Protective Insurance Corporation 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. 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 MD&A, 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.
Special Committee and Contingent Sale Agreement
On May 5, 2020, the Board of Directors (the "Board") of Protective formed a
special committee of independent directors (the "Special Committee") to evaluate
a Stockholder Support and Contingent Sale Agreement (the "Contingent Sale
Agreement") entered into by and among certain prospective third party purchasers
(the "Offering Parties"), certain of Protective's shareholders and the other
parties thereto. The Contingent Sale Agreement was amended and restated on
August 17, 2020.
In June 2020, Protective announced that the Board determined the transactions
contemplated by the Contingent Sale Agreement were not in the best interests of
Protective and our stakeholders. As part of this evaluation, the Board
determined that it would also recommend against the potential tender offer
contemplated by the Contingent Sale Agreement if it were commenced, and that if
the transactions contemplated by the Contingent Sale Agreement were consummated,
it expected to take the necessary actions to redeem all or certain of the Class
A shares of Protective purchased by the Offering Parties pursuant to
Protective's Code of By-laws. Protective also announced that the Special
Committee of the Board was exploring, with the assistance of its independent
financial and legal advisors, strategic alternatives that may be available to
Protective.
Proposed Merger with The Progressive Corporation
Merger Agreement
On February 14, 2021, Protective entered into an Agreement and Plan of Merger
(the "Merger Agreement") with The Progressive Corporation, an Ohio corporation
("Progressive"), and Carnation Merger Sub Inc., an Indiana corporation and
wholly-owned indirect subsidiary of Progressive ("Merger Sub"). The Merger
Agreement provides for, subject to the satisfaction or waiver of specified
conditions, the merger of Merger Sub with and into Protective (the "Merger"),
whereupon the separate existence of Merger Sub will cease and Protective will
continue as the surviving corporation and as a wholly-owned indirect subsidiary
of Progressive.
The Board, at the unanimous recommendation of the Special Committee, unanimously
determined that the Merger Agreement and the transactions contemplated thereby,
including the Merger, are advisable and fair to, and in the best interests of,
Protective and its shareholders, and approved, adopted and declared advisable
the Merger Agreement and the transactions contemplated thereby. The Merger is
expected to close in June or July of 2021. At the effective time of the Merger,
each issued and outstanding share of common stock, without par value, of
Protective (other than each share of Protective's common stock that is owned by
Protective as treasury stock or by any subsidiary of Protective and each share
of Protective's common stock owned by Progressive, Merger Sub or any other
subsidiary of Progressive immediately prior to the effective time of the Merger)
will be automatically canceled and converted into the right to receive $23.30 in
cash, without interest, for a total transaction value of approximately $338
million.
The Merger Agreement contains various customary representations and warranties
from each of Protective, Progressive and Merger Sub. Protective has also agreed
to various customary covenants, including but not limited to conducting its
business in the ordinary course and not engaging in certain types of
transactions during the period between the execution of the Merger Agreement and
the closing of the Merger. However, the Merger Agreement permits Protective to
continue to pay regular quarterly dividends not to exceed $0.10 per share of its
common stock. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting
period expired April 5, 2021. In addition, at the special meeting of
Protective's shareholders held on May 5, 2021, Protective's Class A shareholders
approved the Merger Agreement, the Merger and the other transactions
contemplated by the Merger Agreement. The Merger remains subject to legal and
regulatory approvals including from the Indiana Department of Insurance, as well
as other customary closing conditions.
For additional information regarding the risks associated with the Merger,
please see Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form
10-Q and Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for
the year ended December 31, 2020.
