Notes to Consolidated and Combined Financial Statements
The accompanying consolidated financial statements include the accounts of Positive Physicians Holdings, Inc. and its wholly owned subsidiary (collectively referred to as the “Company”). Positive Physicians Holdings, Inc. is a Pennsylvania domiciled holding company, which was incorporated on May 1, 2018 for the purpose of acquiring three Pennsylvania based reciprocal insurance exchanges: Positive Physicians Insurance Exchange (“PPIX”), Professional Casualty Association (“PCA”), and Physicians’ Insurance Program Exchange (“PIPE”). In connection with the completion of the Company’s initial public offering, PPIX, PCA, and PIPE converted from reciprocal insurance exchanges into stock insurance companies and were merged together to form Positive Physicians Insurance Company (“Positive Insurance Company”), a wholly owned subsidiary of the Company. The Company’s initial public offering and its acquisition of Positive Insurance Company were completed on March 27, 2019. Prior to that time, the Company had minimal assets and liabilities and had not engaged in any operations. References to the Company or Positive Insurance Company financial information in this Annual Report prior to the conversion and merger date is to the financial information of PPIX, PCA, and PIPE on a combined basis. When used in this Annual Report, “we” and “our” mean PPIX, PCA, and PIPE prior to March 27, 2019, and Positive Insurance Company thereafter.
Positive Insurance Company
Positive Insurance Company writes medical malpractice insurance for healthcare providers practicing in Pennsylvania, New Jersey, Ohio, Delaware, Maryland, South Carolina, and Michigan. Diversus Management, LLC (“Diversus Management”) manages and administers essentially all of the operations of Positive Insurance Company under the terms of a management agreement. Diversus Management is a wholly owned subsidiary of Diversus, Inc. (“Diversus”). Pursuant to the terms of the agreement, effective March 27, 2019, Diversus Management provides such administrative services to Positive Insurance Company in exchange for fees based upon a percentage of Positive Insurance Company’s gross written premiums, less return premiums. Diversus Management may also earn quarterly performance management fees based on Positive Insurance Company’s combined ratio and net earned premiums. Positive Insurance Company remains responsible for all underwriting decisions and the payment of all claims and claims related expenses incurred under policies issued by Positive Insurance Company and for all sales commissions paid to producers.
Products and Services
Positive Insurance Company underwrites medical professional liability coverage for physicians, their corporations, medical groups, clinics and allied healthcare providers. Medical professional liability insurance (“MPLI”) protects physicians and other health care providers against liabilities arising from the rendering of, or failure to render, professional medical services. We offer claims-made coverage, claims-made plus, and occurrence-based policies as well as tail coverage in Pennsylvania, New Jersey, Ohio, Delaware, Maryland, South Carolina, and Michigan. Our policies include coverage for the cost of defending claims. Claims-made policies provide coverage to the policyholder for claims reported during the period of coverage. We offer extended reporting endorsements, or tails, to cover claims reported after the policy expires. Occurrence-based policies provide coverage to the policyholders for all losses incurred during the policy coverage year regardless of when the claims are reported. Although we generate a majority of our premiums from individual and small group practices, we also insure several major physician groups.
The Company accounts for its medical professional liability insurance business as a single reporting segment line of business.
Option Agreement
Upon completion of the conversions of PPIX, PCA, and PIPE and the securities offering on March 27, 2019, the Company and Diversus entered into an option agreement whereby either party has the option to cause Diversus, subject to shareholder approval, to merge with and become a wholly owned subsidiary of the Company. Under the terms of the agreement, the option may be exercised by either the Company or Diversus at any time (1) during the period beginning 2 years after completion of the conversions of the exchanges and ending 54 months after the completion of the conversions, or (2) if earlier than 2 years after the completion of the conversions, then such date that the majority stockholder of the Company no longer has the right to appoint a majority of the board of directors of the Company. In connection with any merger, the common stock shareholders of Diversus will receive either cash, common stock shares of the Company, or some combination thereof for their shares of Diversus’ common stock. With respect to the preferred stock shares of Diversus, they will either be paid out in cash or converted into common stock shares of Diversus as if such preferred stock shares were converted into Diversus’ common stock shares immediately prior to the effective date of the merger.
43
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Positive Physicians Holdings, Inc. was formed on May 1, 2018. The accompanying financial statements for 2018 have been prepared on a combined basis and reflect our historical financial information and results of operations of PPIX, PCA, and PIPE as if the conversions and merger took place as of January 1, 2018. Prior to the completion of the initial public offering, the Company, PPIX, PCA, and PIPE were under the common control of Diversus. Additionally, prior to March 27, 2019, the Company did not engage in substantive pre-combination activities, and accordingly, is not considered the acquirer of the net assets of Positive Insurance Company. The acquirer of these net assets is the majority stockholder of the Company. Accordingly, the accompanying financial statements do not reflect any adjustments to fair value as might have been determined had the Company accounted for the acquisition of Positive Insurance Company’s net assets as a business combination.
