 2017 (incurred but not
reported), unallocated loss expense paid related to accident years 2017 and prior changes in the reserves for incurred but not reported losses and loss expenses.
The savings shown in accident year 2017 in the table above reflect favorable loss development in both short-tail lines of business, such as physical damage, and the
Company's independent contractor products (including non-trucking liability, occupational accident and workers' compensation). The deficiencies in accident
years 2014-2016 are largely the result of several severe transportation losses. The Company took action in all accident years to reflect new trends in loss
development for commercial automobile products that have emerged over the last three years. These actions included case reserving reviews, as well as actuarial
product reviews, and resulted in the reserve strengthening noted during the last three years.
Bulk loss reserves are established to provide for potential future adverse development on cases known to the Company and for cases unknown at the reserve date.
Changes in the reserves for incurred but not reported losses and loss expenses occur based upon information received on known and newly reported cases during
the current year and the effect of that development on the application of standard actuarial methods used by the Company.
- 6 -
The Company continues to incorporate more recent loss development data into its loss reserving formulae; however, the dynamic nature of losses associated with
the commercial automobile business, as well as the timing of settlement of large claims, increases the likelihood of variability in loss developments from period to
period. While the Company's basic assumptions have remained consistent, the Company continues to update loss data to reflect changing trends, which can be
expected to result in fluctuations in loss developments over time.
Management's goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible. The Company constantly
monitors changes in trends related to the number of claims incurred relative to correlative variances with premium volume, average settlement amounts, number of
claims outstanding at period ends and the average value per claim outstanding and adjusts actuarial assumptions as necessary to accommodate observed trends.
Ten-Year
Historical
Development
Tables:
The table below presents the development of U.S. generally accepted accounting principles ("GAAP") balance sheet insurance reserves for each year-end from
2008 through 2017, as of December 31, 2018, net of all reinsurance credits.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars
in
thousands)
2008
2009
2010
2011
Year Ended December 31
2012
2013
2014
2015
2016
2017
2018
Liability for
Unpaid Losses
and Loss
Adjustment
Expenses (1)
Liability
$ 231,633 $ 203,253 $ 218,629 $ 290,092 $ 289,236 $ 288,088 $ 295,583 $ 301,753 $ 324,767 $ 372,131 $ 489,404
Reestimated as
of: (2)
One Year Later
Two Years Later 208,702 198,220 201,745 272,285 282,381 268,757 303,540 340,361 369,670
Three Years
222,049 194,430 208,933 280,217 283,673 277,734 285,521 315,589 343,982 388,917
Later
210,562 188,110 204,243 276,525 279,685 288,862 332,175 361,791
Four Years Later 205,519 192,195 202,078 268,299 291,332 313,909 343,898
Five Years Later 208,398 187,792 198,518 275,517 298,861 313,662
Six Years Later
Seven Years
205,986 181,547 200,922 276,812 299,996
Later
200,460 181,998 203,692 279,598
Eight Years Later 200,808 184,122 204,769
Nine Years Later 202,565 183,693
Ten Years Later 201,673
Cumulative
Redundancy
(Deficiency) (3)
$ 29,960 $ 19,560 $ 13,860 $ 10,494 $ (10,760) $ (25,574) $ (48,315) $ (60,038) $ (44,903) $ (16,786)
Cumulative
Amount of
Liability Paid
Through: (4)
One Year Later
Two Years Later 120,628 107,413 109,382 156,271 162,087 159,282 166,642 195,951 217,376
Three Years
$ 84,777 $ 74,182 $ 72,393 $ 94,003 $ 103,941 $ 92,275 $ 92,870 $ 109,228 $ 132,920 $ 143,853
Later
142,731 125,038 133,507 193,566 205,452 166,642 222,295 250,924
Four Years Later 152,679 137,460 147,462 214,873 202,803 234,158 258,576
Five Years Later 161,834 143,461 158,172 227,359 241,533 251,696
Six Years Later
Seven Years
166,290 148,101 166,112 234,578 252,648
Later
170,126 152,375 168,524 241,383
Eight Years Later 173,867 153,999 173,015
Nine Years Later 174,902 157,297
Ten Years Later 177,677
(1) Represents the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the
estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the respective balance sheet date, including incurred but not
reported ("IBNR") losses, to the Company.
(2) Represents the re-estimated amount of the previously recorded liability based on additional information available to the Company as of the end of each
succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of individual claims and as
claims are settled and paid.
(3) Represents the aggregate change in the estimates of each calendar year-end reserve through December 31, 2018.
(4) Represents the cumulative amount paid with respect to the previously recorded calendar year-end liability as of the end of each succeeding year. The payment
patterns shown in this table demonstrate the "long-tail" nature of much of the Company's business, whereby portions of claims, principally in workers'
compensation coverages, do not fully pay out for more than ten years.
- 7 -
Reserve developments for all years ended in the period 1985 through 2011 have produced redundancies as of December 31, 2018, with deficiencies developing for
periods from 2012 forward. The $16.8 million deficiency developed through one year on the 2017 reserve position reflects action taken by management to respond
to higher than expected adverse case development, as previously noted. The deficiencies that have developed in the chart from 2012 through 2017 have been
largely attributable to two main themes. First, the Company engaged in new markets between 2008 and 2013, including professional liability and property
coverages concentrated in the state of Florida. These products (now discontinued) experienced significant adverse loss development in calendar years 2016 and
2017 as more information emerged and was therefore considered in the reserving process. Second, the Company has experienced increased severity in losses
related to its transportation offerings. The Company is currently addressing the rate adequacy and customer segmentation practices of this product in response to
the most recent adverse loss trends.
Readers should note the table above does not present accident or policy year development data, which they may be more accustomed to analyzing. Rather, this
table is intended to present an evaluation of the Company's ability to establish its liability for losses and loss expenses at a given balance sheet date. In reviewing
this information, it is important to understand that this method of presentation causes some development experience to be duplicated. For example, the amount of
any redundancy or deficiency related to losses settled in 2011, but incurred in 2008, will be included in the cumulative development amount for each of the years
ending December 31, 2008, 2009, and 2010. It is also important to note that conditions and trends that have affected development of the liability in the past may
not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.
The table presented below presents loss development data on a gross (before consideration of reinsurance) basis for the same ten year period December 31, 2008
through December 31, 2017, as of December 31, 2018, with a reconciliation of the data to the net amounts shown in the table above.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars
in
thousands)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year Ended December 31
Direct and
Assumed:
Liability for
Unpaid Losses
and Loss
Adjustment
Expenses
Liability
Reestimated as
of December 31,
2018
Cumulative
Redundancy
(Deficiency)
Ceded:
Liability for
Unpaid Losses
and Loss
Adjustment
Expenses
Liability
Reestimated as
of December 31,
2018
Cumulative
Redundancy
(Deficiency)
Net:
Liability for
Unpaid Losses
and Loss
Adjustment
Expenses
Liability
Reestimated as
of December 31,
2018
$ 389,558 $ 359,030 $ 344,520 $ 421,556 $ 455,454 $ 474,470 $ 506,102 $ 513,596 $ 576,330 $ 680,274 $ 865,339
312,965 289,679 301,700 395,271 450,713 519,189 599,457 633,660 647,807 709,523
$ 76,593 $ 69,351 $ 42,820 $ 26,285 $
4,741 $ (44,719) $ (93,355) $ (120,064) $ (71,477) $ (29,249)
$ 157,925 $ 155,777 $ 125,891 $ 131,464 $ 166,218 $ 186,382 $ 210,519 $ 211,843 $ 251,563 $ 308,143 $ 375,935
111,292 105,986 96,931 115,673 150,717 205,527 255,559 271,869 278,137 320,606
$ 46,633 $ 49,791 $ 28,960 $ 15,791 $ 15,501 $ (19,145) $ (45,040) $ (60,026) $ (26,574) $ (12,463)
$ 231,633 $ 203,253 $ 218,629 $ 290,092 $ 289,236 $ 288,088 $ 295,583 $ 301,753 $ 324,767 $ 372,131 $ 489,404
201,673 183,693 204,769 279,598 299,996 313,662 343,898 361,791 369,670 388,917
Cumulative
Redundancy
(Deficiency)
$ 29,960 $ 19,560 $ 13,860 $ 10,494 $ (10,760) $ (25,574) $ (48,315) $ (60,038) $ (44,903) $ (16,786)
- 8 -
Readers are reminded the gross data presented above requires significantly more subjectivity in the estimation of IBNR and loss expense reserves because of the
high limits provided by the Company to its commercial automobile and workers' compensation customers, some of which has been covered by excess of loss and
facultative reinsurance. This is particularly true of excess of loss treaties in which the Company retains risk in only the lower, more predictable, layers of
coverage. Accordingly, one would generally expect more variability in development on a gross basis than on a net basis. The Company's consolidated financial
statements reflect its financial results net of reinsurance.
Environmental
Matters:
Given that one of the Company's core businesses is insuring commercial automobile companies, on occasion claims involving a commercial automobile accident
which has resulted in the spill of a pollutant are made. Certain of the Company's policies may cover these situations on the basis that they were caused by an
accident that resulted in the immediate and isolated spill of a pollutant. These claims are typically reported, evaluated and fully resolved within a short period of
time.
In general, establishing reserves for environmental claims, other than those associated with "sudden and accidental" losses, is subject to uncertainties that are
greater than those represented by other types of claims. Factors contributing to those uncertainties include a lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, and the extent and timing of any
such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when the loss occurred and what policies provide coverage,
what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and
whether cleanup costs represent insured property damage.
Very few environmental claims have historically been reported to the Company. In addition, a review of the businesses of the Company's past and current insureds
indicates that exposure to claims of an environmental nature is limited because the vast majority of the Company's accounts are not currently, and have not in the
past been, involved in the hauling of hazardous substances. Also, the revision of the pollution exclusion in the Company's policies since 1986 has, and is expected
to, further limit exposure to such claims from that point forward.
The Company does not expect to have any significant environmental claims relating to asbestos exposure.
The Company's reserves for unpaid losses and loss expenses at December 31, 2018 did not include significant amounts for liability related to environmental
damage claims. The Company does not foresee significant future exposure to environmental damage claims and accordingly has established no reserve for IBNR
environmental losses at December 31, 2018.
Marketing
Historically, the Insurance Subsidiaries have primarily focused their commercial automobile marketing efforts on large and medium trucking fleets, with their
biggest market share in larger trucking fleets (over 150 power units). The largest of these fleets (over 250 power units) generally self-insure a significant portion of
their risk, and self-insured retention plans are a specialty of the Company. The indemnity contract provided to such customers is designed to cover all aspects of
commercial automobile liability, including third-party liability, property damage, physical damage and cargo, whether arising from vehicular accident or other
casualty loss. The self-insured program is supplemented with large deductible workers' compensation policies in states which do not allow for self-insurance of
this coverage. Fleets with fewer than 250 power units typically purchase full insurance coverage or retain deductibles on each claim. The Company's commercial
automobile offerings also include public livery risks, principally large and medium-sized operators of bus fleets and taxis, work-related accident insurance, on a
group or individual basis, to independent contractors under contract to a fleet sponsor, as well as workers' compensation coverage to employees of independent
contractor fleet owners. Large fleet trucking products are marketed both directly to commercial automobile clients and also through relationships with non-
affiliated brokers and specialized independent agents.
In addition, the Company offers a program of coverages for "small fleet" trucking concerns (owner-operators generally with one to six power units) and "medium
fleet" trucking concerns (7 to 150 power units). Products for small and medium fleets, independent contractors, and non-trucking entities are marketed through
relationships with non-affiliated brokers and specialized agents.
In some cases, the Company will provide specific product offerings to specialized markets through partnerships with brokers and program administrators. As the
Company grows, its distribution strategy has moved toward utilization of non-affiliated agents and brokers to place new business for small and intermediate
commercial automobile (including independent contractor products) and non-transportation workers' compensation. In addition, the Company has developed
customized commercial automobile liability and workers' compensation programs, which are marketed through non-affiliated agent partners. These customized
programs can include a suite of products selected for its targeted customer base, including commercial automobile liability, general liability, non-trucking liability,
cargo, occupational accident, or workers' compensation coverages.
- 9 -
Investments
The Company's investment portfolio is notionally divided between (1) funds which are considered necessary to support insurance underwriting activities and (2)
excess capital funds. Management believes the funds invested in fixed income and short-term securities are more than sufficient to cover underwriting operations
while equity securities and limited partnerships are utilized to invest excess capital funds to achieve higher long-term returns. The following discussion will
concentrate on the different investment strategies for these two major categories.
At December 31, 2018, the market value of the Company's consolidated investment portfolio was approximately $878.6 million, consisting of fixed income
securities, equity securities, investments in limited partnerships, commercial mortgage loans and short-term and other investments and includes $156.9 million of
short-term funds classified as cash equivalents.
A comparison of the allocation of assets within the Company's consolidated investment portfolio, using market value as a basis, is as follows as of December 31:
Fixed income securities
Short-term
Cash equivalents
Total fixed income securities and short-term
Limited partnerships (equity basis)
Commercial mortgage loans (amortized cost basis)
Equity securities
Fixed
Income
and
Short-Term
Investments
2018
2017
67.5%
0.1
17.8
85.4
6.3
0.8
7.5
100.0%
61.1%
0.1
6.9
68.1
8.3
0.0
23.6
100.0%
Fixed income and short-term securities comprised 85.4% of the market value of the Company's consolidated investment portfolio of $878.6 million at December
31, 2018. The fixed income portfolio is widely diversified with no concentrations in any single industry, geographic location or municipality. The largest amount
invested in any single issuer was $3.5 million (0.4% of the Company's consolidated investment portfolio). The Company's fixed income portfolio has a short
duration compared to the duration of its insurance liabilities and, accordingly, the Company does not actively trade fixed income securities but typically holds such
investments until maturity. Exceptions exist in instances where the underlying credit for a specific issue is deemed to be diminished. In such cases, the security
will be considered for disposal prior to maturity. In addition, fixed income securities may be sold when realignment of the portfolio is considered beneficial (e.g.,
moving from taxable to non-taxable issues) or when valuations are considered excessive compared to alternative investments.
Approximately $54.2 million of the Company's fixed income investments (6.2% of the Company's consolidated investment portfolio) consisted of non-rated bonds
and bonds rated as less than investment grade by the National Association of Insurance Commissioners ("NAIC") at year-end. These investments included a
diversified portfolio of over 40 issuers and had a $5.2 million aggregate net unrealized loss position at December 31, 2018.
The market value of the consolidated fixed income portfolio included $7.9 million of net unrealized losses at December 31, 2018 compared to $0.8 million of net
unrealized gains at December 31, 2017. The Company analyzes fixed income securities for other-than-temporary impairment ("OTTI") in accordance with the
Financial Accounting Standards Board OTTI guidance. As has been the Company's consistent policy, OTTI is considered for any individual issue which has
sustained a decline in current market value of at least 20% below original or adjusted cost, and the decline is ongoing for more than six months, regardless of the
evaluation of the creditworthiness of the issuer or the specific issue. Additionally, the Company takes into account any known subjective information in evaluating
for impairment without consideration of the Company's 20% threshold. The current net unrealized loss on fixed income securities consists of $10.8 million of
gross unrealized losses and $2.9 million of gross unrealized gains. The gross unrealized losses equal approximately 1.8% of the cost of all fixed income securities.
See also " Critical
Accounting
Policies"
in Part II, Item 7 of this Annual Report on Form 10-K for additional details of the Company's investment valuation.
- 10 -
Equity
Securities
Because of the large amount of high-quality fixed income investments owned, relative to the Company's loss and loss expense reserves (net of reinsurance
recoverables) and other liabilities, amounts invested in equity securities are not needed to fund current operations and, accordingly, can be committed for longer
periods of time. Equity securities comprised 7.5% of the market value of the Company's consolidated investment portfolio of $878.6 million at December 31,
2018. The Company's equity securities portfolio consists of various securities with diversification from large to small capitalization issuers and among several
industries. The largest single-equity issue owned had a market value of $3.2 million at December 31, 2018 (0.4% of the Company's consolidated investment
portfolio).
An individual equity security will be disposed of when it is determined by the Company's external investment managers or the Board of Directors' Investment
Committee that there is little potential for future appreciation or to reallocate from equity to fixed income securities. Securities are disposed of only when market
conditions dictate, regardless of the impact, positively or negatively, on current period earnings.
As of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 changed the accounting for non-consolidated
equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Previously, the
Company's equity securities were classified as available-for-sale and changes in fair value were recognized in accumulated other comprehensive income (loss) as a
component of shareholders' equity.
During 2018, the Company's external investment managers and the Board of Directors' Investment Committee determined that reallocation of the Company's
equity portfolio would be beneficial and sold $149.2 million of its equity portfolio, resulting in a gain on sale of $51.9 million. The majority of these gains were
included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, were reclassified to
retained earnings as of January 1, 2018 and were therefore not recognized in the consolidated statement of operations for the year ended December 31, 2018.
These equity sales further solidified the conservative nature of its high quality, short-duration investment portfolio; opportunistically utilized the new lower
corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and were accretive to income, given the increase in
yields at the shorter end of the yield curve. Realized losses related to the sale of equity securities during 2018 recognized in the consolidated statement of
operations for the year ended December 31, 2018 were $3.1 million before taxes. Net unrealized losses on equity securities held at December 31, 2018 included in
the consolidated statement of operations for the year ended December 31, 2018 were $9.7 million.
Limited
Partnerships
The Company invests in various limited partnerships engaged in long-short equities, private equity, country-focused funds and real estate development as an
alternative to direct equity investments. The funds used for these investments are part of the Company's excess capital strategy. At December 31, 2018, the
aggregate carrying value was $55.0 million, comprising 6.3% of the market value of the Company's consolidated investment portfolio.
As a group, these investments decreased in value during 2018, with the aggregate of the Company's share of such losses reported by the limited partnerships
totaling approximately $9.3 million.
The Company follows the equity method of accounting for its limited partnership investments and, accordingly, records the total change in value as a component of
net unrealized gains (losses) on equity securities and limited partnership investments. Readers are cautioned that reported increases and decreases in equity value
of the Company's limited partnerships can change quickly as a result of volatile market conditions. Limited partnerships also are highly illiquid investments, and
the Company's ability to withdraw funds is generally subject to significant restrictions.
Investment
Yields
Pre-tax net investment income increased $3.9 million, or 22%, during 2018, reflecting higher interest rates for shorter duration securities, increased dividends and
increased invested assets from continuing positive cash flow from operations. A comparison of consolidated investment yields, before consideration of investment
management expenses, is as follows:
Before federal tax:
Investment income
Investment income plus investment gains (losses)
After federal tax:
Investment income
Investment income plus investment gains (losses)
2018
2017
3.0%
(0.1)
2.7
(0.6)
3.2%
6.2
2.3
5.4
See also " Results
of
Operations"
in Part II, Item 7 of this Annual Report on Form 10-K for additional details of the Company's investment operations.
- 11 -
Regulatory Framework
The Insurance Subsidiaries are currently subject to insurance industry regulation by each of the jurisdictions in which they are licensed. In addition, minor portions
of the Insurance Subsidiaries' business are subject to regulation by Bermudian and Canadian federal and provincial authorities. As an insurance holding company,
Protective is also subject to oversight from the Indiana Department of Insurance. There can be no assurance that laws and regulations will not be changed by one
or more of these regulatory bodies in ways that will require the Company to modify its business models and objectives. In particular, the United States federal
government continuously reviews the regulation and supervision of financial institutions, including insurance companies, as well as tax laws and regulation, which
could impact the Company's operations and performance.
Additionally, changes in laws and regulations governing the insurance industry could have an impact on the Company's ability to generate historical levels of
income from its insurance operations. The Company is obligated to comply with numerous complex and varied governmental regulations in order to maintain its
authority to write insurance business. While the Company has continuously maintained each of its licenses without exception, failure to maintain compliance
could result in governmental regulators temporarily preventing the Company from writing new business, thus having a detrimental effect on the Company. Also,
the ability of the Insurance Subsidiaries to modify certain insurance rates, specifically workers' compensation rates, is heavily regulated and such rate increases are
often denied or delayed for substantial periods by regulators.
Investments made by the Company's domestic Insurance Subsidiaries are regulated by guidelines promulgated by the NAIC, which are designed to provide
protection for both policyholders and shareholders. The statutory capital of each of the Insurance Subsidiaries substantially exceeds the minimum risk-based
capital requirements set by the NAIC. State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for
each insurance company to remain authorized. These computations are referred to as risk-based capital requirements and are based on a number of complex
factors, taking into consideration the quality and nature of assets, the historical adequacy of recorded liabilities and the specific nature of business conducted. At
December 31, 2018, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $117.4 million. Actual consolidated statutory
capital and surplus at December 31, 2018 exceeded this requirement by $278.5 million.
Employees
As of December 31, 2018, the Company had 535 employees, an increase of 7 employees from the prior year-end.
Revenue Concentration
The Company derives a significant percentage of its direct premium volume from certain FedEx Corporation subsidiaries and operating companies ("FedEx"), and
from insurance coverage provided to FedEx's contracted service providers. FedEx represented approximately $16.2 million, $18.5 million and $18.3 million of the
Company's consolidated gross premiums written in 2018, 2017 and 2016, respectively. An additional $174.7 million, $189.4 million and $202.2 million in 2018,
2017 and 2016, respectively, was placed with the Company by a non-affiliated broker on behalf of contracted service providers of FedEx, but this additional
business was not dependent upon the Company's direct business with FedEx.
Competition
Insurance underwriting is highly competitive. The Insurance Subsidiaries compete with other stock and mutual companies and inter-insurance exchanges
(reciprocals). There are numerous insurance companies offering the lines of insurance which are currently written or may in the future be written by the Insurance
Subsidiaries. Many of these companies have been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines
of insurance coverage and have significantly greater financial resources than the Company. In many cases, competitors are willing to provide coverage for rates
lower than those charged by the Insurance Subsidiaries. Many potential clients self-insure workers' compensation and other risks for which the Company offers
coverage, and some have organized "captive" insurance companies as subsidiaries through which they insure their own operations. Some states have workers'
compensation funds that preclude private companies from writing this business in those states. Federal law also authorizes the creation of "Risk Retention
Groups," which may write insurance coverages similar to those offered by the Company.
The Company believes it has a competitive advantage in its major lines of business as the result of its management and staff, its service and products, its
willingness to custom build insurance programs for its customers, its centralized location with ready access to skilled employees, its proprietary databases and the
use of technology with respect to its insureds. Accordingly, should competitors determine to "buy" market share with unprofitable rates, the Insurance Subsidiaries
will generally experience a decline in business until pricing returns to profitable levels.
- 12 -
Availability of Documents
The Company is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is required, pursuant
to Item 101 of Regulation S-K, to provide certain information regarding its website and the availability of certain documents filed with or furnished to the U.S.
Securities and Exchange Commission (the "SEC"). The Company's Internet website is www.protectiveinsurance.com. The Company has included its Internet
website address throughout this Annual Report on Form 10-K as a textual reference only. The information contained on, or accessible through, the Company's
Internet website is not incorporated by reference into this Annual Report on Form 10-K.
The Company makes available, free of charge, by mail or through its Internet website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with or furnishes it to the SEC. The Company also includes on its Internet website its Code of Business Conduct and the
charter of each permanent committee of its Board of Directors (the "Board"). In addition, the Company intends to disclose on its Internet website any amendments
to, or waivers from, its Code of Business Conduct that are required to be publicly disclosed pursuant to rules of the SEC and the Nasdaq Stock Market, LLC
("Nasdaq").
Shareholders may obtain, without charge, a copy of this Annual Report on Form 10-K, including the consolidated financial statements and schedules
thereto, without the accompanying exhibits, upon written request to Protective Insurance Corporation, 111 Congressional Boulevard, Carmel, Indiana
46032, Attention: Investor Relations. A list of exhibits is included in this Annual Report on Form 10-K, and exhibits are available from the Company
upon payment to the Company of the cost of furnishing the exhibits.
- 13 -
Item 1A. RISK FACTORS
The following is a description of the risk factors that could cause our actual results to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business,
financial condition and results of operations, and you should carefully consider them before deciding to invest in, or retain, shares of our common stock. These
risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to
be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future
performance, and historical trends should not be used to anticipate results or trends in future periods.
We compete with a large number of companies in the insurance industry for underwriting revenues.
We compete with a large number of other companies in our selected lines of business. During periods of intense competition for premium, we are vulnerable to the
actions of other companies who may seek to write business without what we believe to be an appropriate regard for ultimate profitability. During these times, it is
very difficult to grow or maintain premium volume without sacrificing underwriting discipline and income.
Insurance underwriting is highly competitive. We compete with other stock and mutual companies and inter-insurance exchanges (reciprocals). There are
numerous insurance companies offering the lines of insurance which are currently written or may in the future be written by us. Many of these companies have
been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines of insurance coverage and have significantly
greater financial resources than us. In many cases, competitors are willing to provide coverage for rates lower than those charged by us. Many potential clients
self-insure workers' compensation and other risks for which we offer coverage, and some have organized "captive" insurance companies as subsidiaries through
which they insure their own operations. Some states have workers' compensation funds that preclude private companies from writing this business in those states.
Federal law also authorizes the creation of "Risk Retention Groups," which may write insurance coverages similar to those offered by us.
We may incur increased costs in competing for underwriting revenues as we seek to expand our business. Increased costs associated with attracting and writing
new clients may negatively impact underwriting revenue. If we are unable to compete effectively, our underwriting revenues may decline, as well as our overall
business results.
New competition could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our coverages at attractive
rates and thereby adversely affect our underwriting results.
Changes in laws and regulations governing the insurance industry could have a negative impact on our ability to generate income from our insurance
operations.
One or more of our Insurance Subsidiaries are regulated and/or licensed in all 50 of the United States, the District of Columbia, all Canadian provinces, Puerto
Rico and Bermuda. We are obligated to comply with numerous complex and varied governmental regulations in order to maintain our authority to write insurance
business. Failure to maintain compliance could result in governmental regulators preventing us from writing new business, which would have a material adverse
impact on us, our results of operations and our financial condition. Further, the ability of our Insurance Subsidiaries to adjust insurance rates and other product
offerings is regulated for significant portions of our business and needed rate adjustments can be denied or delayed for substantial periods by regulators, which
could have a material adverse effect on our results of operations and our financial condition.
A material decline in our financial strength rating could adversely affect our position in the insurance market and cause a significant reduction in our
premiums and earnings.
Our main insurance subsidiary, Protective Insurance Co., currently has a financial strength rating of “A” (Excellent) with a negative outlook by A.M. Best, which
represents a downgrade from the “A+” (Superior) financial strength rating with a negative outlook Protective Insurance Co. had prior to November 20, 2018.
Financial ratings are an important factor influencing the competitive position of insurance companies. A.M. Best ratings, which are commonly used in the
insurance industry, currently range from “A++” (Superior) to “F” (In Liquidation). The objective of A.M. Best’s rating system is to provide potential
policyholders and other interested parties with an expert independent opinion of an insurer’s financial strength and ability to meet ongoing obligations, including
paying claims. This rating is subject to periodic review and may be revised downward, upward or revoked at the sole discretion of A.M. Best. A future downgrade
by A.M. Best could result in the loss of a number of insurance contracts we write and in a substantial loss of business to other competitors, which would have a
material adverse effect on our results of operations.
- 14 -
We have two classes of common stock with unequal voting rights that are effectively controlled by our principal shareholders and management, which
limits other shareholders’ ability to influence our operations.
Our principal shareholders, directors and executive officers and their affiliates control approximately 50% of the outstanding shares of voting Class A Common
Stock and approximately 23% of the outstanding shares of non-voting Class B Common Stock. These parties effectively control us, direct our affairs, and exert
significant influence in the election of directors and approval of significant corporate transactions. The interests of these shareholders may conflict with those of
other shareholders, and this concentration of voting power may limit the marketability of our stock and has the potential to delay, defer or prevent a change in
control that other shareholders may believe to be in their best interests.
We are subject to credit risk relating to our ability to recover amounts due from reinsurers.
We limit our risk of loss from policies of insurance issued by our Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance
companies. Such reinsurance does not relieve us of our responsibility to policyholders should the reinsurers be unable to meet their obligations to us under the
terms of the underlying reinsurance agreements. While we have not experienced any significant reinsurance losses for over 25 years, in the past, a small number of
our less significant reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies, and provisions for
potential uncollectible balances from these reinsurers have been established. If we are unable to collect the amounts due to us from reinsurers, any unreserved
credit losses could adversely affect our results of operations, equity, business and insurer financial strength rating.
We may incur additional losses if our loss reserves are inadequate.
A large portion of our provision for losses recorded is composed of estimates of future loss payments to be made. Such estimates of future loss payments may
prove to be inadequate. Loss and loss expense reserves represent our best estimate at a given point in time but are not an exact calculation of ultimate liability.
Rather, they are complex estimates derived by utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future
events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, inflation, claims handling, case reserving policies and
procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the
time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on our part. As trends in underlying
claims develop, particularly in so-called “long tail” lines in which the adjudication of claims can take many years and which have seen an increase in claim
severity, management is sometimes required to revise reserves. This results in a charge to our earnings in the amount of the adjusted reserves, recorded in the
period the change in estimate is made. These charges can be substantial and can potentially have a material impact, either positively or negatively, on results of
operations and shareholders’ equity.
The loss of our major customer could severely impact our revenue and earnings potential and A.M. Best rating.
We derive a significant percentage of our direct premium volume from FedEx, and from insurance coverage provided to FedEx’s contracted service providers.
The loss of this major customer would likely materially adversely impact our revenue and earnings potential, as well as our A.M. Best rating. Insurance programs
provided to FedEx and programs provided to the contracted service providers are not necessarily dependent upon one another.
Our collateral held may prove to be insufficient.
We require collateral from our large insureds covering the insureds’ obligations for self-insured retentions or deductibles related to policies of insurance provided.
Should we, as surety, become responsible for such insured obligations, the collateral held may prove to be insufficient. In this regard, FedEx utilizes significant
self-insured retentions and deductibles under policies of insurance provided by us. In the case of FedEx, we have determined that the financial strength of the
customer is sufficient to allow for holding only partial collateral at this time. Should we become responsible for this customer’s entire self-insured retention and
deductible obligations, the collateral held would be insufficient, and we would sustain a significant operating loss.
A material drop in interest rates, or disruption in the fixed income markets, could have an adverse impact on our earnings and, potentially, our financial
position.
Given our significant interest-bearing investment portfolio, if interest rates materially drop or the fixed income markets are otherwise disrupted, our income from
these investments could be materially reduced, which would reduce our results of operations, equity, business and insurer financial strength rating. The
functioning of the fixed income markets, the values of the investments we hold and our ability to liquidate them may be adversely affected if those markets are
disrupted by a change in interest rates or otherwise affected by significant negative factors, including, without limitation: local, national, or international events,
such as regulatory changes, wars, or terrorist attacks; a recession, depression, or other adverse developments in either the U.S. or other economies that adversely
affects the value of securities held in our portfolio; financial weakness or failure of one or more financial institutions that play a prominent role in securities
markets or act as a counterparty for various financial instruments, which could further disrupt the markets; inactive markets for specific kinds of securities, or for
the securities of certain issuers or in certain sectors, which could result in decreased valuations and impact our ability to sell a specific security or a group of
securities at a reasonable price when desired; a significant change in inflation expectations; or the onset of deflation or stagflation.
- 15 -
Our investment portfolio is subject to market and credit risks, which could affect our financial results and ability to conduct business.
We have a large portfolio of securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. A decline in the
aggregate value of the securities and limited partnership investments would result in a commensurate decline in our shareholders’ equity, either through the income
statement or directly to equity. The resultant decline could, at least temporarily, materially adversely affect our results of operations, equity, business and insurer
financial strength ratings.
Technological advances, including those specific to the transportation industry, could present us with added competitive risks.
An increase in accident prevention technologies and the growth of autonomous or partially autonomous vehicles could reduce the amount of accidents over time
and shift the liability from the owner of the vehicle to the manufacturer, which would cause automobile insurance to become a smaller portion of our overall
property and casualty insurance book of business. Innovations in telematics and the increase in usage-based information have become more important and will
likely change the way premiums are determined in the future. These advances in technology could materially change the way products in the transportation
industry are designed, priced and underwritten, and if we fail to adjust to these changes in a timely manner, our business and results of operations could be
materially adversely affected.
The failure of our information technology systems and other operational systems to operate properly or disruptions or breaches of our information
systems could adversely affect our business, results of operations and financial condition.
We rely upon complex and expensive information technology systems and other operational systems and on the integrity and timeliness of our data to run our
businesses, service our customers and interact with policyholders, brokers and employers. The pace at which information systems must be upgraded is continually
increasing, requiring an ongoing commitment of significant resources to maintain or upgrade to current standards. Our success may be impacted if we are not able
to develop and expand the effectiveness of existing systems and to continue to enhance information systems that support our operations in a cost-effective manner.
Our networking infrastructure and related assets may also be subject to employee errors or other unforeseen activities that could result in the disruption of business
processes, network degradation and system downtime. To the extent that such disruptions occur, our business, results of operations and financial condition could
be materially and adversely affected, resulting in a possible loss of business.
In addition, our daily business operations require us to retain sensitive data such as proprietary business information and data related to customers, claimants and
business partners within our network infrastructure. Cybersecurity attacks and intrusion efforts are continuous and evolving. The scope and severity of risks that
cyber threats present have increased dramatically, and include, but are not limited to, disruptions in systems, unauthorized release of confidential or otherwise
protected information and corruption of data. Our information technology and other systems could be subject to physical or electronic break-ins; attempts to gain
unauthorized access to data from our employees, vendors or third parties; unauthorized tampering; exploitation of weaknesses related to our vendors or other third
parties; denials of service; computer viruses and other malicious software; or other cybersecurity attacks or breaches, resulting in a failure to maintain the security,
confidentiality or privacy of sensitive data, including personal information relating to our customers and business partners, or in the theft of intellectual property or
proprietary information.
In September 2018, we learned of suspicious activity occurring within two employee email accounts. In response, we launched an investigation and began working
with third-party forensic experts to determine the full nature and scope of this incident. A review of the impacted email accounts determined that certain types of
personal information may have been accessible for a small number of individuals, although no assurance can be given that we will not identify additional
information that was accessed or obtained. We are working with the impacted clients and are in the process of notifying the individuals, and any implicated state
regulators, pursuant to applicable law. We cannot ensure that we will be able to identify, prevent or contain the effects of any additional cyber attacks or other
cybersecurity incidents in the future that bypass our security measures or disrupt our information technology systems or business. Any failure to maintain proper
security, confidentiality or privacy of sensitive data residing on our information technology and other operational systems could delay or disrupt our ability to do
business and service clients, harm our reputation, require us to incur significant remediation costs, subject us to litigation, regulatory fines, a loss of customers and
revenues or otherwise have a material adverse effect on our business, results of operations and financial condition.
Changes in current accounting practices and future pronouncements may materially impact our reported financial results.
Developments in accounting practices may require us to incur considerable additional expenses to comply with such developments, particularly if we are required
to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current
accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, net equity and other historical financial
statement line items that are important to users of our financial statements. Changes could also introduce significant volatility in our results of operations, equity,
business and insurer financial strength rating.
We may be unable to attract and retain qualified employees and successfully execute our Chief Executive Officer transition.
We depend on our ability to attract and retain qualified executive officers, experienced underwriters, claims professionals and other skilled employees who are
knowledgeable about our specialty lines of business. If we are unable to attract and retain such individuals, we may be unable to maintain our current competitive
position in the specialty markets in which we operate and may be unable to achieve our growth strategy.