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Voting and Support Agreement
On February 14, 2021, Protective also entered into a Voting and Support
Agreement (the "Voting Agreement") with Progressive and certain of Protective's
shareholders. The Voting Agreement required that the Protective shareholders
party to the Voting Agreement: (i) appear at the meeting of the holders of
Protective's Class A common stock held on May 5, 2021 to consider resolutions to
approve the Merger Agreement and the Merger or otherwise cause their shares of
Protective's common stock to be counted as present for purposes of calculating a
quorum, and (ii) vote their shares (a) in favor of the adoption of the Merger
Agreement, the Merger and the other transactions contemplated thereby and any
action reasonably requested by Progressive or the Board in furtherance of the
foregoing, (b) against any action or agreement that would result in a material
breach of any covenant, representation or warranty or other obligation or
agreement of Protective contained in the Merger Agreement and (c) against any
takeover proposal or superior proposal (provided, that if the Board had changed
its recommendation with respect to the Merger, any shares of Class A common
stock owned by such shareholders in excess of approximately 35% of the
outstanding shares of Class A common stock would have been voted in the same
proportion as those shares of Class A common stock voted by the holders of
Protective's Class A common stock that were not party to the Voting Agreement).
The Protective shareholders party to the Voting Agreement voted their shares in
favor of the Merger Agreement and the Merger at the special meeting of
Protective's shareholders held on May 5, 2021, in accordance with the terms of
the Voting Agreement.
During the first quarter of 2021, we incurred $3.5 million ($2.7 million, net of
tax) of expenses in conjunction with the activities of the Special Committee
related to the Merger with Progressive discussed above.
COVID-19 Impacts
Beginning in March 2020 and continuing through the date of this Quarterly Report
on Form 10-Q, the global pandemic associated with the novel coronavirus
("COVID-19") and related economic conditions have impacted the global economy
and our results of operations. We saw improvements in net premiums earned
during the third and fourth quarters of 2020 within our commercial automobile
products that continued through the first quarter of 2021. However, net
premiums earned within our public transportation products were negatively
impacted due to a reduction in miles driven, which is the basis for premiums we
receive, as well as an overall reduction in public transportation units
insured. Additionally, during the fourth quarter of 2020, given ongoing
profitability challenges, we discontinued writing new public transportation
business. However, losses and loss expenses incurred during the three months
ended March 31, 2021 reflected favorable impacts within all commercial
automobile products as a result of declines in accident frequency due to lower
traffic density. Additionally, insurance departments throughout the country
have issued bulletins and regulations urging or requiring insurers to extend
grace periods for the payment of policy premiums and to refrain from canceling
or non-renewing policies for the non-payment of policy premiums for
policyholders adversely affected by COVID-19; however, we have not seen a
material decrease or slowdown in premium collection to date. Our liquidity and
capital resources were not materially impacted by COVID-19 and related economic
conditions during the first three months of 2021. For further discussion
regarding the potential impacts of COVID-19 and related economic conditions on
our results, see Part I, Item 1A, "Risk Factors," of our Annual Report on Form
10-K for the year ended December 31, 2021.
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 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.
On August 31, 2017, our Board of Directors authorized the reinstatement of our
share repurchase program for up to 2,464,209 shares of our Class A or Class B
Common Stock. The repurchases may be made in the open market or through
privately negotiated transactions, from time-to-time, and in accordance with
applicable laws, rules and regulations. 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 three
months ended March 31, 2021, we did not repurchase any shares under the share
repurchase program. No share repurchases have been made since March 20, 2020.
Additionally, in connection with the Merger Agreement with Progressive discussed
above, we are prohibited from repurchasing any of our Class A or Class B Common
Stock under the share repurchase program.
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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
fixed income portfolio, including cash, at March 31, 2021 would be expected to
fall by approximately 2.9%. 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 was 6.8
years and 7.1 years at March 31, 2021 and December 31, 2020. The average
duration of our fixed income portfolio remains shorter than the average duration
of our liabilities. We also remain an active participant in the equity
securities markets, using capital in excess of amounts considered necessary to
fund our current operations. The long-term horizon for our equity investments
allows us to invest in positions where ultimate value, and not short-term market
fluctuation, is the primary focus. Investments made by our domestic
property/casualty Insurance Subsidiaries are regulated by guidelines promulgated
by the National Association of Insurance Commissioners (the "NAIC"), which are
designed to provide protection for both policyholders and shareholders.
Net cash provided by operating activities was $20.9 million during the three
months ended March 31, 2021 compared to net cash used in operating activities of
$1.3 million for the three months ended March 31, 2020. The increase in
operating cash flows during the three months ended March 31, 2021 compared to
the same period of 2020 reflected higher premium volume, partially offset by
lower net investment income.