Our consolidated financial statements include our accounts and those of our wholly owned subsidiary. We have eliminated all inter-company accounts and transactions in consolidation.
3.
|
Summary of Significant Accounting Policies
|
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and notes. Actual results could differ from these estimates and such differences could be material. The Company’s principal estimates include the liability for losses and loss adjustment expenses, deferred acquisition costs, other-than-temporary impairments of investments, and valuation of deferred tax assets.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to be cash on hand and depository bank accounts with original maturities of three months or less, are readily convertible to known amounts of cash, and present insignificant risk of changes in value due to changing interest rates.
Investments
Investments in fixed maturity securities are classified as available-for-sale and are stated at fair value. Unrealized holding gains and losses, net of related tax effects, on available-for-sale fixed maturity securities are recorded directly to accumulated other comprehensive income (loss). Investments in equity securities are stated at fair value and unrealized holding gains and losses are credited or charged to net income (loss) as incurred and are included in realized investment (losses) gains, net in the accompanying consolidated and combined statements of operations.
In 2018, the Company had ownership interests in limited partnership equity hedge funds, which are reported as other investments in the accompanying combined balance sheet. The partnership interests were measured at fair value using the funds’ net asset values as a practical expedient. Unrealized holding gains and losses on partnership interests were credited or charged to net income (loss) as incurred and are included in realized investment gains (losses), net in the accompanying combined statement of operations. The Company sold these partnership interests during the second half of 2019.
Realized gains and losses on sales of equity and fixed maturity securities as well as other investments are recognized into income based upon the specific identification method. Interest and dividends are recognized as earned. Short-term investments are considered to be short-term, highly liquid investments that are less than one year in term to the dates of maturity at the purchase dates, and they present insignificant risk of changes in value due to changing interest rates.
The Company regularly evaluates all of its investments based on current economic conditions, credit loss experience, and other specific developments. If there is a decline in a security’s net realizable value that is other than temporary, it is considered as a realized loss and the cost basis in the security is reduced to its estimated fair value.
44
A fixed maturity security is considered to be other-than-temporarily impaired when the security’s fair value is less than its amortized cost basis and 1) we intend to sell the security, 2) it is more likely than not that we will be required to sell the security before recovery of the security’s amortized cost basis, or 3) we believe we will be unable to recover the entire amortized cost basis of the security (i.e., credit loss has occurred). Other-than-temporary-impairments (“OTTI”) of fixed maturity securities are separated into credit and noncredit-related amounts when there are credit-related losses associated with the impaired fixed maturity security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered, by comparing the present value of cash flows expected to be collected from the security, computed using original yield as the discount rate, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.”
Deferred Acquisition Costs
Certain direct acquisition costs consisting of commissions, premium taxes and certain other direct underwriting expenses that vary with and are primarily related to the successful production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned. The method followed in computing deferred acquisition costs limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected losses and loss adjustment expenses, may require adjustments to deferred acquisition costs. If the estimation of net realizable value indicates that the deferred acquisition costs are not recoverable, then they would be written off.
Prepaid Management Fee
Prepaid management fee comprises costs incurred by the Company to execute a new management agreement with Diversus Management and is amortized on a straight-line basis over the seven-year useful life of the agreement.
Liability for Losses and Loss Adjustment Expenses
Liability for losses and loss adjustment expenses include an amount determined from individual case estimates and loss reports and an amount, based on prior experience, actuarial assumptions and management judgments for losses incurred but not reported. Such liabilities are necessarily based on assumptions and estimates, and while management believes the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates for establishing the resulting liabilities are continually reviewed. Estimating the ultimate cost of future losses and loss adjustment expenses is an uncertain and complex process. This estimation process is based upon the assumption that past developments are an appropriate indicator of future events and involves a variety of actuarial techniques that analyze experience, trends, and other relevant factors. The uncertainties involved with the reserving process include internal factors, such as changes in claims handling procedure, as well as external factors, such as economic trends and changes in the concepts of legal liability and damage awards. Accordingly, final loss settlements may vary from the present estimates, particularly when those payments may not occur until well into the future. Adjustments to previously established reserves are reflected in the operating results of the period in which the adjustment is determined to be necessary. Such adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.
We also offer extended reporting coverage at no additional charge in the event of disability, death or retirement after a policyholder reaches the age of 55 and has been a mature-claims policyholder with Positive Insurance Company for at least one year. An extended reporting endorsement policy reserve is required to assure that premiums are not earned prematurely. This reserve is actuarially determined, and the balance is included in unearned premiums in the consolidated and combined balance sheets.