Effective October 17, 2018, our Board of Directors appointed John D. “Jay” Nichols as our Interim Chief Executive Officer and Chairman of our Board of
Directors and commenced a search process to identify a permanent chief executive officer as a result of the resignation of W. Randall Birchfield as our Chief
Executive Officer, President and Chief Operating Officer and as a member of our Board of Directors. If we are unable to appoint a permanent chief executive
officer with the desired level of experience and expertise in a timely manner, or if we encounter difficulties in this transition, our strategic planning and execution
could be hindered or delayed, and our ability to attract and retain other key members of senior management could be adversely affected. Any such disruptions or
uncertainties could have a material adverse effect on our results of operations, financial condition and the market price of our common stock.
- 16 -
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
The Company owns its home office building and the adjacent real estate in Carmel, Indiana. The home office building contains a total of 181,000 square feet of
usable space, and the Company currently occupies approximately 74% of this space, with the remainder being leased to non-affiliated entities on short-term leases
expiring through 2023.
The Company also owns a building and the adjacent real estate in Indianapolis, approximately nine miles from its main office in Carmel. The building contains
approximately 15,000 square feet of usable space, and is used primarily for off-site data storage and as a contingent back-up and disaster recovery site.
The Company's entire operations are conducted from these two facilities. The current facilities are expected to be adequate for the Company's operations for the
near future.
Item 3. LEGAL PROCEEDINGS
In the ordinary, regular and routine course of its business, the Company is frequently involved in various matters of litigation relating principally to claims for
insurance coverage provided. No currently pending matter is deemed by management to be material to the Company or outside the ordinary course of business.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
- 17 -
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF
EQUITY SECURITIES
Shares of the Company's Class A and Class B Common Stock are traded on Nasdaq under the symbols PTVCA and PTVCB, respectively. The Class A and Class
B common shares have identical rights and privileges, except that Class B shares have no voting rights other than on matters for which Indiana law requires class
voting. As of February 28, 2019 there were approximately 400 record holders of Class A Common Stock and approximately 1,000 record holders of Class B
Common Stock.
The Company has paid quarterly cash dividends continuously since 1974. The Company paid a quarterly dividend of $.28 per share during 2018. In the first
quarter of 2019, the Company declared a dividend of $.10 per share. The Company expects to continue its policy of paying regular cash dividends, although there
is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions and are subject to regulatory
restrictions. At December 31, 2018, $117.4 million, or 33.0% of shareholders' equity, represented net assets of the Company's Insurance Subsidiaries which, at that
time, could not be transferred in the form of dividends, loans or advances to Protective because of minimum statutory capital requirements. However, management
believes that these restrictions do not currently pose any material dividend payment concerns for the Company. The Board intends to address the subject of
dividends at each of its future meetings and will consider the Company's earnings, returns on investments and its capital needs.
The following table presents information regarding the Company's repurchases of its Common Stock for the periods indicated:
October 1 - October 31, 2018
November 1 - November 30, 2018
December 1 - December 31, 2018
Period
Total
Total number of
shares
purchased
Average price
paid per share
Total number
of shares
purchased as
part of publicly
announced
plans or
programs (1)
72,108 $
15,085
-
87,193
22.64
22.79
-
72,108
15,085
-
87,193
Maximum
number of
shares that may
yet be
purchased
under the plans
or programs (1)
2,194,666
2,179,581
2,179,581
(1) On August 31, 2017, the Company's Board of Directors authorized the reinstatement of the Company's share repurchase program for up to 2,464,209
shares of the Company's Class A or Class B Common Stock. On August 7, 2018, the Company's Board of Directors reaffirmed the Company's share
repurchase program, but also provided that the aggregate dollar amount of shares of the Company's Common Stock that may be repurchased under the
share repurchase program through August 8, 2019 may not exceed $25.0 million. The repurchases may be made in the open market or through privately
negotiated transactions, from time to time, and in accordance with applicable laws, rules and regulations. Pursuant to this share repurchase program, the
Company entered into a Rule 10b5-1 plan on September 24, 2018, which authorized the repurchase of up to $12.0 million of the Company's outstanding
common shares at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act. The Rule 10b5-1 plan
expired on November 8, 2018. No duration has been placed on the Company's share repurchase program, and the Company reserves the right to amend,
suspend or discontinue it at any time. The share repurchase program does not commit the Company to repurchase any shares of its Common Stock. The
Company has funded, and intends to continue to fund, the share repurchase program from cash on hand.
- 18 -
Corporate Performance
The following graph shows a five-year comparison of cumulative total return for the Company's Class B Common Stock, the Russell 2000 Index and the
Company's peer group as determined by management (the "PTVCB Peer Group"). The basis of comparison is a $100 investment at December 31, 2013, in each of
(i) Protective, (ii) the Russell 2000 Index and (iii) the PTVCB Peer Group. All dividends are assumed to be reinvested.
Index
Protective Insurance Corporation
Russell 2000 Index
PTVCB Peer Group
2013
2014
Year Ended December 31
2016
2015
2017
2018
$
100.00 $
100.00
100.00
98.17 $
104.89
104.36
95.51 $
100.26
113.12
104.38 $
121.63
136.57
103.91 $
139.44
148.11
75.93
124.09
154.20
Amerisafe, Inc.
Atlas Financial Holdings, Inc.
Donegal Group Inc.
EMC Insurance Group Inc.
Employers Holdings, Inc.
FedNat Holding Company
Hallmark Financial Services, Inc.
PTVCB Peer Group
HCI Group, Inc.
Heritage Insurance Holdings, Inc.
James River Group Holdings, Ltd.
NMI Holdings, Inc.
Safety Insurance Group, Inc.
United Insurance Holdings Corp.
Universal Insurance Holdings, Inc.
- 19 -
Item 6. SELECTED FINANCIAL DATA
The table below provides selected consolidated financial data of the Company. The information has been derived from our consolidated financial statements for
each of the years in the five-year period ended December 31, 2018. You should read this selected consolidated financial data in conjunction with the audited
consolidated financial statements and notes as of and for the year ended December 31, 2018 included in Part II, Item 8 " Financial
Statements
and
Supplementary
Data
", and Part II, Item 7 " Management's
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
" included in this Annual Report on Form
10-K.
2018
Year Ended December 31
2015
2016
2017
(Dollars
in
thousands,
except
per
share
data)
2014
Gross premiums written
$
582,500 $
504,737 $
403,004 $
383,553 $
382,388
Net premiums earned
Net investment income
432,880
328,145
276,011
263,335
261,627
22,048
18,095
14,483
12,498
9,055
Net realized and unrealized gains (losses) on investments
(25,691)
19,686
23,228
(1,261)
14,930
Losses and loss expenses incurred
345,864
247,518
186,481
155,750
159,596
Net income (loss)
(34,075)
18,323
28,945
23,283
29,717
Earnings (loss) per share -- net income (loss) (1)
(2.28)
1.21
1.92
1.55
Cash dividends per share
Investment portfolio (2)
Total assets
Shareholders' equity
Book value per share
1.98
1.00
1.12
1.08
1.04
1.00
878,638
854,595
749,501
729,877
757,421
1,490,131
1,357,016
1,154,137
1,085,771
1,144,247
356,082
418,811
404,345
394,498
399,496
23.95
27.83
26.81
26.25
26.67
(1) Earnings (loss) per share are adjusted for the dilutive effect of restricted stock outstanding for 2014-2017.
(2) Includes money market instruments classified as cash equivalents in the consolidated balance sheets.
- 20 -
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) is a property-casualty insurer specializing in marketing and underwriting property, liability and
workers compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors. Additionally, we
offer workers' compensation coverage for a variety of operations outside the transportation industry. We operate as one reportable property and casualty insurance
segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.
The term “Protective,” as used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), refers to
Protective Insurance Corporation, the parent company. The terms the “Company,” “we,” “us” and our,” as used throughout this M&DA, refer to Protective and all
of its subsidiaries unless the context clearly indicates otherwise. The term “Insurance Subsidiaries,” as used throughout this MD&A, refers to Protective Insurance
Company, Protective Specialty Insurance Company, Sagamore Insurance Company and B&L Insurance, Ltd.
Effective January 1, 2017, we determined that our business constituted one reportable property and casualty insurance segment. During 2016, we had two
reportable segments – property and casualty insurance and reinsurance. We moved to a single reportable segment based on how our operating results are regularly
reviewed by our chief operating decision maker when making decisions about how resources are to be allocated and assessing performance.
Effective August 1, 2018, we changed our name to Protective Insurance Corporation to better align our holding company's and Insurance Subsidiaries' identities
and to reflect our position within the insurance industry.
Effective January 1, 2018, we adopted Accounting Standards Update ("ASU") 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, resulting in a cumulative-effect adjustment of $71.0 million ($46.2 million, net of
tax). This adjustment moved our historical unrealized gains and losses, net of tax, on our equity portfolio from accumulated other comprehensive income (loss) to
retained earnings, but had no impact on overall shareholders' equity. In addition, for 2018 and forward, the change in fair value for equity securities is required to
be recognized in net earnings rather than in other comprehensive income (loss). The impact to our consolidated statements of operations will vary depending upon
the level of volatility in the performance of the securities held in our equity portfolio and the overall market.
On December 22, 2017, the U.S. Tax Cut and Jobs Act of 2017 (the "U.S. Tax Act") was signed into law. The U.S. Tax Act lowered the U.S. corporate income rate
from 35% to 21% effective January 1, 2018. As a result, we recorded a tax benefit of $9.6 million related to the remeasurement of our deferred tax assets and
liabilities during the fourth quarter of 2017. As of December 31, 2017, the IRS had not yet published all of the detailed regulations resulting from the enactment of
the U.S. Tax Act; therefore, while we had not completed our accounting for the tax effects, we made a reasonable estimate of the tax effects on our existing
deferred tax balances at December 31, 2017. We finalized our accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income
tax expense (benefit) were recorded during 2018.
On July 13, 2018, A.M. Best Company, Inc. ("A.M. Best") affirmed our financial strength rating of "A+" (Superior). At the same time, A.M. Best revised its
outlook to negative based on their monitoring of our growth strategy and the potential for adverse loss development in certain lines of business.
On November 20, 2018, A.M. Best downgraded our financial strength rating to "A" (Excellent) from "A+" (Superior), citing three consecutive years of material
adverse loss development. A.M. Best continues to categorize our balance sheet as "very strong" and our operating performance as "adequate," but its outlook
remains negative.
Liquidity and Capital Resources
The primary sources of our liquidity are (1) funds generated from insurance operations, including net investment income, (2) proceeds from the sale of
investments, and (3) proceeds from maturing investments.
We generally experience positive cash flow from operations. Premiums are collected on insurance policies in advance of the disbursement of funds for payment of
claims. Operating costs of our property/casualty Insurance Subsidiaries, other than loss and loss expense payments and commissions paid to related agency
companies, average less than one-third of net premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of
time depending on the type of insurance coverage provided and the timing of the claim payments. Because losses are often settled in periods subsequent to when
they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues.
Our cash flow relating to premiums is significantly affected by reinsurance programs in effect, whereby we cede both premium and risk to other insurance and
reinsurance companies. These programs vary significantly among products and certain contracts call for reinsurance payment patterns, which do not coincide with
the collection of premiums by us from our insureds.
- 21 -
On August 31, 2017, our Board of Directors authorized the reinstatement of our share repurchase program for up to 2,464,209 shares of our Class A or Class B
Common Stock. On August 7, 2018, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares
of our common stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25.0 million. The repurchases may be
made in the open market or through privately negotiated transactions, from time-to-time, and in accordance with applicable laws, rules and regulations. On
September 24, 2018, we entered into a stock repurchase plan for the purpose of repurchasing up to $12.0 million of shares of our common stock, at various pricing
thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Rule 10b5-1 Plan"). The Rule
10b5-1 Plan was established pursuant to, and as part of, our share repurchase program and permits shares to be repurchased in accordance with pre-determined
criteria when repurchases would otherwise be prohibited, such as during self-imposed blackout periods, or under insider trading laws. The Rule 10b5-1 plan
expired on November 8, 2018. The share repurchase program may be amended, suspended or discontinued at any time and does not commit us to repurchase any
shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on hand. The actual number and value of the
shares to be purchased will depend on the performance of our stock price, market volume and other market conditions. During the year ended December 31, 2018,
we paid $4.6 million to repurchase 7,770 shares of Class A and 191,898 shares of Class B Common Stock under the share repurchase program.
For several years, our investment philosophy has emphasized the purchase of short-term bonds with high quality and liquidity. Our fixed income investment
portfolio continues to emphasize shorter-duration instruments. If there was a hypothetical increase in interest rates of 100 basis points, the price of our bonds at
December 31, 2018 would be expected to fall by approximately 2.8%. The credit quality of our fixed income securities remains high with a weighted average
rating of AA-, including cash. The average contractual life of our fixed income and short-term investment portfolio increased to 5.5 years at December 31, 2018
compared to 4.9 years at December 31, 2017. The average duration of our fixed income portfolio remains much shorter than both the contractual maturity average
and the duration of our liabilities. We also remain an active participant in the equity securities market, allocating capital in excess of amounts considered necessary
to fund our current operations. The long-term horizon for our equity investments allows us to invest in positions where ultimate value, and not short-term market
fluctuation, is the primary focus. Investments made by our domestic property/casualty Insurance Subsidiaries are regulated by guidelines promulgated by the
National Association of Insurance Commissioners (the "NAIC"), which are designed to provide protection for both policyholders and shareholders.
Net cash flows from operations increased $3.0 million to $100.7 million for 2018 from $97.7 million in 2017. The increase in operating cash flow was primarily
related to higher premium volume in 2018 compared to 2017. Net cash flows from operations increased $65.3 million to $97.7 million for 2017 compared to $32.4
million in 2016. The 2017 increase in operating cash flows was related to higher premium volume in 2017 compared to 2016.
Net cash provided by investing activities was $23.7 million for 2018 compared to net cash used in investing activities of $74.3 million in 2017. The $98.0 million
change was primarily related to higher proceeds from sales of fixed income and equity securities and lower purchases of equity securities and fixed income
investments. These increases were partially offset by lower proceeds from maturities of our fixed income securities and lower distributions from limited
partnerships during 2018, in addition to the purchase of $10.0 million of company-owned life insurance in the first quarter of 2018. Net cash used in investing
activities was $74.3 million for 2017 compared to $27.4 million in 2016. The increase of $46.9 million in cash used in investing activities was primarily related to
higher purchases of equity securities and fixed income investments and lower proceeds from sales of equity and fixed income securities. These increases were
partially offset by higher distributions from limited partnership investments and higher proceeds from maturities of fixed income securities in 2017.
Net cash used in financing activities for 2018 consisted of regular cash dividend payments to shareholders of $16.8 million ($1.12 per share) and $4.6 million to
repurchase 199,668 shares of our common stock. Financing activities for 2017 consisted of regular cash dividend payments to shareholders of $16.3 million ($1.08
per share) and $1.9 million to repurchase 84,960 shares of our Class B Common Stock. Financing activities for 2016 consisted solely of the regular cash dividend
payments to shareholders of $15.8 million ($1.04 per share).
Our assets at December 31, 2018 included $156.9 million of investments included within cash and cash equivalents on the consolidated balance sheets that are
readily convertible to cash without market penalty and an additional $45.9 million of fixed income investments maturing in less than one year. We believe these
liquid investments, plus the expected cash flow from premium collections, are sufficient to provide for projected claim payments and operating cost demands. In
the event competitive conditions produce inadequate premium rates and we choose to further restrict volume, the liquidity of our investment portfolio would permit
us to continue paying claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. In
addition, our reinsurance program is structured to mitigate significant cash outlays that accompany large losses.
- 22 -
We previously maintained a revolving line of credit with a $40.0 million limit that had an expiration date of September 23, 2018. Interest on this line of credit was
referenced to the London Interbank Offered Rate ("LIBOR") and could be fixed for periods of up to one year at our option. Outstanding drawings on this line of
credit were $20.0 million at December 31, 2017. On August 9, 2018, we entered into a credit agreement providing a revolving credit facility with a $40.0 million
limit, with the option for up to an additional $35.0 million in incremental loans at the discretion of the lenders. This credit agreement, which has an expiration date
of August 9, 2022, replaced our line of credit that was to expire on September 23, 2018. Interest on this credit facility is referenced to LIBOR and can be fixed for
periods of up to one year at our option. Outstanding drawings on this revolving credit facility were $20.0 million as of December 31, 2018. At December 31,
2018, the effective interest rate was 3.61%, and we had $20.0 million remaining under the revolving credit facility. The current outstanding borrowings were used
to repay the previous line of credit. Our revolving credit facility has two financial covenants, each of which were met as of December 31, 2018, requiring us to
have a minimum U.S. Generally Accepted Accounting Principles ("GAAP") net worth and a maximum consolidated leverage ratio of 0.35 to 1.00.
Annualized net premiums written by our Insurance Subsidiaries for 2018 equaled approximately 112.3% of the combined statutory surplus of these Insurance
Subsidiaries, a level consistent with higher premiums written. Premium writings of 100% and in some cases up to 200% of surplus are generally considered
acceptable by regulatory authorities. Further, the statutory capital of each of our Insurance Subsidiaries substantially exceeded minimum risk-based capital
requirements set by the NAIC as of December 31, 2018. Accordingly, we have the ability to significantly increase our business without seeking additional capital
to meet regulatory guidelines.
Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of our Insurance Subsidiaries. As such, there are statutory restrictions on the
transfer of substantial portions of this equity to Protective. At December 31, 2018, $64.1 million may be transferred by dividend or loan to Protective without
approval by, or prior notification to, regulatory authorities. An additional $213.1 million of shareholders' equity of our Insurance Subsidiaries could be advanced
or loaned to Protective with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical. We believe these
restrictions pose no material liquidity concerns for us. We also believe the financial strength and stability of our Insurance Subsidiaries would permit access by
Protective to short-term and long-term sources of credit when needed. Protective had cash and marketable securities valued at $15.2 million at December 31, 2018.
- 23 -
Non-GAAP Measures
We believe investors’ understanding of our performance is enhanced by our disclosure of underwriting income (loss), which is a measure that is not calculated in
accordance with GAAP. Underwriting income (loss) represents the pre-tax profitability of our insurance operations and is derived by subtracting net realized and
unrealized gains (losses) on investments and net investment income from income (loss) before federal income tax expense (benefit). For 2018, we also had a
goodwill impairment charge, which has also been excluded from the calculation of underwriting income (loss). We use underwriting income (loss) as an internal
performance measure in the management of our operations because we believe it gives us and users of our financial information useful insight into our results of
operations, our underlying business performance and our ongoing operating trends. Underwriting income (loss) should not be viewed as a substitute for income
(loss) before federal income tax expense (benefit) calculated in accordance with GAAP, and other companies may define underwriting income (loss) differently.
In addition, for 2018, the goodwill impairment charge has been excluded from other operating expenses when calculating our expense ratio and our combined ratio,
as these ratios are intended to depict our underlying business performance and ongoing operating trends. We also believe that the exclusion of this goodwill
impairment charge improves the comparability of our expense ratio and our combined ratio with our ratios in prior years.
Income (loss) before federal income tax expense (benefit)
Less: Net realized and unrealized gains (losses) on investments
Less: Net investment income
Less: Goodwill impairment charge included in other operating expenses (see below)
Underwriting income (loss)
Other operating expenses
Less: Goodwill impairment charge
Other operating expenses, excluding goodwill impairment charge
Ratios
Losses and loss expenses incurred
Net premiums earned
Loss ratio
Other operating expenses
Less: Commissions and other income
Other operating expenses, less commissions and other income
Net premiums earned
Expense ratio
Impact of goodwill impairment charge
Expense ratio, excluding goodwill impairment charge
Combined ratio
Combined ratio, excluding goodwill impairment charge
- 24 -
$
$
$
$
$
$
2018
2017
2016
(43,872)
(25,691)
22,048
(3,152)
(37,077)
137,177
3,152
134,025
$
$
$
$
345,864
432,880
$
79.9%
$
137,177
9,932
127,245
432,880
$
10,122
19,686
18,095
–
(27,659) $
113,594
–
113,594
$
$
247,518
328,145
$
75.4%
$
113,594
5,308
108,286
328,145
29.4%
33.0%
(0.7)%
28.7%
109.3%
108.6%
–
33.0%
108.4%
108.4%
43,054
23,228
14,483
–
5,343
89,462
–
89,462
186,481
276,011
67.6%
89,462
5,275
84,187
276,011
30.5%
–
30.5%
98.1%
98.1%
Results of Operations
2018
Compared
to
2017
Gross premiums written
Ceded premiums written
Net premiums written
Net premiums earned
Net investment income
Commissions and other income
Net realized and unrealized gains (losses) on investments
Total revenue
Losses and loss expenses incurred
Other operating expenses
Total expenses
Income (loss) before federal income tax benefit
Federal income tax benefit
Net income (loss)
2018
2017
Change
% Change
$
$
$
$
582,500 $
(138,102)
444,398 $
504,737 $
(151,348)
353,389 $
432,880 $
22,048
9,932
(25,691)
439,169
345,864
137,177
483,041
(43,872)
(9,797)
(34,075) $
328,145 $
18,095
5,308
19,686
371,234
247,518
113,594
361,112
10,122
(8,201)
18,323 $
77,763
13,246
91,009
104,735
3,953
4,624
(45,377)
98,346
23,583
(53,994)
(1,596)
(52,398)
15.4%
(8.8)%
25.8%
31.9%
21.8%
87.1%
(230.5)%
39.7%
20.8%
Gross premiums written for 2018 increased $77.8 million (15.4%), while net premiums earned increased $104.7 million (31.9%), as compared to 2017. The higher
gross premiums written and net premiums earned were the result of continued growth in our commercial automobile and workers' compensation products in both
our retail and program distribution channels. The difference in the percentage change for premiums written compared to earned was reflective of the normal
differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business
in-force.
Premiums ceded to reinsurers on our insurance business averaged 23.7% of gross premiums written for 2018 compared to 30.0% for 2017. The percentage of
premiums ceded to reinsurance decreased as a result of changes in our reinsurance structure. In the third quarter of 2017, we lowered the quota share rate on our
workers' compensation premiums to reflect growing profitability and confidence in this book of business. We also restructured our commercial automobile
reinsurance treaty, moving away from variable premium ceded rates (based on loss performance) to a flat ceding arrangement with no material changes to the
economic risks taken for these products (i.e., ceded losses will decrease by a similar amount as ceded premiums). The impact of these changes to our reinsurance
structure was partially offset by reserve strengthening in 2018 that resulted in ceding an additional $17.3 million in premium from prior treaty years related to
variable premium adjustment provisions in our historical reinsurance treaties. Our historical commercial automobile reinsurance treaties cause an adjustment to
premiums ceded when the ultimate loss estimate changes for a reinsurance treaty year. Reserve strengthening in 2017 also resulted in ceding an additional $13.7
million in premium related to these variable premium adjustment provisions in 2017.
Losses and loss expenses incurred during 2018 increased $98.3 million (39.7%) to $345.9 million compared to $247.5 million in 2017. The loss ratio also
increased to 79.9% for 2018 compared to a loss ratio of 75.4% for 2017. The loss ratio is calculated as the percentage of losses and loss expenses incurred to net
premiums earned. The increased losses and loss expenses and loss ratio in 2018 reflected reserve adjustments of $16.8 million related to unfavorable prior accident
year loss development in commercial automobile coverages. These unfavorable loss developments were the result of increased claim severity due to a more
challenging litigation environment, as well as an unexpected increase in the time to settle claims leading to an unfavorable change in claim settlement patterns.
The 2018 loss ratio also reflected an increase in current accident year losses driven by severe commercial automobile losses, including continued emergence of
severity. The 2017 loss ratio also reflected a $19.2 million reserve strengthening related to prior accident year deficiencies that developed as a result of
unfavorable loss development from commercial automobile coverages, particularly from severe transportation loss events that occurred primarily during the first
six months of 2017 and higher than expected loss development for discontinued lines of business.
- 25 -
Commercial automobile products covered by our reinsurance treaties are subject to an aggregate stop-loss provision. Once this aggregate stop-loss level is reached,
for every $100 of additional loss, we are responsible only for our $25 retention. The following table illustrates the financial impact of a further 5% or 10% increase
in ultimate losses for the five most recent reinsurance treaty years (2013-2017) covering these commercial automobile products:
Gross loss expense from further strengthening current reserve position
Net financial loss
$/share (after tax)
5% Increase in
Ultimate Loss
Ratio
10% Increase in
Ultimate Loss
Ratio
$
$
$
34.3 $
9.0 $
0.48 $
68.7
17.6
0.94
Net investment income for 2018 increased 21.8% to $22.0 million compared to $18.1 million for 2017. The increase reflected an increase in average funds invested
resulting from positive cash flow, as well as higher interest rates, which led to higher reinvestment yields for our short-duration fixed income portfolio. After-tax
investment income increased by 39.4% to $17.7 million during 2018, compared to $12.7 million during 2017, reflecting the aforementioned higher interest rates
and reinvestment yield environment.
Net realized and unrealized losses on investments of $25.7 million during 2018 were driven by $9.7 million in unrealized losses on equity securities during the
period, which are now recorded in the consolidated statements of operations in conjunction with our adoption of ASU 2016-01, a $9.3 million decrease in the value
of our limited partnership investments and net realized losses on sales of fixed income and equity securities of $6.6 million. During 2018, we sold $149.2 million
in equity securities resulting in a gain on sale of $51.9 million. The majority of this gain was included in unrealized gains within other comprehensive income
(loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, was reclassified to retained earnings as of January 1, 2018 and not recognized in the
consolidated statements of operations for 2018. These equity sales further solidified the conservative nature of our high quality, short-duration investment
portfolio; opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and
were accretive to income, given the increase in yields at the shorter end of the yield curve. Comparative 2017 net realized investment gains were $19.7 million,
consisting primarily of $12.5 million in gains reported from our investments in limited partnerships and $7.4 million in net realized gains from sales of securities.
Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change
in aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.
Other operating expenses for 2018 increased $23.6 million, or 20.8%, to $137.2 million compared to 2017. The increase in other operating expenses was primarily
due to increased commission expenses as a result of increased premiums written and higher salary and benefit expense and a non-cash impairment charge of $3.2
million recorded in the fourth quarter of 2018 to write off our entire goodwill balance. See Note M for further discussion. The ratio of consolidated other
operating expenses less commissions and other income to net premiums earned (the "expense ratio") was 29.4% during 2018, or 28.7% excluding the impact of the
goodwill impairment charge, compared to 33.0% for 2017. The decrease in the expense ratio was primarily related to the leveraging effect of higher net premiums
earned in 2018 compared to 2017.
Federal income tax benefit was $9.8 million for 2018 compared to income tax benefit of $8.2 million in 2017. The effective tax rate for 2018 was 22.3% compared
to (81.0%) in 2017. The effective federal income tax rate in 2018 differed only slightly from the normal statutory rate primarily as a result of tax-exempt
investment income. In the fourth quarter of 2017, we recorded a benefit of $9.6 million related to the remeasurement of deferred tax assets and liabilities pursuant
to the U.S. Tax Act, which impacted our effective federal income tax rate for 2017.
As a result of the factors discussed above, net loss for 2018 was $34.1 million compared to net income of $18.3 million in 2017, a change of $52.4 million.
- 26 -
2017
Compared
to
2016
Gross premiums written
Ceded premiums written
Net premiums written
Net premiums earned
Net investment income
Commissions and other income
Net realized and unrealized gains (losses) on investments
Total revenue
Losses and loss expenses incurred
Other operating expenses
Total expenses
Income before federal income tax expense (benefit)
Federal income tax expense (benefit)
Net income
2017
2016
Change
% Change
$
$
$
$
504,737 $
(151,348)
353,389 $
403,004 $
(131,252)
271,752 $
101,733
(20,096)
81,637
328,145 $
18,095
5,308
19,686
371,234
247,518
113,594
361,112
10,122
(8,201)
18,323 $
276,011 $
14,483
5,275
23,228
318,997
186,481
89,462
275,943
43,054
14,109
28,945 $
52,134
3,612
33
(3,542)
61,037
24,132
(32,932)
(22,310)
(10,622)
25.2%
15.3%
30.0%
18.9%
24.9%
0.6%
(15.2)%
32.7%
27.0%
Gross premiums written for 2017 increased $101.7 million (25.2%), while net premiums earned increased $52.1 million (18.9%), as compared to 2016. The
increase in net premiums written and earned was primarily due to an increase of $60.8 million in net premiums earned related to commercial automobile products
and $3.7 million in higher net premiums earned related to workers' compensation products, which were consistent with our growth strategy. These increases were
partially offset by $8.1 million of lower premiums generated by reinsurance products, reflective of our decision to completely withdraw from the property
catastrophe reinsurance and professional liability reinsurance markets, and a decrease of $3.9 million in premiums earned from personal automobile products. The
difference in the percentage change for premiums written compared to earned is reflective of the normal differences in the financial statement recognition of earned
premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.
Premiums ceded to reinsurers averaged 30.0% of gross premiums written for 2017, compared to 32.6% for 2016. The percentage of premiums ceded to reinsurance
decreased as a result of changes in our reinsurance structure in the third quarter of 2017. The change in net premiums earned, compared to growth in gross
premiums written, was a function of premium adjustment provisions in our historical commercial automobile reinsurance treaties. This historical reinsurance
structure, which was revised in the July 2017 reinsurance renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a
reinsurance treaty year. This resulted in ceding an additional $13.7 million in premium in connection with our reserve strengthening in 2017.
Losses and loss expenses incurred during 2017 increased $61.0 million (32.7%) from $186.5 million in 2016 to $247.5 million in 2017, due primarily to adverse
prior accident year development and growth in net premiums earned. The 2017 loss ratio was 75.4%, compared to 67.6% for 2016. The higher loss ratio during
2017 was the result of adverse loss development in our commercial automobile related liability coverages from prior accident years. The prior year reserve
deficiency in 2017 increased the loss ratio for 2017 by 5.9 percentage points compared to a 5.0 percentage point increase experienced in 2016 due to the prior year
reserve deficiencies in 2016. We had an overall reserve deficiency on prior year claims during 2017 of $19.2 million and a $13.8 million deficiency on prior year
claims during 2016.
Net investment income for 2017 increased 24.9% to $18.1 million compared to $14.5 million for 2016, primarily due to higher interest rates leading to higher
reinvestment yields for fixed income securities, increased dividends from equity securities and an increase in average funds invested resulting from positive cash
flow. After-tax investment income of $12.7 million increased 23.0% during 2017 compared to the prior year reflecting the above factors, as well as the mix
between taxable and tax-exempt investment income.
Net realized and unrealized gains on investments totaled $19.7 million in 2017 compared to $23.2 million during 2016. Direct trading gains during 2017 were $8.2
million lower compared to the prior year. Other-than-temporary impairment of $0.4 million, netted with gains of $1.6 million on previously impaired available-for-
sale securities that were sold in 2017, are included in the net gains stated above. Investments in limited partnerships produced gains of $12.5 million in 2017,
compared to gains of $2.5 million during 2016. Limited partnership investments utilized by us are primarily engaged in long-short equities, private equity,
country-focused funds and real estate development as an alternative to direct equity investments. The aggregate of our share of gains and losses in these entities
represented a 16.3% appreciation in value for 2017, compared to a 3.3% increase in value for 2016.
Other operating expenses for 2017 increased $24.1 million (27.0%) to $113.6 million from $89.5 million in 2016. This increase was due primarily to an increase
in commission expense as a result of the increase in premiums written and higher salary and salary-related expenses, reflective of our increased workforce in
response to the continued expansion of our products and services. Reinsurance ceded credits, included as an offset to other operating expenses, were 30.8% lower
in 2017, resulting primarily from ceding a lower percentage of workers' compensation premium to reinsurers in our most recent reinsurance treaty.
- 27 -
Income tax benefit was $8.2 million for 2017 compared to income tax expense of $14.1 million in 2016. We recorded a benefit of $9.6 million related to the
remeasurement of deferred tax assets and liabilities in the fourth quarter of 2017 pursuant to the U.S. Tax Act. Our effective federal tax rate for 2017 was (81.0%)
as compared to 32.8% in 2016. The effective tax rate for 2017 was affected primarily by the impact of the U.S. Tax Act discussed above.
As a result of the factors discussed above, net income for 2017 decreased $10.6 million to $18.3 million compared to $28.9 million in 2016.
Critical Accounting Policies
The Company's significant accounting policies that are material and/or subject to significant degrees of judgment are highlighted below.
Investment
Valuation
All marketable securities are included in the Company's balance sheets at current fair market value.
Approximately 59% of the Company's assets are composed of investments at December 31, 2018. Approximately 92% of these investments are publicly-traded,
owned directly and have readily-ascertainable market values. The remaining 8% of investments are composed primarily of minority interests in several limited
partnerships. These limited partnerships are engaged in long-short equities, private equity, country-focused funds and real estate development as an alternative to
direct equity investments. These partnerships do not have readily-determinable market values themselves. Rather, the values recorded are those provided to the
Company by the respective partnerships based on the underlying assets of the limited partnerships. While a substantial portion of the underlying assets are
publicly-traded securities, those which are not publicly-traded have been valued by the respective limited partnerships using their experience and judgment.
Under Financial Accounting Standards Board ("FASB") guidance, if a fixed income security is in an unrealized loss position and the Company has the intent to sell
the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the decline in value is deemed
to be other-than-temporary and is recorded to net realized gains (losses) on investments in the consolidated statements of operations. For impaired fixed income
securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that
it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized gains (losses) on
investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in
shareholders' equity within accumulated other comprehensive income (loss).
In conjunction with the adoption of ASU 2016-01, unrealized gains or losses on equity securities will be recognized in the consolidated statements of operations
and are no longer evaluated for other-than-temporary declines.
It is important to note that all available-for-sale securities included in the Company's consolidated financial statements are valued at current fair market values.
The evaluation process for determination of other-than-temporary decline in value of investments, as described above, does not change these valuations but, rather,
determines when a decline in value will be recognized in the consolidated statements of operations (other-than-temporary decline), as opposed to a charge to
shareholders' equity (temporary decline). This evaluation process is subject to risks and uncertainties because it is not always clear what has caused a decline in
value of an individual security or because some declines may be associated with general market conditions or economic factors, which relate to an industry in
general, but not necessarily to an individual issue. The Company has attempted to minimize many of these uncertainties by adopting a largely objective evaluation
process as described above. However, to the extent that certain declines in value are reported as unrealized at December 31, 2018, it is possible that future earnings
charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost. At
December 31, 2018, the total gross unrealized loss included in the Company's fixed income portfolio was approximately $10.8 million. No individual issue
constituted a material amount of this total. Had this entire amount been considered other-than-temporary at December 31, 2018, there would have been no impact
on total shareholders' equity or book value since the decline in value of these securities was previously recognized as a reduction to shareholders' equity.
- 28 -
Reinsurance
Recoverable
Reinsurance ceded transactions were as follows for the years ended December 31 (dollars in thousands):
Reinsurance recoverable
Premium ceded (reduction to premium earned)
Losses ceded (reduction to losses incurred)
Reinsurance ceded credits (reduction to operating expenses)
$
2018
2017
2016
392,436 $
131,080
148,285
23,124
318,331 $
145,201
128,086
23,187
255,024
130,012
108,656
33,512
A discussion of the Company's reinsurance strategies is presented in Part I, Item 1, " Business
", of this Annual Report on Form 10-K.
Amounts recoverable under the terms of reinsurance contracts comprised approximately 26% of total Company assets as of December 31, 2018. In order to be
able to provide the high limits required by the Company's insureds, the Company shares a significant amount of the insurance risk of the underlying contracts with
various insurance entities through the use of reinsurance contracts. Some reinsurance contracts provide that a loss will be shared among the Company and its
reinsurers on a predetermined pro-rata basis ("quota-share"), while other contracts provide that the Company will keep a fixed amount of the loss, similar to a
deductible, with reinsurers taking all losses above this fixed amount ("excess of loss"). Some risks are covered by a combination of quota-share and excess of loss
contracts. The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss
and loss expense reserves, as described below. Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts
recorded as recoverable from reinsurers. Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the
Company. Further, the high limits provided by certain of the Company's insurance policies for commercial automobile liability, workers' compensation and
professional liability risks provide more variability in the estimation process than lines of business with lower coverage limits.
