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.
Net cash used in investing activities was $86.0 million for 2020 compared to $151.9 million in 2019. The $65.9 million change was primarily due to a $31.3 million decrease in the investment of cash and cash equivalents into fixed income securities, $52.0 million higher proceeds from maturities of fixed income securities and a $30.1 million increase in net proceeds from sales of equity securities, partially offset by $18.8 million less in limited partnership distributions during 2020 compared to 2019. Net cash used in investing activities was $151.9 million for 2019 compared to net cash provided by investing activities of $23.7 million in 2018. The $175.6 million change was primarily the result of a decrease in proceeds from sales of our fixed income and equity securities of $229.7 million compared to 2018. We also had higher purchases of fixed income and equity securities of $8.2 million during 2019 compared to 2018. These cash outflows were partially offset by $33.4 million in distributions received from our limited partnership investments in 2019 compared to $6.9 million in 2018 and $20.4 million higher proceeds from maturities of fixed income securities during 2019 compared to 2018. Additionally, during 2018, we purchased $10.0 million of company-owned life insurance, which did not recur in 2019.
Federal income tax expense was $1.9 million for the year ended December 31, 2020 compared to $1.3 million for the year ended December 31, 2019. The effective tax rate on consolidated income for 2020 was 29.9% compared to 15.3% during 2019. The difference in the effective federal income tax rate from the normal statutory rate was primarily related to the impact of a valuation allowance on our deferred tax assets recorded in the current period, in addition to the effects of tax-exempt investment income and the dividends received deduction. In assessing the valuation of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or availability to carryback the losses to taxable income during the periods in which those temporary differences become deductible. We considered several factors when analyzing the need for a valuation allowance, including our current three year cumulative GAAP loss through December 31, 2020, the increase in deferred tax assets due to the adoption of CECL at January 1, 2020 discussed above, the change in unrealized gains and losses and the loss of a high taxable income year from the carryback period. The three year cumulative loss limits our ability to use projected income beyond 2020 in the analysis. As of December 31, 2020 and 2019, we had no valuation allowance. However, the application of intra-period tax allocation rules to benefits associated with deferred tax assets resulted in a charge to continuing operations as of December 31, 2020 of $1.3 million in the consolidated statement of operations, offset by a corresponding benefit in shareholders' equity within accumulated other comprehensive income (loss).
As of December 31, 2020, the Company has a recoverable due from a single customer, Personnel Staffing Group, for $47.3 million related to claims that have been paid or will be paid on behalf of Personnel Staffing Group by the Company for which the Company has recorded a $16.5 million credit impairment allowance. As discussed above and in Note A and Note T to the consolidated financial statements, the allowance amount is management’s best estimate of the ultimate credit impairment for the recoverable based on the expected timing and amount of cash flows from Personnel Staffing Group. This estimate is particularly sensitive to the default and recovery in default assumptions which have a significant impact on the allowance. These assumptions involve significant uncertainty and management judgment.
Description of Business: Protective Insurance Corporation (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. The Company offers a range of products and services, the most significant being commercial automobile and workers' compensation insurance products. The Company operates as one reportable property and casualty insurance segment based on how its operating results are regularly reviewed by its chief operating decision maker when making decisions about how resources are allocated and assessing performance.
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.