Premium Deficiency Reserves
Premium deficiency reserves and the related expenses are recognized when it is probable that expected future benefit payments, loss adjustment expenses, direct administration costs, and an allocation of indirect administration costs under a group of existing contracts will exceed anticipated future premiums and reinsurance recoveries considered over the remaining lives of the contracts, and are recorded as a component of deferred acquisition costs in the accompanying consolidated and combined balance sheets. The Company does not consider anticipated investment income when calculating premium deficiency reserves. As of December 31, 2019 and 2018, the Company did not have any premium deficiency reserves.
45
Reinsurance
The Company cedes insurance risk to other insurance companies. This arrangement allows us to minimize the net loss potential arising from large risks. Reinsurance contracts do not relieve the Company of its obligation to its policyholders. Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contract.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments, non-U.S. government bonds, premiums receivable, and balances recoverable from reinsurers. Non-U.S. government bonds are diversified, and no one investment accounts for greater than 5% of our invested assets. Cash and cash equivalents are deposited with financial institutions with balances that fluctuate in excess of federally insured limits. If the financial institutions were not to honor their contractual liability to us, we could incur losses. We are of the opinion that there is low risk because of the financial strength of the respective financial institutions. We are also subject to concentrations of credit risk through short-term money market investments. The credit risk related to short-term money market investments is minimized by our investing in money market funds or repurchase agreements, both secured by U.S. government securities.
No one insured accounted for over 10% of premiums receivable at December 31, 2019 and December 31, 2018 or gross written premium for the years ended December 31, 2019 and 2018. We have reinsurance contracts with various reinsurers all of whom have A.M. Best ratings of A or better or have provided collateral to secure their obligations.
Revenue Recognition
Premiums are earned on a daily pro rata basis over the terms of the insurance policies. Unearned premium reserves are established to cover the unexpired portion of the policies in force less amounts ceded to reinsurers. For consideration received for policies with effective dates subsequent to the reporting period, the Company records an advance premium liability in lieu of written premium.
Premiums associated with tails are generally earned as written, except for the afore-mentioned extended reporting coverage in the event of disability, death or retirement. Other forms of tails, in which premiums are earned as written, include the following: 1) An insured who terminates a claims-made policy with their prior carrier, and who purchases tail coverage (extended reporting coverage) from their old carrier or obtains retroactive (prior-acts) coverage from a new carrier, or 2) Stand-alone tail coverage in which an insured is offered a tail policy by their prior carrier but seeks a competitive quote from a different carrier. Both types of tail coverage insure against claims reported after the end of the original policy period for incidents that occurred while that policy was in effect.
Comprehensive Income (Loss)
Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale fixed maturity securities and unrealized losses related to factors other than credit on fixed maturity securities, are reported as a separate component in the equity section in the accompanying consolidated and combined balance sheets. Such items, along with net income (loss), are components of comprehensive income (loss), and are reflected in the accompanying consolidated and combined statements of comprehensive income (loss). Reclassifications of realized gains and losses on sales of investments out of accumulated other comprehensive income (loss) are recorded in realized investment (losses) gains, net in the accompanying consolidated and combined statements of operations.
Income Taxes
The Company accounts for income taxes under the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated and combined financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated and combined financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversal of existing taxable temporary differences, tax planning strategies, projected future taxable income, and recent financial operations.
46
Prior to March 27, 2019, PPIX, PCA, and PIPE filed separate federal income tax returns. The Company did not recognize any interest and penalties in the accompanying consolidated statement of operations for the year ended December 31, 2019 and the combined statement of operations for the year ended December 31, 2018. PPIX, PCA, and PIPE remain subject to examination by the Internal Revenue Service for tax years 2016 through 2018 and the short stub period in 2019. Beginning with 2019 tax year, the Company will file a consolidated federal income tax return.
Conversion Costs
PPIX, PCA, and PIPE incurred direct consulting and other costs related to the conversions from reciprocal insurance exchanges to stock forms of ownership and as part of offering securities during the initial public offering which took place on March 27, 2019. Conversion and securities offering costs that were not expected to be reimbursed from the gross proceeds of the offering were expensed as incurred and included in other underwriting expenses in the accompanying consolidated and combined statements of operations.
4.
|
Recent Accounting Pronouncements
|
As an emerging growth company, we have elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. The following discussion includes effective dates for both public business entities and emerging growth companies, as well as whether specific guidance may be adopted early.
Recently Adopted Accounting Pronouncements
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-01 for the year ended December 31, 2018.
The amendments in this ASU:
|
•
|
require, among other things, that equity investments be measured at fair value with changes in fair value recognized in net income (loss),
|
|
•
|
simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment,
|
|
•
|
eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet,
|
|
•
|
require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes,
|
|
•
|
require an entity to present separately in other comprehensive income the portion of the total change in the fair value of the liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments,
|
|
•
|
require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the consolidated financial statements, and
|
|
•
|
clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
|
With the adoption of ASU 2016-01, a cumulative effect of unrealized holding gains and losses on previously classified available-for-sale equity securities included in accumulated other comprehensive income at January 1, 2018 are to be reclassified to retained earnings. At January 1, 2018, unrealized holding gains in equity securities, net of tax effect, of $1,387,895 were reclassified from accumulated other comprehensive income to retained earnings for the year ended December 31, 2018.