It should be noted, however, that a change in the estimate of amounts due from reinsurers on unpaid claims will not, in itself, result in charges or credits to losses
incurred. This is because any change in estimated recovery follows the estimate of the underlying loss. Thus, it is the computation of the gross underlying loss
that is critical.
As with any receivable, credit risk exists in the recoverability of reinsurance. This may be even more pronounced than in normal receivable situations since
recoverable amounts are not generally due until the loss is settled which, in some cases, may be many years after the contract was written. If a reinsurer is unable,
in the future, to meet its financial commitments under the terms of the contracts, the Company would be responsible to satisfy the reinsurer's portion of the loss.
The financial condition of each of the Company's reinsurers is vetted upon the execution of a given treaty, and only reinsurers with superior credit ratings are
utilized. However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in
the interim period. Reviews of the current financial strength of each reinsurer are made frequently and, should impairment in the ability of a reinsurer be
determined to exist, current year operations would be charged in amounts sufficient to provide for the Company's additional liability. Such charges are included in
other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit loss rather than a
deficiency associated with the loss reserving process.
Loss
and
Loss
Expense
Reserves
The Company's reserves for losses and loss expenses ("reserves") are determined based on complex estimation processes using historical experience, current
economic information and available industry statistics. The Company's claims range from routine "fender benders" to the highly complex and costly third-party
bodily injury claims involving large tractor-trailer rigs. Reserving for each class of claims requires a set of assumptions based upon historical experience,
knowledge of current industry trends and seasoned judgment. The high limits provided in many of the Company's policies provide for greater volatility in the
reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger
claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions,
as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time. Changes to previously established loss and
loss expense reserve amounts are charged or credited to losses and loss expenses incurred in the accounting periods in which they are determined. See Note C to
the consolidated financial statements for additional information relating to loss and loss expense reserve development.
The Company's methods for determining loss and loss expense reserves are essentially identical for interim and annual reporting periods.
- 29 -
A detailed analysis and discussion for each of the above basic reserve categories follows:
Reserves
for
known
losses
(Case
reserves)
Each known claim, regardless of complexity, is handled by a claims adjuster experienced with claims of a similar nature, and a "case" reserve appropriate for the
individual loss occurrence is established. For routine "short-tail" claims, such as physical damage, the Company records an initial reserve that is based upon
historical loss settlements adjusted for current trends. As information regarding the loss occurrence is gathered in the claim handling process, the initial reserve is
adjusted to reflect the anticipated ultimate cost to settle the claim. For more complex claims, which can tend toward being "long-tail" in nature, an experienced
claims adjuster will review the facts and circumstances surrounding the loss occurrence to make a determination of the reserve to be established. Many of the more
complex claims involve litigation and necessitate an evaluation of potential jury awards, in addition to the factual information, to determine the value of each
claim. Each claim is frequently monitored and the recorded reserve is increased or decreased relative to information gathered during the settlement life cycle.
Reserves
for
incurred
but
not
reported
losses
The Company uses both standard actuarial techniques common to most insurance companies as well as proprietary techniques developed by the Company in
connection with its specialty business products. For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor
methods. The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to
claim settlement trends and fluctuations in premium exposure for its short-tail lines. A minimum of 12 running accident quarters is used to project the reserve
necessary for incurred but not reported ("IBNR") losses for its short-tail lines.
The Company also uses the loss development factor approach for its long-tail lines of business. A minimum of 15 accident years is included in the loss
development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for IBNR losses. A minimum of 20
accident years is used for long-tail workers' compensation reserve projections. Significant emphasis is placed on the use of tail factors for the Company's long-tail
lines of business.
For the Company's commercial automobile risks, which are covered by regularly changing reinsurance agreements and which contain wide-ranging self-insured
retentions ("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company's exposures to loss. In
situations where the Company's reinsurance structure, the insured's SIR selections, policy volume, and other factors are changing, current accident period loss
exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company
supplements the above-described actuarial methods with loss ratio reserving techniques developed from the Company's proprietary databases to arrive at the
reserve for IBNR losses for the calendar/accident period under review. As losses for a given calendar/accident period develop with the passage of time,
management evaluates such development on a monthly and quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with regard to the
anticipated ultimate incurred losses. This process continues until all losses are settled for each period subject to this method.
Reserves
for
loss
adjustment
expenses
While certain of the Company's products involve case basis reserving for allocated loss adjustment expenses, the majority of such reserves are determined on a
bulk basis. The Company uses historical analysis of the ratios of allocated loss adjustment expenses paid to losses paid on closed claims to arrive at the expected
ultimate incurred loss adjustment expense factors applicable to each affected product. Once developed, the factors are applied to the expected ultimate incurred
losses, including IBNR, on all open claims. The resulting ultimate incurred allocated loss adjustment expense is then reduced by amounts paid to date on all open
claims to arrive at the reserve for allocated loss adjustment expenses to be incurred in the future for the handling of specific claims.
For those loss adjustment expenses not specific to individual claims (general claims handling expenses referred to as unallocated loss adjustment expenses), the
Company uses a variation of the standard industry loss adjustment expenses paid to losses paid (net of reinsurance) ratio analysis that equally weighs paid and
incurred losses to establish the necessary reserves. The selected factors are applied to 100% of IBNR reserves and to case reserves, with consideration given for
that portion of loss adjustment expense already paid at the reserve measurement date. Such factors are monitored and revised, as necessary, on a quarterly basis.
- 30 -
Sensitivity
Analysis
-
Potential
impact
on
reserve
volatility
from
changes
in
key
assumptions
Management is aware of the potential for variation from the reserves established at any particular point in time. Savings or deficiencies could develop in future
valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The Company's reserve selections
are developed to be a "best estimate" of unpaid losses at a point in time and, due to the unique nature of its exposures, particularly in the large commercial
automobile excess product, ranges of reserve estimates are not established during the reserving process. However, basic assumptions that could potentially impact
future volatility of the Company's valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:
● Consistency in the individual case reserving processes;
●
●
●
The selection of loss development factors in the establishment of bulk reserves for incurred but not reported losses and loss expenses;
Projected future loss trend; and
Expected loss ratios for the current book of business, particularly the Company's commercial automobile products, where the number of accounts insured,
selected SIRs, policy limits and reinsurance structures may vary widely from period to period.
Under reasonably possible scenarios, it is conceivable that the Company's selected loss estimates could be 10% or more redundant or deficient. The majority of the
Company's reserves for losses and loss expenses, on a net of reinsurance basis, relate to its commercial automobile products. Perhaps the most significant example
of sensitivity to variation in the key assumptions is the loss ratio selection for the Company's commercial automobile products for policies subject to certain major
reinsurance treaties. The following table presents the approximate impacts on gross and net loss reserves of both a hypothetical 10 percentage point and a
hypothetical 20 percentage point increase or decrease in the loss factors actually utilized in the Company's reserve determination at December 31, 2018 for the
prior six treaty periods, which covers exposures earned on policies written between July 3, 2012 and December 31, 2018. The Company's selection of the range of
values presented should not be construed as the Company's prediction of future events, but rather simply an illustration of the impact of such events, should they
occur.
The variation in impact from loss ratio increases and decreases is attributable to minimum and maximum premium rate factors included in the various reinsurance
contracts. In between the minimum and maximum ceded premium provisions within the treaty terms, net premiums earned can be increased or decreased based on
a change in loss expectation. The total impact to profitability in the same scenarios is shown below ($ in millions):
Gross Reserves
Net Reserves
Net premiums earned
Cumulative Net Underwriting Income (Loss)
Federal Income Tax Considerations
$
$
$
$
10% Loss
10% Loss
20% Loss
Ratio Increase
Ratio Decrease
Ratio Increase
72.0 $
(72.0) $
144.1 $
20% Loss
Ratio Decrease
(144.1)
18.0 $
(0.4) $
(18.4) $
(19.5) $
16.5 $
36.0 $
36.0 $
(0.4) $
(36.4) $
(49.5)
41.1
90.6
The liability method is used in accounting for federal income taxes. Using this method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The provision for deferred federal income tax is based on items of income and expense that are reported in different years in the
consolidated financial statements and tax returns and are measured at the tax rate in effect in the year the difference originated.
On December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% effective January 1,
2018. GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted. As a result of the U.S. Tax Act, the Company
recorded a tax benefit of $9.6 million related to the remeasurement of its deferred tax assets and liabilities during the fourth quarter of 2017. As of December 31,
2017, the IRS had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while the Company had not
completed its accounting for the tax effects, it made a reasonable estimate of the tax effects on its existing deferred tax balances at December 31, 2017. The
Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded in
2018.
- 31 -
Net deferred tax liabilities reported at December 31 are as follows (dollars in thousands):
Total deferred tax liabilities
Total deferred tax assets
Net deferred tax assets (liabilities)
2018
2017
$
$
(12,906) $
19,168
6,262 $
(23,836)
9,478
(14,358)
Deferred tax assets at December 31, 2018 included approximately $10.0 million related to the timing of deductibility of loss and loss expense reserves, the majority
of which relate to policy liability discounts required by the Internal Revenue Code of 1986, as amended, which are perpetual in nature and, in the absence of the
termination of the Company's business, will not, in the aggregate, reverse to a material degree in the foreseeable future. $3.5 million of deferred tax assets are
related to the results of the Company's limited partnership investments. Unearned premiums discount and deferred ceding commissions represent $2.3 million and
$1.2 million of deferred tax assets, respectively. An additional $0.6 million relates to impairment adjustments made to investments, as required by accounting
regulations. The unrealized gains in the Company's investment portfolios would allow for the recovery of this deferred tax at any time. The balance of deferred tax
assets consists of various normal operating expense accruals and is not considered to be material. As a result of its analysis, management has determined that no
valuation allowance is necessary at December 31, 2018.
FASB provides guidance for recognizing and measuring uncertain tax positions and prescribes a threshold condition that a tax position must meet for any of the
benefit of the uncertain tax position to be recognized in the consolidated financial statements. Based on this guidance, management regularly analyzes tax positions
taken or expected to be taken in a tax return based on the threshold condition prescribed. Tax positions that do not meet or exceed this threshold condition are
considered uncertain tax positions. Interest related to uncertain tax positions, if any, would be recognized in income tax expense. Penalties, if any, related to
uncertain tax positions would be recorded in income tax expense (benefit).
Impact of Inflation
To the extent possible, the Company attempts to recover the impact of inflation on loss costs and operating expenses by increasing the premiums it charges.
Within the commercial automobile business, a majority of the Company's accounts are charged as a percentage of an insured's gross revenue, mileage or payroll.
As these charging bases increase with inflation, premium revenues are immediately increased. The remaining premium rates charged are adjustable only at
periodic intervals and often require state regulatory approval. Such periodic increases in premium rates may lag far behind cost increases.
To the extent inflation influences yields on investments, the Company is also affected. The Company's short-term and fixed investment portfolios are structured in
direct response to available interest rates over the yield curve. As available market interest rates fluctuate in response to the presence or absence of inflation, the
yields on the Company's investments are impacted. Further, as inflation affects current market rates of return, previously committed investments might increase or
decline in value depending on the type and maturity of investment. For additional information, see Part II, Item 7A, " Quantitative
and
Qualitative
Disclosures
about
Market
Risk"
, in this Annual Report on Form 10-K.
Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves, as portions of these reserves are
expected to be paid over extended periods of time. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss
adjustment expenses.
- 32 -
Contractual Obligations
The table below sets forth the amounts of the Company's contractual obligations at December 31, 2018.
Total
Less than 1
year
Payments Due by Period
1 - 3 Years
(dollars
in
millions)
3 - 5 Years
More Than 5
Years
Loss and loss expense reserves
$
865.3 $
302.9 $
285.6 $
103.8 $
173.0
Investment commitment
Operating leases
Borrowings
Total
1.3
0.5
1.3
0.4
20.0
20.0
–
0.1
–
–
–
–
–
–
–
$
887.1 $
324.6 $
285.7 $
103.8 $
173.0
The Company's loss and loss expense reserves do not have contractual maturity dates, and the exact timing of the payment of claims cannot be predicted with
certainty. However, based upon historical payment patterns, the above table presents an estimate of when the Company might expect its direct loss and loss
expense reserves (without the benefit of reinsurance recoveries) to be paid. Timing of the collection of the related reinsurance recoverable, estimated to be $392.4
million at December 31, 2018, or 45% of the amounts presented in the above table, would approximate that of the above projected direct reserve payout but could
lag behind such payments by several months in some instances.
The investment commitment in the above table relates to a maximum unfunded capital obligation for a limited partnership investment at December 31, 2018. The
actual call dates for such funding could vary from that presented.
Borrowings made under the Company's line of credit can be called by the lender, under certain circumstances, with short notice. The Company entered into a new
line of credit on August 9, 2018 with an expiration date of August 9, 2022.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
- 33 -
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates within the property and casualty insurance industry and, accordingly, has significant invested assets that are exposed to various market
risks. These market risks relate to interest rate fluctuations, credit risks, equity security market prices and, to a lesser extent, foreign currency rate fluctuations. All
of the Company's invested assets, with the exception of investments in limited partnerships and equity securities, are classified as available-for-sale.
Based on the structure of the Company's investment portfolio, one of the most significant of the four identified market risks relates to prices in the equity security
market. Although not the largest category of the Company's invested assets, equity securities and limited partnerships, which are predominately invested in
equities, have a high potential for short-term price fluctuation. The market value of the Company's equity and limited partnerships positions at December 31, 2018
was $121.5 million, or approximately:
●
●
14% of the Company's consolidated investment portfolio of $878.6 million; and
34% of the Company's shareholders' equity of $356.1 million.
Funds invested in the equities market are not considered to be assets necessary for the Company to conduct its daily operations and, therefore, can be committed
for extended periods of time. The long-term nature of the Company's equity investments allows it to invest in positions where ultimate value, and not short-term
market fluctuations, is the primary focus.
Reference is made to the discussion of limited partnership investments in " Critical
Accounting
Policies
" in Part II, Item 7 of this Annual Report on Form 10-K.
All of the market risks attendant to equity securities also apply to the underlying assets in these limited partnerships, and to a greater degree because of the
generally more aggressive investment philosophies utilized by the limited partnerships. In addition, these investments are illiquid. There is no primary or
secondary market on which these limited partnerships trade and, in most cases, the Company is prohibited from disposing of its limited partnership interests for
some period of time and must seek approval from the general partner for any such disposal. Distributions of earnings from these limited partnerships are largely at
the sole discretion of the general partners, and distributions are generally not received by the Company for many years after the earnings have been reported.
Finally, through the application of the equity method of accounting, the Company's share of net income reported by the limited partnerships often includes
significant amounts of unrealized appreciation on the underlying investments.
The Company's fixed income portfolio totaled $592.6 million at December 31, 2018. Approximately 35% of this portfolio is made up of U.S. Government and
municipal debt securities, and the average contractual maturity of the Company's fixed maturity investments is approximately 5.5 years with an average modified
duration of approximately 2.6 years. Although the Company is exposed to interest rate risk on its fixed income investments, given the anticipated duration of the
Company's liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, even a 100 to 200 basis point increase in interest rates
would not have a material impact on the Company's ability to conduct daily operations or to meet its obligations and would, in fact, result in significantly higher
investment income in a relatively short period of time, as short-term investments and maturing bonds could be reinvested in the higher yielding securities.
There is an inverse relationship between interest rate fluctuations and the fair value of the Company's fixed income investments. Additionally, the fair value of
interest rate sensitive instruments may be affected by the financial strength of the issuer, prepayment options, relative values of alternative investments, liquidity of
the investment, currency fluctuations for non-U.S. debt holdings and other general market conditions. The Company monitors its sensitivity to interest rate risk by
measuring the change in fair value of its fixed income investments relative to hypothetical changes in interest rates.
The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 that would result from an instantaneous
change in yield rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on current fair value. The analysis
presents the sensitivity of the fair value of the Company's financial instruments to selected changes in market rates and prices. The range of rates chosen reflects
the Company's view of changes that the Company believes are reasonably possible over a one-year period. The Company's selection of the range of values chosen
to represent changes in interest rates should not be construed as the Company's prediction of future market events, but rather, as an illustration of the impact of
such events, should they occur. The equity portfolio was compared to the S&P 500 Index due to its correlation with the vast majority of the Company's current
equity portfolio. The limited partnership portfolio was compared to the S&P 500 Index and Indian BSE 500 Index due to their significant correlation with the vast
majority of the Company's limited partnership portfolio. As previously indicated, several other factors can impact the fair values of fixed income investments and,
therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented below.
- 34 -
The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 due to an instantaneous increase in
yield rates of 100 basis points and a 10% decline in the S&P 500 Index and the Indian BSE 500 Index (dollars in thousands).
2018
Fixed income securities
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity securities:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
Limited partnerships
Short-term
Total
2017
Fixed income securities
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity securities:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
Limited partnerships
Short-term
Total
Fair
Value
Increase (Decrease)
Interest
Rate Risk
Equity
Risk
$
$
$
$
10,687 $
37,385
64,422
9,750
2,835
5,423
190,450
38,540
29,155
25,180
178,818
592,645
17,945
3,179
25,253
6,920
2,303
5,489
5,333
66,422
55,044
1,000
715,111 $
16,586 $
27,075
43,469
19,488
3,135
6,492
198,349
24,204
96,650
37,394
49,011
521,853
46,578
10,278
45,470
25,402
13,061
50,291
10,683
201,763
70,806
1,000
795,422 $
(404) $
(2,012)
(2,612)
(49)
(48)
(176)
(5,417)
(1,270)
(769)
(549)
(5,864)
(19,170)
–
–
–
–
–
–
–
–
–
–
(19,170) $
(820) $
(1,103)
(1,381)
(794)
(83)
(200)
(5,126)
(772)
(1,861)
(959)
(886)
(13,985)
–
–
–
–
–
–
–
–
–
–
(13,985) $
–
–
–
–
–
–
–
–
–
–
–
–
(1,795)
(318)
(2,525)
(692)
(230)
(549)
(533)
(6,642)
(4,022)
–
(10,664)
–
–
–
–
–
–
–
–
–
–
–
–
(4,658)
(1,028)
(4,547)
(2,540)
(1,306)
(5,029)
(1,068)
(20,176)
(5,278)
–
(25,454)
- 35 -
The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 due to an instantaneous increase in
yield rates of 150 basis points and a 15% decline in the S&P 500 Index and the Indian BSE 500 Index (dollars in thousands).
2018
Fixed income securities
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity securities:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
Limited partnerships
Short-term
Total
2017
Fixed income securities
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity securities:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
Limited partnerships
Short-term
Total
Fair
Value
Increase (Decrease)
Interest
Rate Risk
Equity
Risk
$
$
$
$
10,687 $
37,385
64,422
9,750
2,835
5,423
190,450
38,540
29,155
25,180
178,818
592,645
17,945
3,179
25,253
6,920
2,303
5,489
5,333
66,422
55,044
1,000
715,111 $
16,586 $
27,075
43,469
19,488
3,135
6,492
198,349
24,204
96,650
37,394
49,011
521,853
46,578
10,278
45,470
25,402
13,061
50,291
10,683
201,763
70,806
1,000
795,422 $
(607) $
(3,021)
(3,917)
(73)
(71)
(263)
(8,125)
(1,904)
(1,154)
(824)
(8,794)
(28,753)
–
–
–
–
–
–
–
–
–
–
(28,753) $
(1,229) $
(1,657)
(2,072)
(1,192)
(125)
(299)
(7,690)
(1,158)
(2,791)
(1,438)
(1,329)
(20,980)
–
–
–
–
–
–
–
–
–
–
(20,980) $
–
–
–
–
–
–
–
–
–
–
–
–
(2,692)
(477)
(3,788)
(1,038)
(345)
(823)
(800)
(9,963)
(6,034)
–
(15,997)
–
–
–
–
–
–
–
–
–
–
–
–
(6,987)
(1,542)
(6,821)
(3,810)
(1,959)
(7,544)
(1,602)
(30,265)
(7,916)
–
(38,181)
- 36 -
ANNUAL REPORT ON FORM 10-K
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 2018
PROTECTIVE INSURANCE CORPORATION
CARMEL, INDIANA
- 37 -
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Protective Insurance Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Protective Insurance Corporation and subsidiaries (the Company) as of December 31, 2018 and
2017, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 7, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-01
As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for the recognition and measurement of certain
financial instruments in 2018 due to the adoption of ASU No. 2016-01, Recognition
and
Measurement
of
Financial
Assets
and
Financial
Liabilities.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 1970.
Indianapolis, Indiana
March 7, 2019
- 38 -
Consolidated Balance Sheets
Protective Insurance Corporation and Subsidiaries
(in
thousands,
except
share
data)
Assets
Investments:
Fixed income securities (Amortized cost: 2018, $600,504; 2017, $521,017)
Equity securities
Limited partnerships (Affiliated: 2018, $32,028; 2017, $43,586)
Commercial mortgage loans
Short-term and other
Cash and cash equivalents
Restricted cash and cash equivalents
Accounts receivable--less allowance (2018, $403; 2017, $484)
Accrued investment income
Reinsurance recoverable
Prepaid reinsurance premiums
Deferred policy acquisition costs
Property and equipment--less accumulated depreciation (2018, $19,531; 2017, $16,614)
Other assets
Current federal income taxes recoverable
Deferred federal income taxes
Liabilities and Shareholders' Equity
Reserves:
Losses and loss expenses
Unearned premiums
Reinsurance payable
Short-term borrowings
Depository liabilities
Accounts payable and other liabilities
Deferred federal income taxes
Shareholders' equity:
Common stock:
Class A voting -- authorized 3,000,000 shares; outstanding -- 2018 - 2,615,339; 2017 - 2,623,109 shares
Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2018 - 12,253,922; 2017 - 12,423,518 shares
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
See notes to consolidated financial statements.
- 39 -
December 31
2018
2017
592,645 $
66,422
55,044
6,672
1,000
721,783
163,996
6,815
102,972
4,358
392,436
6,095
6,568
46,645
24,760
7,441
6,262
1,490,131 $
865,339 $
71,625
936,964
66,632
20,000
173
110,280
–
1,134,049
112
522
54,720
(7,347)
308,075
356,082
1,490,131 $
521,853
201,763
70,806
–
1,000
795,422
64,680
4,033
87,551
4,159
318,331
4,578
5,608
47,317
18,399
6,938
–
1,357,016
680,274
53,085
733,359
62,308
20,000
3,050
105,130
14,358
938,205
112
530
55,078
46,391
316,700
418,811
1,357,016
$
$
$
$
Consolidated Statements of Operations
Protective Insurance Corporation and Subsidiaries
(in
thousands,
except
per
share
data)
Revenue:
Net premiums earned
Net investment income
Commissions and other income
Net realized gains (losses) on investments, excluding impairment losses
Other-than-temporary impairment losses on investments
Net unrealized gains (losses) on equity securities and limited partnership investments
Net realized and unrealized gains (losses) on investments
Expenses:
Losses and loss expenses incurred
Other operating expenses
Income (loss) before federal income tax expense (benefit)
Federal income tax expense (benefit)
Net income (loss)
Per share data:
Basic and diluted earnings (loss)
Dividends paid to shareholders
See notes to consolidated financial statements.
- 40 -
Year Ended December 31
2017
2018
2016
432,880 $
22,048
9,932
(6,632)
(19)
(19,040)
(25,691)
439,169
345,864
137,177
483,041
(43,872)
328,145 $
18,095
5,308
7,366
(149)
12,469
19,686
371,234
247,518
113,594
361,112
10,122
(9,797)
(34,075) $
(8,201)
18,323 $
276,011
14,483
5,275
26,498
(5,743)
2,473
23,228
318,997
186,481
89,462
275,943
43,054
14,109
28,945
(2.28) $
1.21 $
1.92
$ 1.12 $
$ 1.08 $
$ 1.04
$
$
$
$
Consolidated Statements of Comprehensive Income (Loss)
Protective Insurance Corporation and Subsidiaries
(in
thousands)
Net income (loss)
Other comprehensive income (loss), net of tax:
Unrealized net gains (losses) on fixed income securities:
Unrealized net gains (losses) arising during the period
Less: reclassification adjustment for net gains (losses) included in net income (loss)
Foreign currency translation adjustments
Other comprehensive income (loss)
Comprehensive income (loss)
See notes to consolidated financial statements.
- 41 -
Year Ended December 31
2017
2018
2016
$
(34,075) $
18,323 $
28,945
(9,680)
(2,812)
(6,868)
17,340
4,691
12,649
8,618
13,491
(4,873)
(830)
522
235
(7,698)
13,171
(4,638)
$
(41,773) $
31,494 $
24,307
Consolidated Statements of Shareholders' Equity
Protective Insurance Corporation and Subsidiaries
(in
thousands)
Common Stock
Class A
Class B
Shares
Amount
Shares
Amount
2,623 $
–
112
–
12,403 $
–
529 $
–
Accumulated
Other
Additional
Paid-In
Capital
Comprehensive Retained
Income (Loss) Earnings
37,858 $
–
303,053 $
28,945
Total
Equity
394,498
28,945
52,946 $
–
Balance at January 1, 2016
Net income
Foreign currency translation
adjustment, net of tax
Change in unrealized gain
(loss) on investments, net of
tax
Common stock dividends
Repurchase of common stock
Restricted stock grants
Balance at December 31, 2016
Net income
Foreign currency translation
adjustment, net of tax
Change in unrealized gain
(loss) on investments, net of
tax
Common stock dividends
Repurchase of common stock
Restricted stock grants
Balance at December 31, 2017
Cumulative effect of adoption
of ASU 2016-01, net of tax
Cumulative effect of adoption
of ASU 2018-02
Net loss
Foreign currency translation
adjustment, net of tax
Change in unrealized gain
(loss) on investments, net of
tax
Common stock dividends
Repurchase of common stock
Restricted stock grants
Balance at December 31, 2018
–
–
–
–
–
235
–
235
–
–
–
–
2,623
–
–
–
–
–
112
–
–
–
–
58
12,461
–
–
–
–
3
532
–
–
–
–
1,340
54,286
–
(4,873)
–
–
–
33,220
–
–
(15,803)
–
–
316,195
18,323
(4,873)
(15,803)
–
1,343
404,345
18,323
–
–
–
–
–
522
–
522
–
–
–
–
2,623
–
–
–
–
–
–
(8)
–
2,615 $
–
–
–
–
112
–
–
–
–
–
–
–
–
112
–
–
(85)
48
12,424
–
–
–
–
–
–
(4)
2
530
–
–
–
–
–
–
(360)
1,152
55,078
12,649
–
–
–
46,391
–
(16,302)
(1,516)
–
316,700
12,649
(16,302)
(1,880)
1,154
418,811
–
–
–
–
(46,157)
46,157
–
117
–
(117)
(34,075)
–
(34,075)
(830)
–
(830)
–
–
(192)
22
12,254 $
–
–
(9)
1
522 $
–
–
(832)
474
54,720 $
(6,868)
–
–
–
(7,347) $
–
(16,835)
(3,755)
–
308,075 $
(6,868)
(16,835)
(4,596)
475
356,082
See notes to consolidated financial statements.
- 42 -
Consolidated Statements of Cash Flows
Protective Insurance Corporation and Subsidiaries
(in
thousands)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Year Ended December 31
2017
2018
2016
$
(34,075) $
18,323 $
28,945
Change in accounts receivable and unearned premium
Change in accrued investment income
Change in reinsurance recoverable on paid losses
Change in losses and loss expenses reserves, net of reinsurance
Change in other assets, other liabilities and current income taxes
Amortization of net policy acquisition costs
Net policy acquisition costs deferred
Provision for deferred income tax expense (benefit)
Bond amortization
Loss on sale of property and equipment
Depreciation
Net realized (gains) losses on investments
Compensation expense related to restricted stock
Net cash provided by operating activities
Investing activities
Purchases of fixed maturities and equity securities
Purchases of limited partnership interests
Distributions from limited partnerships
Proceeds from maturities
Proceeds from sales of fixed maturities
Proceeds from sales of equity securities
Net sales of short-term investments
Purchase of insurance company-owned life insurance
Purchase of commercial mortgage loans
Purchases of property and equipment
Proceeds from disposals of property and equipment
Net cash provided by (used in) investing activities
Financing activities
Dividends paid to shareholders
Repurchase of common shares
Net cash used in financing activities
(3,904)
(199)
956
117,027
8,204
54,981
(55,940)
(18,794)
184
–
6,102
25,691
475
100,708
(415,326)
(450)
6,869
64,035
241,429
149,195
–
(10,000)
(6,672)
(5,439)
10
23,651
2,678
(278)
(446)
47,229
49,221
47,387
(51,824)
(3,866)
1,865
235
5,752
(19,686)
1,154
97,744
(436,932)
(1,097)
19,230
131,623
148,652
69,756
500
–
–
(6,661)
582
(74,347)
(2,721)
108
692
23,568
(8,063)
18,085
(17,813)
2,838
3,030
63
5,521
(23,228)
1,343
32,368
(400,670)
–
1,462
78,691
199,790
88,773
11,258
–
–
(7,725)
1,059
(27,362)
(16,835)
(4,596)
(21,431)
(16,302)
(1,880)
(18,182)
(15,803)
–
(15,803)
Effect of foreign exchange rates on cash and cash equivalents
(830)
522
235
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents
Cash, cash equivalents and restricted cash and cash equivalents at beginning of year
Cash, cash equivalents and restricted cash and cash equivalents at end of year
Supplemental Disclosures of Cash Flow Information
Cash paid for income taxes, net of refunds
Cash paid for interest
See notes to consolidated financial statements.
- 43 -
102,098
68,713
170,811 $
5,737
62,976
68,713 $
(10,562)
73,538
62,976
9,500 $
504 $
– $
456 $
10,173
309
$
$
$
Notes to Consolidated Financial Statements
Protective Insurance Corporation and Subsidiaries
(All
dollars
amounts
presented
in
these
notes
are
in
thousands,
except
share
and
per
share
data)
Note A - Summary of Significant Accounting Policies
Description of Business: Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (the "Company"), based in Carmel, Indiana, is a property-casualty
insurer specializing in marketing and underwriting property, liability and workers' compensation coverage for trucking and public transportation fleets, as well as
coverage for trucking industry independent contractors. In addition, the Company offers workers' compensation coverage for a variety of operations outside the
transportation industry. The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most
significant being commercial automobile and workers' compensation insurance products.
The term “Insurance Subsidiaries,” as used throughout these notes, refers to Protective Insurance Company, Protective Specialty Insurance Company, Sagamore
Insurance Company and B&L Insurance, Ltd.
Effective August 1, 2018, the Company changed its name to Protective Insurance Corporation to better align its holding company's and Insurance Subsidiaries'
identities and to reflect its position within the insurance industry.
Effective January 1, 2017, the Company determined that its business constituted one reportable property and casualty insurance segment. During 2016 and prior
years, the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a single reportable segment based on
how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are allocated and
assessing performance.
Basis of Presentation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Inter-company transactions
and accounts have been eliminated in consolidation.
Use of Estimates: Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results will differ from those estimates.
Cash and Cash Equivalents: The Company considers investments in money market funds to be cash equivalents. Carrying amounts for these instruments
approximate their fair values.
Investments : Carrying amounts for fixed income securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for
specific securities where quoted market prices are not available. Equity securities are carried at quoted market prices (fair value). Commercial mortgage loans are
carried primarily at
interests in
commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in all related cash flows of the
underlying mortgage loans. There was no valuation allowance on the Company's commercial mortgage loans as of December 31, 2018.
along with a valuation allowance for
These investments represent
losses when necessary.
amortized cost
The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record
its proportionate share of the limited partnership's net income. To the extent the limited partnerships include both realized and unrealized investment gains or
losses in the determination of net income or loss, then the Company would also recognize, through its consolidated statements of operations, its proportionate share
of the investee's unrealized, as well as realized, investment gains or losses within net unrealized gains (losses) on equity securities and limited partnership
investments.
Short-term and other investments are carried at cost, which approximates their fair values.
Fixed income securities are considered to be available-for-sale. The related unrealized net gains or losses (net of applicable tax effects) on fixed income securities
are reflected directly in shareholders' equity. Included within available-for-sale fixed income securities are convertible debt securities. A portion of the changes in
the fair values of convertible debt securities is reflected as a component of net realized gains (losses) on investments, excluding impairment losses within the
consolidated statements of operations. Realized gains and losses on disposals of fixed income securities are recorded on the trade date. Realized gains and losses
on fixed income securities are determined by the specific identification of the cost of investments sold and are included in net realized gains (losses) on
investments, excluding impairment losses.
Effective January 1, 2018, equity securities are recorded at fair value, with unrealized net gains or losses reflected as a component of net unrealized gains (losses)
on equity securities and limited partnership investments within the consolidated statements of operations. Realized gains and losses on disposals of equity
securities are recorded on the trade date and included in net realized gains (losses) on investments, excluding impairment losses. Prior to adoption of the new
accounting guidance, unrealized gains and losses related to equity securities were reflected directly in shareholders’ equity unless a decline in value was
determined to be other-than-temporary, in which case the loss was charged to income.
- 44 -
In accordance with the Financial Accounting Standards Board's ("FASB") other-than-temporary impairment guidance, if a fixed income security is in an unrealized
loss position and the Company has the intent to sell the fixed income security, or it is more likely than not that the Company will have to sell the fixed income
security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment
losses on investments in the consolidated statements of operations. For impaired fixed income securities that the Company does not intend to sell or in cases
where it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost
basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses on investments in the consolidated
statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholders' equity.
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized
cost basis of the fixed income security. The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the
appropriate effective interest rate.
Property and Equipment: Property and equipment are carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line
method.
Goodwill and Other Intangible Assets: Goodwill is not amortized. Rather, it is tested for impairment in accordance with FASB guidance, at the reporting-unit
level. Goodwill is tested annually (during the fourth quarter) or more often if events or circumstances, such as adverse changes in the business climate, indicate
there may be impairment. As a result of the impairment analysis conducted by the Company in the fourth quarter of 2018, the Company concluded the entire
goodwill balance was impaired, resulting in an impairment loss of $3,152. See Note M for further discussion. This impairment charge is included within other
operating expenses in the consolidated statements of operations. Intangible assets determined to have finite lives, such as customer relationships and employment
agreements, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. In addition, impairment
testing is performed on these amortizing intangible assets if impairment indicators are noted.
Reserves for Losses and Loss Expenses: The reserves for losses and loss expenses are determined using case basis evaluations and statistical analyses and
represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year-end. These reserves include estimates of future trends in
claim severity and frequency and other factors which could vary as the losses are ultimately settled. While actual results will differ from such estimates,
management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed, and as adjustments to these reserves
become necessary, such adjustments are reflected in current operations.
Recognition of Revenue and Costs: Premiums are earned over the period for which insurance protection is provided. A reserve for unearned premiums,
computed by the daily pro-rata method, is established to reflect amounts applicable to subsequent accounting periods. Commissions to unaffiliated companies and
premium taxes applicable to unearned premiums are deferred and expensed as the related premiums are earned. The Company does not defer acquisition costs that
are not directly variable with the production of premium. If it is determined that expected losses and deferred expenses will likely exceed the related unearned
premiums, the asset representing deferred policy acquisition costs is reduced and an expense is charged against current operations to reflect any such premium
deficiency. In the event that the expected premium deficiency exceeds deferred policy acquisition costs, an additional liability would be recorded with a
corresponding expense to current operations for the amount of the excess premium deficiency. Anticipated investment income is considered in determining
recoverability of deferred acquisition costs. The Company had no material contract assets, contract liabilities, or deferred contract costs recorded on its
consolidated balance sheet at December 31, 2018.