Net cash provided by investing activities was $17.1 million for the three months
ended March 31, 2021 compared to $16.5 million for the three months ended March
31, 2020. The increase reflected higher proceeds from maturities and sales of
fixed income and equity securities, partially offset by $14.4 million less in
limited partnership distributions and $10.1 million higher purchases of fixed
income and equity securities during the three months ended March 31, 2021 when
compared to the same period in 2020.
Net cash used in financing activities for the three months ended March 31, 2021
consisted of regular cash dividend payments to shareholders of $1.4 million
($0.10 per share). Financing activities for the three months ended March 31,
2020 consisted of regular cash dividend payments to shareholders of $1.4 million
($0.10 per share) and $1.8 million to repurchase shares of our Class B Common
Stock.
Our assets at March 31, 2021 included $87.0 million of investments included
within cash and cash equivalents on the condensed consolidated balance sheet
that are readily convertible to cash without market penalty and an additional
$97.0 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 or our premiums are
further restricted due to market conditions, including related to the impact of
COVID-19, we believe the liquidity of our investment portfolio would permit us
to continue to pay claims as settlements are reached without requiring the
disposal of investments at a loss, regardless of interest rates in effect at the
time.
We maintain 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, which has an expiration date of August 9, 2022.
Interest on this revolving credit facility is referenced to the London Interbank
Offered Rate 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
March 31, 2021. At March 31, 2021, the effective interest rate was 1.21% and we
had $20.0 million remaining under the revolving credit facility. The current
outstanding borrowings were used to repay our previous line of credit. Our
revolving credit facility has two financial covenants, each of which were met as
of March 31, 2021. These covenants require us to have a minimum U.S. generally
accepted accounting principles ("GAAP") net worth and a maximum consolidated
debt to equity ratio of 0.35.
Annualized net premiums written by our Insurance Subsidiaries for the first
quarter of 2021 equaled approximately 130% of the combined statutory surplus of
these subsidiaries. According to the NAIC, acceptable ranges for the ratio of
net premiums written to statutory surplus include results of up to 300%. This
ratio is designed to measure our ability to absorb above-average losses and our
financial strength. Additionally, the statutory capital of each of our Insurance
Subsidiaries substantially exceeded minimum risk-based capital requirements set
by the NAIC as of March 31, 2021. As a result, we have the ability to 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 March
31, 2021, $68.6 million may be transferred by dividend or loan to Protective
during the remainder of 2021 without approval by, or prior notification to,
regulatory authorities. An additional $158.1 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 $7.8 million at March 31, 2021.
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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 or loss 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 the three months ended March 31, 2021, we also excluded
corporate charges incurred in conjunction with the Board's review of the Merger
Agreement, the Voting Agreement and the Merger discussed above from the
calculation of underwriting income (loss). We believe the exclusion of these
corporate charges more accurately reflects our operational results. 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.
The ratio of consolidated other operating expenses, less commissions and other
income, to net premiums earned, or our expense ratio, and the ratio of losses
and loss expenses incurred, plus other operating expenses, less commissions and
other income, to net premiums earned, or our combined ratio, are measures of our
profitability that we believe increase the period-to-period comparability of our
operational results. For the three months ended March 31, 2021, we also
excluded the corporate charges discussed above 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 the exclusion of these charges improves the
comparability of our expense and combined ratios with our ratios in prior
years. Our management uses these ratios to evaluate performance, allocate
resources and forecast future operating periods. While expense ratios and
combined ratios are widely used within our industry, our use of such ratios may
not be directly comparable to similarly titled measures reported by other
companies.