In February 2016, the FASB issued guidance that requires lessees to recognize leases, including operating leases, on the lessee’s balance sheet, unless a lease is considered a short-term lease. This guidance also requires entities to make new judgments to identify leases. The guidance was effective for annual and interim reporting periods beginning after December 15, 2018 and permitted early adoption. The Company’s adoption of this guidance on January 1, 2019 did not have a significant impact on our financial condition, results of operations or cash flows.
47
Recently Issued Accounting Pronouncements
New accounting rules and disclosure requirements can impact the results and the comparability of the Company’s consolidated and combined financial statements. The following recently issued accounting pronouncements are relevant to the Company’s consolidated and combined financial statements:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification ("ASC") and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13 will remove all current recognition thresholds and will require entities under the new current expected credit loss ("CECL") model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument's contractual life. The new CECL model is based upon expected losses rather than incurred losses. Additionally, the credit loss recognition guidance for available-for-sale securities is amended and will require that credit losses on such debt securities should be recognized as an allowance for credit losses rather than a direct write-down of amortized cost balance. The ASU was effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which extended the effective date of adopting ASU 2016-13. Under ASU 2019-10, ASU 2016-13 will be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Company, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For all other entities, including smaller reporting companies like the Company, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar year-end companies). The Company is currently a smaller reporting company, so once the ASU becomes effective, the Company’s expected adoption date for ASU 2016-13 would change from fiscal years beginning after December 15, 2019 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. At this time, we are evaluating the potential impact of ASU 2016-13 in the Company’s consolidated financial statements.
The Company uses fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Fixed maturity available-for-sale securities and equity securities are recorded at fair value on a recurring basis. FASB ASC Topic 820 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy under ASC Topic 820 are as follows:
|
Level 1:
|
Quoted (unadjusted) prices for identical assets in active markets.
|
|
Level 2:
|
Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in nonactive markets (few transactions, limited information, noncurrent prices, high variability over time, etc., inputs other than quoted prices that are observable for the asset (interest rates, yield curves, volatilities, default rates, etc., and inputs that are derived principally from or corroborated by other observable market data)).
|
|
Level 3:
|
Unobservable inputs that cannot be corroborated by observable market data.
|
Under ASC Topic 820, we base fair values of assets on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FASB ASC Topic 820. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon our or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. Management uses its best judgment in estimating the fair value of financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts we could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period end and have not been re-evaluated or updated for purposes of the consolidated and combined financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. Additionally, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
48
We obtain one price for each security primarily from a third-party pricing service (“pricing service”), which generally uses quoted prices or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, non-binding broker quotes, benchmark yields, credit spreads, default rates, and prepayment speeds.
In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest-level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Amortized cost/cost, gross unrealized gains, gross unrealized losses, and fair value of fixed maturity securities by major security type for the results at December 31, 2019 and 2018 are as follows:
|
|
Amortized