Reinsurance : Reinsurance premiums, commissions, expense reimbursements and reserves related to the Company's reinsured business are accounted for on bases
consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other insurers have been
reported as a reduction of premium earned. Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as
reinsurance recoverable assets. Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the
reinsurer over prescribed periods. Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date,
as well as projected loss experience applicable to the various contract periods. Estimates of reinstatement premiums on reinsurance contracts covering
catastrophic events are, to the extent reasonably determinable, recorded concurrently with the related loss.
Should impairment in the ability of a reinsurer to satisfy its obligations to the Company be determined to exist, current year operations would be charged in
amounts sufficient to provide for the Company's additional liability. Such charges, when incurred, are included in other operating expenses, rather than losses and
loss expenses incurred, because the inability of the Company to collect from reinsurers is a credit risk rather than a deficiency associated with the loss reserving
process.
- 45 -
Deferred Taxes: Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement and tax return bases of assets
and liabilities based on enacted tax rates and laws. The deferred tax benefits of the deferred tax assets are recognized to the extent realization of such benefits is
more likely than not. Deferred income tax expense or benefit generally represents the net change in deferred income tax assets and liabilities during the year.
Current income tax expense represents the tax liability associated with revenues and expenses currently taxable or deductible on various income tax returns for the
year reported.
Restricted Stock: Shares of restricted stock vest over the vesting period from the date of grant and certain shares of restricted stock are accelerated for retirement-
eligible recipients in accordance with the non-substantive, post-grant date vesting clause of Accounting Standards Codification ("ASC") Topic 715, Compensation
—Retirement Benefits. Restricted stock is valued based on the closing price of the Company's Class B Common Stock on the day the award is granted. Non-
vested shares of restricted stock will be forfeited should an executive's employment terminate for any reason other than death, disability, or retirement as defined
by the Compensation Committee (the "Compensation Committee") of the Board of Directors (the "Board") of the Company.
Earnings (Loss) Per Share: Diluted earnings (loss) per share of common stock are based on the average number of shares of Class A and Class B Common Stock
outstanding during the year, adjusted for the dilutive effect, if any, of restricted stock awards outstanding. Basic earnings (loss) per share are presented exclusive
of the effect of share-based awards outstanding.
Comprehensive Income (Loss): The Company records accumulated other comprehensive income (loss) from unrealized gains and losses on available-for-sale
securities and from foreign exchange adjustments as a separate component of shareholders' equity. A reclassification adjustment to other comprehensive income
(loss) is made for gains or losses during the period included in net income (loss).
Fair Value Measurements: The Company provides disclosures related to recurring and non-recurring fair value measurements with separate disclosures for the
amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, separate
disclosures are provided for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements as well as additional clarification for
both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both
recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.
Insurance Company-Owned Life Insurance: Included within other assets on the consolidated balance sheet at December 31, 2018 is $10,000 of insurance
company-owned life insurance. The carrying value of the company-owned life insurance policies represents the cash surrender value as reported by the respective
insurer, which approximates fair value.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, as
amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated
guidance, the Company's commission and fee income, other than that directly associated with insurance contracts, is subject to this updated guidance. The updated
guidance requires an entity to recognize revenue as performance obligations are met in order to reflect the transfer of promised goods or services to customers in an
amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1)
identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction
price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB
issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to
the first quarter of 2018. The Company adopted the new guidance as of January 1, 2018. The adoption of the new guidance did not have a material impact on the
Company's consolidated financial statements. The Company had no material contract assets, contract liabilities, or deferred contract costs recorded on its
consolidated balance sheet at December 31, 2018.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 changed the accounting for non-consolidated equity investments that are not accounted
for under the equity method of accounting by requiring changes in fair value to be recognized in income. Previously, the Company's equity securities were
classified as available-for-sale and changes in fair value were recognized in accumulated other comprehensive income (loss) as a component of shareholders'
equity. The Company adopted ASU 2016-01 as of January 1, 2018 using the modified retrospective approach and recorded a cumulative-effect adjustment to
reclassify unrealized gains on equity securities of $71,012 ($46,157, net of tax) from other comprehensive income (loss) to retained earnings within the
consolidated balance sheet as of December 31, 2018. Going forward, unrealized gains or losses on equity securities will be recognized in the consolidated
statements of operations within net unrealized gains (losses) on equity securities and limited partnership investments.
- 46 -
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-
15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing
diversity in practice in how certain cash receipts and cash payments are presented and classified. The Company adopted ASU 2016-15 as of January 1, 2018. The
adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update amends ASC Topic 230 to add and clarify
guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of
cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance was applied retrospectively. The Company
adopted the new guidance as of January 1, 2018 and made an adjustment within net cash provided by operating activities on the consolidated statement of cash
flows for the year ended December 31, 2017 to reflect $4,000 of restricted cash, which was classified within restricted cash and short-term investments on the
December 31, 2017 consolidated balance sheet. The Company also changed the presentation of restricted cash and cash equivalents on its consolidated balance
sheets to reflect this amount on a separate line. The adoption of the new guidance did not have an impact on the Company's consolidated statements of operations.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU allows for the option to
reclassify, from accumulated other comprehensive income (loss) to retained earnings, stranded tax effects resulting from the newly enacted federal corporate
income tax rate in the U.S. Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act"), which was enacted on December 22, 2017. The legislation included a reduction to
the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification was the difference between the historical
corporate income tax rate and the newly enacted 21 percent corporate income tax rate. The Company adopted the new guidance in the first quarter of 2018 and
recorded a cumulative-effect adjustment to reclassify the tax effects on fixed income investments of $117 from other comprehensive income (loss) to retained
earnings within the consolidated balance sheet as of December 31, 2018.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-
04. This amendment removes Step 2 of the goodwill impairment test under current guidance. The new guidance requires an impairment charge to be recognized
for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for
interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company adopted the new guidance in the fourth
quarter of 2018 and recognized an impairment charge of $3,152 related to the impairment of goodwill. See Note M for further discussion.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 superseded the current lease guidance in ASC Topic
840, Leases. Under the new guidance, lessees are required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's
obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees are required to recognize a right-of-use asset, which
is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The guidance provides for a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. In July 2018,
the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided adopters an additional transition method by allowing entities to
initially apply ASU 2016-02, and subsequent related standards, at the adoption date and recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. The Company adopted the new guidance on January 1, 2019 utilizing the transition method allowed per ASU 2018-
11, and accordingly, comparative period financial information will not be adjusted for the effects of the new guidance. No cumulative-effect adjustment was
required to the opening balance of retained earnings on the adoption date. The Company has substantially completed an assessment of the new standard’s impact
and determined the new standard will not have a material impact on the Company's consolidated statements of operations or cash flows; however, the estimated
impact of adopting the new guidance will result in a right-of-use asset and lease liability being recorded on the consolidated balance sheets subsequent to
December 31, 2018 of approximately $400 based on the lease portfolio existing as of the date of this Annual Report on Form 10-K.
- 47 -
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or
ASU 2016-13. This update introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at
the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model
for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather
than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-13 is effective for interim and annual
reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018.
The Company is currently evaluating the effects the adoption of ASU 2016-13 will have on its consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. This update provides clarification, corrects errors in and makes minor
improvements to various ASC topics. Many of the amendments in this update have transition guidance with effective dates for annual periods beginning after
December 15, 2018 and some amendments in this update do not require transition guidance and were effective upon issuance of this update. The Company will
adopt amendments as they become applicable. The Company has determined that the impact of these improvements will not be material to its consolidated
financial statements.
I n August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement, or ASU 2018-13. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and
Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level
3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value
measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual
reporting periods beginning after December 15, 2019. The Company is currently evaluating the effects the adoption of ASU 2018-13 will have on its consolidated
financial statements.
- 48 -
Note B - Investments
The following is a summary of available-for-sale securities at December 31:
December 31, 2018 (1)
Fixed income securities
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
December 31, 2017
Fixed income securities
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity securities:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
$
$
$
Fair
Value
Cost or
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Net Unrealized
Gains (Losses)
10,687 $
37,385
64,422
9,750
2,835
5,423
190,450
38,540
29,155
25,180
178,818
592,645 $
10,636 $
37,168
66,241
10,208
2,835
5,095
196,925
38,586
29,102
25,339
178,369
600,504 $
145 $
371
14
27
–
376
127
377
239
6
1,252
2,934 $
(94) $
(154)
(1,833)
(485)
–
(48)
(6,602)
(423)
(186)
(165)
(803)
(10,793) $
51
217
(1,819)
(458)
–
328
(6,475)
(46)
53
(159)
449
(7,859)
Fair
Value
Cost or
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Net Unrealized
Gains (Losses)
16,586 $
27,075
43,469
19,488
3,135
6,492
198,349
24,204
96,650
37,394
49,011
521,853
46,578
10,278
45,470
25,402
13,061
50,291
10,683
201,763
15,839 $
27,180
42,861
19,271
3,124
6,079
198,419
23,656
97,059
37,971
49,558
521,017
23,565
6,763
31,859
8,949
5,768
46,177
7,670
130,751
818 $
47
749
266
11
451
1,602
933
322
475
–
5,674
24,031
3,602
13,937
16,793
7,401
4,153
3,313
73,230
(71) $
(152)
(141)
(49)
–
(38)
(1,672)
(385)
(731)
(1,052)
(547)
(4,838)
(1,018)
(87)
(326)
(340)
(108)
(39)
(300)
(2,218)
747
(105)
608
217
11
413
(70)
548
(409)
(577)
(547)
836
23,013
3,515
13,611
16,453
7,293
4,114
3,013
71,012
Total
$
723,616 $
651,768 $
78,904 $
(7,056) $
71,848
(1) Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been
restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements
for further discussion.
- 49 -
The following table summarizes, for available-for-sale fixed maturities in an unrealized loss position at December 31, 2018 and available-for-sale fixed maturities
and equity securities in an unrealized loss position at December 31, 2017, respectively, the aggregate fair value and gross unrealized loss categorized by the
duration individual securities have been continuously in an unrealized loss position.
Fixed income securities:
12 months or less
Greater than 12 months
Total fixed income securities
Equity securities (1) :
12 months or less
Greater than 12 months
Total equity securities
Total
Number of
Securities
2018
Fair
Value
Gross
Unrealized Loss
Number of
Securities
2017
Fair
Value
Gross
Unrealized Loss
275 $
217
492
–
–
–
492 $
282,646 $
131,001
413,647
–
–
–
413,647 $
(7,296)
(3,497)
(10,793)
–
–
–
(10,793)
459 $
112
571
65
–
65
636 $
313,421 $
75,638
389,059
46,654
–
46,654
435,713 $
(2,683)
(2,155)
(4,838)
(2,218)
–
(2,218)
(7,056)
(1) Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been
restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements
for further discussion.
Unrealized losses in the Company's fixed income portfolio are generally the result of interest rate or foreign currency fluctuations. The Company does not intend
to sell any fixed income securities in an unrealized loss position at December 31, 2018, and it is not more likely than not that the Company will have to sell any
such fixed income security before recovery of its amortized cost basis. Accordingly, the Company does not believe any unrealized losses represent other-than-
temporary impairments as of December 31, 2018.
The fair value and the cost or amortized cost of fixed income investments at December 31, 2018, organized by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment
penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.
One year or less
Excess of one year to five years
Excess of five years to ten years
Excess of ten years
Total contractual maturities
Asset-backed securities
Total
Fair Value
Cost or Amortized Cost
$
$
45,858
287,506
101,605
6,641
441,610
151,035
592,645
7.7% $
48.5
17.1
1.2
74.5
25.5
100.0% $
46,150
290,743
104,571
6,410
447,874
152,630
600,504
7.7%
48.4
17.4
1.1
74.6
25.4
100.0
Major categories of investment income for the years ended December 31, are summarized as follows:
Interest on fixed income securities
Dividends on equity securities
Money market funds, Short-term and other
Investment expenses
Net investment income
2018
2017
2016
19,092 $
4,380
1,529
25,001
(2,953)
22,048 $
15,340 $
4,611
471
20,422
(2,327)
18,095 $
13,254
3,598
128
16,980
(2,497)
14,483
$
$
- 50 -
Gains and losses on investments, including equity method earnings from limited partnerships, for the years ended December 31 are summarized below:
Gross gains on available-for-sale investments sold during the period:
Fixed income securities
Equity securities (1)
Total gains
Gross losses on available-for-sale investments sold during the period:
Fixed income securities
Equity securities (1)
Total losses
2018
2017
2016
$
10,807 $
–
10,807
9,135 $
10,481
19,616
(14,367)
–
(14,367)
(9,882)
(2,368)
(12,250)
11,628
28,742
40,370
(10,940)
(2,932)
(13,872)
Other-than-temporary impairments
(19)
(149)
(5,743)
Change in value of limited partnership investments
(9,343)
12,469
2,473
Losses on equity securities:
Realized losses on equity securities sold during the period (2)
Unrealized losses on equity securities held at the end of the period
Realized and unrealized losses on equity securities held at the end of the period
(3,072)
(9,697)
(12,769)
–
–
–
–
–
–
Net realized and unrealized gains (losses) on investments
$
(25,691) $
19,686 $
23,228
(1) Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been
restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements
for further discussion.
(2) During 2018, the Company sold $149,195 in equity securities, resulting in a gain on sale of $51,900. The majority of these gains were included in unrealized
gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, were reclassified to retained earnings
as of January 1, 2018 and were therefore not recognized in the consolidated statements of operations for the year ended December 31, 2018.
Gain and loss activity for fixed income and equity security investments, as shown in the previous table, includes adjustments for other-than-temporary impairment
for the years ended December 31 summarized as follows:
Cumulative charges to income at beginning of year
Writedowns based on objective and subjective criteria
Recovery of prior writedowns upon sale or disposal
Net pre-tax realized gain
2018
2017
2016
$
4,209 $
5,650 $
10,513
19
(3,298)
3,279
149
(1,590)
1,441
5,743
(10,606)
4,863
Cumulative charges to income at end of year
$
930 $
4,209 $
5,650
There is no primary market and only a limited secondary market for the Company's investments in limited partnerships and, in most cases, the Company is
prohibited from disposing of its limited partnership interests for some period of time and generally must seek approval from the applicable general partner for any
such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received
by the Company for many years after the earnings have been reported. The Company has a commitment to contribute up to an additional $1,317 to a limited
partnership as of December 31, 2018.
- 51 -
The Company's limited partnerships include one investment which primarily invests in public and private equity markets in India. This limited partnership
investment's value as of December 31, 2018 and 2017 was $26,344 and $29,817, respectively. At December 31, 2018, the Company's estimated ownership interest
in this limited partnership investment was approximately 6%. The Company's share of income (losses), from both realized and unrealized appreciation (losses)
from this limited partnership investment was ($3,473), $7,665 and ($1,117) in 2018, 2017 and 2016, respectively. The summarized financial information of this
limited partnership investment as of and for the years ended December 31 is as follows:
Investment income (loss)
Partnership expenses
Net investment loss
Realized gain on investments
Unrealized appreciation (depreciation) on investments
Net increase (decrease) in partners' capital resulting from operations
Total assets
Total liabilities
Total partners' capital
$
$
$
2018
2017
2016
4,298 $
6,874
(2,576)
623 $
2,206
(1,583)
(5)
2,426
(2,431)
12,314
8,723
7,754
(65,250)
133,807
(21,002)
(55,512) $
140,947 $
(15,679)
462,058 $
45,483
416,575
566,629 $
30,976
535,653
448,263
39,988
408,275
The Company's limited partnerships include an additional investment which primarily invests in public equity and fixed income markets. This limited partnership
investment's value as of December 31, 2018 and 2017 was $14,975 and $19,380, respectively. At December 31, 2018, the Company's estimated ownership interest
in this limited partnership investment was approximately 5%. The Company's share of income (losses) from both realized and unrealized appreciation (losses)
from this limited partnership investment was ($4,404), $1,452 and $2,662 in 2018, 2017 and 2016, respectively. The summarized financial information of this
limited partnership investment as of and for the years ended December 31 is as follows:
Investment income
Partnership expenses
Net investment income
Realized gain (loss) on investments
Unrealized appreciation (depreciation) on investments
Net increase (decrease) in partners' capital resulting from operations
Total assets
Total liabilities
Total partners' capital
$
$
$
2018
2017
2016
19,507 $
9,132
10,375
14,524 $
12,861
1,663
13,534
10,628
2,906
(37,143)
(15,073)
830
(48,132)
49,847
46,685
(74,900) $
36,437 $
50,421
241,174 $
20,020
221,154
354,709 $
2,000
352,709
464,184
14,555
449,629
The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $87,981 and $86,335 at December 31, 2018 and
2017, respectively.
Short-term investments at December 31, 2018 included $1,000 in certificates of deposit issued by a Bermuda bank.
The Company's fixed income securities are over 90% invested in investment grade fixed income investments. The Company has no fixed income investments that
were originally issued with guarantees by a third-party insurance company nor does the Company have any direct exposure to any guarantor at December 31, 2018.
Approximately $54,233 of fixed income investments (6.2% of the Company's consolidated investment portfolio, which includes money market instruments
classified as cash equivalents) consists of non-rated bonds and bonds rated as less than investment grade at year-end. These investments include a diversified
portfolio of over 40 issuers and have a $5,202 aggregate net unrealized loss position at December 31, 2018.
- 52 -
Note C - Loss and Loss Expense Reserves
Activity in the reserves for losses and loss expenses for the years ended December 31 is summarized as follows. All amounts are shown net of reinsurance, unless
otherwise indicated.
2018
2017
2016
Reserves, gross of reinsurance recoverable, at the beginning of the year
Reinsurance recoverable on unpaid losses at the beginning of the year
Reserves at the beginning of the year
$
680,274 $
308,143
372,131
576,330 $
251,563
324,767
Provision for losses and loss expenses:
Claims occurring during the current year
Claims occurring during prior years
Total incurred losses and loss expenses
Loss and loss expense payments:
Claims occurring during the current year
Claims occurring during prior years
Total paid
Reserves at the end of the year
329,078
16,786
345,864
228,303
19,215
247,518
84,738
143,853
228,591
489,404
67,234
132,920
200,154
372,131
513,596
211,843
301,753
172,645
13,836
186,481
54,239
109,228
163,467
324,767
Reinsurance recoverable on unpaid losses at the end of the year
375,935
308,143
251,563
Reserves, gross of reinsurance recoverable, at the end of the year
$
865,339 $
680,274 $
576,330
The table above shows that a reserve deficiency of $16,786 developed during 2018 in the settlement of claims occurring on or before December 31, 2017,
compared to reserve deficiencies of $19,215 in 2017 and $13,836 in 2016. The developments for each year are composed of individual claim savings and
deficiencies which, in the aggregate, have resulted from the settlement of claims at amounts higher or lower than previously reserved and from changes in
estimates of losses incurred but not reported as part of the normal reserving process.
The $16,786 prior accident year deficiency that developed during 2018 primarily related to unfavorable loss development in commercial automobile coverages.
This unfavorable loss development was the result of increased claim severity due to a more challenging litigation environment, as well as an unexpected increase in
the time to settle claims leading to an unfavorable change in claim settlement patterns. This 2018 deficiency compares to a deficiency of $19,215 for 2017, also
related to unfavorable loss development from commercial automobile coverages, particularly from severe transportation loss events that occurred primarily during
the first six months of 2017 and higher than expected loss development for discontinued lines of business.
Losses and loss expenses for 2018 also reflected an increase in current accident year losses caused by severe commercial automobile losses, including continued
emergence of severity.
Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $7,545 and $7,559 at December 31, 2018 and 2017,
respectively.
The following is information about incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and
the total of incurred ‐ but ‐ not ‐ reported liabilities plus expected development on reported claims included within the net incurred claims amounts.
- 53 -
Workers' Compensation
As of December 31, 2018
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
Total of
Incurred-
but-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Number
of
Reported
Claims
Per Year
3,784
4,223
4,546
4,481
5,275
5,406
6,308
6,059
16,106
12,893
985
1,098
2,179
2,824
3,780
4,482
5,328
6,740
13,918
36,250
77,584
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2018
2009 2010 2011 2012 2013 2014 2015 2016 2017
$ 17,270 $ 20,931 $ 21,447 $ 21,261 $ 21,268 $ 20,767 $ 20,641 $ 20,817 $ 20,946 $ 21,153 $
20,644 20,111 19,400 19,300 18,849 18,344 19,195 19,541 19,819
26,057 26,628 26,958 26,767 25,515 27,293 26,617 26,631
23,965 25,544 24,887 24,485 25,616 27,020 26,775
27,619 30,638 29,913 32,121 32,553 31,131
36,768 36,968 34,009 33,427 31,031
26,277 23,115 25,889 24,948
35,240 29,757 29,317
42,387 37,731
62,973
Total $ 311,509 $
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
$
2009
2011
2010
2012
2013
2017
2016
2014
2015
3,974
9,134
4,916
11,963
11,912
4,597
2018
4,186 $ 10,073 $ 13,343 $ 15,576 $ 16,592 $ 17,448 $ 18,028 $ 18,514 $ 18,982 $ 19,261
13,845 14,966 15,835 16,590 16,789 17,062
15,973 18,884 20,617 21,622 22,569 22,991
11,004 14,834 17,415 18,946 20,276 21,157
4,880 12,792 18,065 21,655 23,643 24,968
5,328 13,665 19,075 22,387 23,968
2,918 10,128 15,020 17,487
5,784 13,377 18,461
6,150 15,811
10,987
Total $ 192,153
Outstanding liabilities prior to 2009 net of reinsurance 12,640
Liabilities for claims and claims adjustment expenses, net of reinsurance $ 131,996
- 54 -
Commercial Liability
As of December 31, 2018
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
Total of
Incurred-
but-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Number
of
Reported
Claims
Per Year
899
2,403
2,901
3,130
3,749
3,320
3,185
3,707
5,261
6,870
190
112
131
135
663
307
2,785
7,048
25,527
70,070
106,968
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2018
2017
2009 2010 2011 2012 2013 2014 2015 2016
$ 29,707 $ 30,406 $ 30,203 $ 26,280 $ 27,259 $ 25,872 $ 25,373 $ 25,320 $ 25,485 $ 25,761 $
31,124 22,161 21,899 19,139 20,300 19,764 19,377 19,081 19,985
46,829 43,832 31,633 36,894 35,805 37,122 36,076 37,852
49,743 54,269 49,743 51,367 48,708 51,475 51,648
53,817 39,143 37,701 36,371 46,690 48,857
49,971 52,254 52,483 52,964 64,372
61,420 70,174 64,323 71,088
61,638 68,974 77,362
103,126 103,611
179,589
Total $ 680,125 $
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
$
2009
2010
2011
2012
2013
2017
2014
2016
2015
1,649
7,166
1,809
11,635
11,350
3,086
2018
928 $ 17,880 $ 19,718 $ 23,521 $ 24,866 $ 25,066 $ 25,114 $ 25,125 $ 25,199 $ 25,391
16,052 18,627 18,517 18,866 18,662 18,791
23,615 30,795 33,255 34,009 35,561 36,400
23,252 32,942 45,303 47,601 50,036 50,750
5,167 15,772 25,270 34,481 44,865 46,084
9,046 28,393 45,075 57,692
10,923 27,582 49,267 63,133
6,843 30,377 52,764
11,415 46,529
18,689
Total $ 416,223
4,621
Liabilities for claims and claims adjustment expenses, net of reinsurance $ 268,523
Outstanding liabilities prior to 2009 net of reinsurance
4,023
- 55 -
Professional Liability Reinsurance Assumed (in runoff)
As of December 31, 2018
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
Total of
Incurred-
but-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Number
of
Reported
Claims
Per Year
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
–
24
116
706
1,847
2,297
5,422
1,035
–
–
11,447
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 2010 2011 2012 2013 2014 2015 2016
– $
$
– $
– $
– $
– $
– $
2017
2018
– $
– $
– $
– $
2,196 4,277 7,827 7,946 9,733 10,740 11,689 11,893 11,677
10,492 8,314 9,017 9,859 10,779 12,735 12,744 12,725
10,041 9,276 5,569 10,157 14,605 16,555 14,949
14,370 13,034 11,618 17,694 23,256 22,213
12,675 8,825 7,259 9,837 12,749
11,638 7,859 7,147 10,422
6,368 2,482 1,522
–
–
Total $ 86,257 $
–
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited)
Accident Year
2009
2010
2011
$
– $
– $
41
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
– $
729
50
2012
– $
– $
– $
2016
2017
2013
2014
2015
– $
3,505
637
103
– $
5,844
2,061
992
123
– $
7,758
4,983
2,388
1,135
723
2018
–
9,904 11,132 11,334 11,334
8,104 10,404 11,679 12,280
5,077
8,355 11,239 13,091
5,088 10,988 14,779 18,229
6,627
3,207
99
–
–
Total $ 64,867
–
Liabilities for claims and claims adjustment expenses, net of reinsurance $ 21,390
Outstanding liabilities prior to 2009 net of reinsurance
3,999
1,899
5
–
2,241
390
–
761
10
- 56 -
Physical Damage (1)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31 (2016-2017 is Supplementary Information and Unaudited)
Number of
Reported
Claims Per
Year
As of December 31, 2018
Total of
Incurred-but-
Not-Reported
Liabilities Plus
Expected
Development
on Reported
Claims
Accident Year
2016 and prior
2017
2018
Accident Year
2016 and prior
2017
2018
2016
2017
2018
$
40,651 $
39,477 $
48,440
Total $
39,658 $
47,193
53,726
140,577 $
5
512
4,221
4,738
9,619
10,517
10,186
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
For the Years Ended December 31 (2016-2017 is Supplementary Information and Unaudited)
2016
2017
2018
$
34,114 $
39,354 $
39,517
Total $
Outstanding liabilities prior to 2016 net of reinsurance
Liabilities for claims and claims adjustment expenses, net of reinsurance $
39,073
46,554
41,631
127,258
10
13,329
(1) The majority of physical damage claims settle within a two-year period. The triangles above have been abbreviated to reflect the short-tail nature of
this business.
- 57 -
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance
sheet at December 31 is as follows.
Net outstanding liabilities
Commercial Liability
Workers' Compensation
Physical Damage
Professional Liability Assumed
Other short-duration insurance lines
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid claims
Commercial Liability
Workers' Compensation
Physical Damage
Other short-duration insurance lines
Reinsurance recoverable on unpaid losses at the end of the year
$
2018
2017
268,523 $
131,996
13,329
21,390
33,716
468,954
194,483
172,869
1,851
6,732
375,935
162,581
113,751
9,087
28,980
39,883
354,282
124,695
170,394
51
13,002
308,142
Unallocated claims adjustment expenses
20,450
17,850
Total gross liability for unpaid claims and claims adjustment expense
$
865,339 $
680,274
The following is supplementary information about average historical claims duration as of December 31, 2018:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
(Supplementary Information and Unaudited)
Years
Commercial Liability
Workers' Compensation
Physical Damage
Professional Liability
Assumed
2
3
1
8.5 % 30.5 % 23.7 % 20.6 %
17.3 % 26.3 % 16.3 % 10.4 %
80.6 % 14.1 %
4
5
9.9 %
5.7 %
6
1.9 %
4.3 %
7
1.9 %
3.3 %
8
0.5 %
1.6 %
9
0.5 %
1.8 %
10
0.7 %
1.3 %
2.0 % N/A N/A N/A N/A N/A N/A N/A
1.1 %
3.6 % 13.5 % 19.0 % 18.3 % 17.8 % 11.0 %
1.7 %
–
N/A
Reserve
methodologies
for
incurred
but
not
reported
losses
The Company uses both standard actuarial techniques common to most insurance companies as well as proprietary techniques developed by the Company in
connection with its specialty business products. For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor
methods. The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to
claim settlement trends and fluctuations in premium exposure for its short-tail lines. A minimum of 12 running accident quarters is used to project the reserve
necessary for incurred but not reported losses for its short-tail lines.
The Company also uses the loss development factor approach for its long-tail lines of business, including workers' compensation. A minimum of 15 accident years
is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but
not reported losses. Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.
For the Company's commercial automobile risks, which are covered by regularly updated reinsurance agreements and which contain wide-ranging self-insured
retentions ("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company's exposures to loss. In
situations where the Company's reinsurance structure, the insured's SIR selections, policy volume, and other factors are changing, current accident period loss
exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company
supplements the above-described actuarial methods with loss ratio reserving techniques developed from the Company's proprietary databases to arrive at the
reserve for incurred but not reported losses for the calendar/accident period under review. As losses for a given calendar/accident period develop with the passage
of time, management evaluates such development on a monthly and quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with
regard to the anticipated ultimate incurred losses. This process continues until all losses are settled for each period subject to this method.
- 58 -
Claim
count
methodology
The Company uses a claim event and coverage combination to estimate frequency. For example, a single claim event involving loss for physical damage of a
vehicle and personal injury to a claimant would be considered two claims for purposes of the calculation of frequency. A single claim event causing personal
injury to two claimants would be considered a single claim under the methodology. Due to the number of reinsurance assumed treaties entered into (and the
varying structures: both quota share and excess of loss) the Company deems it impractical to collect claim frequency information related to this business and this
information has not been made available to the Company.
Note D – Reinsurance
The Insurance Subsidiaries cede portions of their gross premiums written to certain other insurers under excess of loss and quota share treaties and by facultative
placements. Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis ("quota-share"),
while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount
("excess of loss"). Reinsurance treaties with other companies permit the recovery of a portion of related direct losses. Management determines the amount of net
exposure it is willing to accept generally on a product-line basis. Certain historical treaties covering commercial automobile risks include annual deductibles
which must be exceeded before the Company can recover under the terms of the treaty. The Company retains a higher percentage of the direct premium in
consideration of these deductible provisions. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under
reinsurance contracts.
The Company also serves as an assuming reinsurer on treaties with direct writing insurance companies and, prior to June 30, 2015, under retrocessions from other
reinsurers for catastrophic property coverages. Accordingly, for periods prior to that date, the occurrence of catastrophic events could have had a significant
impact on the Company's operations. In addition, the Insurance Subsidiaries participate in certain mandatory residual market pools, which require insurance
companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium
writings on a state or national level. Historically, the operation of these assigned risk pools has resulted in net losses being allocated to the Company, although
such losses have not been material in relation to the Company's operations.
The following table summarizes the impact of reinsurance ceded and assumed on the Company's net premiums written and earned for the most recent three years:
Direct
Ceded on direct
Net direct
Assumed
Ceded on assumed
Net assumed
2018
Premiums Written
2017
2016
2018
Premiums Earned
2017
$
581,070 $
(138,102)
442,968
504,033 $
(151,348)
352,685
395,625 $
(131,166)
264,459
562,364 $
(131,080)
431,284
470,158 $
(145,201)
324,957
1,430
–
1,430
704
–
704
7,379
(86)
7,293
1,596
–
1,596
3,188
–
3,188
2016
394,679
(129,926)
264,753
11,344
(86)
11,258
Net
$
444,398 $
353,389 $
271,752 $
432,880 $
328,145 $
276,011
Net losses and loss expenses incurred for 2018, 2017 and 2016 have been reduced by ceded reinsurance recoveries of approximately $148,173, $128,086 and
$108,656, respectively. Ceded reinsurance premiums and loss recoveries for the purchase of catastrophe reinsurance coverage on the Company's net direct
business were not material.
Net losses and loss expenses incurred include a savings of $1,300 for 2018 and expenses of $5,223 and $14,746 for 2017 and 2016, relating to reinsurance assumed
from non-affiliated insurance or reinsurance companies.
Components of reinsurance recoverable at December 31, are as follows:
Case unpaid losses, net of valuation allowance
Incurred but not reported unpaid losses and loss expenses
Paid losses and loss expenses
Unearned premiums
- 59 -
2018
2017
163,011 $
211,805
1,250
16,370
392,436 $
119,615
187,163
2,206
9,347
318,331
$
$
Note E - Income Taxes
On December 22, 2017, the U.S. Tax Act was signed into law, which lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As a
result, the Company recorded a tax benefit of $9,572 related to the remeasurement of its deferred tax assets and liabilities at December 31, 2017. As of December
31, 2017, the Internal Revenue Service ("IRS") had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore,
while the Company had not completed its accounting for the tax effects, it made a reasonable estimate of the tax effects on its existing deferred tax balances at
December 31, 2017. The Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense
(benefit) were recorded during 2018.
The U.S. Tax Act provides for a change in the methodology employed to calculate reserves for tax purposes. Beginning January 1, 2018, a higher interest rate
assumption and longer payout patterns are used to discount these reserves. In addition, companies are no longer able to elect to use their own experience to
discount reserves, but instead are required to use the industry-based tables published by the IRS annually. During 2017, the Company estimated the provisional tax
impacts related to the change in methodology as $1,696. During 2018, the IRS published the discount factor tables and the Company calculated the tax impact of
the methodology change and recorded an updated amount for deferred tax assets and an offsetting deferred tax liability of $2,262 at December 31, 2018. The
deferred tax liability was amortized into income in the amount of $323 during 2018 in accordance with the 8-year inclusion described in the U.S. Tax Act.
Deferred income taxes are calculated to account for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31
are as follows:
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments
Deferred acquisition costs
Loss and loss expense reserves
Limited partnership investments
Accelerated depreciation
Other
Total deferred tax liabilities
Deferred tax assets:
Loss and loss expense reserves
Limited partnership investments
Unearned premiums discount
Other-than-temporary investment declines
Deferred compensation
Deferred ceding commission
Other
Total deferred tax assets
Net deferred tax (assets) liabilities
$
2018
2017
4,572 $
2,552
3,583
–
690
1,509
12,906
9,999
3,498
2,321
625
580
1,173
972
19,168
15,086
1,804
2,623
3,826
492
1,791
25,622
6,761
–
1,837
815
885
627
339
11,264
$
(6,262) $
14,358
A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements as of
December 31 is as follows:
Statutory federal income rate applied to pre-tax income (loss)
Tax effect of (deduction):
Tax-exempt investment income
Change in enacted tax rates
Other
Federal income tax expense (benefit)
- 60 -
2018
2017
2016
$
(9,213) $
3,543 $
15,069
(253)
–
(331)
(9,797) $
(968)
(9,572)
(1,204)
(8,201) $
(938)
–
(22)
14,109
$
Federal income tax expense (benefit) as of December 31 consists of the following:
Tax expense (benefit) on pre-tax income (loss):
Current
Deferred
The provision for deferred federal income taxes as of December 31 consists of the following:
Limited partnerships
Discounts of loss and loss expense reserves
Reserves - salvage and subrogation and other
Unearned premium discount
Deferred compensation
Other-than-temporary investment declines
Deferred acquisitions costs and ceding commission
Change in enacted tax rates
Unrealized gains / losses
Other
Provision for deferred federal income taxes
2018
2017
2016
8,997 $
(18,794)
(9,797) $
(4,335) $
(3,866)
(8,201) $
11,271
2,838
14,109
2018
2017
2016
(2,383) $
(2,704)
427
(484)
305
695
201
–
(13,876)
(975)
(18,794) $
4,099 $
1,315
56
(1,767)
(168)
(127)
1,553
(9,572)
–
745
(3,866) $
503
(114)
(1,110)
298
595
2,320
(95)
–
–
441
2,838
$
$
$
$
The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized.
Management has determined that no such valuation allowance is necessary at December 31, 2018 or 2017. As of December 31, 2018, calendar years 2017, 2016
and 2015 remain subject to examination by the IRS.
The Company has no uncertain tax positions as of December 31, 2018 or 2017. The Company recognizes accrued interest and penalties, if any, related to
unrecognized tax benefits in income tax expense (benefit) and changes in such accruals would impact the Company's effective tax rate. There were no amounts
accrued for the payment of interest at December 31, 2018, 2017 and 2016.
Note F - Shareholders' Equity
The Company's Class A and Class B Common Stock has a stated value of approximately $.04 per share. The Company paid a total of $16,835, or $1.12 per share,
in dividends during 2018, $16,302, or $1.08 per share, during 2017 and $15,803, or $1.04 per share, during 2016.