Three Months Ended
March 31
(dollars in thousands) 2021 2020
Income (loss) before federal income tax expense (benefit) $ 16,353 $ (25,139 )
Less: Net realized and unrealized gains (losses) on
investments
10,509 (27,756 )
Less: Net investment income 5,306 7,236
Less: Corporate charges included in other operating
expenses 1 (3,474 ) -
Underwriting income (loss) $ 4,012 $ (4,619 )
Other operating expenses 41,855 34,110
Less: Corporate charges 1 3,474 -
Other operating expenses, excluding corporate charges 38,381 34,110
Ratios
Losses and loss expenses incurred $ 82,318 $ 81,831
Net premiums earned 122,853 109,659
Loss ratio 67.0 % 74.6 %
Other operating expenses $ 41,855 $ 34,110
Less: Commissions and other income 1,858 1,663
Other operating expenses, less commissions and other income 39,997 32,447
Net premiums earned
122,853 109,659
Expense ratio 32.6 % 29.6 %
Impact of corporate charges (2.9 )% -
Expense ratio, excluding corporate charges 29.7 % 29.6 %
Combined ratio 99.6 % 104.2 %
Combined ratio, excluding corporate charges 96.7 % 104.2 %
1 Represents the corporate charges incurred in conjunction with the activities
of the Special Committee related to the Merger with Progressive discussed above.
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Results of Operations
Comparison of First Quarter 2021 to First Quarter 2020 (in thousands)
2021 2020 Change % Change
Gross premiums written $ 145,056 $ 134,006 $ 11,050 8.2 %
Ceded premiums written (26,229 ) (24,772 ) (1,457 ) 5.9 %
Net premiums written $ 118,827 $ 109,234 $ 9,593 8.8 %
Net premiums earned $ 122,853 $ 109,659 $ 13,194 12.0 %
Net investment income 5,306 7,236 (1,930 ) (26.7 )%
Commissions and other income 1,858 1,663 195 11.7 %
Net realized and unrealized gains
(losses) on investments 10,509 (27,756 ) 38,265 (137.9 )%
Total revenue 140,526 90,802
Losses and loss expenses incurred 82,318 81,831 487 0.6 %
Other operating expenses 41,855 34,110 7,745 22.7 %
Total expenses 124,173 115,941
Income (loss) before federal income tax
expense (benefit) 16,353 (25,139 ) 41,492
Federal income tax expense (benefit) 3,415 (2,983 ) 6,398
Net income (loss) $ 12,938 $ (22,156 ) $ 35,094Gross premiums written during the first quarter of 2021 increased $11.1 million
(8.2%), while net premiums earned increased $13.2 million (12.0%), as compared
to the first quarter of 2020. The higher net premiums earned in the first
quarter of 2021 were primarily the result of increased premiums related to rate
increases, growth in existing business lines and new business policies sold
primarily in our commercial automobile line of business. This increase was
partially offset by declines in premiums within our public transportation
commercial automobile products as a result of a reduction in miles driven, which
is the basis for premiums we receive, as well as an overall reduction in public
transportation units insured, both due to the impact of COVID-19. Additionally,
during the fourth quarter of 2020, given ongoing profitability challenges, we
discontinued writing new public transportation business. 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 18.1% of gross
premiums written for the first quarter of 2021 compared to 18.5% in the first
quarter of 2020. The decrease in the percentage of premiums ceded was the
result of higher growth in certain products that are not reinsured and an
increase in the percentage of premium earning in under the 2020 reinsurance
treaty year which had lower ceding participation than the previous treaty.
Losses and loss expenses incurred during the first quarter of 2021 increased
$0.5 million (0.6%) compared to the first quarter of 2020, resulting in a loss
ratio of 67.0% during the first quarter of 2021 compared to a loss ratio of
74.6% during the first quarter of 2020. The loss ratio is calculated as the
percentage of losses and loss expenses incurred to net premiums earned. The
lower loss ratio in the first quarter of 2021 reflected results of our
underwriting actions, including non-renewal of unprofitable business as well as
rate increases in commercial automobile. Additionally, losses and loss expenses
incurred reflected favorable impacts from COVID-19 within several of our
commercial automobile products as a result of declines in accident frequency due
to lower traffic density.
Net investment income for the first quarter of 2021 decreased 26.7% to $5.3
million compared to $7.2 million for the first quarter of 2020. The decrease
reflected lower interest rates earned on cash and cash equivalent balances and
lower interest rates on reinvestment in the first quarter of 2021, partially
offset by an increase in average funds invested resulting from positive cash
flows from operations compared to the first quarter of 2020.