Cost/Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
10,689,829
|
|
|
$
|
100,223
|
|
|
$
|
38,490
|
|
|
$
|
10,751,562
|
|
States, territories, and possessions
|
|
|
1,096,638
|
|
|
|
46,385
|
|
|
|
—
|
|
|
|
1,143,023
|
|
Subdivisions of states, territories, and possessions
|
|
|
12,440,863
|
|
|
|
389,472
|
|
|
|
7,470
|
|
|
|
12,822,865
|
|
Industrial and miscellaneous
|
|
|
69,445,114
|
|
|
|
1,591,777
|
|
|
|
6,299
|
|
|
|
71,030,592
|
|
Total fixed maturity securities
|
|
$
|
93,672,444
|
|
|
$
|
2,127,857
|
|
|
$
|
52,259
|
|
|
$
|
95,748,042
|
|
|
|
Amortized
Cost/Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
12,859,101
|
|
|
$
|
87,354
|
|
|
$
|
208,699
|
|
|
$
|
12,737,756
|
|
States, territories, and possessions
|
|
|
1,111,879
|
|
|
|
14,497
|
|
|
|
897
|
|
|
|
1,125,479
|
|
Subdivisions of states, territories, and possessions
|
|
|
13,230,690
|
|
|
|
105,965
|
|
|
|
44,591
|
|
|
|
13,292,064
|
|
Industrial and miscellaneous
|
|
|
59,561,984
|
|
|
|
14,030
|
|
|
|
1,524,644
|
|
|
|
58,051,370
|
|
Total fixed maturity securities
|
|
$
|
86,763,654
|
|
|
$
|
221,846
|
|
|
$
|
1,778,831
|
|
|
$
|
85,206,669
|
|
The table below sets forth the contractual maturity profile of our investments in fixed maturity securities at December 31, 2019 and 2018. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Amortized
Cost/Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost/Cost
|
|
|
Fair Value
|
|
Due in less than one year
|
|
$
|
8,570,607
|
|
|
$
|
8,584,991
|
|
|
$
|
7,094,266
|
|
|
$
|
6,549,872
|
|
Due after one year to five years
|
|
|
59,713,323
|
|
|
|
60,844,219
|
|
|
|
50,676,297
|
|
|
|
47,892,580
|
|
Due after five years to ten years
|
|
|
24,656,702
|
|
|
|
25,539,400
|
|
|
|
27,617,956
|
|
|
|
29,361,896
|
|
Due after ten years
|
|
|
731,812
|
|
|
|
779,432
|
|
|
|
1,375,135
|
|
|
|
1,402,321
|
|
|
|
$
|
93,672,444
|
|
|
$
|
95,748,042
|
|
|
$
|
86,763,654
|
|
|
$
|
85,206,669
|
|
Realized gains and losses are determined using the specific identification method. During the years ended December 31, 2019 and 2018, proceeds from maturities and sales and gross realized gains and losses on securities and other investments are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Proceeds
|
|
$
|
18,672,307
|
|
|
$
|
19,660,697
|
|
Gross gains
|
|
|
651,765
|
|
|
|
206,973
|
|
Gross losses
|
|
|
299,997
|
|
|
|
182,717
|
|
49
The components of net realized investment gains (losses) for the years ended December 31, 2019 and 2018 are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
(Loss) gain on sales of fixed maturity securities
|
|
$
|
(27,146
|
)
|
|
$
|
26,112
|
|
Gain (loss) on sales of equity securities and other investments
|
|
|
378,914
|
|
|
|
(1,856
|
)
|
Total gain on sales of investments
|
|
|
351,768
|
|
|
|
24,256
|
|
Unrealized gain (loss) on equity securities and other
investments
|
|
|
952,508
|
|
|
|
(1,557,518
|
)
|
Total net realized investment gains (losses)
|
|
$
|
1,304,276
|
|
|
$
|
(1,533,262
|
)
|
The components of net investment income for the years ended December 31, 2019 and 2018 are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Fixed maturity securities
|
|
$
|
2,328,645
|
|
|
$
|
2,311,546
|
|
Cash and short-term investments
|
|
|
441,666
|
|
|
|
61,402
|
|
Equity securities
|
|
|
274,791
|
|
|
|
316,736
|
|
Other investments
|
|
|
27,708
|
|
|
|
9,022
|
|
|
|
|
3,072,810
|
|
|
|
2,698,706
|
|
Less investment expenses
|
|
|
112,443
|
|
|
|
129,799
|
|
Net investment income
|
|
$
|
2,960,367
|
|
|
$
|
2,568,907
|
|
The following table shows fair value and gross unrealized losses of our fixed maturity investments with unrealized losses that are not deemed to be other-than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019:
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
Description of securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
2,628,516
|
|
|
$
|
8,227
|
|
|
$
|
4,061,077
|
|
|
$
|
30,263
|
|
|
$
|
6,689,593
|
|
|
$
|
38,490
|
|
Subdivisions of states, territories, and possessions
|
|
|
—
|
|
|
|
—
|
|
|
|
93,000
|
|
|
|
7,470
|
|
|
|
93,000
|
|
|
|
7,470
|
|
Industrial and miscellaneous
|
|
|
4,773,607
|
|
|
|
5,934
|
|
|
|
350,922
|
|
|
|
365
|
|
|
|
5,124,529
|
|
|
|
6,299
|
|
Total fixed maturity securities
|
|
$
|
7,402,123
|
|
|
$
|
14,161
|
|
|
$
|
4,504,999
|
|
|
$
|
38,098
|
|
|
$
|
11,907,122
|
|
|
$
|
52,259
|
|
At December 31, 2019, we had 47 fixed maturity securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $14,161 and 40 securities in unrealized loss positions of 12 months or longer with a combined gross unrealized loss of $38,098.