On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's
Class A or Class B Common Stock. On August 7, 2018, the Company's Board of Directors reaffirmed its share repurchase program, but also provided that the
aggregate dollar amount of shares of the Company's Common Stock that may be repurchased under the share repurchase program through August 8, 2019 may not
exceed $25,000. Pursuant to this share repurchase program, the Company entered into a Rule 10b5-1 plan on September 24, 2018, which authorized the
repurchase of up to $12,000 of the Company's outstanding common shares at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1
of the Securities Exchange Act of 1934. The Rule 10b5-1 plan expired on November 8, 2018. No duration has been placed on the Company's share repurchase
program, and the Company reserves the right to amend, suspend or discontinue it at any time. The share repurchase program does not commit the Company to
repurchase any shares of its Common Stock.
During the year ended December 31, 2018, the Company paid $4,596 to repurchase 7,770 shares of Class A Common Stock at an average share price of $21.58
and 191,898 shares of Class B Common Stock at an average share price of $23.07 under the share repurchase program.
- 61 -
Accumulated
Other
Comprehensive
Income
(Loss)
A reconciliation of the components of accumulated other comprehensive income (loss) at December 31 is as follows:
Investments:
Total unrealized gain (loss) before federal income tax expense (benefit)
Deferred tax benefit (liability)
Net unrealized gains (losses) on investments
Foreign exchange adjustment:
Total unrealized losses
Deferred tax benefit
Net unrealized losses on foreign exchange adjustment
2018
2017
$
(7,859) $
1,651
(6,208)
71,848
(25,148)
46,700
(1,442)
303
(1,139)
(475)
166
(309)
Accumulated other comprehensive income (loss)
$
(7,347) $
46,391
Details of changes in net unrealized gains (losses) on investments for the years ended December 31 are as follows:
Investments:
Pre-tax holding gains (losses) on debt and equity securities arising during period (1)
Less: applicable federal income tax expense (benefit)
$
Pre-tax gains (losses) on debt and equity securities included in net income (loss) during period (1)
Less: applicable federal income tax expense (benefit)
2018
2017
2016
(12,253) $
(2,573)
(9,680)
(3,560)
(748)
(2,812)
26,677 $
9,337
17,340
7,217
2,526
4,691
13,259
4,641
8,618
20,755
7,264
13,491
Change in unrealized gains (losses) on investments
$
(6,868) $
12,649 $
(4,873)
(1) Effective January 1, 2018, the Company adopted ASU 2016-01 and unrealized gains (losses) related to equity securities are no longer reflected in accumulated
other comprehensive income (loss). Prior periods have not been restated to conform to the current presentation.
Note G - Other Operating Expenses
Details of other operating expenses for the years ended December 31:
Amortization of gross deferred policy acquisition costs
Other underwriting expenses
Reinsurance ceded credits
Total underwriting expenses
Operating expenses of non-insurance companies
Goodwill impairment charge
Total other operating expenses
Note H - Employee Benefit Plans
2018
2017
2016
$
$
78,105 $
46,638
(23,124)
101,619
32,406
3,152
137,177 $
70,574 $
37,230
(23,187)
84,617
28,977
–
113,594 $
51,597
41,692
(33,512)
59,777
29,685
–
89,462
The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan (the "Plan") which covers nearly all employees. The Company's
contributions are based on a set percentage and the contributions to the Plan for 2018, 2017 and 2016 were $3,486, $2,797 and $2,449, respectively.
- 62 -
Note I - Stock Based Compensation
In accordance with the terms of the 1981 Stock Purchase Plan (the "1981 Plan"), the Company is obligated to repurchase shares issued under the 1981 Plan, at a
price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase from one outside director. A limited
number of shares have ever been repurchased under the 1981 Plan. At December 31, 2018, there were 46,875 shares of Class A Common Stock and 187,500
shares of Class B Common Stock outstanding which remain eligible for repurchase by the Company.
Restricted
Stock:
The Company issues shares of restricted Class B Common Stock to the Company's outside directors, which serve as the annual retainer compensation for the
outside directors. The shares are distributed to the outside directors on the vesting date, which, with the exception of pro-rated annual retainers granted to outside
directors, is one year following the date of grant. The table below provides details of the restricted stock issuances to directors for 2018, 2017 and 2016:
Grant Date
5/10/2016
5/9/2017
8/31/2017
2/9/2018
5/8/2018
Number of
Shares Issued
17,677
18,183
1,257
408
19,085
Vesting Date
5/10/2017
5/9/2018
5/9/2018
5/9/2018
5/8/2019
Service Period
7/1/2016 - 6/30/2017
7/1/2017 - 6/30/2018
8/31/2017 - 6/30/2018
2/9/2018 - 6/30/2018
7/1/2018 - 6/30/2019
Grant Date Fair
Value Per
Share
24.89
24.20
21.90
24.20
23.05
$
$
$
$
$
Compensation expense related to the above stock grants is recognized over the period in which the directors render the services.
Director compensation expense associated with these restricted stock grants of $464, $454 and $460 was charged against income for the restricted stock awards
granted in 2018, 2017 and 2016, respectively.
On February 8, 2017, the Company issued 20,181 shares of restricted Class B Common Stock to certain of the Company's executives under the Company's
Restricted Stock Compensation Plan. The shares of restricted stock represent a portion of the calendar year 2017 compensation earned by certain executives under
the terms of the Company's Executive Incentive Bonus Plan. The shares of restricted stock will vest over a three-year period from the date of grant. The shares of
restricted stock were valued based on the closing price of the Company's Class B Common Stock on February 8, 2017, the day the shares of restricted stock were
granted. Each share of restricted stock was valued at $23.80 per share, representing a total value of $480. Non-vested shares of restricted stock will be forfeited
should an executive's employment terminate for any reason other than death, disability or retirement, as defined by the Compensation Committee.
In May 2017, the Company's Compensation Committee granted equity-based awards pursuant to the Company's Long-Term Incentive Plan (the "Long-Term
Incentive Plan"), which was approved by the Company's shareholders at the 2017 Annual Meeting of Shareholders. Certain participants under the Long-Term
Incentive Plan were granted performance-based equity awards (the "2017 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to
such award determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 2017 growth in net premiums
earned and the Company's 2017 combined ratio. The combined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating
expenses, less commission and other income to (B) net premiums earned. No 2017 LTIP Awards were earned based on the Company's performance in 2017, and
therefore no shares were issued pursuant to the 2017 LTIP Awards. In addition to the 2017 LTIP Awards, in May 2017 the Company's Compensation Committee
also granted Value Creation Incentive Plan awards (the "2017 VCIP Awards") to certain participants under the Long-Term Incentive Plan. The 2017 VCIP
Awards are performance-based equity awards that will be earned based on the Company's cumulative operating income over a three-year performance period from
January 1, 2017 through December 31, 2019 relative to a cumulative operating income goal for the period set by the Compensation Committee in March 2017. For
the purpose of the 2017 VCIP Awards, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments. Any
2017 VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B Common Stock at the end of the three-year performance period,
but no later than March 15, 2020. No shares are eligible to be issued under the 2017 VCIP Awards as of December 31, 2018.
- 63 -
In March 2018, the Company's Compensation Committee granted equity-based awards pursuant to the Long-Term Incentive Plan. Certain participants under the
Long-Term Incentive Plan were granted equity awards (the "2018 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such
award determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 2018 growth in gross premiums earned
and the Company's 2018 combined ratio, as defined above. No 2018 LTIP Awards were earned based on the Company's performance in 2018, and therefore no
shares were issued pursuant to the 2018 LTIP Awards. In addition to the 2018 LTIP Awards, in March 2018 the Company's Compensation Committee also
granted Value Creation Incentive Plan awards (the "2018 VCIP Awards") to certain participants under the Long-Term Incentive Plan. The 2018 VCIP Awards are
performance-based equity awards that will be earned based on the Company's cumulative operating income, as defined above, over a three-year performance
period from January 1, 2018 through December 31, 2020 relative to a cumulative operating income goal for the period set by the Compensation Committee in
March 2018. Any 2018 VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B Common Stock at the end of the three-year
performance period, but no later than March 15, 2021. No shares are eligible to be issued under the 2018 VCIP Awards as of December 31, 2018.
On November 13, 2018, the Company entered into an employment agreement (the "Agreement") with its Interim Chief Executive Officer, John D. Nichols, Jr.
Pursuant to the terms of the Agreement, on November 13, 2018, Mr. Nichols was granted 85,000 restricted shares of the Company's Class B Common Stock (the
"Stock Grant"), of which 42,500 shares will vest as of October 17, 2019; 21,250 shares will vest as of October 17, 2020, and 21,250 shares will vest as of October
17, 2021. The Company recorded $140 in expense in the fourth quarter of 2018 related to the Stock Grant.
Note J – Segment Information
Effective January 1, 2017, the Company determined that its business constituted one reportable property and casualty insurance segment based on how its
operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are allocated and assessing
performance. The property and casualty insurance segment provides multiple lines of insurance coverage primarily to commercial automobile companies, as well
as to independent contractors who contract with commercial automobile companies. In addition, the Company provides workers' compensation coverage for a
variety of operations outside the transportation industry.
The following table summarizes segment revenues for the years ended December 31:
Revenues:
Net premiums earned
Net investment income
Net realized and unrealized gains (losses) on investments
Commissions and other income
Total revenues
Note K - Earnings (Loss) Per Share
2018
2017
2016
$
$
432,880 $
22,048
(25,691)
9,932
439,169 $
328,145 $
18,095
19,686
5,308
371,234 $
276,011
14,483
23,228
5,275
318,997
The following is a reconciliation of the denominators used in the calculation of basic and diluted earnings (loss) per share for the years ended December 31:
Average shares outstanding for basic earnings (loss) per share
Dilutive effect of share equivalents
2018
14,964,812
2017
15,065,216
2016
15,071,900
–
42,220
12,108
Average shares outstanding for diluted earnings (loss) per share
14,964,812
15,107,436
15,084,008
Note L - Concentrations of Credit Risk
The Company writes policies of excess insurance attaching above SIRs and also writes policies that contain per-claim deductibles. Those losses and claims that fall
within the SIR limits are obligations of the insured; however, the Company writes surety bonds in favor of various regulatory agencies guaranteeing the insureds'
payment of claims within the SIR. Further, specified portions of losses and claims incurred under large deductible policies, while obligations of the Company, are
contractually reimbursable to the Company from the insureds. The Company requires collateral from its insureds to serve as a source of reimbursement if the
Company is obligated to pay claims within the SIR by reason of an insured's default or if the insured fails to reimburse the Company for deductible amounts paid
by the Company.
Acceptable collateral may be provided in the form of letters of credit on Company-approved banks, Company-approved marketable securities or cash. At
December 31, 2018, the Company held collateral in the aggregate amount of $333,188.
- 64 -
The amount of collateral required of an insured is determined by the financial condition of the insured, the type of obligations guaranteed by the Company,
estimated reserves for incurred losses within the SIR or deductible that have been reported to the insured or the Company, estimated incurred but not reported
losses, and estimated losses that are expected to occur within the SIR or deductible prior to the next collateral adjustment date. In general, the Company attempts
to hold collateral equal to 100% of the ultimate losses that would be paid by or due the Company in the event of an insured's default. Periodic audits are conducted
by the Company to evaluate its exposure and the collateral required. If a deficiency in collateral is noted as the result of an audit, additional collateral is requested
immediately. Because collateral amounts contain numerous estimates of the Company's exposure, are adjusted only periodically and are sometimes reduced based
on the superior financial condition of the insured, the amount of collateral held by the Company at a given point in time may not be sufficient to fully reimburse the
Company for all of its guarantees or amounts due in the event of an insured's default. In that regard, the Company is not fully collateralized for the guarantees
made for, or the deductible amounts that may be due from, FedEx Corporation and certain of its subsidiaries and related entities ("FedEx"), and in the event of their
default, such default may have a material adverse impact on the Company. The Company estimates its uncollateralized exposure related to FedEx to be as much as
70% (after-tax) of shareholders' equity at December 31, 2018.
The Company's balance sheet includes paid and estimated unpaid amounts recoverable from reinsurers under various agreements. These recoverables are only
partially collateralized. The largest amount due from an individual reinsurer, net of collateral and offsets, was $48,473 at December 31, 2018.
Note M – Acquisition and Related Goodwill and Intangibles
On October 31, 2008, the Company purchased a commercial lines specialty insurance agency for a cash purchase price of $3,500. As part of the purchase, the
Company recorded goodwill of $3,152 and intangible assets of $179. Accumulated amortization of intangible assets was $179 as of both December 31, 2018 and
2017.
During the fourth quarter of 2018, the Company conducted its annual impairment review. Based on the results of that review, the Company concluded that its
entire goodwill balance was impaired, resulting in an impairment loss of $3,152. The Company utilized a market approach, which considered revenue and
earnings multiples of its own and comparable company information. In the analysis, the Company considered the significant decline in its stock price and the
decline in overall financial performance during 2018, particularly in more recent periods, as well as the downgrade to its A.M. Best rating in late 2018.
- 65 -
Note N – Fair Value
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to
measure their fair value. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, accounts
payable and accrued expenses, income taxes payable, short-term borrowings and unearned premiums approximate fair value because of the short-term nature of
these items. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:
As of December 31, 2018:
Description
Fixed income securities:
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Options embedded in convertible securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity securities:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
Short-term
Cash equivalents
Total
Total
Level 1
Level 2
Level 3
10,687 $
37,385
64,422
9,750
2,835
5,423
186,651
3,799
38,540
29,155
25,180
178,818
592,645
17,945
3,179
25,253
6,920
2,303
5,489
5,333
66,422
1,000
156,855
816,922 $
– $
–
–
–
2,835
–
–
–
–
–
–
–
2,835
17,945
3,179
25,253
6,920
2,303
5,489
5,333
66,422
1,000
–
70,257 $
10,687 $
37,385
64,422
9,750
–
5,423
186,651
3,799
38,540
29,155
25,180
178,818
589,810
–
–
–
–
–
–
–
–
–
156,855
746,665 $
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
- 66 -
As of December 31, 2017:
Description
Fixed income securities:
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Options embedded in convertible securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity securities:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
Short-term
Cash equivalents
Total
Total
Level 1
Level 2
Level 3
$
$
16,586 $
27,075
43,469
19,488
3,135
6,492
193,058
5,291
24,204
96,650
37,394
49,011
521,853
46,578
10,278
45,470
25,402
13,061
50,291
10,683
201,763
1,000
59,173
783,789 $
– $
–
–
–
3,135
–
–
–
–
–
–
–
3,135
46,578
10,278
45,470
25,402
13,061
45,276
10,683
196,748
1,000
–
200,883 $
16,586 $
27,075
43,469
19,488
–
6,492
193,058
5,291
24,204
96,650
37,394
49,011
518,718
–
–
–
–
–
5,015
–
5,015
–
59,173
582,906 $
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Level inputs, as defined by the FASB guidance, are as follows:
Level Input:
Level 1
Level 2
Level 3
Input Definition:
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
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.
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the
measurement date.
The Company did not have any Level 3 assets at December 31, 2018 or 2017. Level 3 assets, when present, are valued using various unobservable inputs including
extrapolated data, proprietary models and indicative quotes. A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring
basis using Level 3 inputs is as follows for the years ended December 31:
Beginning of period balance
Total gains or losses (realized) included in income
Purchases
Settlements
Transfers into Level 3
Transfers out of Level 3
End of period balance
2018
2017
– $
–
–
–
–
–
– $
25,218
406
81
(9,123)
144
(16,726)
–
$
$
Quoted market prices are obtained whenever possible. Where quoted market prices are not available, fair values are estimated using broker/dealer quotes for
specific securities. These techniques are significantly affected by the Company's assumptions, including discount rates and estimates of future cash flows.
Potential taxes and other transaction costs have not been considered in estimating fair values.
Transfers between levels, if any, are recorded as of the beginning of the reporting period. There were no significant transfers of assets between Level 1 and Level
2 during 2018.
- 67 -
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair
values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance
sheets.
Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments
such as policy reserve liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying
economic value of the Company. The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:
Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited
partnership to carry the investment at its proportionate share of the limited partnership's equity. The underlying assets of the Company's investments in limited
partnerships are carried primarily at fair value, and, therefore, the Company's carrying value of limited partnerships approximates fair value. As these investments
are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level 3.
Commercial mortgage loans: Commercial mortgage loans are carried primarily at amortized cost along with a valuation allowance for losses when necessary.
These investments represent interests in commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in
all related cash flows of the underlying mortgage loans. The fair value of the Company’s investment in these commercial mortgage loans is based on expected
future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk. These investments are classified as
Level 3.
Short-term borrowings: The fair value of the Company's short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted
market prices are available, on the current market interest rates available to the Company for debt of similar terms and remaining maturities.
A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's consolidated balance sheets at
December 31, 2018 and 2017 is as follows:
2018:
Assets:
Limited partnerships
Commercial mortgage loans
Liabilities:
Short-term borrowings
2017:
Assets:
Limited partnerships
Commercial mortgage loans
Liabilities:
Short-term borrowings
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair Value
$
55,044 $
6,672
– $
–
– $
–
55,044 $
6,672
55,044
6,672
20,000
–
20,000
–
20,000
$
70,806 $
–
– $
–
– $
–
70,806 $
–
70,806
–
20,000
–
20,000
–
20,000
Note O - Quarterly Results of Operations (Unaudited)
Quarterly results of operations are as follows:
1st
2nd
3rd
4th
1st
2nd
3rd
4th
2018
2017
Net premiums earned
Net investment income
Net realized and unrealized
$
105,462 $
4,636
111,940 $
5,796
96,807 $
5,578
118,671 $
6,038
73,974 $
3,692
67,996 $
4,716
89,100 $
4,027
97,075
5,661
gains (losses) on investments
(4,533)
(3,435)
2,373
(20,096)
6,294
3,296
5,944
4,152
Losses and loss expenses
incurred
72,298
77,488
94,540
101,537
48,599
71,754
60,673
66,492
Net income (loss)
330
2,487
(12,325)
(24,567)
6,756
(12,343)
7,434
16,476
Net income (loss) per share
$
0.02 $
0.17 $
(0.82) $
(1.65) $
0.45 $
(0.82) $
0.49 $
1.10
- 68 -
Note P - Statutory
Net income of the Insurance Subsidiaries, all of which are wholly-owned, as determined in accordance with statutory accounting practices, was $36,236, $22,000
and $31,647 for 2018, 2017 and 2016, respectively. Consolidated statutory capital and surplus for these Insurance Subsidiaries was $395,891 and $421,663 at
December 31, 2018 and 2017, respectively, of which $64,134 may be transferred by dividend or loan to Protective during calendar year 2019 with proper
notification to, but without approval from, regulatory authorities.
State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for each insurance company to remain
authorized. These computations are referred to as risk-based capital requirements and are based on a number of complex factors taking into consideration the
quality and nature of assets, the historical adequacy of recorded liabilities and the specific nature of business conducted. At December 31, 2018, the minimum
statutory capital and surplus requirements of the Insurance Subsidiaries was $117,426. Actual consolidated statutory capital and surplus at December 31, 2018
exceeded this requirement by $278,464.
Note Q - Leases
The Company leases certain computer and related equipment using noncancelable operating leases. Lease expense for 2018, 2017 and 2016 was $204, $417 and
$157, respectively. At December 31, 2018, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted
of the following:
2019
2020
2021
2022 and thereafter
Total minimum payments required
Note R – Debt
$
$
342
114
15
1
472
On August 9, 2018, the Company entered into a credit agreement providing a revolving credit facility with a $40,000 limit, with the option for up to an additional
$35,000 in incremental loans at the discretion of the lenders. This credit agreement, which has an expiration date of August 9, 2022, replaced the Company's
revolving line of credit that was to expire on September 23, 2018. Interest on this credit facility is referenced to the London Interbank Offered Rate and can be
fixed for periods of up to one year at the Company's option. Outstanding drawings on this revolving credit facility were $20,000 as of December 31, 2018. At
December 31, 2018, the effective interest rate was 3.61%, and the Company had $20,000 remaining under the revolving credit facility. The current outstanding
borrowings were used to repay the previous line of credit. The Company's revolving credit facility has two financial covenants, each of which were met as of
December 31, 2018, requiring the Company to have a minimum U.S. generally accepted accounting principles net worth and a maximum consolidated leverage
ratio of 0.35 to 1.00.
Note S - Related Parties
At December 31, 2018, the Company is invested in two limited partnerships with an aggregate estimated value of $32,028 that are managed by organizations in
which one director of the Company is an executive officer and owner. The Company’s ownership interest in these limited partnerships at December 31, 2018 was
6% for the New Vernon India Fund and 37% for the New Vernon Global Opportunity Fund. During 2018, the Company withdrew $4,229 from the New Vernon
Global Opportunity Fund II, which liquidated its investment in this limited partnership. The Company also withdrew $2,271 from the New Vernon Global
Opportunity Fund, which reduced its investment in this limited partnership. These limited partnerships contributed to or (reduced) investment gains, net of fees, in
2018, 2017 and 2016 by ($5,059), $9,549 and ($971), respectively.
The Company utilizes the services of an investment firm of which one director of the Company is a partial owner. These investment firms manage equity
securities and fixed income portfolios with an aggregate market value of approximately $17,065 at December 31, 2018. Total commissions and net fees earned by
the investment firms and affiliates on these portfolios were $103, $97 and $207 for the years ended December 31, 2018, 2017 and 2016.
- 69 -
Note T – Subsequent Events
In January 2019, the Company withdrew $10,000 from the New Vernon India Fund limited partnership, which reduced the Company's investment in this limited
partnership. The Company also withdew $5,684 from the New Vernon Global Opportunity Fund limited partnership, which liquidated the Company's investment
in this limited partnership.
On February 26, 2019, the Board of Directors of Protective Insurance Corporation declared a quarterly dividend of $0.10 per share on the Company's Class A and
Class B Common Stock. The dividend per share will be payable March 26, 2019 to shareholders of record on March 12, 2019.
- 70 -
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No response to this item is required.
Item 9A. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of December 31, 2018, under the supervision and with the participation of management, including the Interim Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in
Rule 13a-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the "Exchange Act". Based upon
that evaluation, the Interim Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring
that information required to be disclosed in reports that the Company files or submits under the Exchange Act is (a) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's rules and forms; and (b) accumulated and communicated to management, including
the Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company noted no
change in its internal control over financial reporting that occurred during the three months ended December 31, 2018 that materially affected, or is reasonably
likely to materially affect, its internal control over financial reporting.
Management's Responsibility for Financial Statements
Management is responsible for the preparation of the Company's consolidated financial statements and related information appearing in this Annual Report on
Form 10-K. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations in conformity with U.S. generally accepted accounting principles. Management has
included in the Company's financial statements amounts that are based upon estimates and judgments which it believes are reasonable under the circumstances.
The Audit Committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review
accounting, control, auditing and financial reporting matters.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including the Interim Chief Executive Officer and the Chief
Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on the
Company's evaluation under this framework, management concluded that the Company's internal control over financial reporting was effective as of December 31,
2018. The effectiveness of the Company's internal control over financial reporting as of December 31, 2018 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which is included herein.
- 71 -
To the Shareholders and the Board of Directors of Protective Insurance Corporation
Report of Independent Registered Public Accounting Firm
Opinion on Internal Control over Financial Reporting
We have audited Protective Insurance Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO
criteria). In our opinion, Protective Insurance Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets of Protective Insurance Corporation and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive
income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement
schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”) and our report dated March 7, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
March 7, 2019
- 72 -
Item 9B. OTHER INFORMATION
None.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item concerning the Company's directors and nominees for director, Audit Committee members and financial expert(s) and
concerning disclosure of delinquent filers under Section 16(a) of the Exchange Act is incorporated herein by reference from the Company's definitive Proxy
Statement for its 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the
Company's fiscal year.
The executive officers of the Company are expected to serve until the next annual meeting of the Board of Directors or until their respective successors are elected
and qualified.
The following summary sets forth certain information concerning the Company's executive officers as of February 28, 2019:
Name
John D. Nichols Jr.
William C. Vens
Matthew A. Thompson
Jeremy F. Goldstein
Patrick S. Schmiedt
Age
58
47
54
47
38
Interim Chief Executive Officer and Chairman of the Board of Directors
Title
Chief Financial Officer
Executive Vice President
Executive Vice President
Chief Underwriting Officer
Served in Such
Capacity Since
2018 (1)
2016 (2)
2016 (3)
2017 (4)
2018 (5)
(1) Mr. Nichols was appointed Interim Chief Executive Officer and elected Chairman of the Board of Directors in October 2018. Mr. Nichols joined the
Company's Board of Directors in May 2017, most recently serving as the Chairman of the Audit Committee from March 2017 until October 2018. Mr.
Nichols served as Chief Executive Officer of AXIS Re, a leading reinsurer to global property and casualty insurance companies, from 2012 until February
2017. Prior to joining Axis Re, Mr. Nichols served as President of RenaissanceRe Ventures Ltd. from 2001 until 2010, where he was responsible for business
development and management of joint venture and venture capital business. Mr. Nichols is also a director of Delaware North Companies and National
General Holdings Corp.
(2) Mr. Vens was elected Chief Financial Officer in August 2016. Mr. Vens joined the Company in June 2014 as Managing Director – Finance and after that
served as Vice President of Strategy and Planning from June 2016 until August 2016. Prior to joining the Company, Mr. Vens served as Chief Financial
Officer of HighWave Energy, Inc. from 2011 to May 2014.
(3) Mr. Thompson was elected Executive Vice President in November 2016. He previously served as Senior Vice President of the Company from 2015 to 2016
and as Vice President of Sales from 2011 to 2015.
(4) Mr. Goldstein was elected Executive Vice President in November 2017. He previously served as Senior Vice President of the Company from 2015 to 2017, as
Vice President from 2011 to 2015 and as Corporate Secretary from 2016 to 2018.
(5) Mr. Schmiedt was elected Chief Underwriting Officer in October 2018. He previously served as Senior Vice President of Underwriting from 2016 to 2018, as
Vice President of Underwriting from 2015 to 2016 and as Assistant Vice President of Underwriting from 2013 to 2015.
Code of Conduct
The Board of Directors has adopted a Code of Business Conduct (the "Code") as our code of ethics document, which is applicable to all directors, officers at the
vice president level and above, as well as certain other employees with control over accounting data. The Code incorporates our guidelines designed to deter
wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The Code also incorporates our expectations of our
employees that enable us to comply with applicable laws, rules and regulations and to provide accurate and timely disclosure in our filings with the SEC and other
public communications.
The Code is available on our website at www.protectiveinsurance.com. The Board of Directors reviews the Code annually and approves any amendments
necessary to update the Code. We intend to disclose on our website any amendments to, or waivers from, the Code that are required to be publicly disclosed
pursuant to the rules of the SEC and Nasdaq. Copies can also be obtained free of charge by contacting our Investor Relations department at
investors@protectiveinsurance.com or by written request to Protective Insurance Corporation, Attention: Investor Relations, 111 Congressional Blvd., Suite 500,
Carmel, Indiana 46032.
- 73 -
Item 11. EXECUTIVE COMPENSATION *
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS *
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE *
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES *
* The information required by Items 11, 12, 13 and 14 is incorporated herein by reference from the Company's definitive Proxy Statement for its 2019 Annual
Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) 1. List of Financial Statements --The following consolidated financial statements of the registrant and its subsidiaries (including the Report of Independent
Registered Public Accounting Firm) are submitted in Item 8 of this Annual Report on Form 10-K.
Consolidated Balance Sheets - December 31, 2018 and 2017
Consolidated Statements of Operations - Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) – Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows - Years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
2.
List of Financial Statement Schedules --The following consolidated financial statement schedules of Protective Insurance Corporation and subsidiaries are
included in this Annual Report on Form 10-K:
Pursuant to Article 7:
Schedule I Summary of Investments--Other than Investments in Related Parties
Schedule II Condensed Financial Information of Registrant
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning Property/Casualty Insurance Operations
All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
- 74 -
3. Index to Exhibits:
INDEX TO EXHIBITS
Exhibit No. Description
3.1
Amended and Restated Articles of Incorporation of Protective Insurance Corporation (Incorporated as an exhibit by reference to Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Code of By-Laws of Protective Insurance Corporation, as amended February 22, 2019
1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its
Annual Meeting held May 5, 1981) (SEC File No. 000-05534)*
Baldwin & Lyons, Inc. Restricted Stock Compensation Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive
Proxy Statement filed on April 1, 2010 for its Annual Meeting held May 4, 2010)(SEC File No. 000-05534)*
Baldwin & Lyons, Inc. Annual Incentive Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement
filed on April 7, 2017 for its Annual Meeting held May 9, 2017)*
Baldwin & Lyons, Inc. Long-Term Incentive Plan (Incorporated as an exhibit by reference to Appendix B to the Company's definitive Proxy
Statement filed on April 7, 2017 for its Annual Meeting held May 9, 2017)*
Severance, Confidentiality, Non-Competition and Non-Solicitation Agreement, dated May 10, 2018, by and between the Company and W. Randall
Birchfield (Incorporated as an exhibit by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)*
Severance, Confidentiality, Non-Competition and Non-Solicitation Agreement, dated June 22, 2018, by and between the Company and Matthew A.
Thompson (Incorporated as an exhibit by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)*
Severance Pay, Release and Waiver of Rights, dated February 15, 2018, by and between the Company and Michael J. Case (Incorporated as an
exhibit by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2018)*
Employment Agreement, dated as of August 13, 2018, by and between the Company and W. Randall Birchfield (Incorporated as an exhibit by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 22, 2018)*
10.9
Separation and Release Agreement, dated as of October 17, 2018, by and between the Company and W. Randall Birchfield*
10.10
Employment Agreement, dated as of November 13, 2018, by and between the Company and John D. Nichols, Jr. (Incorporated as an exhibit by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on November 16, 2018)*
10.11
Confidentiality, Non-Competition, and Non-Solicitation Agreement, dated May 25, 2018, by and between the Company and Jeremy F. Goldstein*
10.12
Confidentiality, Non-Competition, and Non-Solicitation Agreement, dated July 26, 2018 by and between the Company and Patrick S. Schmiedt*
21
23
24
31.1
31.2
32
101
Subsidiaries of Protective Insurance Corporation
Consent of Ernst & Young LLP
Powers of Attorney for certain Officers and Directors
Certification of the Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Interim Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
The following materials from Protective Insurance Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, formatted in
XBRL (eXtensible Business Reporting Language): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Operations, (3) the
Consolidated Statements of Comprehensive Income (Loss), (4) the Consolidated Statements of Shareholders' Equity, (5) the Consolidated
Statements of Cash Flows, and (6) the Notes to Consolidated Financial Statements.
* Indicates management contracts or compensatory plans or arrangements.
Item 16. FORM 10-K SUMMARY
None.
- 75 -
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in thousands)
As of December 31, 2018
SCHEDULE I
Amount at
Which Shown
in
the
Consolidated
Balance Sheet
(1)
Cost
Fair Value
$
10,636 $
37,168
66,241
10,208
2,835
5,095
196,925
38,586
29,102
25,339
178,369
600,504
15,963
3,981
23,111
3,287
1,259
6,797
5,032
59,430
10,687 $
37,385
64,422
9,750
2,835
5,423
190,450
38,540
29,155
25,180
178,818
592,645
17,945
3,179
25,253
6,920
2,303
5,489
5,333
66,422
6,672
6,672
1,000
1,000
1,000
1,000
10,687
37,385
64,422
9,750
2,835
5,423
190,450
38,540
29,155
25,180
178,818
592,645
17,945
3,179
25,253
6,920
2,303
5,489
5,333
66,422
6,672
1,000
1,000
$
667,606 $
666,739 $
666,739
Type of Investment
Fixed Income Securities:
Bonds:
Agency collateralized mortgage obligations
Agency mortgage-backed securities
Asset-backed securities
Bank loans
Certificates of deposit
Collateralized mortgage obligations
Corporate securities
Mortgage-backed securities
Municipal obligations
Non-U.S. government obligations
U.S. government obligations
Total fixed income securities
Equity Securities:
Common Stocks:
Consumer
Energy
Financial
Industrial
Technology
Funds (e.g. mutual funds, closed end funds, ETFs)
Other
Total equity securities
Commercial mortgage loans
Short-term:
Certificates of deposit
Total short-term and other
Total investments
(1) Amounts presented above do not include investments of $156,855 classified as cash and cash equivalents in the consolidated balance sheet.
- 76 -
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
(in thousands)
Assets
Investment in subsidiaries
Due from affiliates
Investments other than subsidiaries:
Fixed income securities
Limited partnerships
Cash and cash equivalents
Accounts receivable
Other assets
Total assets
Liabilities and shareholders' equity
Liabilities:
Premiums payable
Deposits from insureds
Short-term borrowings
Other liabilities
Shareholders' equity:
Common stock:
Class A
Class B
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
SCHEDULE II
$
$
$
December 31
2018
2017
401,260 $
1,152
22,302
215
22,517
15,185
2,276
28,794
471,184 $
22,964 $
58,748
20,000
13,390
115,102
112
522
54,720
(7,347)
308,075
356,082
436,879
1,191
22,306
222
22,528
26,496
6,833
24,772
518,699
14,046
60,893
20,000
4,949
99,888
112
530
55,078
46,391
316,700
418,811
Total liabilities and shareholders' equity
$
471,184 $
518,699
- 77 -
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME (LOSS) - PARENT COMPANY ONLY
(in thousands)
SCHEDULE II
Revenue:
Commissions and service fees
Cash dividends from subsidiaries
Net investment income
Net realized gains (losses) on investments
Other
Expenses:
Salary and related items
Other
Income (loss) before federal income tax benefit and equity in undistributed income of
subsidiaries
Federal income tax benefit
Equity in undistributed income of subsidiaries
$
Year Ended December 31
2017
2018
2016
17,456 $
5,000
569
(192)
51
22,884
20,158
11,724
31,882
(8,998)
(2,862)
(6,136)
(27,939)
18,863 $
10,000
348
308
(106)
29,413
18,140
9,686
27,826
1,587
(2,971)
4,558
13,765
27,736
20,000
134
(3)
(24)
47,843
17,462
10,808
28,270
19,573
(69)
19,642
9,303
Net income (loss)
$
(34,075) $
18,323 $
28,945
- 78 -
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - PARENT COMPANY ONLY
(in thousands)
SCHEDULE II
Net income (loss)
Other comprehensive income (loss), net of tax:
Unrealized net gains (losses) on fixed income securities:
Unrealized net gains (losses) arising during the period
Less: reclassification adjustment for net gains (losses) included in net income (loss)
Foreign currency translation adjustments
Other comprehensive income (loss)
Comprehensive income (loss)
- 79 -
Year Ended December 31
2017
2018
2016
$
(34,075) $
18,323 $
28,945
(9,680)
(2,812)
(6,868)
17,340
4,691
12,649
8,618
13,491
(4,873)
(830)
522
235
(7,698)
13,171
(4,638)
$
(41,773) $
31,494 $
24,307
Net cash provided by operating activities
Investing activities:
Purchases of investments
Sales or maturities of investments
Net sales of short-term investments
Distributions from limited partnerships
Net purchases of property and equipment
Net cash used in investing activities
Financing activities:
Dividends paid to shareholders
Repurchase of common shares
Net cash used in financing activities
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
(in thousands)
SCHEDULE II
Year Ended December 31
2017
2018
2016
$
14,019 $
44,998 $
15,484
(11,435)
11,213
–
–
(3,677)
(3,899)
(16,835)
(4,596)
(21,431)
(11,311)
26,496
15,185 $
(21,365)
9,146
–
298
(3,394)
(15,315)
(16,302)
(1,880)
(18,182)
11,501
14,995
26,496 $
(4,000)
3,493
2,165
–
(4,278)
(2,620)
(15,803)
–
(15,803)
(2,939)
17,934
14,995
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents
Cash, cash equivalents and restricted cash and cash equivalents at beginning of year
Cash, cash equivalents and restricted cash and cash equivalents at end of year
$
Note to Condensed Financial Statements -- Basis of Presentation
The Company's investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition. The Company's
share of net income of its subsidiaries is included in income using the equity method. These financial statements should be read in conjunction with the Company's
consolidated financial statements.