Net realized and unrealized gains on investments of $10.5 million during the
first quarter of 2021 were primarily driven by $7.8 million in unrealized gains
on equity securities during the period and $2.3 million in realized gains on
sales of securities as a result of continued improvement in the global financial
markets. Additionally, we saw a $0.4 million increase in the value of our
limited partnership investments in the first quarter of 2021. These gains were
partially offset by impairments on our fixed income securities of $0.1 million
recognized during the period. Comparative first quarter 2020 net realized and
unrealized losses on investments of $27.8 million were primarily driven by $22.3
million in unrealized losses on equity securities, which were largely
attributable to disruptions in the financial markets related to COVID-19, $4.8
million in net realized losses on sales of securities, excluding impairment
losses, and a $0.7 million decrease in the value of our limited partnership
investments. Realized investment gains and losses result from decisions
regarding overall portfolio realignment as well as the sale of individual
securities, including the change in the aggregate value of limited partnerships
and, as such, should not be expected to be consistent from period to period.
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Other operating expenses for the first quarter of 2021 increased $7.7 million,
or 22.7%, to $41.9 million compared to $34.1 million for the first quarter of
2020. The increase was driven primarily by $3.5 million of corporate charges
incurred during the first quarter of 2021 for third party advisors to the
Special Committee in connection with the Merger with Progressive, as discussed
above, and higher variable costs related to the premiums earned during the first
quarter of 2021. The expense ratio was 32.6% during the first quarter of 2021,
or 29.7% excluding the corporate charges discussed above, compared to 29.6% for
the first quarter of 2020.
Federal income tax expense was $3.4 million for the first quarter of 2021
compared to a $3.0 million federal income tax benefit for the first quarter of
2020. The effective tax rate on consolidated income for the first quarter of
2021 was 20.9% compared to 11.9% on consolidated loss for the first quarter of
2020. The difference in the effective federal income tax rate from the normal
statutory rate was primarily related to the effects of tax-exempt investment
income and the dividends received deduction. The effective tax rate for the
first quarter of 2020 was impacted by the recording of a valuation allowance of
$4.9 million on our deferred tax assets, of which $2.3 million was recorded in
the condensed consolidated statement of operations and the balance was recorded
in shareholders' equity within accumulated other comprehensive income (loss) in
the prior period. We did not record a valuation allowance on our deferred tax
assets in the first quarter of 2021. The effective tax rate can fluctuate
throughout the year because estimates used in the quarterly tax provision are
updated as more information becomes available throughout the year.
As a result of the factors mentioned above, net income increased $35.1 million
to $12.9 million during the first quarter of 2021 compared to net loss of $22.2
million during the first quarter of 2020.
Sensitivity Analysis
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 majority of our reserves
for losses and loss expenses, on a net of reinsurance basis, relate to our
commercial automobile products. Perhaps the most significant example of
sensitivity to variation in the key assumptions is the loss ratio selection for
our commercial automobile products for policies subject to certain major
reinsurance treaties.
Commercial automobile products covered by our reinsurance treaties from July 3,
2013 through July 2, 2019 are subject to an unlimited aggregate stop-loss
provision. Currently, each of these treaty years is reserved at or above the
attachment level of these treaties. For every $100 of additional loss, we are
responsible only for our $25 retention. Commercial automobile products covered
by our reinsurance treaty from July 3, 2019 through July 2, 2020 are also
subject to an unlimited aggregate stop-loss provision. Once the aggregate
stop-loss level is reached, for every $100 of additional loss, we are
responsible for our $65 retention. This increase in our retention compared to
recent years reflects the combination of (1) a decreased need for stop-loss
reinsurance protection resulting from a decrease in our commercial automobile
subject limits profile, (2) a higher cost for this coverage and (3) our
confidence in profitability improvements given the limit reductions and rate
increases on our commercial automobile products. In 2020, due to continued rate
achievement in our commercial automobile products, improvements in our mix of
business and reductions to our average policy loss limits, we decided to
non-renew the annual aggregate deductible treaty for policies written on and
after July 3, 2020.
Forward-Looking Information
The disclosures in this Quarterly Report on Form 10-Q contain "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995). All statements, trend analyses and other information contained in this
Quarterly Report on Form 10-Q relative to markets for our products and trends in
our operations or financial results, as well as other statements including words
such as "may," "target," "anticipate," "believe," "plan," "estimate," "expect,"
"intend," "project," and other similar expressions, constitute forward-looking
statements.