The following table shows fair value and gross unrealized losses of our fixed maturity investments with unrealized losses that are not deemed to be other-than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2018:
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
Description of securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
1,757,021
|
|
|
$
|
5,521
|
|
|
$
|
8,858,782
|
|
|
$
|
203,178
|
|
|
$
|
10,615,803
|
|
|
$
|
208,699
|
|
States, territories, and possessions
|
|
|
410,416
|
|
|
|
897
|
|
|
|
—
|
|
|
|
—
|
|
|
|
410,416
|
|
|
|
897
|
|
Subdivisions of states, territories, and possessions
|
|
|
3,138,650
|
|
|
|
11,729
|
|
|
|
1,993,170
|
|
|
|
32,862
|
|
|
|
5,131,820
|
|
|
|
44,591
|
|
Industrial and miscellaneous
|
|
|
28,187,416
|
|
|
|
563,317
|
|
|
|
25,787,215
|
|
|
|
961,327
|
|
|
|
53,974,631
|
|
|
|
1,524,644
|
|
Total fixed maturity securities
|
|
$
|
33,493,503
|
|
|
$
|
581,464
|
|
|
$
|
36,639,167
|
|
|
$
|
1,197,367
|
|
|
$
|
70,132,670
|
|
|
$
|
1,778,831
|
|
50
At December 31, 2018, we had 210 fixed maturity securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $581,464 and 243 fixed maturity securities in unrealized loss positions of 12 months or longer with a combined gross unrealized loss of $1,197,367.
Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates, which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.
We evaluated each security and took into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. We found that the declines in fair value are most likely attributable to increases in interest rates, and there is no evidence that the likelihood of not receiving all of the contractual cash flows as expected has changed. Our fixed maturity portfolio is managed by our investment committee in concert with an outside investment manager for investment grade bond investments. By agreement, the investment manager cannot sell any security without the consent of our investment committee if such sale will result in a net realized loss.
We monitor our investment portfolio and review securities that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. When assessing whether the amortized cost basis of the security will be recovered, we compare the present value of the cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as the “credit loss.” If there is a credit loss, the impairment is considered to be other-than-temporary. If we identify that an other-than-temporary impairment loss has occurred, we then determine whether we intend to sell the security, or if it is more likely than not that we will be required to sell the security prior to recovering the amortized cost basis less any current-period credit losses. If we determine that we do not intend to sell, and it is more likely than not that we won’t be required to sell the security, then the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the other-than-temporary impairment loss will be recognized in other comprehensive income (loss), net of tax. If we determine that we intend to sell the security, or that it is more likely than not that we will be required to sell the security prior to recovering its amortized cost basis less any current-period credit losses, then the full amount of the other-than-temporary impairment will be recognized in earnings.
For the years ended December 31, 2019 and 2018, we determined that none of our fixed maturity securities were other-than-temporarily impaired. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.
The table below presents the level within the fair value hierarchy generally utilized by us to estimate the fair value of assets disclosed on a recurring basis at December 31, 2019:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
U.S. government
|
|
$
|
10,751,562
|
|
|
$
|
—
|
|
|
$
|
10,751,562
|
|
|
$
|
—
|
|
States, territories, and possessions
|
|
|
1,143,023
|
|
|
|
—
|
|
|
|
1,143,023
|
|
|
|
—
|
|
Subdivisions of states, territories and possessions
|
|
|
12,822,865
|
|
|
|
—
|
|
|
|
12,822,865
|
|
|
|
—
|
|
Industrial and miscellaneous
|
|
|
71,030,592
|
|
|
|
—
|
|
|
|
71,030,592
|
|
|
|
—
|
|
Total fixed maturity securities
|
|
|
95,748,042
|
|
|
|
—
|
|
|
|
95,748,042
|
|
|
|
—
|
|
Equity securities
|
|
|
7,756,966
|
|
|
|
7,756,966
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
103,505,008
|
|
|
$
|
7,756,966
|
|
|
$
|
95,748,042
|
|
|
$
|
—
|
|
The table below presents the level within the fair value hierarchy generally utilized by us to estimate the fair value of assets disclosed on a recurring basis at December 31, 2018:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
U.S. government
|
|
$
|
12,737,756
|
|
|
$
|
—
|
|
|
$
|
12,737,756
|
|
|
$
|
—
|
|
States, territories, and possessions
|
|
|
1,125,479
|
|
|
|
—
|
|
|
|
1,125,479
|
|
|
|
—
|
|
Subdivisions of states, territories and possessions
|
|
|
13,292,064
|
|
|
|
—
|
|
|
|
13,292,064
|
|
|
|
—
|
|
Industrial and miscellaneous
|
|
|
58,051,370
|
|
|
|
—
|
|
|
|
58,051,370
|
|
|
|
—
|
|
Total fixed maturity securities
|
|
|
85,206,669
|
|
|
|
—
|
|
|
|
85,206,669
|
|
|
|
—
|
|
Equity securities
|
|
|
7,267,094
|
|
|
|
7,267,094
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
92,473,763
|
|
|
$
|
7,267,094
|
|
|
$
|
85,206,669
|
|
|
$
|
—
|
|
51
At December 31, 2018, we had ownership interests in limited partnership equity hedge funds. Our partnership interests were measured at fair value using the funds’ net asset values as a practical expedient and are excluded from the fair value hierarchy tables above. At December 31, 2018, the fair value and cost basis of these investments were $4,051,399 and $3,547,687, respectively. During the second half of 2019, we sold our interests in these limited partnership funds and recognized a pre-tax gain of $556,723. There were no sales of these investments in 2018.