- 80 -
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
SCHEDULE III
As of December 31
Reserves
for Unpaid
Claims and
Claim
Adjustment
Expenses
Unearned
Premiums
Other
Policy
Claims
and
Benefits
Payable
Deferred
Policy
Acquisition
Costs
Year Ended December 31
Amortization
Benefits,
of
Claims,
Deferred
Losses
Policy
and
Acquisition
Settlement
Costs
Expenses
Net
Premium
Earned
Net
Investment
Income
(A)
(A)
Other
Operating
Expenses
Net
Premiums
Written
(A) (B)
$
6,568 $ 865,339 $ 71,625
– $ 432,880 $
22,048 $ 345,864 $
78,105 $ 23,514 $ 444,398
5,608
680,274
53,085
– 328,145
18,095 247,518
70,574
14,043 353,389
1,172
576,330
21,694
– 276,011
14,483 186,481
51,597
8,180 271,752
Segment
Property/Casualty
Insurance
2018
2017
2016
(A) Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of
assumptions and estimates. Results among these categories would change if different methods were applied.
(B)
Commission allowances relating to reinsurance ceded are offset against other operating expenses.
- 81 -
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
REINSURANCE
(
(in thousands)
SCHEDULE IV
Direct
Premiums
Ceded to
Other
Companies
Assumed from
Other
Companies
Net
Amount
% of Amount
Assumed to Net
$
562,364 $
131,080 $
1,596 $
432,880
470,158
145,201
3,188
328,145
394,679
130,012
11,344
276,011
0.4%
1.0%
4.1%
Premiums Earned -
Years Ended December 31:
2018
2017
2016
Note:
Included in Ceded to Other Companies is $0, $0 and $86 for 2018, 2017 and 2016, respectively, relating to retrocessions associated with premiums
assumed from other companies. Percentage of Amount Assumed to Net above considers the impact of this retrocession.
- 82 -
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(in thousands)
SCHEDULE VI
As of December 31
Reserves
for
Unpaid
Claims
Adjustment
Expenses
Deferred
Policy
Acquisition
Costs
Discount,
if any
Deducted
from
Reserves
Unearned
Premiums
Earned
Premiums
Year Ended December 31
Claims and Claim
Adjustment
Expenses Incurred
Related to
Current
Year
Prior
Years
Amortization
of
Deferred
Policy
Acquisition
Costs
Net
Investment
Income
Paid
Claims
and Claims
Adjustment
Expenses
Net
Premiums
Written
Affiliation with
Registrant
Consolidated
Property/Casualty
Subsidiaries:
2018
2017
2016
$
6,568 $ 865,339 $
680,274
5,608
576,330
1,172
– $ 71,625 $ 432,880 $
53,085 328,145
–
21,694 276,011
–
22,048 $ 329,078 $ 16,786 $
18,095 228,303 19,215
14,483 172,645 13,836
78,105 $ 228,591 $ 444,398
200,154 353,389
70,574
163,467 271,752
51,597
- 83 -
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURES
March 7, 2019
PROTECTIVE INSURANCE CORPORATION
By: /s/ John D. Nichols, Jr.
John D. Nichols, Jr.
Interim Chief Executive Officer and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signatures
/s/ John D. Nichols, Jr.
John D. Nichols, Jr.
/s/ William C. Vens
William C. Vens
/s/ Steven J. Bensinger
Steven J. Bensinger
/s/ Stuart D. Bilton
Stuart D. Bilton
/s/ Otto N. Frenzel IV
Otto N. Frenzel IV
/s/ LoriAnn Lowery-Biggers
LoriAnn Lowery-Biggers
/s/ David W. Michelson
David W. Michelson
/s/ James A. Porcari III
James A. Porcari III
/s/ Nathan Shapiro
Nathan Shapiro
/s/ Robert Shapiro
Robert Shapiro
Title
Interim Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
- 84 -
Date
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
CODE OF BY-LAWS
OF
PROTECTIVE INSURANCE CORPORATION
Adopted: February 22, 2019
ARTICLE 1
Identification
Section 1.1.
Name . The name of the Corporation is Protective Insurance Corporation (hereinafter referred to as the “Corporation”).
ARTICLE 2
Capital Stock
Section 2.1.
Consideration for Shares. The Board of Directors of the Corporation may authorize shares to be issued for consideration
consisting of any tangible or intangible property or benefit to the Corporation, including cash, promissory notes, services performed, contracts for services to be
performed, or other securities of the Corporation.
Section 2.2.
Certificates for Shares . The shares of the Corporation shall be represented in the form of stock certificates unless the
Board of Directors shall by resolution provide that some or all of any class or series of stock shall be comprised of uncertificated shares. Any such resolution shall
not apply to shares already represented by a stock certificate unless and until the stock certificate is surrendered to the Corporation. Notwithstanding the adoption
of any resolution providing for uncertificated shares, all stock certificates of the Corporation shall be signed by the Chairman, Chief Executive Officer, President,
Chief Operating Officer or an Executive Vice President and attested by the Secretary or an Assistant Secretary, certifying the number of shares owned by such
shareholder and such other information as may be required by law. Where any such certificate is also signed by a transfer agent or a registrar, or both, the
signatures of the officers of the Corporation may be facsimiles. The Corporation may issue and deliver any such certificate notwithstanding that any such officer
who shall have signed, or whose facsimile signature shall have been imprinted on, such certificate shall have ceased to be such officer. The form of the stock
certificate shall be prescribed by resolution of the Board of Directors.
Section 2.3.
Record Holders . The Corporation has two classes of common shares, Class A (voting) and Class B (non-voting) shares,
which shares are identical except for voting rights. The Corporation shall be entitled to treat the person in whose name any share of stock of the Corporation, or
any warrant, right or option to acquire stock of the Corporation, is registered in the records of the Corporation as the owner thereof for all purposes, including, but
not limited to, receiving dividends, and (as to Class A Stock only) vote as such owner, and shall not be bound to recognize any equitable or other claim to, or
interest in, such share, warrant, right or option on the part of any other person, whether or not the Corporation shall have notice thereof, except as may be expressly
provided otherwise by law, the Articles of Incorporation, or this Code of By-Laws. In no event shall any transferee of shares of the Corporation become a
shareholder of the Corporation until express notice of the transfer shall have been received by the Corporation.
- 1 -
Section 2.4.
Transfer of Shares . Except as otherwise provided by law, transfers of shares of the capital stock of the Corporation shall
be made only on the books of the Corporation by the record owner thereof in person, or by such owner’s legal guardian or personal representative, or by such
owner’s attorney-in-fact thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or the Corporation’s transfer
agent, upon payment of any and all taxes thereon and, in the case of certificated shares, on surrender for cancellation to the Secretary of the Corporation of the
certificate or certificates for such shares (except as hereinafter provided in the case of lost, destroyed or stolen certificates), properly endorsed by the holder
thereof, or if such shares are uncertificated, upon receipt of proper transfer instructions from the registered owner of such shares, in each case accompanied by the
proper evidence of succession, assignment or authority to transfer satisfactory to the Corporation. No restriction on the transfer or registration of transfer of shares
of stock of the Corporation shall be enforceable against a holder or transferee of such shares who has no knowledge of such restriction, unless such restriction (i) is
permitted by the Act and all other applicable laws, and (ii) is noted conspicuously on the front or back of the certificates for such shares, or is contained in the
information statement required by the Act with respect to any shares issued without certificates.
Section 2.5.
Lost, Destroyed and Stolen Certificates . The holder of any shares shall immediately notify the Corporation if a certificate
therefor shall be lost, stolen, destroyed, or mutilated beyond recognition, and the Corporation may issue a new certificate or uncertificated shares in the place of
any certificate theretofore issued by it which is alleged to have been lost, stolen, destroyed or mutilated beyond recognition; provided, however, that the Chief
Financial Officer or Secretary may, in his discretion, require the owner of the certificate which is alleged to have been lost, stolen, destroyed or mutilated beyond
recognition, or such owner’s legal representative, to (i) furnish an affidavit as to such loss, theft or destruction, (ii) give the Corporation a bond with such surety or
sureties, and in such sum, as it may direct, to indemnify the Corporation and its Directors and officers against any claim that may be made against it or any of them
on account of the issuance of such new certificate or uncertificated shares in place of the allegedly lost, stolen, destroyed or mutilated certificate, and/or (iii) satisfy
other reasonable requirements imposed by the Board of Directors. The Chief Financial Officer or Secretary may, however, if he so chooses, refuse to issue any
such new certificate or uncertificated shares except pursuant to the order of a court having jurisdiction in such matter.
ARTICLE 3
Meetings of Shareholders
Section 3.1.
Annual Meeting . The annual meeting of the shareholders for the election of Directors and for the transaction of such
other business as may properly come before the meeting shall be held on the first Tuesday in May of each year, or on such other date twelve (12) business days
prior to or following this date as may be designated by the Board of Directors. Failure to hold the annual meeting at the designated time shall not affect the validity
of any corporate action.
- 2 -
Section 3.2.
Special Meetings . Special meetings of the shareholders may be called by the Chief Executive Officer, Chairman, the
Board of Directors, or by the holders of at least twenty-five percent (25%) of all votes entitled to be cast on any issue proposed to be considered at the proposed
special meeting upon delivery to the Corporation's Secretary of one or more written demands, signed and dated, describing the purpose or purposes for which it is
to be held.
Section 3.3.
Place of Meetings . As provided in the Articles of Incorporation, meetings of shareholders of the Corporation shall be
held at such place, within or without the State of Indiana, as may be specified in the respective calls, notice of the meeting, or waiver of notice thereof.
Section 3.4.
Notice of Meetings . Written or electronic notice of each shareholders' meeting stating the date, time, and place and, for a
special meeting, the purpose(s) for which the meeting is called, shall be given by the Corporation not less than ten (10) (unless a greater period of notice is required
by law in a particular case) nor more than sixty (60) days prior to the date of the meeting, to each shareholder of record, to the shareholder's address as it appears
on the current record of shareholders of the Corporation.
Section 3.5.
Business of Shareholder Meetings . At each annual meeting, the shareholders shall elect the Directors and shall conduct
only such other business as shall have been properly brought before the meeting. To be properly brought before an annual meeting, all business, including
nominations of candidates for and the election of Directors, must be (a) specified in the notice of the meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly
brought before the meeting by a shareholder of the Corporation who (i) was a shareholder of record at the time of giving the notice provided for in this Section 3.5
or in Section 3.6 of this Code of By-Laws, as applicable, (ii) is entitled to vote at the meeting, and (iii) complied with the notice procedures set forth in this
Section 3.5 or in Section 3.6 of this Code of By-Laws, as applicable.
For business other than nominations of candidates for and the election of Directors to be properly brought before an annual meeting by a shareholder
pursuant to clause (c) of the preceding paragraph, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation at the
principal executive office of the Corporation. To be timely, a shareholder’s notice shall be delivered not less than ninety (90) days nor more than one hundred
twenty (120) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is
advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the shareholder, to be timely, must be so
delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual
meeting or the 10th day following the day on which public announcement (as defined herein) of the date of such meeting is first made.
- 3 -
Such shareholder’s notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting such business at the meeting and any material interest in such business of such
shareholder and any Shareholder Associated Person (as defined below) covered by clause (b)(iii) below or on whose behalf the proposal is made; (b) as to the
shareholder giving the notice and any Shareholder Associated Person covered by clause (b)(iii) below or on whose behalf the proposal is made (i) the name and
address of such shareholder, as they appear on the Corporation’s books, and the name and address of any Shareholder Associated Person, (ii) the class and number
of shares of the Corporation which are owned beneficially or of record by such shareholder and by any Shareholder Associated Person as of the date such notice is
given, (iii) any derivative positions held or beneficially held by the shareholder and by any Shareholder Associated Person and whether and the extent to which any
hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other agreement, arrangement or understanding (including any
short position or any borrowing or lending of shares) has been made, the effect or intent of which is to mitigate loss to or manage risk or benefit of share price
changes for, or to increase or decrease the voting power of, such shareholder or any Shareholder Associated Person with respect to the Corporation’s securities, and
(iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to propose such business; (c) in the event that such business
includes a proposal to amend either the Articles of Incorporation or this Code of By-Laws of the Corporation, the language of the proposed amendment; and (d) if
the shareholder intends to solicit proxies in support of such shareholder’s proposal, a representation to that effect.
Notwithstanding anything in this Code of By-Laws to the contrary and not including nominations of candidates for and the election of Directors, which
are governed by Section 3.6 of this Code of By-Laws, no business shall be conducted at any annual meeting except in accordance with this Section 3.5, and the
Chairman or other person presiding at an annual meeting of shareholders may refuse to permit any business to be brought before an annual meeting without
compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholder’s proposal without such shareholder having made the
representation required by clause (d) of the preceding paragraph of this Section 3.5. If a shareholder does not appear or send a qualified representative to present
his or her proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of
such vote may have been received by the Corporation.
For the purposes of this Section 3.5, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections
13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). “Shareholder Associated Person” of any shareholder means (i) any
person controlling, directly or indirectly, or acting in concert with, such shareholder, (ii) any beneficial owner of shares of stock of the Corporation owned of
record or beneficially by such shareholder and (iii) any person controlling, controlled by or under common control with such Shareholder Associated Person.
Notwithstanding the foregoing provisions of this Section 3.5, a shareholder seeking to include a proposal in a proxy statement that has been prepared by
the Corporation to solicit proxies for an annual meeting shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder
with respect to the matters set forth in this Section 3.5.
In no event shall the adjournment of a meeting commence a new time period for the giving of a shareholder’s notice as described above.
- 4 -
Section 3.6.
Notice of Shareholder Nominations . Nominations of persons for election as Directors may be made by the Board of
Directors or by any shareholder who is a shareholder of record at the time of giving the notice of nomination provided for in this Section 3.6 and who is entitled to
vote in the election of Directors. Any shareholder of record entitled to vote in the election of Directors at a meeting may nominate a person or persons for election
as Directors only if timely written notice of such shareholder’s intent to make such nomination is given to the Secretary of the Corporation at the principal
executive office of the Corporation in accordance with the procedures for bringing nominations before an annual meeting set forth in this Section 3.6. To be timely,
a shareholder’s notice shall be delivered (a) with respect to an election to be held at an annual meeting of shareholders, not less than ninety (90) days nor more than
one hundred twenty (120) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the shareholder, to be timely,
must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such
annual meeting or the 10th day following the day on which public announcement (as defined in Section 3.5 of this Code of By-Laws) is first made of the date of
such meeting, and (b) with respect to an election to be held at a special meeting of shareholders, not earlier than the 120th day prior to such special meeting and not
later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first
made of the date of the special meeting and of the nominees to be elected at such meeting.
Such shareholder’s notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination as they appear on the
Corporation’s books, the person or persons to be nominated and the name and address of any Shareholder Associated Person (as defined in Section 3.5 of this Code
of By-Laws) covered by clause (c) below or on whose behalf the nomination is made; (b) a representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting in such election and intends to appear in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) (i) the class and number of shares of the Corporation which are owned beneficially or of record by such shareholder and by any Shareholder
Associated Person as of the date such notice is given and (ii) any derivative positions held or beneficially held by the shareholder and by any Shareholder
Associated Person and whether and the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of, or any
other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares) has been made, the effect or intent of which is
to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, such shareholder or any Shareholder
Associated Person as of the date such notice is given with respect to the Corporation’s securities; (d) a description of all arrangements or understandings between
or among the shareholder, any Shareholder Associated Person, each nominee and any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder; (e) such other information regarding each nominee proposed by such shareholder as would have
been required to be disclosed in solicitations of proxies for election of Directors in an election contest (even if an election contest is not involved), or is otherwise
required, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder; (f) the consent of each nominee to
serve as a Director if so elected; and (g) if the shareholder intends to solicit proxies in support of such shareholder’s nominee(s), a representation to that effect. The
Corporation may require any person or persons to be nominated to furnish such other information as it may reasonably require to determine the eligibility of such
person or persons to serve as a Director of the Corporation.
The Chairman or other person presiding at any meeting of shareholders to elect Directors and the Board of Directors may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure or if the shareholder solicits proxies in support of such shareholder’s nominee(s)
without such shareholder having made the representation required by clause (g) of the preceding paragraph. If a shareholder does not appear or send a qualified
representative to present his or her nomination at such meeting, the Corporation need not present such nomination for a vote at such meeting, notwithstanding that
proxies in respect of such nomination may have been received by the Corporation.
- 5 -
Notwithstanding anything in this Section 3.6 to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the
Corporation at an annual meeting is increased and there is no public announcement naming all of the nominees for Directors or specifying the size of the increased
Board of Directors made by the Corporation at least ninety (90) days prior to the first anniversary of the preceding year’s annual meeting, a shareholder’s notice
required by this Section 3.6 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be
delivered not later than the close of business on the 10th day following the day on which such public announcement is first made of the date of such meeting.
Section 3.7.
Addresses of Shareholders . The address of any shareholder appearing upon the records of the Corporation shall be
deemed to be the same address as the latest address of such shareholder appearing on the records maintained by the transfer agent for the class of stock held by
such shareholder.
Section 3.8.
Waiver of Notice . Notice of any meeting may be waived in writing by any shareholder if the waiver is signed by the
shareholder entitled to the notice and delivered to the Corporation for inclusion in the minutes or filing with the Corporation’s records. Attendance at any meeting,
in person or by proxy, if the proxy sets forth in reasonable detail the purposes of such meeting, or participation in a meeting by remote communication in
accordance with the Act (a) waives objection to lack of notice or defective notice of the meeting, unless the shareholder or his proxy at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting, and (b) waives objection to consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the meeting notice, unless the shareholder or his proxy objects to considering the matter when it is presented. Each
shareholder who has, in the manner above provided, waived notice or objection to notice of a shareholders’ meeting shall be conclusively presumed to have been
given due notice of such meeting, including the purpose or purposes thereof .
Section 3.9.
Voting at Meetings .
(a)
Voting Rights . Except as may be otherwise provided in the Articles of Incorporation, every shareholder of Class A shares shall have the
right at all meetings of the shareholders to one vote for each share standing in his name on the books of the Corporation on the record date for such meetings.
Class B shares shall have no voting rights except as required by the Act. Only such persons shall be entitled to notice of or to vote, in person or by proxy, at any
shareholders’ meeting as shall appear as shareholders upon the books of the Corporation as of such record date as the Board of Directors shall determine, which
date may not be earlier than the date seventy (70) days immediately preceding the meeting. In the absence of such determination, the record date shall be the
fiftieth (50th) day immediately preceding the date of such meeting. Unless otherwise provided by the Board of Directors, shareholders of record shall be
determined as of the close of business on the record date.
- 6 -
(b)
Quorum and Action . The persons owning a majority of the stock of this Corporation entitled to vote at such meeting shall constitute a
quorum at any meeting of shareholders, and be capable of transacting any business thereof, except as otherwise provided by law or by the Articles of
Incorporation; but if, at any meeting of the shareholders, there be less than a quorum present, a majority in interest of the shareholders present in person or by
proxy may adjourn from time to time without notice other than by announcement at the meeting until the holders of the amount of stock requisite to constitute a
quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the
meeting as originally notified. If a quorum exists as to a matter to be considered at a meeting of shareholders, action on such matter (other than the election of
Directors) is approved if the votes properly cast favoring the action exceed the votes properly cast opposing the action, except as the Articles of Incorporation or
the Act require a greater number of affirmative votes. Directors shall be elected by a plurality of the votes properly cast.
(c)
Proxies . A shareholder entitled to vote at any meeting of shareholders may vote either in person or by proxy, executed in writing by the
shareholder or a duly authorized officer, Director, employee, agent or attorney-in-fact of such shareholder. (For purposes of this section, a proxy granted by any
means acceptable to the Corporation, including, but not limited to, electronic means, shall be deemed “executed in writing by the shareholder”.) No proxy shall be
voted at any meeting of shareholders unless the same shall be filed with the Secretary of the meeting at the commencement thereof. The general proxy of a
fiduciary shall be given the same effect as the general proxy of any other shareholder. No proxies shall be valid after eleven (11) months from the date or
execution unless a longer term is expressly provided therein.
Voting List. The Secretary shall make, at least five (5) business days before each meeting of shareholders, a complete list of the shareholders entitled to
vote at such meeting, arranged in alphabetical order, with the address of each and the number of shares held by each, which list, for the period of five (5) business
days prior to such meeting, shall be kept on file at the principal office of the Corporation and shall be subject to inspection by any shareholder at any time during
usual business hours. Such a list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder
during the whole time of the meeting.
Section 3.10.
Conduct of Meetings. Shareholder’s meetings, including the order of business, shall be conducted in accordance with
Roberts’ Rules of Order, Revised, except insofar as the Articles of Incorporation, this Code of By-Laws, or any rule adopted by the Board of Directors or
shareholders may otherwise provide. The shareholders may, by affirmative vote of a majority of the shareholders in attendance at any given meeting, waive the
requirement of this section. Such waiver shall not preclude any shareholder from invoking the requirements of this section at any subsequent meeting.
- 7 -
ARTICLE 4
The Board of Directors
Section 4.1.
Duties and Qualifications. The business and affairs of the Corporation shall be managed by a Board of Directors, none of
whom need be shareholders of the Corporation.
Section 4.2.
Number and Terms of Office . There shall be no less than six (6) but no more than nine (9) Directors of the Corporation,
who shall be elected at each annual meeting of the shareholders, to serve for a term of one (1) year and until their successors shall be chosen and qualified, or until
removal, resignation or death. If the annual meeting of the shareholders is not held at the time designated in this Code of By-Laws, such failure shall not cause any
defect in the existence of the Corporation, and the Directors then in office shall hold over until their successors shall be chosen and qualified.
Section 4.3.
Management and Committees .
(a)
All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation managed under the
direction of, its Board of Directors, subject to any limitations set forth in the Articles of Incorporation.
(b)
The Board of Directors may appoint a Chairman. The Chairman shall preside, or designate a delegate to preside, at all meetings of the
Board and shareholders and shall have such other powers and duties as this Code of By-Laws or the Board of Directors may prescribe.
(c)
If the Chairman of the Board is not an Independent Director, the independent members of the Board of Directors shall appoint a Lead
Director from among the independent members of the Board of Directors. The Lead Director shall ensure that the Board of Directors is able to carry out its
responsibilities effectively and independently of both management and shareholders and shall have such other powers and duties as this Code of By-Laws or the
Board of Directors may prescribe. The Lead Director shall preside at all executive sessions of independent directors. The Lead Director may also serve as
Chairman of the Corporation’s Nominating and Governance Committee.
(d)
The Board of Directors may appoint one or more committees from among its members as it determines to be necessary. Each committee
may have one (1) or more members, who shall serve at the pleasure of the Board of Directors. The creation of a committee and the appointment of members to it
must be approved by the greater of a majority of all of the Directors in office when the action is taken, or the number of Directors required by the Articles of
Incorporation or this Code of By-Laws to take action under the Act. Committees shall have such authority and duties as are specified in the charter establishing
such committee, as specifically adopted by the Board of Directors.
- 8 -
(e)
Except to the extent inconsistent with the foregoing provisions of this Section or with the resolutions of the Board of Directors creating a
committee, the provisions of this Code of By-Laws which govern meetings, action without meetings, notice and waiver of notice, and voting requirements of the
Board of Directors apply to each committee and its members, as if the committee constituted the full Board of Directors.
(f)
One third (1/3) of the members of a committee (but in no case less than two (2) Directors) shall be necessary to constitute a quorum for the
transaction of any business of the committee and the act of the majority of the Directors present at a committee meeting at which a quorum is present shall be the
act of the committee, unless the act of a greater number is required by law, the Articles of Incorporation, this Code of By-Laws, or the committee’s charter.
Section 4.4.
Annual and Regular Meetings . Unless otherwise agreed upon, the Board of Directors shall meet each year, immediately
following the annual meeting of the shareholders, at the place where such meeting of shareholders was held, for consideration of any other business which may be
brought before the meeting. No notice shall be necessary for the holding of this annual meeting.
Section 4.5.
Special Meetings . Other meetings of the Board of Directors may be held regularly pursuant to a resolution of the Board
to such effect or may be held upon the call of the Chief Executive Officer, the Chairman, the Lead Director, or of any two (2) members of the Board and upon
twenty-four (24) hours’ notice specifying the time, place and general purposes of the meeting, given to each Director, either personally or by mail, facsimile,
telephone or electronic transmission. No notice shall be necessary for any regular meeting and notice of any other meeting may be waived in writing, signed by the
Director entitled to the notice and filed with the minutes or the Corporation’s records. Attendance at any such meeting shall constitute waiver of notice of such
meeting. Pursuant to Indiana law, the Board of Directors is authorized to conduct meetings by any means of communication by which all Directors participating
may simultaneously hear each other during the meeting. A Director participating in a meeting by this means is deemed to be present in person at the meeting.
Section 4.6.
Action Without a Meeting . Any action required or permitted to be taken at any meeting of the Board of Directors may be
taken without a meeting if the action is taken by all members of the Board. The action must be evidenced by one or more written consents, in one or more
counterparts, describing the action taken, signed by each Director, and included in the minutes or filed with the corporate records reflecting the action
taken. Electronic signatures, in accordance with the Uniform Electronic Transactions Act (IC 26-2-8), and facsimile signatures shall have the same validity and
effect as original signatures. Action taken under this Section 4.6 is effective when the last Director signs the consent, unless the consent specifies a different prior
or subsequent effective date, in which case the action is effective on or as of the specified date. A consent signed under this Section 4.6 shall have the same effect
as a unanimous vote of all members of the Board and may be described as such in any document .
- 9 -
Section 4.7.
Quorum and Action . A majority of the whole Board of Directors (but in no case less than two (2) Directors) shall be
necessary to constitute a quorum for the transaction of any business, except the filing of vacancies, and the act of the majority of the Directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by law, the Articles of Incorporation, or this
Code of By-Laws.
Section 4.8.
Vacancies . Any vacancy in the Board of Directors, including a vacancy resulting from an increase in the number of
Directors, may be filled by a majority vote of all the remaining members of the Board of Directors, even if less than a quorum. The term of any Director so elected
by the Board of Directors shall expire at the end of the term for which such Director’s predecessor was elected, or if the vacancy arises because of an increase in
the size of the Board of Directors, at the end of the term specified at the time of election or selection .
Section 4.9.
Resignation and Removal . A Director may resign at any time by delivering written notice to the Board of Directors,
Chairman, Lead Director, Chief Executive Officer, or Secretary of the Corporation, which resignation shall be effective when such notice is delivered, unless such
notice specifies a later effective date. Except as otherwise provided in the Act, a Director may be removed, with or without cause, by the shareholders of the
Corporation as provided in the Articles of Incorporation only at a meeting of the shareholders called for the purpose of removing the Director, the notice of which
shall state that the purpose or one of the purposes of the meeting shall be to remove the specified Director.
Section 4.10.
Compensation of Directors . The Board of Directors is empowered and authorized to fix and determine the
compensation of the Directors. Except as determined by the Board of Directors, members of the Board of Directors shall receive no compensation for acting in
such capacity.
Section 4.11.
Indemnification .
(a)
To the extent not inconsistent with applicable law, every Eligible Person shall be indemnified by the Corporation against all
Liability and reasonable Expense that may be incurred by him in connection with or resulting from any Claim, (i) if such Eligible Person is Wholly Successful with
respect to the Claim, or (ii) if not Wholly Successful, then if such Eligible Person is determined, as provided in either Section 4.11(f) or 4.11(g), to have acted in
good faith, in what he reasonably believed to be the best interests of the Corporation or at least not opposed to its best interests and, in addition, with respect to any
criminal claim is determined to have had reasonable cause to believe that his conduct was lawful or had no reasonable cause to believe that his conduct was
unlawful. The termination of any Claim, by judgment, order, settlement (whether with or without court approval), or conviction or upon a plea of guilty or of nolo
contendere, or its equivalent, shall not create a presumption that an Eligible Person did not meet the standards of conduct set forth in clause (ii) of this subsection
(a). The actions of an Eligible Person with respect to an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 shall be deemed to
have been taken in what the Eligible Person reasonably believed to be the best interests of the Corporation or at least not opposed to its best interests if the Eligible
Person reasonably believed he was acting in conformity with the requirements of such Act or he reasonably believed his actions to be in the interests of the
participants in or beneficiaries of the plan.
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(b)
The term “Claim” as used in this Section 4.11 shall include every pending, threatened, or completed claim, action, suit, or
proceeding and all appeals thereof (whether brought by or in the right of this Corporation or any other corporation or otherwise), civil, criminal, administrative, or
investigative, formal or informal, in which an Eligible Person may become involved, as a party or otherwise:
(i)
(ii)
by reason of his being or having been an Eligible Person, or
by reason of any action taken or not taken by him in his capacity as an Eligible Person, whether or not he continued in such capacity at the time
such Liability or Expense shall have been incurred.
(c)
The term “Eligible Person” as used in this Section 4.11 shall mean every person (and the estate, heirs, and personal representatives
of such person) who is or was a Director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer,
employee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other organization or entity,
whether for profit or not. An Eligible Person shall also be considered to have been serving an employee benefit plan at the request of the Corporation if his duties
to the Corporation also imposed duties on, or otherwise involved services by, him to the plan or to participants in or beneficiaries of the plan.
(d)
The terms “Liability” and “Expense” as used in this Section 4.11 shall include, but shall not be limited to, counsel fees and
disbursements and amounts of judgments, fines, or penalties against (including excise taxes assessed with respect to an employee benefit plan), and amounts paid
in settlement by or on behalf of an Eligible Person.
(e)
The term “Wholly Successful” as used in this Section 4.11 shall mean (i) termination of any claim against the Eligible Person in
question without any finding of liability or guilt against him, (ii) approval by a court, with knowledge of the indemnity herein provided, of a settlement of any
Claim, or (iii) the expiration of a reasonable period of time after the making or threatened making of any Claim without the institution of the same, without any
payment or promise made to induce a settlement.
(f)
Every Eligible Person claiming indemnification hereunder (other than one who has been Wholly Successful with respect to any
Claim) shall be entitled to indemnification (i) if special independent legal counsel, which may be regular counsel of the Corporation, or other disinterested person
or persons, in either case selected by the Board of Directors, whether or not a disinterested quorum exists (such counsel or person or persons being hereinafter
called the “Referee”), shall deliver to the Corporation a written finding that such Eligible Person has met the standards of conduct set forth in Section 4.11(a)(ii),
and (ii) if the Board of Directors, acting upon such written finding, so determines. The Board of Directors shall, if an Eligible Person is found to be entitled to
indemnification pursuant to the preceding sentence, also determine the reasonableness of the Eligible Person’s Expenses. The Eligible Person claiming
indemnification shall, if requested, appear before the Referee, answer questions that the Referee deems relevant and shall be given ample opportunity to present to
the Referee evidence upon which the Eligible Person relies for indemnification. The Corporation shall, at the request of the Referee, make available facts, opinions,
or other evidence in any way relevant to the Referee’s findings that are within the possession or control of the Corporation.
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(g)
If an Eligible Person claiming indemnification pursuant to Section 4.11(f) is found not to be entitled thereto, or if the Board of
Directors fails to select a Referee under Section 4.11(f) within a reasonable amount of time following a written request of an Eligible Person for the selection of a
Referee, or if the Referee or the Board of Directors fails to make a determination under Section 4.11(f) within a reasonable amount of time following the selection
of a Referee, the Eligible Person may apply for indemnification with respect to a Claim to a court of competent jurisdiction, including a court in which the Claim is
pending against the Eligible Person. On receipt of an application, the court, after giving notice to the Corporation and giving the Corporation ample opportunity to
present to the court any information or evidence relating to the claim for indemnification that the Corporation deems appropriate, may order indemnification if it
determines that the Eligible Person is entitled to indemnification with respect to the Claim because such Eligible Person met the standards of conduct set forth in
Section 4.11(a)(ii). If the court determines that the Eligible Person is entitled to indemnification, the court shall also determine the reasonableness of the Eligible
Person’s Expenses.
(h)
The rights of indemnification provided in this Section 4.11 shall be in addition to any rights to which any Eligible Person may
otherwise be entitled. Irrespective of the provisions of this Section 4.11, the Board of Directors may, at any time and from time to time, (i) approve indemnification
of any Eligible Person to the full extent permitted by the provisions of applicable law at the time in effect, whether on account of past or future transactions, and
(ii) authorize the Corporation to purchase and maintain insurance on behalf of any Eligible Person against any Liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability.
(i)
Expenses incurred by an Eligible Person with respect to any Claim may be advanced by the Corporation (by action of the Board of
Directors, whether or not a disinterested quorum exists) prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the Eligible Person
to repay such amount unless he is determined to be entitled to indemnification.
(j)
The provisions of this Section 4.11 shall be deemed to be a contract between the Corporation and each Eligible Person, and an
Eligible Person’s rights hereunder shall not be diminished or otherwise adversely affected by any repeal, amendment, or modification of this Section 4.11 that
occurs subsequent to such person becoming an Eligible Person.
(k)
The provisions of this Section 4.11 shall be applicable to Claims made or commenced after the adoption hereof, whether arising
from acts or omissions to act occurring before or after the adoption hereof.
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ARTICLE 5
Officers of the Corporation
Section 5.1. Election, Qualification and Term of Office . The officers of the Corporation shall consist of a Chief Executive Officer
(also “CEO” herein), a Chief Financial Officer (also “CFO” herein), a Secretary, and a Treasurer. The Corporation may, at the discretion of the CEO and as
otherwise required by Indiana law or other required regulatory requirements or best practices, have the following officers: Chief Operating Officer (also “COO”
herein), a President, one (1) or more Executive Vice Presidents, one (1) or more Senior Vice Presidents, one (1) or more Vice Presidents, and such assistant
officers as the CEO shall designate. The CEO will be appointed by the Board of Directors. The CFO will be appointed jointly by both the CEO and the Board of
Directors. All other officers will be appointed by the CEO. Any two (2) or more offices may be held by the same person, except the duties of the President and the
Secretary shall not be performed by the same person. If required to do so by law, at the Board meeting following action by the CEO, the Board of Directors will
elect each officer (other than assistant officers), as appointed by the CEO.
any reason, the same may be filled by the CEO.
Section 5.2. Vacancies . Whenever any vacancies shall occur in any of the offices of the Corporation (other than CEO or CFO) for
Section 5.3. Resignation and Removal . Any officer, other than the CEO, may resign at any time by delivering notice to the Board of
Directors, the Chairman, the CEO or the Secretary of the Corporation, and such resignation shall be effective upon delivery or such later date, as specified in the
resignation, upon the condition that the Corporation concurs with the delayed resignation. The CEO may resign by providing notice to the Board of Directors, the
Chairman, the Lead Director, or the Secretary of the Corporation. The CEO may be removed, either with or without cause, at any time by majority vote of the
entire Board of Directors. Any other officer may be removed, with or without cause, at the discretion of the CEO. The resignation or removal of an officer does
not affect the Corporation’s contract rights, if any, with the officer.
Committee of the Board of Directors.
Section 5.4. Compensation . Each executive officer shall receive such compensation for his service as set by the Compensation
The Chief Executive Officer . Subject to the general control of the Board of Directors, the Chief
Executive Officer shall manage and supervise all the affairs and personnel of the Corporation and shall discharge all the usual functions of the Chief Executive
Officer of a Corporation.
Section 5.5
The President: Shall perform the duties as outlined and as defined by the Board of Directors or CEO.