Investors are cautioned that such forward-looking statements are based on
current expectations and assumptions that are subject to risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements, many of which are difficult to predict and generally beyond our
control. Investors are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof. Investors are
also urged to carefully review and consider the various disclosures made by us,
which attempt to advise interested parties of the factors that affect our
business, including "Risk Factors" set forth in Part I, Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2020 and in Part II, Item 1A
of this Quarterly Report on Form 10-Q. 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.
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Factors that could contribute to these differences include, among other things:
? general economic conditions, including continued volatility of the financial
markets, prevailing interest rate levels and stock and credit market
performance, which may affect or continue to affect (among other things) our
ability to sell our products and to collect amounts due to us, our ability to
access capital resources and the costs associated with such access to capital
and the market value of our investments;
? the risks related to our proposed Merger with Progressive, and Merger Sub
described above, including:
• our inability to complete the proposed Merger due to the failure to satisfy any
of the conditions to completion of the proposed Merger, including that a
governmental entity may prohibit, delay or refuse to grant approval for the
consummation of the Merger;
• uncertainty as to the timing of completion of the proposed Merger;
• the occurrence of any event, change or other circumstances that could give rise
to the termination of the Merger Agreement;
• risks related to disruption of management's attention from our ongoing business
operations due to the proposed Merger;
• the effect of the announcement of the proposed Merger on our relationships with
our clients, operating results and business generally; and
• the outcome of the pending legal proceedings initiated against us and the
members of our Board of Directors related to the proposed Merger and the
outcome of any other legal proceedings initiated against us, Progressive or
others related to the proposed Merger;
? the effects of the COVID-19 pandemic and associated government actions on our
operating and financial performance;
? our ability to obtain adequate premium rates and manage our growth strategy;
? increasing competition in the sale of our insurance products and services
resulting from the entrance of new competitors into, or the expansion of the
operations of existing competitors in, our markets and our ability to retain
existing customers;
? other changes in the markets for our insurance products;
? the impact of technological advances, including those specific to the
transportation industry;
? changes in the legal or regulatory environment, which may affect the manner in
which claims are adjusted or litigated, including loss and loss adjustment
expense;
? legal or regulatory changes or actions, including those relating to the
regulation of the sale, underwriting and pricing of insurance products and
services and capital requirements;
? the impact of a downgrade in our financial strength rating;
? technology or network security disruptions or breaches;
? adequacy of insurance reserves;
? availability of reinsurance and ability of reinsurers to pay their obligations;
? our ability to attract and retain qualified employees;
? tax law and accounting changes; and
? legal actions brought against us.
Some of the significant risks and uncertainties that could cause actual results
to differ materially from our expectations and projections are described more
fully in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q
and in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for
the year ended December 31, 2020. You should read that information in
conjunction with this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our unaudited condensed consolidated
financial statements and related notes in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
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Critical Accounting Policies
A summary of our significant accounting policies that we consider to be the most
dependent on the application of estimates and assumptions can be found in the
Management's Discussion and Analysis section of our Annual Report on Form 10-K
for the year ended December 31, 2020. As of March 31, 2021, our critical
accounting policies and estimates have not changed from those described in our
Annual Report on Form 10-K for the year ended December 31, 2020.
Concentrations of Credit Risk
Our Insurance Subsidiaries cede portions of their gross premiums to numerous
reinsurers under quota share and excess of loss treaties, as well as facultative
placements. These reinsurers assume commensurate portions of the risk of loss
covered by the contracts. As losses are reported and reserved, portions of the
gross losses attributable to reinsurers are established as receivable assets and
losses incurred are reduced. At March 31, 2021, amounts due from reinsurers on
unpaid losses were estimated to total approximately $421 million. Because of
the large policy limits reinsured by us, the ultimate amount of incurred but not
reported losses and loss adjustment expenses attributable to reinsurers could
vary significantly from this estimate; provided, however, absent the inability
to collect from reinsurers, such variance would not result in changes in net
claim losses incurred by us.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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