6.
|
Deferred Acquisition Costs
|
The following table summarizes the movements in deferred acquisition costs for the years ended December 31, 2019 and 2018:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance, beginning of year
|
|
$
|
3,985,193
|
|
|
$
|
4,078,322
|
|
Amount capitalized during the year
|
|
|
6,453,710
|
|
|
|
8,645,636
|
|
Amount amortized during the year
|
|
|
7,854,417
|
|
|
|
8,738,765
|
|
Balance, end of year
|
|
$
|
2,584,486
|
|
|
$
|
3,985,193
|
|
Effective as of March 27, 2019, Positive Insurance Company entered into a new policy reinsurance agreement. Under the new agreement, the Company retains a portion of its exposure and pays to the reinsurers a portion of the premiums received on all policies reinsured. Insurance policies written by us are reinsured with other insurance companies principally to:
|
•
|
reduce net liability on individual risks and clash occurrences;
|
|
•
|
mitigate the effect of individual loss occurrences;
|
|
•
|
cover us against losses in excess of policy limits and extra contractual obligation claims;
|
|
•
|
stabilize underwriting results; and
|
|
•
|
increase our underwriting capacity.
|
Under Pennsylvania law, each insured must maintain MPLI of at least $1,000,000 for each claim and $3,000,000 of annual aggregate coverage. The Company provides primary insurance coverage up to $500,000 per claim and $1,500,000 of annual aggregate coverage. The Pennsylvania Medical Care Availability and Reduction of Error (“MCARE”) Fund provides coverage for any losses above $500,000 per claim up to $1,000,000. In cases where coverage under the Pennsylvania MCARE Fund does not apply, the primary insurance provides coverage up to $1,000,000 per claim and $3,000,000 of annual aggregate coverage. The Company retains the first $300,000 in loss on all Pennsylvania claims and reinsurance covers the excess up to $1,000,000 that is not covered by the Pennsylvania MCARE Fund. We cede to reinsurers any Pennsylvania claims in excess of $1,000,000.
Other states in which we write insurance require doctors to maintain certain minimum coverage and provide a fund that provides coverage for losses above a certain amount, but some states do not prescribe insurance requirements for doctors.
We offer primary coverage up to $1,000,000 for each claim and $3,000,000 of annual aggregate coverage in Delaware, Maryland, Michigan, Ohio, New Jersey, and South Carolina. We retain the first $300,000 in loss for claims from these states, and reinsurance covers the excess up to $1,000,000. If an insured in New Jersey requests, additional coverage of $1,000,000, each claim, each insured, each policy can be provided and is fully ceded to the reinsurer up to a maximum aggregate liability of $2,000,000 to the reinsurer per the term of the reinsurance agreement. In South Carolina and Michigan, the insured can elect policy limits of $200,000 per claim and, on these claims, we retain the first $100,000 and the reinsurer covers the next $100,000.
We also purchase additional reinsurance coverage for clash, losses in excess of policy limits and extra contractual obligation claims.
Our premiums under the new reinsurance agreement are based on a percentage of our earned premiums during the term of the agreement. The agreement was renewed on April 1, 2020.
52
Reinsurance does not legally discharge the insurance company issuing the policy from primary liability for the full amount due under the reinsured policies. A primary factor in the selection of reinsurers from whom we purchase reinsurance is their financial strength. Our reinsurance arrangements are generally renegotiated annually. The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. Our reinsurance providers, the majority of whom are longstanding partners that understand our business, are all carefully selected with the help of our reinsurance broker. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. Hannover Re, our current reinsurance partner, has an “A+ (Superior)” rating from A.M. Best. According to A.M. Best, companies with a rating of “A” or better “have an excellent ability to meet their ongoing obligations to policyholders.”
As of December 31, 2019, the Company’s reinsurance recoverable of $7,850,409 was supported by $6,051,000 of collateral. The uncollateralized portion of this balance was recoverable from reinsurers rated “A” or better by A.M. Best.
As of December 31, 2019, the Company had reinsurance recoverable balances due from the following unaffiliated reinsurer in excess of 5% of shareholders’ equity:
|
|
Reinsurance Recoverable
|
|
|
Collateral
|
|
Hannover Re
|
|
$
|
6,199,000
|
|
|
$
|
5,419,000
|
|
We generally do not assume risks from other insurance companies. However, we could be required by statute to participate in guaranty funds, which are formed to pay claims on policies issued by insolvent property and casualty insurers domiciled in certain states, such as Pennsylvania. This participation, where applicable, requires us to pay an annual assessment based on our premiums written and determined on a market share basis. At December 31, 2019, our participation was not material.