The President shall perform the duties of the CEO in the CEO’s absence or disability, such powers granted by the CEO, or in the case of disability, as granted by
the Board of Directors.
Section 5.6.
Section 5.7
Chief Operating Officer. Shall perform the duties as outlined by the Board of Directors or CEO.
Section 5.8
Chief Financial Officer . The Chief Financial Officer shall be the principal financial officer of the
Corporation and shall have such powers and perform such duties as the Board of Directors or CEO may prescribe. The Chief Financial Officer is also responsible
for financial planning and record keeping as well as financial reporting to the Board of Directors, Committees of the Board of Directors, senior management and
various regulatory authorities.
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Section 5.9 Executive Vice Presidents . The Executive Vice Presidents shall, in the order determined by the CEO, have all the
powers of and perform all the duties incumbent upon the President and/or COO during any absence or disability, assist the Board of Directors, CEO, COO and/or
President in supervising the operations of the Corporation and, subject to the direction of the CEO, COO and/or President, shall manage and supervise certain
operations of the Corporation.
powers and duties as the CEO may prescribe.
Section 5.10 Senior Vice Presidents and Vice Presidents . The Senior Vice Presidents and Vice Presidents shall have all such other
Section 5.11
The Secretary . The Secretary shall serve at the direction of the CEO and/or President, attend all
meetings of the shareholders and of the Board of Directors, and keep, or cause to be kept, in a book provided for the purpose, a true and complete record of the
proceedings of such meeting, and he shall perform a like duty, when required, and/or when necessary, for all standing committees appointed by the Board of
Directors. He shall attest the execution of all deeds, leases, agreements and other official documents and shall affix the corporate seal thereto. He shall attend to
the giving and serving of all notices of the Corporation required by this Code of By-Laws, shall have custody of the books (except books of account), records and
corporate seal of the Corporation, and in general shall perform all duties pertaining to the office of Secretary and such other duties as the CEO and/or President
shall prescribe and as this Code of By-Laws or the Board of Directors may prescribe.
Section 5.12
The Treasurer . The Treasurer shall serve at the direction of the CEO and CFO and keep correct and
complete records of accounts, showing accurately at all times the financial condition of the Corporation. He shall have charge and custody of, and be responsible
for, all funds, notes, securities and other valuables which may from time to time come into the possession of the Corporation. He shall deposit, or cause to be
deposited, all funds of the Corporation with such depositories as the CEO, President and CFO requires, or whenever required, provide a statement of the financial
condition of the Corporation, and in general shall perform all duties pertaining to the office of Treasurer and such other duties as the CEO, President and CFO or
this Code of By-Laws or the Board of Directors may prescribe.
Section 5.13
Assistant Officers . Such assistant officers as the officers shall from time to time designate shall have
such powers and duties as the officers whom they are designated to assist shall specify and delegate to them, and such other powers and duties the CEO may
prescribe. An Assistant Secretary may, in the absence or disability of the Secretary, attest the execution of all documents by the Corporation and affix the
corporate seal thereto.
Section 5.14 Delegation of Authority . In case of the absence or inability to act of any officer of the Corporation, other than the CEO,
the CEO may delegate for the time being the duties of such officer to any other officer or to any Director. In case of the absence or inability to act of the CEO, the
Board of Directors may delegate for the time being the duties of such officer to any other officer or to any Director.
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ARTICLE 6
Execution of Documents and Other Actions on
Behalf of the Corporation
Section 6.1
Execution of Documents in the Ordinary Course of Business . Unless otherwise required by law or
otherwise directed by the Board of Directors, all written contracts and agreements into which the Corporation enters in the ordinary course of its business shall be
executed on behalf of the Corporation by any officer of the Corporation or by any other employee or agent of the Corporation expressly authorized by the
Chairman, CEO. or the Board of Directors to execute any such documents.
Section 6.2
Execution of Documents Outside the Ordinary Course of Business. Unless otherwise required by law or
otherwise directed by the Board of Directors, all deeds, mortgages, deeds of trust, notes, assignments and other instruments made by the Corporation and all
written contracts and agreements entered into by the Corporation, other than those contracts and agreements entered into in the ordinary course of its business, shall
be executed on behalf of the Corporation by the CEO or the CFO and, when required, attested by the Secretary or an Assistant Secretary of the Corporation.
However, the Board of Directors may expressly authorize by resolution any officer, employee, or agent of the Corporation to execute any such deed, mortgage,
assignment, instrument, contract or agreement on behalf of the Corporation singly and without the necessity of any additional execution or attestation by any other
officer of the Corporation.
Section 6.3 Execution and Endorsement of Checks and Drafts . Unless otherwise required by law, all checks, drafts, bills of exchange
and other orders for the payment of money (other than notes) by or to the Corporation shall be executed or endorsed on behalf of the Corporation by any two of the
following duly elected officers of the Corporation: CEO, President, COO, CFO, Executive Vice President, Treasurer or Secretary. However, the CEO or CFO may
expressly authorize in writing any one or more officers or other employees of the Corporation to execute or endorse any checks, drafts, or other orders for the
payment of money on behalf of the Corporation, singly and without any additional signature, endorsement or attestation by any other officer of the Corporation.
Section 6.4 Voting of Shares Owned by the Corporation . The Board of Directors is empowered and authorized to appoint any person
to vote in person or by proxy any shares of another corporation standing in the name of the Corporation at any meeting of the shareholders of such other
corporation. If the Board of Directors makes no such appointment with respect to any such meeting, the shares may be voted in person or by proxy by the
Chairman, or, in the absence of the Chairman, by the CEO, President, COO, any Executive Vice President, the Secretary or the Treasurer of the Corporation.
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ARTICLE 7
Miscellaneous
Amendments . Subject to law and the Articles of Incorporation, the power to make, alter, amend or
repeal all or any part of this Code of By-Laws is vested in the Board of Directors. The affirmative vote of a majority of all the Directors shall be necessary to
affect any such changes in this Code of By-Laws.
Section 7.1
Corporate Seal . The seal of the Corporation shall be circular in form with the name of the Corporation
around the top of its periphery, the word “Indiana” around the bottom of its periphery, and the word “Seal” through the center. The absence of the impression of
the corporate seal from any document shall not affect in any way the validity or effect of such document.
Section 7.2
on the thirty-first (31 st ) day of December of each year.
Section 7.3
Fiscal Year . The fiscal year of the Corporation commences on the first (1 st ) day of January and ends
Section 7.4 Definitions . When used in this Code of By-Laws, the following terms shall have the meanings set forth below:
“Act” means the Indiana Business Corporation Law, as then in effect and as amended from time to time.
“Articles of Incorporation” means the Articles of Incorporation of the Corporation as then in effect and as amended from time to time.
Section 7.5
Conflicts and Inconsistencies with the Act . This Code of By-Laws constitutes “bylaws” within the
meaning of, and as subject to and governed by, the Act. In the event that any provision of this Code of By-Laws is prohibited by any provision of the Act or is in
direct conflict or inconsistent with any provision of the Articles of Incorporation, such provision of the Act or the Articles of Incorporation, as the case may be,
shall be controlling, but such conflict or inconsistency shall not impair, nullify or otherwise affect the remaining terms and provisions of this Code of By-Laws,
which shall remain in full force and effect. If any provision of this Code of By-Laws is inconsistent with, or different than, any non-mandatory provision of the
Act, the provision of this Code of By-Laws shall be controlling.
Section 7.6
Construction . The headings of Articles, Sections and paragraphs in this Code of By-Laws are for
descriptive purposes only and shall not control, alter, or otherwise affect the meaning, scope or intent or any provision of this Code of By-Laws. Except as
expressly provided otherwise in this Code of By-Laws, any reference to an Article or Section shall mean and refer to an Article or Section of this Code of By-
Laws. Except where the context of their use clearly requires a different interpretation, singular terms shall include the plural, and masculine terms shall include the
feminine or neuter, and vice versa, to the extent necessary to give the defined terms or other terms used in this Code of By-Laws their proper meanings. The terms,
“herein,” “hereof,” “hereunder,” “hereto,” “hereinafter,” “hereinbefore,” and similar words, wherever they appear in this Code of By-Laws, shall mean and refer to
this Code of By-Laws in its entirety and not to any specific Article, Section, or paragraph of this Code of By-Laws, unless the context of their use clearly requires a
different interpretation.
determined to be in violation of the Act shall in no way render any of the remaining provisions invalid.
Section 7.7
Severability . Any provision of this Code of By-Laws, or any amendment or alteration hereof, which is
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Separation and General Release Agreement
This Separation and General Release Agreement (this “ Agreement ”) is made as of this 17 th day of October, 2018, by and among Protective Insurance
Corporation, an Indiana Corporation, together with its subsidiaries, affiliates, successors, and assignees (the “ Company ”) and W. Randall Birchfield (“ Executive
,” and together with the Company, the “ Parties ”).
WHEREAS, Executive has been employed by the Company under an Employment Agreement between the Company and Executive dated as of August
16, 2018 (the “ Employment Agreement ”);
WHEREAS, the Parties have agreed that Executive’s employment with the Company will terminate effective as of October 17 , 2018 (the “ Separation
Date ”);
WHEREAS, the Parties desire to enter into this Agreement to set forth the definitive rights and obligations of the Parties upon termination of the
employment relationship.
NOW, THEREFORE, in consideration of the mutual covenants, commitments and agreements contained herein, and for other good and valuable
consideration the receipt and sufficiency of which the Parties hereby acknowledge, the Parties intending to be legally bound agree as follows:
- 1 -
1) Definitions . Capitalized terms that are used but not defined in this Agreement shall have the meanings ascribed to such terms in the Employment Agreement.
2) Resignation . Effective as of the Separation Date, Executive resigns from his positions as Chief Executive Officer of the Company and as a member of the
Company’s Board of Directors, and from any and all other positions and offices he holds at the Company, and the Company hereby accepts such resignation.
Executive agrees to execute and deliver any documents necessary or appropriate to affect his resignation and to take all actions reasonably requested by the
Company to affect such resignations.
3) Consideration . The Company hereby waives any right it may otherwise have to recoup a pro-rata portion of the Retention Bonus. The Company
acknowledges its continuing obligation to provide Executive with the benefits described in Section 8(e) of the Employment Agreement that are payable upon a
resignation without Good Reason.
4) Restrictive Covenants . Executive acknowledges and agrees the Restrictive Covenants in Section 11 of the Employment Agreement will continue to remain
in full force and effect, as specified in the Employment Agreement.
5) General Release and Waiver .
a) General Release . Executive, for and on behalf of himself and each of his heirs, executors, administrators, personal representatives, successors and
assigns, to the maximum extent permitted by law, hereby acknowledges full and complete satisfaction of and ABSOLUTELY AND IRREVOCABLY
AND UNCONDITIONALLY FULLY AND FOREVER RELEASES, ACQUITS AND DISCHARGES Protective Insurance Corporation together with
its subsidiaries, parents, affiliates, owners and shareholders, including but not limited to each of such entities’ past and present direct and indirect
shareholders, directors, members, partners, officers, employees, attorneys, agents and representatives, and their respective heirs, executors, administrators,
personal representatives, successors and assigns (collectively, the “ Released Parties ”), from any and all claims, demands, suits, causes of action,
liabilities, obligations, judgments, orders, debts, liens, contracts, agreements, covenants and causes of action of every kind and nature, whether known or
unknown, suspected or unsuspected, concealed or hidden, vested or contingent, in law or equity, existing by statute, common law, contract or otherwise,
which have existed, may exist or do exist, through and including the execution and delivery by Executive of this Agreement (but not including
Executive’s or the Company’s performance under this Agreement) (“ Claims ”), including, without limitation, any of the foregoing arising out of or in any
way related to or based upon:
(1) Executive’s application for and employment with the Company, his being an officer or employee of the Company, or the termination of such
employment;
(2) any and all claims in tort or contract, and any and all claims alleging breach of an express or implied, or oral or written, contract, policy manual
or employee handbook;
(3) any alleged misrepresentation, defamation, interference with contract, intentional or negligent infliction of emotional distress, sexual harassment,
negligence or wrongful discharge; or
(4) any federal, state or local law, statute, ordinance or regulation, including but not limited to all labor and employment discrimination laws, and
including specifically the Age Discrimination in Employment Act of 1987, as amended by the Older Workers Benefit Protection Act and
otherwise (the “ ADEA ”).
b) Acknowledgment of Waiver; Disclaimer of Benefits . Executive acknowledges and agrees that he is waiving all rights to sue or obtain equitable, remedial
or punitive relief from any or all Released Parties of any kind whatsoever concerning any Claims, including, without limitation, reinstatement, back pay,
front pay, attorneys’ fees and any form of injunctive relief. Notwithstanding the foregoing, Executive further acknowledges that he is not waiving and is
not being required to waive (i) any rights that are provided under (or preserved by) this Agreement, or (ii) any right that cannot be waived by law,
including the right to file a charge or participate in an administrative investigation or proceeding of the Equal Employment Opportunity Commission or
any other government agency prohibiting waiver of such right; provided,
however
, that Executive hereby disclaims and waives any right to share or
participate in any monetary award resulting from the prosecution of such charge or investigation, excepting only any benefit or remedy to which
Executive is or becomes entitled pursuant to Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
c) Effect of Release and Waiver . Executive understands and intends that this Section 5 constitutes a general release of all claims except as otherwise
explicitly provided in this Agreement, and that no reference herein to a specific form of claim, statute or type of relief is intended to limit the scope of
such general release and waiver.
d) Waiver of Unknown Claims . Executive expressly waives all rights afforded by any statute which limits the effect of a release with respect to unknown
claims. Executive understands the significance of his release of unknown claims and his waiver of statutory protection against a release of unknown
claims.
6) Executive’s Representations and Covenants Regarding Actions . Executive represents, warrants and covenants to each of the Released Parties that at no
time prior to or contemporaneous with his execution of this Agreement has he knowingly engaged in any wrongful conduct against, on behalf of or as the
representative or agent of the Company. Executive further represents, warrants and covenants to each of the Released Parties that at no time prior to or
contemporaneous with his execution of this Agreement has he filed or caused or knowingly permitted the filing or maintenance, in any state, federal or
foreign court, or before any local, state, federal or foreign administrative agency or other tribunal, any Claim, known or unknown, suspected or unsuspected,
which he may now have or has ever had against the Released Parties which is based in whole or in part on any matter referred to in Section 5 above.
Executive hereby grants the Company his perpetual and irrevocable power of attorney with full right, power and authority to take all actions necessary to
dismiss or discharge any such Claim. Executive further covenants and agrees that he will not encourage any person or entity, including but not limited to any
current or former employee, officer, director or stockholder of the Company, to institute any Claim against the Released Parties or any of them.
7) No Conflict of Interest . Executive hereby covenants and agrees that he will not, directly or indirectly, incur any obligation or commitment, or enter into
any contract, agreement or understanding, whether express or implied, and whether written or oral, which would be in conflict with his obligations, covenants
or agreements hereunder or that could cause any of his representations or warranties herein to be untrue or inaccurate.
8) Remedies . Executive acknowledges and affirms that in the event of any breach by Executive of any of his covenants, agreements or obligations hereunder,
monetary damages would be inadequate to compensate the Released Parties or any of them. Accordingly, in addition to other remedies which may be
available to the Released Parties hereunder or otherwise at law or in equity, any Released Party will be entitled to specifically enforce such covenants,
obligations and restrictions through injunctive and/or equitable relief, in each case without the posting of any bond or other security with respect thereto.
Should any provision of this Agreement be adjudged to any extent invalid by any court or tribunal of competent jurisdiction, each provision will be deemed
modified to the minimum extent necessary to render it enforceable.
9) Acknowledgment of Voluntary Agreement; ADEA Compliance . Executive acknowledges that he has entered into this Agreement freely and without
coercion, that he has been advised by the Company to consult with counsel of his choice, that he has had adequate opportunity to so consult, and that he has
been given all time periods required by law to consider this Agreement, including but not limited to the 21-day period required by the ADEA (the “
Consideration Period ”). Executive understands that he may execute this Agreement less than 21 days from its receipt from the Company, but agrees that such
execution will represent his knowing waiver of such Consideration Period. Executive further acknowledges that within the 7-day period following his
execution of this Agreement (the “ Revocation Period ”), he will have the unilateral right to revoke this Agreement, and that the Company’s obligations
hereunder will become effective only upon the expiration of the Revocation Period without Executive’s revocation hereof. In order to be effective, notice of
Executive’s revocation of this Agreement must be received by the Company in writing on or before the last day of the Revocation Period.
10) Incorporation of Employment Agreement . The following provisions of the Employment Agreement shall be deemed to be incorporated into this
Agreement as if set forth verbatim into this Agreement: Section 8(g) (relating to no mitigation or offset); Section 10 (relating to indemnification and liability
insurance); Section 11 (relating to restrictive covenants); Section 12 (relating to assignments); Section 13 (relating to representations); Section 14 (relating to
resolution of disputes); Section 15 (relating to certain tax matters); Section 17(c) (relating to inconsistencies); Section 17(e) (relating to beneficiaries); Section
17(h) (relating to withholding taxes); and Section 17(i) (relating to cooperation).
11) Complete Agreement . This Agreement constitutes the complete and entire agreement and understanding of the Parties with respect to the subject matter
hereof, and supersedes in its entirety any and all prior understandings, commitments, obligations and/or agreements, whether written or oral, with respect
thereto, except as expressly provided herein.
12) No Strict Construction . The language used in this Agreement will be deemed to be the language mutually chosen by the Parties to reflect their mutual
intent, and no doctrine of strict construction will be applied against any Party.
13) No Admission of Liability . Nothing herein will be deemed or construed to represent an admission by the Company or the Released Parties of any violation
of law, breach of contract, or other wrongdoing of any kind whatsoever.
14) Third Party Beneficiaries . The Released Parties are intended third-party beneficiaries of this Agreement, and this Agreement may be enforced by each of
them in accordance with the terms hereof in respect of the rights granted to such Released Parties hereunder. Except and to the extent set forth in the
preceding sentence (or in Section 10), this Agreement is not intended for the benefit of any person other than the Parties, and no such other person will be
deemed to be a third-party beneficiary hereof. Without limiting the generality of the foregoing, it is not the intention of the Company to establish any policy,
procedure, course of dealing or plan of general application for the benefit of or otherwise in respect of any other employee, officer, director or stockholder,
irrespective of any similarity between any contract, agreement, commitment or understanding between the Company and such other employee, officer, director
or stockholder, on the one hand, and any contract, agreement, commitment or understanding between the Company and Executive, on the other hand, and
irrespective of any similarity in facts or circumstances involving such other employee, officer, director or stockholder, on the one hand, and Executive, on the
other hand.
15) Notices . All notices, consents, waivers and other communications required or permitted by this Agreement will be in writing and will be deemed given to a
Party when: (a) delivered to the appropriate address by hand or overnight delivery; (b) sent by facsimile or e-mail with confirmation of transmission by the
transmitting equipment; or (c) three (3) days following mailing by certified or registered mail, postage prepaid and return receipt requested, in each case to the
following addresses, facsimile numbers or e-mail addresses and marked to the attention of the Party (by name or title) designated below (or to such other
address, facsimile number, e-mail address or person as a Party may hereafter designate by written notice to the other Parties):
If to the Company:
Protective Insurance Corporation
111 Congressional Blvd, Suite 500
Carmel, IN 46032
T: +1 317-636-9800
Attention: General Counsel
If to Executive:
W. Randall Birchfield
13585 Dallas Drive
Carmel, IN 46033
16) Governing Law . All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement will be governed by, and
construed in accordance with, the laws of the State of Indiana, without giving effect to any choice of law or conflict of law rules or provisions that would cause
the application hereto of the laws of any jurisdiction other than the State of Indiana. In furtherance of the foregoing, the internal law of the State of Indiana
will control the interpretation and construction of this Agreement, even though under any other jurisdiction’s choice of law or conflict of law analysis the
substantive law of some other jurisdiction may ordinarily apply.
17) Severability . The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this
Agreement, which will otherwise remain in full force and effect.
18) Counterparts . This Agreement may be executed in separate counterparts, each of which will be deemed to be an original and all of which taken together will
constitute one and the same agreement. Signatures delivered by facsimile (including, without limitation, by “pdf”) shall be effective for all purposes.
19) Amendments and Waivers . Except with respect to any non-competition or similar post-employment restrictive covenants, which will be subject to
modification by a court of competent jurisdiction pursuant to their express terms (as may be modified herein), no amendment to or waiver of this Agreement
or any of its terms will be binding upon any Party unless consented to in writing by such Party.
20) Headings . The headings of the Sections and subsections of this Agreement are for purposes of convenience only, and will not be deemed to amend, modify,
expand, limit or in any way affect the meaning of any of the provisions hereof.
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IN WITNESS WHEREOF, the Parties have executed this Separation and General Release Agreement effective as of the date of the first signature affixed
below or as otherwise provided in this Agreement.
READ CAREFULLY BEFORE SIGNING
I have read this Separation and General Release Agreement and have had the opportunity to consult legal counsel prior to my signing of this Agreement. I
understand that by executing this Agreement I will relinquish any right or demand I may have against the Released Parties or any of them.
DATED:_________________
By:_____________________________
W. Randall Birchfield
DATED:_________________
PROTECTIVE INSURANCE CORPORATION
By: ____________________________
Name:
Title:
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CONFIDENTIALITY, NON-COMPETITION,
AND NON-SOLICITATION AGREEMENT
This CONFIDENTIALITY, NON-COMPETITION, AND NON-SOLICITATION AGREEMENT (this “ Agreement ”) is made and entered into as
of May 25, 2018 (the “Effective Date”), by and between Baldwin & Lyons, Inc., an Indiana corporation (the “ Company ”), and Jeremy Goldstein (the “ Executive
“).
PRELIMINARY STATEMENTS
The Company is in the highly competitive insurance industry and its products and services include, but are not limited to, marketing and underwriting
insurance for the transportation industry, insurance brokerage operations, claims servicing, loss prevention services, automobile insurance, reinsurance, workers
compensation insurance, professional liability insurance, and related services (the “ Business” ). The Company conducts the Business throughout the United
States, Canada, Puerto Rico, and Bermuda, and has its headquarters in Carmel, Indiana; and
Upon the execution of this Agreement, the Executive agrees to continue to serve as a highly valued member of the Company’s team, specifically as one of
the Executive Vice Presidents of the Company or one of its subsidiaries, with duties and responsibilities coextensive with critical areas of the Business, including,
but not limited to, assisting in developing the Company’s business strategies, working closely with highly valued customers of the Company, and he/she has access
to virtually all of the Company’s Confidential Information. In such role, the Executive developed substantial business knowledge and expertise in the conduct of
the Business, close relationships with highly valued customers of the Company, and he/she has acquired knowledge regarding Confidential Information of the
Company; and
This Agreement is entered into to secure Executive’s continued service to the Company and to protect, among other things, the Company’s goodwill,
customer and referral relationships, trade secrets, intellectual property, confidential information, and other property that is proprietary to the Company.
In consideration of the mutual promises set forth in this Agreement, and for other valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Executive and the Company (the “ parties ”) hereby agree as follows:
1.
2.
Continued Service . The Executive agrees to continue to perform the duties of his/her position to the best of his/her abilities.
Employment At-Will . Subject to Section 3 below, Executive will be employed by the Company on an at-will basis which means that
he/she may terminate his/her employment at any time for any or no reason, and that the Company may terminate his/her employment at any time for any or no
reason.
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3.
Termination of Employment .
3.01
Termination by Company . In the event the Company terminates the Executive’s employment, the Company shall make a Separation
Payment to the Executive in an amount that is equivalent to twenty-four (24) months of the Executive’s then current base salary, less applicable taxes and other
legally-required deductions, the Executive’s holiday bonus for two (2) years, and an amount equal to the Executive’s annual incentive bonus (including, but not
limited to the Executive’s AIP and LTIP) for the year in which separation occurs. Further, the Company shall pay for all costs associated with the continuation of
Executive’s medical, dental, and/or vision benefits under COBRA for a period of twelve (12) months, which period shall begin on the first day of the month
following the Executive’s Separation Date. If Executive is dismissed for dishonest activities, fraud, gross neglect of duty, or misconduct, the Executive shall not
be entitled to any such Separation Payment.
3.02
Termination by Executive for Good Reason . Executive may terminate his/her employment with the Company and receive the same
benefits as described in 3.01 above upon the occurrence of any of the following circumstances:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
The assignment to Executive of duties lasting more than sixty (60) days that are materially inconsistent with Employee’s then current position or
a material change in his reporting relationship to the CEO or his/her successor;
The assignment of Executive of duties or association with activities which, if performed, could create a material risk to the professional
reputation of the Executive, subject the Executive to personal liability under state or federal law, violate any applicable code of professional
conduct, or create an untenable employment environment.
The failure of the Company to continue to provide Executive with office space, related facilities and support personnel (including, but not
limited to, administrative and secretarial assistance) within the Company’s principal executive offices commensurate with his/her responsibilities
to, and position within, the Company;
A reduction by the Company in the amount of Executive’s base salary or the discontinuation or reduction by the Company of Executive’s
participation at the same level of eligibility as compared to other peer employees in any incentive compensation, additional compensation,
benefits, policies or perquisites subject to Executive understanding that such reduction(s) shall be permissible if the change applies in a similar
way to other peer level employees;
The relocation of the Company’s principal executive offices or Executive’s place of work to a location requiring a change of more than fifty (50)
miles in Executive’s daily commute;
A failure by the Company to perform its obligations under this Agreement; or
If Executive terminates employment on or before the two (2) year anniversary of the Occurrence of a Change in Control. “ Change in Control ”
shall mean the occurrence of any of the following events.
(1) Any Person acquires ownership of the Class A Common Stock that, together with Class A Common Stock previously held by the acquirer,
constitutes more than fifty percent (50%) of the total Fair Market Value or total voting power of the Company’s stock. If any Person is
considered to own more than fifty percent (50%) of the total Fair Market Value or total voting power of the Company’s stock, the acquisition of
additional stock by the same Person does not cause a change in ownership. An increase in the percentage of stock owned by any Person as a
result of a transaction in which the Company acquires its stock in exchange for property, is treated as an acquisition of stock;
(2) Any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by that Person)
ownership of the Company’s stock possessing at least thirty percent (30%) of the total voting power of the stock;
(3) A majority of the members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not
endorsed by a majority of the members of the Board prior to the date of appointment or election; or
(4) Any Person acquires (or has acquired during the twelve (12) month period ending on a date of the most recent acquisition by that Person) assets
from a corporation that have a total gross fair market value equal to at least forty percent (40%) of the total gross fair market value of all the
Company’s assets immediately prior to the acquisition or acquisitions. Gross fair market value means the value of the Company’s assets, or the
value of the assets being disposed of, without regard to any liabilities associated with these assets.
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A Change of Control shall not apply with respect to the assumption or reallocation of Class A Common Stock among the Shapiro family or entities,
as disclosed in the definitive proxy statements filed by the Company with the Securities Exchange Commission;
In determining whether a Change of Control occurs, the attribution rules of Code Section 318 apply to determine stock ownership. For purposes of
the definition of Change of Control, a "Person" shall mean any person, entity or "group" within the meaning of Section 13(d)(3) or Section 14(d)(2)
of the Exchange Act, except that such term shall not include (a) any member of the Company Group, (b) a trustee or other fiduciary holding securities
under an employee benefit plan of any member of the Company Group, (c) an underwriter temporarily holding securities pursuant to an offering of
such securities or (d) an entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their
ownership of shares of the Company.
In the event the Executive terminates employment with the Company for Good Reason as defined above, the Company will provide Executive with the Separation
Payment described in subsection 3.01 above.
3.03
Release . As a condition to the Executive’s receipt of the above-described Separation Payment, he/she shall execute a release of claims in a
form prepared by and satisfactory to the Company. Within fourteen (14) business days of the effective date of such release of claims, the Executive shall receive
the first Separation Payment described above, which will be paid over the course of twenty-four (24) months in accordance with the Company’s regular bi-weekly
payroll schedule. The Executive acknowledges and agrees that his/her obligations as set forth below, and the rights of the Company as described in this
Agreement, shall be enforceable by the Company, whether or not the Executive executes the above-described release of claims and receives the Separation
Payment.
4.
Confidentiality . The Executive acknowledges and agrees that he/she shall maintain the confidentiality of this Agreement and shall not
disclose it to any other employee of the Company or other person; provided , however , he/she may disclose it to his/her spouse and/or legal counsel or as required
by law. The Executive also acknowledges and agrees that the Confidential Information (as defined below) of the Company, its subsidiaries, and affiliates (the “
Company Group ”) and all physical embodiments thereof are valuable, special and unique assets of the business of the Company Group and have been developed
by the Company Group at considerable time and expense. Such Confidential Information is the sole property of the Company Group and the Executive has no
individual right or ownership interest in any of the Company Group’s Confidential Information. The Executive further acknowledges that access to such
Confidential Information will be needed in connection with the performance of his/her duties and responsibilities during his/her employment with the Company.
Therefore, the Executive agrees that, except as necessary in regard to his/her assigned duties and responsibilities with the Company, he/she shall hold in confidence
all Confidential Information and will not reproduce, use, distribute, disclose, publish, or otherwise disseminate any Confidential Information, in whole or in part,
and will take no action causing, or fail to take any action necessary to prevent causing, any Confidential Information to lose its character as Confidential
Information, nor willfully make use of such information for his/her own purposes or for the benefit of any person, firm, corporation, association, or other entity
(except the Company Group) under any circumstances.
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Notwithstanding the above, the Executive may disclose such Confidential Information pursuant to a court order, subpoena, or other legal process, provided that, at
least ten (10) days (or such lesser period as is practicable given the terms of any order, subpoena or other legal process) in advance of any legal disclosure, he/she
shall furnish the Company with a copy of the judicial or administrative order requiring that such information be disclosed together with a written description of the
information to be disclosed (which description shall be in sufficient detail to allow the Company to determine the nature and scope of the information proposed to
be disclosed), and the Executive agrees to cooperate with the Company Group to deliver the minimum amount of information necessary to comply with such order.
For purposes of this Agreement, the term “ Confidential Information ” means information, including but not limited to, any technical or nontechnical data, formula,
pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, pricing, rates, forms, loss prevention
practices, claims data, list of actual or potential customers or suppliers, or other information similar to any of the foregoing, which derives economic value, actual
or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its
disclosure or use. Notwithstanding anything contained herein to the contrary, Confidential Information does not include information that: (a) is or becomes
generally available to the public, other than through any wrongful act or omission by the Executive or any other person or entity; (b) becomes available to the
Executive on a non-confidential basis from a source other than the Company Group, provided it is not subject to a confidentiality agreement between a member of
the Company Group and a third party; or (c) is required to be disclosed pursuant to applicable federal, state, or local laws or judicial process. The provisions of this
Section 2 shall apply to Confidential Information during the Term and at all times thereafter, and shall survive the termination of this Agreement and the
Executive’s separation of employment.
Executive agrees to maintain in trust, as the Company’s property, all documents, information and Confidential Information, both in tangible and intangible form,
concerning the Company’s Business or the Executive’s role for Company. Executive agrees to return to Company all documents or other property belonging to the
Company, including any and all copies thereof (whether in tangible or intangible form) in the possession or under the control of Executive upon separation of
employment or at any other time upon request of Company.
This Agreement supplements and does not supersede Executive’s obligations under all statute(s) and common law(s) that protect the Company’s trade secrets
and/or property.
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5.
Restrictive Covenants .
5.01 Non-Competition .
(a)
During the Restricted Period, Executive shall not, directly or indirectly, for or on behalf of a Specified Competitor (as defined below),
market, offer, promote, manage, or sell Competitive Products. “ Competitive Products ” are those products and/or services that are the same as or substantially
similar to (in terms of type, brand, functionality, or purpose) the products and services designed, developed, sold, marketed and/or distributed by the Company
Group, as well as the products and services under development by the Company Group, in each case at any time during the two (2) year period immediately
preceding the Separation Date. A “Specified Competitor” of the Company is defined as (1) Fairfax Financial Holdings, including all of its subsidiaries or
affiliates, or (2) any entity or operation engaged in any type of underwriting, administration, agency, reinsurance or property & casualty industry that has
been in existence for less than two (2) years from the date on which the Executive begins his/her/her relationship with such entity, or (3) any entity or which
the Executive becomes an owner, executive or principal, to the extent that it is involved in any business concern that involves any Competitive Products
(including, without limitation, an insurance agency that sells or administers Competitive Products). The restrictions contained in this paragraph are necessary
because of the Executive’s extensive knowledge of the Business, the industry as a whole, and the Company’s customers, and because a competitor would gain an
unfair competitive advantage by associating with the Executive during the Restricted Period. These restrictions are not intended to restrict Executive’s ability to
practice law.
(b)
Due to the nature of the Business and the nature of the Executive’s job duties and responsibilities with the Company, which are co-extensive
with the entire scope of the Company’s Business, the broadest geographic scope enforceable by law for the restrictions set forth in Section 5.01(a) shall be
applicable, as follows:
The United States of America, Canada, Puerto Rico, and Bermuda;
Each state, province, commonwealth, territory, and other political subdivision of the United States of America, Canada, Puerto Rico, and
Bermuda;
Indiana and any state, province, commonwealth, territory, or other political subdivision in which the Executive performed any services for the
Company Group at any time in the two (2) year period immediately preceding the Separation Date; and
Within one hundred (100) miles of any office or facility of the Company Group.
(c)
“ Restricted Period ” means throughout the Term and for a period of twenty-four (24) months immediately following the Term
(regardless of how, when or why the Executive’s employment relationship ends). The Restricted Period shall be tolled automatically by any period in which the
Executive is in violation of any of his/her restrictive covenant obligations set forth in Section 5 of this Agreement.
(d)
Ethical Obligations . Notwithstanding anything contained herein to the contrary, Employee acknowledges that Employee has
certain independent ethical obligations concerning confidentiality and conflicts of interest imposed by the applicable provisions of the Indiana Rules of
Professional Conduct (as well as possibly other model rules of professional conduct), which prevent or limit Employee in Employee’s capacity as an attorney from
representing or otherwise working for any direct or indirect competitor of the Company whose interest may be materially adverse to the interest of the Company as
well as prohibit Employee from disclosing, relying upon or otherwise using Company information for the benefit of such competitors. Employee acknowledges
that such ethical obligations, specifically including Rules 1.6 through 1.9 of the Indiana Rules of Professional Conduct, shall be deemed part of this Agreement and
shall run concurrent with all other restrictive covenant obligations contained herein.
- 5 -
5.02. Non-Solicitation .
(a)
For a period of twenty-four (24) months immediately following the Separation Date, directly or indirectly, call upon, solicit,
accept any business of, provide any services or products to, contact, or have any communication with any Customer for the purpose of: (i) diverting or influencing,
or attempting to divert or influence, any business of such Customer to any Competitor (as defined below), or (ii) marketing, selling, offering, or providing any
Competitive Products (as defined above). A “Customer” is defined as any person or entity for or to whom the Company Group sold or distributed any products or
services during the two (2) years prior to the Separation Date or during the Term of this Agreement.
(b)
During the Restricted Period, the Executive shall not, directly or indirectly, call upon, solicit, accept any business of, provide any services or
products to, contact, or have any communication with any Prospect for the purpose of: (i) diverting or influencing, or attempting to divert or influence, any
business of such Prospect to any Competitor (as defined below), or (ii) marketing, selling, offering, or providing any Competitive Products (as defined above). A
“Prospect” is defined as any person or entity: (x) for or to whom the Company Group provided a quote to provide products or services; (y) for or to whom the
Company Group was preparing a quote to provide products or services at the time of the Executive’s separation from the Company.
(c)
For a period of twenty-four (24) months immediately following the Separation Date, the Executive shall not, directly or indirectly, solicit for
employment, endeavor to entice away from the Company Group, hire or retain (or attempt to do any of the foregoing) any person who is or was an employee,
independent contractor, or other personnel of Company Group at any time during the twelve (12) month period prior to the Separation Date, or interfere in any way
with the relationship between the Company Group and any of its Customers, employees, independent contractors, or other personnel.
(d)
A “ Competitor ” of the Company is any entity engaged in similar insurance Business as the Company Group to the extent that they are
involved in any business concern that involves any Competitive Products (including, without limitation, an insurance agency that sells Competitive Products).
5.03. Non-Disparagement . During the Term, and at all times thereafter, the Executive shall not, directly or indirectly, make any negative or disparaging
statement or encourage others to make any such statement that has the effect of embarrassing or criticizing the Company Group, the services and products offered
or provided in the Business, including, without limitation, the Company Group’s actual or prospective Customers or employees.
5.04. Survival . The obligations of the Executive and the rights of the Company pursuant to this Section 3 shall survive any termination of this Agreement for
the periods of time specified herein, or, if no time limitation is included, indefinitely.
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5.05.
Remedies .
(a)
Remedies . The parties recognize, acknowledge and agree that (i) any breach or threatened breach of the provisions of Sections 5.01 or 5.02
shall cause irreparable harm and injury to the Company and that money damages alone will not provide an adequate remedy for such breach or threatened breach,
(ii) the duration, scope and geographical application of Sections 5.01 and 5.02 are fair and reasonable under the circumstances of the Business, and are reasonably
required to protect the legitimate business interests of the Company, (iii) the restrictions contained in Sections 5.01 and 5.02 will not prevent the Executive from
earning or seeking a livelihood, and (iv) the restrictions contained in Sections 5.01 and 5.02 shall apply in all areas where such application is permitted by law.
Accordingly, the Executive agrees that the Company shall be entitled to have the provisions of Sections 5.01 and 5.02 specifically enforced by any court having
jurisdiction, and that such a court may issue a temporary restraining order, preliminary injunction, or other appropriate equitable relief, without having to prove the
inadequacy of available remedies at law, having to post any bond or any other undertaking. In addition, the Company shall be entitled to avail itself of all such
other actions and remedies available to it or any member of the Company Group under law or in equity and shall be entitled to such damages as it sustains by
reason of such breach or threatened breach. It is the express desire and intent of the parties that the provisions of Sections 5.01 and 5.02 be fully enforced.
(b)
Severability . In light of the fact that the covenants set forth in this Section 5 are reasonably required to protect the Company’s legitimate
interests, if any provision of Section 5 hereof is held to be unenforceable because of the duration of such provision, the area covered thereby or the scope of the
activity restrained, the parties hereby expressly agree that the court making such determination shall have the power to reduce the duration and/or areas of such
provision and/or the scope of the activity to be restrained contained in such provision and, in its reduced form, such provision shall then be enforceable.
Furthermore, if any court shall refuse to enforce any of the separate covenants deemed included in Section 5 , then such unenforceable covenant shall be deemed
eliminated from the provisions hereof to the extent necessary to permit the remaining separate covenants to be enforced in accordance with their terms. The
prevailing party in any action arising out of a dispute in respect of any provision of this Section 5 shall be entitled to recover from the non-prevailing party
reasonable attorneys’ fees and costs and disbursements incurred in connection with the prosecution or defense, as the case may be, of any such action.
6.
Works for Hire/Inventions . The Executive acknowledges that all original works of authorship that are made by him (solely or jointly with
others) within the scope of his/her employment and that are protectable by copyright are “works made for hire,” pursuant to the United States Copyright Act (17
U.S.C. §101). Any and all inventions, improvements, discoveries, designs, works of authorship, concepts or ideas, or expressions thereof, whether or not subject to
patents, copyrights, trademarks or service mark protections, and whether or not reduced to practice, that are conceived or developed by the Executive while
employed with the Company and which relate to or result from the actual or anticipated business, work, research or investigation of the Company (collectively,
“Inventions”), shall be the sole and exclusive property of the Company, as applicable. The Executive shall do all things reasonably requested by the Company to
assign to and vest in the Company the entire right, title and interest to any such Inventions and to obtain full protection therefor.
7.
Waiver . No failure on the part of either party hereto to exercise, and no delay by either party hereto in exercising any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy by either party hereto preclude any other
or further exercise thereof or the exercise by such party of any other right, power or remedy. No express waiver or assent by either party hereto of any breach of
or default in any term or condition of this Agreement by the other party shall constitute a waiver of or an assent to any succeeding breach of or default in the same
or any other term or condition hereof.
8.
Severability . All rights and restrictions contained in this Agreement may be exercised and shall be applicable and binding only to the extent
that they do not violate any applicable laws and are intended to be limited to the extent necessary so that they will not render this Agreement illegal, invalid or
unenforceable. If any term of this Agreement, or part thereof, not essential to the commercial purpose of this Agreement shall be held to be illegal, invalid or
unenforceable by a court of competent jurisdiction, it is the intention of the parties that the remaining terms hereof, or part thereof, shall constitute their agreement
with respect to the subject matter hereof and all such remaining terms, or parts thereof, shall remain in full force and effect. To the extent legally permissible, any
illegal, invalid or unenforceable provision of this Agreement shall be replaced by a valid provision, which will implement the commercial purpose of the illegal,
invalid or unenforceable provision.
- 7 -
9.
Notices . All notices, requests, demands or other communications required or permitted to be given or made hereunder shall be in writing
and delivered personally or sent by Federal Express or other similar express courier. The addresses and facsimile numbers of the parties for purposes of this
Agreement are:
Company:
Executive:
Baldwin & Lyons, Inc.
111 Congressional Blvd., Suite 500
Carmel, IN 46032
Attention : Human Resources
Jeremy Goldstein
___________________
___________________
Either party may change the address to which notices or other communications to such party shall be delivered or mailed by giving notice thereof to the other party
hereto in the manner provided herein.
10.
Governing Law/Venue . This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the
State of Indiana without reference to any jurisdiction’s principles of conflicts of law to the contrary. The parties consent to the exclusive jurisdiction of all state
courts located in Hamilton County, Indiana, or the federal courts located in Marion County, Indiana, as well as to the jurisdiction of all courts to which an appeal
may be taken from such courts, for the purpose of any suit, action, or other proceeding arising out of, or in connection with, this Agreement, or any of the
transactions contemplated hereby including, without limitation, any proceeding relating to provisional remedies and interim or injunctive relief. Each party hereby
expressly waives any and all rights to bring any suit, action, or other proceeding in or before any court or tribunal other than the courts described above, and
covenants that it shall not seek in any manner to resolve any dispute other than as set forth in this section, or to challenge or set aside any decision, award, or
judgment obtained in accordance with the provisions hereof. Each party hereby expressly waives any and all objections it may have to venue, including, without
limitation, the inconvenience of such forum, in any of such courts. In addition, each party consents to the service of process by personal service or any manner in
which notices may be delivered hereunder in accordance with this Agreement.
11.
Assignment . The parties acknowledge that this Agreement has been entered into as a result of, among other things, the specialized
knowledge and experience of the Executive, and agree that this Agreement may not be assigned or transferred by him. The rights and benefits of the Company
under this Agreement shall be transferable to any member of the Company Group or to any successor, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against its successors and assigns.
12.
Entire Agreement . This Agreement shall not be modified or amended except by an instrument in writing signed by or on behalf of the
parties hereto. This Agreement supersedes and replaces any prior such agreement(s) between the parties.
- 8 -
13.
Incorporation of Preliminary Statements . The Preliminary Statements to this Agreement are herein incorporated into this section of the
Agreement. The terms of this Agreement shall remain in full force and effect regardless of whether the Executive’s position, title, role or responsibilities identified
in the Preliminary Statements changes by reason of promotion, reassignment, demotion, or otherwise.
14.
Statutory and Common Law Duties . The duties that the Executive owes to the Company under this Agreement shall be deemed to
include all applicable federal and state statutory and common law obligations and such duties do not in any way supersede or limit any of the obligations or duties
that he/she owes to the Company pursuant to any applicable law.
15.
Construction of Agreement . This Agreement shall be deemed to have been drafted jointly by the parties, and, in the event of an ambiguity
in this Agreement, this Agreement shall not be construed against either party as a result of the drafting hereof. All nouns, pronouns, and any variation thereof shall
be deemed to refer the masculine, feminine, neuter, singular, or plural as the context may require.
16.
Prospective Employer . During any applicable Restricted Period, the Executive shall inform any prospective employer about the existence
of this Agreement before accepting employment.
17.
Executive’s Acknowledgments . The Executive acknowledges and agrees that he/she has carefully read this entire Agreement and has
been given the opportunity to discuss this Agreement with the Company and, if he/she so chooses, his/her legal counsel before signing. He/she acknowledges and
agrees that the restrictions set forth in this Agreement are reasonable and necessary for the reasonable and proper protection of the Company and the Business.
He/she acknowledges that he/she has been given a copy of this Agreement. By signing, the Executive agrees to accept all of the terms and conditions of this
Agreement and he/she understands that the Company is relying upon his/her stated acceptance of such terms and conditions.
18.
Counterparts . This Agreement may be executed in two (2) original, facsimile, or electronic counterparts, each of which will be deemed to
be an original, but both of which when taken together shall constitute one and the same document. Only one (1) counterpart signed by the party against whom
enforceability is sought must be produced to evidence the existence of this Agreement.
- 9 -
IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the date first written above.
THE COMPANY :
BALDWIN & LYONS, INC.
By:
Name:
Title:
THE EXECUTIVE:
______________________________________
Jeremy Goldstein
______________________________________
Date
- 10 -
CONFIDENTIALITY, NON-COMPETITION,
AND NON-SOLICITATION AGREEMENT
This CONFIDENTIALITY, NON-COMPETITION, AND NON-SOLICITATION AGREEMENT (this “ Agreement ”) is made and entered into as
of July 26, 2018 (the “Effective Date”), by and between Baldwin & Lyons, Inc., an Indiana corporation (the “ Company ”), and Patrick S. Schmiedt (the “
Executive “).
PRELIMINARY STATEMENTS
The Company is in the highly competitive insurance industry and its products and services include, but are not limited to, marketing and underwriting
insurance for the transportation industry, insurance brokerage operations, claims servicing, loss prevention services, automobile insurance, reinsurance, workers
compensation insurance, professional liability insurance, and related services (the “ Business” ). The Company condu cts the Business throughout the United
States, Canada, Puerto Rico, and Bermuda, and has its headquarters in Carmel, Indiana; and
Upon the execution of this Agreement, the Executive agrees to continue to serve as a highly valued member of the Company’s team, specifically as one of
the Senior Vice Presidents of the Company or one of its subsidiaries, with duties and responsibilities coextensive with critical areas of the Business, including, but
not limited to, assisting in developing the Company’s business strategies, working closely with highly valued customers of the Company, and he/she has access to
virtually all of the Company’s Confidential Information. In such role, the Executive developed substantial business knowledge and expertise in the conduct of the
Business, close relationships with highly valued customers of the Company, and he/she has acquired knowledge regarding Confidential Information of the
Company; and
This Agreement is entered into to secure Executive’s continued service to the Company and to protect, among other things, the Company’s goodwill,
customer and referral relationships, trade secrets, intellectual property, confidential information, and other property that is proprietary to the Company.
In consideration of the mutual promises set forth in this Agreement, and for other valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Executive and the Company (the “ parties ”) hereby agree as follows:
1.
2.
Continued Service . The Executive agrees to continue to perform the duties of his/her position to the best of his/her abilities.
Employment At-Will . Subject to Section 3 below, Executive will be employed by the Company on an at-will basis which means that
he/she may terminate his/her employment at any time for any or no reason, and that the Company may terminate his/her employment at any time for any or no
reason.
- 1 -
3.
Termination of Employment .
3.01
Termination by Company . In the event the Company terminates the Executive’s employment, the Company shall make a Separation
Payment to the Executive in an amount that is equivalent to twenty-four (24) months of the Executive’s then current base salary, less applicable taxes and other
legally-required deductions, the Executive’s holiday bonus for two (2) years, and an amount equal to the Executive’s annual incentive bonus (including, but not
limited to the Executive’s AIP and LTIP) for the year in which separation occurs. Further, the Company shall pay for all costs associated with the continuation of
Executive’s medical, dental, and/or vision benefits under COBRA until the earlier of twelve (12) months following the first day of the month following the
Executive’s Separation Date, or such time as Executive secures benefits through another means. If Executive is dismissed for dishonest activities, fraud, gross
neglect of duty, or misconduct, the Executive shall not be entitled to any such Separation Payment. The Company has a right to set-off any Separation Payment
with any other wages or compensation the Employee earns from other employment or endeavors during the period for which Separation Payments are made.
3.02
Termination by Executive for Good Reason . Executive may terminate his/her employment with the Company and receive the same
benefits as described in 3.01 above upon the occurrence, without Employee’s consent, of any of the following circumstances:
(a)
The assignment to Executive of duties lasting more than sixty (60) days that are materially inconsistent with Employee’s then current position;
(b)
(d)
(e)
(f)
(g)
The assignment of Executive of duties which, if performed, would create a material risk to the professional reputation of the Executive or subject
the Executive to personal liability under state or federal law.
A reduction by the Company in the amount of Executive’s base salary or the discontinuation or reduction by the Company of Executive’s
participation at the same level of eligibility as compared to other peer employees in any incentive compensation, additional compensation,
benefits, policies or perquisites subject to Executive understanding that such reduction(s) shall be permissible if the change applies in a similar
way to other peer level employees;
The relocation of the Company’s principal executive offices or Executive’s place of work to a location requiring a change of more than fifty (50)
miles in Executive’s daily commute; or
A failure by the Company to perform its obligations under this Agreement; or
If Executive terminates employment on or before the two (2) year anniversary of the Occurrence of a Change in Control. “ Change in Control ”
shall mean the occurrence of any of the following events.
(1) Any Person acquires ownership of the Class A Common Stock that, together with Class A Common Stock previously held by the acquirer,
constitutes more than fifty percent (50%) of the total Fair Market Value or total voting power of the Company’s stock. If any Person is
considered to own more than fifty percent (50%) of the total Fair Market Value or total voting power of the Company’s stock, the acquisition of
additional stock by the same Person does not cause a change in ownership. An increase in the percentage of stock owned by any Person as a
result of a transaction in which the Company acquires its stock in exchange for property, is treated as an acquisition of stock;
(2) Any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by that Person)
ownership of the Company’s stock possessing at least thirty percent (30%) of the total voting power of the stock;
(3) A majority of the members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not
endorsed by a majority of the members of the Board prior to the date of appointment or election; or
(4) Any Person acquires (or has acquired during the twelve (12) month period ending on a date of the most recent acquisition by that Person) assets
from a corporation that have a total gross fair market value equal to at least forty percent (40%) of the total gross fair market value of all the
Company’s assets immediately prior to the acquisition or acquisitions. Gross fair market value means the value of the Company’s assets, or the
value of the assets being disposed of, without regard to any liabilities associated with these assets.
- 2 -
A Change of Control shall not apply with respect to the assumption or reallocation of Class A Common Stock among the Shapiro family or entities,
as disclosed in the definitive proxy statements filed by the Company with the Securities Exchange Commission;
In determining whether a Change of Control occurs, the attribution rules of Code Section 318 apply to determine stock ownership. For purposes of
the definition of Change of Control, a "Person" shall mean any person, entity or "group" within the meaning of Section 13(d)(3) or Section 14(d)(2)
of the Exchange Act, except that such term shall not include (a) any member of the Company Group, (b) a trustee or other fiduciary holding securities
under an employee benefit plan of any member of the Company Group, (c) an underwriter temporarily holding securities pursuant to an offering of
such securities or (d) an entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their
ownership of shares of the Company.
In the event the Executive terminates employment with the Company for Good Reason as defined above, the Company will provide Executive with the Separation
Payment described in subsection 3.01 above.
3.03
Release . As a condition to the Executive’s receipt of the above-described Separation Payment, he/she shall execute a release of claims in a
form prepared by and satisfactory to the Company. Within fourteen (14) business days of the effective date of such release of claims, the Executive shall receive
the first Separation Payment described above, which will be paid over the course of twenty-four (24) months in accordance with the Company’s regular bi-weekly
payroll schedule. The Executive acknowledges and agrees that his/her obligations as set forth below, and the rights of the Company as described in this
Agreement, shall be enforceable by the Company, whether or not the Executive executes the above-described release of claims and receives the Separation
Payment.
4.
Confidentiality . The Executive acknowledges and agrees that he/she shall maintain the confidentiality of this Agreement and shall not
disclose it to any other employee of the Company or other person; provided , however , he/she may disclose it to his/her spouse and/or legal counsel or as required
by law. The Executive also acknowledges and agrees that the Confidential Information (as defined below) of the Company, its subsidiaries, and affiliates (the “
Company Group ”) and all physical embodiments thereof are valuable, special and unique assets of the business of the Company Group and have been developed
by the Company Group at considerable time and expense. Such Confidential Information is the sole property of the Company Group and the Executive has no
individual right or ownership interest in any of the Company Group’s Confidential Information. The Executive further acknowledges that access to such
Confidential Information will be needed in connection with the performance of his/her duties and responsibilities during his/her employment with the Company.
Therefore, the Executive agrees that, except as necessary in regard to his/her assigned duties and responsibilities with the Company, he/she shall hold in confidence
all Confidential Information and will not reproduce, use, distribute, disclose, publish, or otherwise disseminate any Confidential Information, in whole or in part,
and will take no action causing, or fail to take any action necessary to prevent causing, any Confidential Information to lose its character as Confidential
Information, nor willfully make use of such information for his/her own purposes or for the benefit of any person, firm, corporation, association, or other entity
(except the Company Group) under any circumstances.
Notwithstanding the above, the Executive may disclose such Confidential Information pursuant to a court order, subpoena, or other legal process, provided that, at
least ten (10) days (or such lesser period as is practicable given the terms of any order, subpoena or other legal process) in advance of any legal disclosure, he/she
shall furnish the Company with a copy of the judicial or administrative order requiring that such information be disclosed together with a written description of the
information to be disclosed (which description shall be in sufficient detail to allow the Company to determine the nature and scope of the information proposed to
be disclosed), and the Executive agrees to cooperate with the Company Group to deliver the minimum amount of information necessary to comply with such order.
For purposes of this Agreement, the term “ Confidential Information ” means information, including but not limited to, any technical or nontechnical data, formula,
pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, pricing, rates, forms, loss prevention
practices, claims data, list of actual or potential customers or suppliers, or other information similar to any of the foregoing, which derives economic value, actual
or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its
disclosure or use. Notwithstanding anything contained herein to the contrary, Confidential Information does not include information that: (a) is or becomes
generally available to the public, other than through any wrongful act or omission by the Executive or any other person or entity; (b) becomes available to the
Executive on a non-confidential basis from a source other than the Company Group, provided it is not subject to a confidentiality agreement between a member of
the Company Group and a third party; or (c) is required to be disclosed pursuant to applicable federal, state, or local laws or judicial process. The provisions of this
Section 2 shall apply to Confidential Information during the Term and at all times thereafter, and shall survive the termination of this Agreement and the
Executive’s separation of employment.
Executive agrees to maintain in trust, as the Company’s property, all documents, information and Confidential Information, both in tangible and intangible form,
concerning the Company’s Business or the Executive’s role for Company. Executive agrees to return to Company all documents or other property belonging to the
Company, including any and all copies thereof (whether in tangible or intangible form) in the possession or under the control of Executive upon separation of
employment or at any other time upon request of Company.
This Agreement supplements and does not supersede Executive’s obligations under all statute(s) and common law(s) that protect the Company’s trade secrets
and/or property.
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5.
Restrictive Covenants .
5.01 Non-Competition .
(a)
During the Restricted Period, Executive shall not, directly or indirectly, for or on behalf of a Specified Competitor (as defined below),
market, offer, promote, manage, or sell Competitive Products. “ Competitive Products ” are those products and/or services that are the same as or substantially
similar to (in terms of type, brand, functionality, or purpose) the products and services designed, developed, sold, marketed and/or distributed by the Company
Group, as well as the products and services under development by the Company Group, in each case at any time during the two (2) year period immediately
preceding the Separation Date. A “Specified Competitor” of the Company is defined as (1) Fairfax Financial Holdings, including all of its subsidiaries or
affiliates, or (2) any entity or operation engaged in any type of underwriting, administration, agency, reinsurance or property & casualty industry that has
been in existence for less than two (2) years from the date on which the Executive begins his/her/her relationship with such entity, or (3) any entity or which
the Executive becomes an owner, executive or principal, to the extent that it is involved in any business concern that involves any Competitive Products
(including, without limitation, an insurance agency that sells or administers Competitive Products). The restrictions contained in this paragraph are necessary
because of the Executive’s extensive knowledge of the Business, the industry as a whole, and the Company’s customers, and because a competitor would gain an
unfair competitive advantage by associating with the Executive during the Restricted Period.
(b)
Due to the nature of the Business and the nature of the Executive’s job duties and responsibilities with the Company, which are co-extensive
with the entire scope of the Company’s Business, the broadest geographic scope enforceable by law for the restrictions set forth in Section 5.01(a) shall be
applicable, as follows:
The United States of America, Canada, Puerto Rico, and Bermuda;
Each state, province, commonwealth, territory, and other political subdivision of the United States of America, Canada, Puerto Rico, and
Bermuda;
Indiana and any state, province, commonwealth, territory, or other political subdivision in which the Executive performed any services for the
Company Group at any time in the two (2) year period immediately preceding the Separation Date; and
Within one hundred (100) miles of any office or facility of the Company Group.
(c)
“ Restricted Period ” means throughout the Term and for a period of twenty-four (24) months immediately following the Term
(regardless of how, when or why the Executive’s employment relationship ends). The Restricted Period shall be tolled automatically by any period in which the
Executive is in violation of any of his/her restrictive covenant obligations set forth in Section 5 of this Agreement.
- 4 -
5.02. Non-Solicitation .
(a)
For a period of twenty-four (24) months immediately following the Separation Date, directly or indirectly, call upon, solicit,
accept any business of, provide any services or products to, contact, or have any communication with any Customer for the purpose of: (i) diverting or influencing,
or attempting to divert or influence, any business of such Customer to any Competitor (as defined below), or (ii) marketing, selling, offering, or providing any
Competitive Products (as defined above). A “Customer” is defined as any person or entity for or to whom the Company Group sold or distributed any products or
services during the two (2) years prior to the Separation Date or during the Term of this Agreement.
(b)
During the Restricted Period, the Executive shall not, directly or indirectly, call upon, solicit, accept any business of, provide any services or
products to, contact, or have any communication with any Prospect for the purpose of: (i) diverting or influencing, or attempting to divert or influence, any
business of such Prospect to any Competitor (as defined below), or (ii) marketing, selling, offering, or providing any Competitive Products (as defined above). A
“Prospect” is defined as any person or entity: (x) for or to whom the Company Group provided a quote to provide products or services; (y) for or to whom the
Company Group was preparing a quote to provide products or services at the time of the Executive’s separation from the Company.
(c)
For a period of twenty-four (24) months immediately following the Separation Date, the Executive shall not, directly or indirectly, solicit for
employment, endeavor to entice away from the Company Group, hire or retain (or attempt to do any of the foregoing) any person who is or was an employee,
independent contractor, or other personnel of Company Group at any time during the twelve (12) month period prior to the Separation Date, or interfere in any way
with the relationship between the Company Group and any of its Customers, employees, independent contractors, or other personnel.
(d)
A “ Competitor ” of the Company is any entity engaged in similar insurance Business as the Company Group to the extent that they are
involved in any business concern that involves any Competitive Products (including, without limitation, an insurance agency that sells Competitive Products).
- 5 -
5.03. Non-Disparagement . During the Term, and at all times thereafter, the Executive shall not, directly or indirectly, make any negative or disparaging
statement or encourage others to make any such statement that has the effect of embarrassing or criticizing the Company Group, the services and products offered
or provided in the Business, including, without limitation, the Company Group’s actual or prospective Customers or employees.
5.04. Survival . The obligations of the Executive and the rights of the Company pursuant to this Section 3 shall survive any termination of this Agreement for
the periods of time specified herein, or, if no time limitation is included, indefinitely.
5.05.
Remedies .
(a)
Remedies . The parties recognize, acknowledge and agree that (i) any breach or threatened breach of the provisions of Sections 5.01 or 5.02
shall cause irreparable harm and injury to the Company and that money damages alone will not provide an adequate remedy for such breach or threatened breach,
(ii) the duration, scope and geographical application of Sections 5.01 and 5.02 are fair and reasonable under the circumstances of the Business, and are reasonably
required to protect the legitimate business interests of the Company, (iii) the restrictions contained in Sections 5.01 and 5.02 will not prevent the Executive from
earning or seeking a livelihood, and (iv) the restrictions contained in Sections 5.01 and 5.02 shall apply in all areas where such application is permitted by law.
Accordingly, the Executive agrees that the Company shall be entitled to have the provisions of Sections 5.01 and 5.02 specifically enforced by any court having
jurisdiction, and that such a court may issue a temporary restraining order, preliminary injunction, or other appropriate equitable relief, without having to prove the
inadequacy of available remedies at law, having to post any bond or any other undertaking. In addition, the Company shall be entitled to avail itself of all such
other actions and remedies available to it or any member of the Company Group under law or in equity and shall be entitled to such damages as it sustains by
reason of such breach or threatened breach. It is the express desire and intent of the parties that the provisions of Sections 5.01 and 5.02 be fully enforced.
(b)
Severability . In light of the fact that the covenants set forth in this Section 5 are reasonably required to protect the Company’s legitimate
interests, if any provision of Section 5 hereof is held to be unenforceable because of the duration of such provision, the area covered thereby or the scope of the
activity restrained, the parties hereby expressly agree that the court making such determination shall have the power to reduce the duration and/or areas of such
provision and/or the scope of the activity to be restrained contained in such provision and, in its reduced form, such provision shall then be enforceable.
Furthermore, if any court shall refuse to enforce any of the separate covenants deemed included in Section 5 , then such unenforceable covenant shall be deemed
eliminated from the provisions hereof to the extent necessary to permit the remaining separate covenants to be enforced in accordance with their terms. The
prevailing party in any action arising out of a dispute in respect of any provision of this Section 5 shall be entitled to recover from the non-prevailing party
reasonable attorneys’ fees and costs and disbursements incurred in connection with the prosecution or defense, as the case may be, of any such action.
- 6 -
6.
Works for Hire/Inventions . The Executive acknowledges that all original works of authorship that are made by him (solely or jointly with
others) within the scope of his/her employment and that are protectable by copyright are “works made for hire,” pursuant to the United States Copyright Act (17
U.S.C. §101). Any and all inventions, improvements, discoveries, designs, works of authorship, concepts or ideas, or expressions thereof, whether or not subject to
patents, copyrights, trademarks or service mark protections, and whether or not reduced to practice, that are conceived or developed by the Executive while
employed with the Company and which relate to or result from the actual or anticipated business, work, research or investigation of the Company (collectively,
“Inventions”), shall be the sole and exclusive property of the Company, as applicable. The Executive shall do all things reasonably requested by the Company to
assign to and vest in the Company the entire right, title and interest to any such Inventions and to obtain full protection therefor.
7.
Waiver . No failure on the part of either party hereto to exercise, and no delay by either party hereto in exercising any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy by either party hereto preclude any other
or further exercise thereof or the exercise by such party of any other right, power or remedy. No express waiver or assent by either party hereto of any breach of
or default in any term or condition of this Agreement by the other party shall constitute a waiver of or an assent to any succeeding breach of or default in the same
or any other term or condition hereof.
8.
Severability . All rights and restrictions contained in this Agreement may be exercised and shall be applicable and binding only to the extent
that they do not violate any applicable laws and are intended to be limited to the extent necessary so that they will not render this Agreement illegal, invalid or
unenforceable. If any term of this Agreement, or part thereof, not essential to the commercial purpose of this Agreement shall be held to be illegal, invalid or
unenforceable by a court of competent jurisdiction, it is the intention of the parties that the remaining terms hereof, or part thereof, shall constitute their agreement
with respect to the subject matter hereof and all such remaining terms, or parts thereof, shall remain in full force and effect. To the extent legally permissible, any
illegal, invalid or unenforceable provision of this Agreement shall be replaced by a valid provision, which will implement the commercial purpose of the illegal,
invalid or unenforceable provision.
9.
Notices . All notices, requests, demands or other communications required or permitted to be given or made hereunder shall be in writing
and delivered personally or sent by Federal Express or other similar express courier. The addresses and facsimile numbers of the parties for purposes of this
Agreement are:
Company:
Baldwin & Lyons, Inc.
111 Congressional Blvd., Suite 500
Carmel, IN 46032
Attention : General Counsel
Executive: Patrick S. Schmiedt
___________________
___________________
Either party may change the address to which notices or other communications to such party shall be delivered or mailed by giving notice thereof to the other party
hereto in the manner provided herein.
- 7 -
10.
Governing Law/Venue . This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the
State of Indiana without reference to any jurisdiction’s principles of conflicts of law to the contrary. The parties consent to the exclusive jurisdiction of all state
courts located in Hamilton County, Indiana, or the federal courts located in Marion County, Indiana, as well as to the jurisdiction of all courts to which an appeal
may be taken from such courts, for the purpose of any suit, action, or other proceeding arising out of, or in connection with, this Agreement, or any of the
transactions contemplated hereby including, without limitation, any proceeding relating to provisional remedies and interim or injunctive relief. Each party hereby
expressly waives any and all rights to bring any suit, action, or other proceeding in or before any court or tribunal other than the courts described above, and
covenants that it shall not seek in any manner to resolve any dispute other than as set forth in this section, or to challenge or set aside any decision, award, or
judgment obtained in accordance with the provisions hereof. Each party hereby expressly waives any and all objections it may have to venue, including, without
limitation, the inconvenience of such forum, in any of such courts. In addition, each party consents to the service of process by personal service or any manner in
which notices may be delivered hereunder in accordance with this Agreement.
11.
Assignment . The parties acknowledge that this Agreement has been entered into as a result of, among other things, the specialized
knowledge and experience of the Executive, and agree that this Agreement may not be assigned or transferred by him. The rights and benefits of the Company
under this Agreement shall be transferable to any member of the Company Group or to any successor, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against its successors and assigns.
12.
Entire Agreement . This Agreement shall not be modified or amended except by an instrument in writing signed by or on behalf of the
parties hereto. This Agreement supersedes and replaces any prior such agreement(s) between the parties.
13.
Incorporation of Preliminary Statements . The Preliminary Statements to this Agreement are herein incorporated into this section of the
Agreement. The terms of this Agreement shall remain in full force and effect regardless of whether the Executive’s position, title, role or responsibilities identified
in the Preliminary Statements changes by reason of promotion, reassignment, demotion, or otherwise.
14.
Statutory and Common Law Duties . The duties that the Executive owes to the Company under this Agreement shall be deemed to
include all applicable federal and state statutory and common law obligations and such duties do not in any way supersede or limit any of the obligations or duties
that he/she owes to the Company pursuant to any applicable law.
15.
Construction of Agreement . This Agreement shall be deemed to have been drafted jointly by the parties, and, in the event of an ambiguity
in this Agreement, this Agreement shall not be construed against either party as a result of the drafting hereof. All nouns, pronouns, and any variation thereof shall
be deemed to refer the masculine, feminine, neuter, singular, or plural as the context may require.
16.
Prospective Employer . During any applicable Restricted Period, the Executive shall inform any prospective employer about the existence
of this Agreement before accepting employment.
17.
Executive’s Acknowledgments . The Executive acknowledges and agrees that he/she has carefully read this entire Agreement and has
been given the opportunity to discuss this Agreement with the Company and, if he/she so chooses, his/her legal counsel before signing. He/she acknowledges and
agrees that the restrictions set forth in this Agreement are reasonable and necessary for the reasonable and proper protection of the Company and the Business.
He/she acknowledges that he/she has been given a copy of this Agreement. By signing, the Executive agrees to accept all of the terms and conditions of this
Agreement and he/she understands that the Company is relying upon his/her stated acceptance of such terms and conditions.
18.
Counterparts . This Agreement may be executed in two (2) original, facsimile, or electronic counterparts, each of which will be deemed to
be an original, but both of which when taken together shall constitute one and the same document. Only one (1) counterpart signed by the party against whom
enforceability is sought must be produced to evidence the existence of this Agreement.
- 8 -
IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the date first written above.
THE COMPANY :
BALDWIN & LYONS, INC.
By:
Name:
Title:
THE EXECUTIVE:
______________________________________
Patrick S. Schmiedt
______________________________________
Date
- 9 -
NAME
Protective Insurance Company
Sagamore Insurance Company (1)
Protective Specialty Insurance Company (1)
B&L Insurance, Ltd.
B&L Brokerage Services, Inc.
B&L Management, Inc.
SUBSIDIARIES OF PROTECTIVE INSURANCE CORPORATION
STATE OR JURISDICTION OF ORGANIZATION OR INCORPORATION
Indiana
Exhibit 21
Indiana
Indiana
Bermuda
Indiana
Indiana
(1) Wholly-owned subsidiary of Protective Insurance Company
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 2-72576) pertaining to the Company’s 1981 Stock Purchase Plan, the
Registration Statement (Form S-8 No. 333-90452) pertaining to the Company’s 2002 Stock Purchase Plan, and the Registration Statement (Form S-8 No. 333-
167142) pertaining to the Company’s Restricted Stock Compensation Plan of our reports dated March 7, 2019, with respect to the consolidated financial statements
and schedules of Protective Insurance Corporation and subsidiaries, and the effectiveness of internal control over financial reporting of Protective Insurance
Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2018.
Exhibit 23
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
March 7, 2019
POWERS OF ATTORNEY
Exhibit 24
Know All Men By These Presents, that each person whose signature appears below constitutes and appoints William C. Vens and Sally B. Wignall, or
either of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities noted below to sign the Protective Insurance Corporation Annual Report on Form 10-K for the fiscal year ended December 31,
2018, and any and all amendments thereto, required to be filed pursuant to the requirements of Sections 12(g), 13, or 15(d) of the Securities and Exchange Act of
1934, as amended, granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that
each of said attorneys-in-fact and agents, or his substitute, may lawfully do or cause to be done by virtue hereof.
Signature and Title
/s/ John D. Nichols, Jr.
John D. Nichols, Jr., Interim Chief Executive Officer and Chairman of the
Board of Directors
/s/ Steven J. Bensinger
Steven J. Bensinger, Director
/s/ Stuart D. Bilton
Stuart D. Bilton, Director
/s/ Otto N. Frenzel IV
Otto N. Frenzel IV, Director
/s/ LoriAnn Lowery-Biggers
LoriAnn Lowery-Biggers, Director
/s/ David W. Michelson
David W. Michelson, Director
/s/ James A. Porcari III
James A. Porcari III, Director
/s/ Nathan Shapiro
Nathan Shapiro, Director
/s/ Robert Shapiro
Robert Shapiro, Director
Date
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
CERTIFICATION
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
CERTIFICATION
I, John D. Nichols, Jr., certify that:
1.
I have reviewed this annual report on Form 10-K of Protective Insurance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 7, 2019
/s/ John D. Nichols, Jr.
John D. Nichols, Jr., Interim Chief Executive Officer and Chairman of
the Board of Directors
CERTIFICATION
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
CERTIFICATION
I, William C. Vens, certify that:
1.
I have reviewed this annual report on Form 10-K of Protective Insurance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 7, 2019
/s/ William C. Vens
William C. Vens
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Protective Insurance Corporation (the "Company") on Form 10-K for the annual period ending December 31, 2018 as
filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, John D. Nichols, Jr., Interim Chief Executive Officer and Chairman of
the Board of Directors, and William C. Vens, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ John D. Nichols, Jr.
John D. Nichols, Jr.
Interim Chief Executive Officer and Chairman of the Board of
Directors
March 7, 2019
/s/ William C. Vens
William C. Vens
Chief Financial Officer
March 7, 2019