On October 9, 2018, Positive Physicians Captive Insurance Company (“PPCIC”), a sponsored captive insurance company, was incorporated in the State of New Jersey and is a wholly owned subsidiary of Positive Insurance Company. PPCIC was licensed under the New Jersey Captive Insurance Act on October 16, 2018. PPCIC has one protected unincorporated cell, Keystone Captive Group (“Keystone”). Keystone is owned by an insured of Positive Insurance Company. Effective October 16, 2018, the Company entered into a reinsurance agreement with Keystone and that agreement was endorsed in 2019 for continuous annual renewal.
The effect of reinsurance on premiums written, amounts earned, and losses incurred for the years ended December 31, 2019 and 2018 is as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
26,717,701
|
|
|
$
|
25,323,049
|
|
Ceded
|
|
|
4,044,207
|
|
|
|
3,700,189
|
|
Premiums written, net of reinsurance
|
|
$
|
22,673,494
|
|
|
$
|
21,622,860
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
27,137,204
|
|
|
$
|
27,435,509
|
|
Ceded
|
|
|
3,436,241
|
|
|
|
3,847,675
|
|
Premiums earned, net of reinsurance
|
|
$
|
23,700,963
|
|
|
$
|
23,587,834
|
|
Losses and loss adjustment expenses incurred:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
19,145,058
|
|
|
$
|
21,879,774
|
|
Ceded
|
|
|
3,570,449
|
|
|
|
2,296,556
|
|
Losses and loss adjustment expenses incurred, net of
Reinsurance
|
|
$
|
15,574,609
|
|
|
$
|
19,583,218
|
|
53
8.
|
Losses and Loss Adjustment Expenses
|
The following table provides a reconciliation of our beginning and ending unpaid loss and loss adjustment expense (“LAE”) reserve balances for the years ended December 31, 2019 and 2018.
|
|
2019
|
|
|
2018
|
|
Balance at January 1
|
|
$
|
68,392,333
|
|
|
$
|
68,374,554
|
|
Less: Reinsurance recoverable on liability for losses
and loss adjustment expenses
|
|
|
7,956,043
|
|
|
|
8,585,851
|
|
Add: Reinsurance recoverable on claims paid
|
|
|
5,791
|
|
|
|
1,196,573
|
|
Net liability at January 1
|
|
|
60,442,081
|
|
|
|
60,985,276
|
|
Losses and loss adjustment expenses incurred, net:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
15,438,338
|
|
|
|
15,525,397
|
|
Prior years
|
|
|
136,271
|
|
|
|
4,057,821
|
|
Total incurred losses and loss adjustment
Expenses
|
|
|
15,574,609
|
|
|
|
19,583,218
|
|
Less losses and loss adjustment expenses paid, net:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,334,938
|
|
|
|
714,198
|
|
Prior years
|
|
|
18,588,912
|
|
|
|
19,412,215
|
|
Total losses and loss adjustment expenses paid
|
|
|
19,923,850
|
|
|
|
20,126,413
|
|
Net liability for losses and loss adjustment expenses,
at December 31
|
|
|
56,092,840
|
|
|
|
60,442,081
|
|
Add: Reinsurance recoverable on liability for losses
and loss adjustment expenses
|
|
|
7,850,409
|
|
|
|
7,956,043
|
|
Less: Reinsurance recoverable on claims paid
|
|
|
335,274
|
|
|
|
5,791
|
|
Liability for losses and loss adjustment expenses,
at December 31
|
|
$
|
63,607,975
|
|
|
$
|
68,392,333
|
|
The liability for losses and LAE at December 31, 2019 and 2018 was $63,607,975 and $68,392,333, respectively. For the years ended December 31, 2019 and 2018, $18,588,912 and $19,412,215, respectively, has been paid for incurred claims attributable to insured events of prior years. Original estimates are increased or decreased, as additional information becomes known regarding individual claims. The Company recorded unfavorable development of $136,271 on its prior period reserves for the year ended December 31, 2019. The adverse development consisted of reserve strengthening in the 2018 report year for claims-made policies and, to a lesser extent, the 2012 and 2016 accident years for occurrence policies, but was largely offset by favorable development in the 2015 report year for claims-made policies and 2017 accident year for occurrence policies. For the year ended December 31, 2018, the Company experienced unfavorable development of $4,057,821 primarily related to significant reserve strengthening in the 2016 and 2017 accident years for both claims-made and occurrence policies.
54
Incurred and Paid Loss Development Information
The following information is presented about incurred and paid loss development at December 31, 2019, 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.
The information about incurred and paid claims development for the years ended December 31, 2010 to December 31, 2018 is presented as supplementary information and is unaudited.
|
|
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
December 31,
2019
|
|
Accident Year
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Total of
Incurred-
But-Not-
Reported
Liabilities
Plus
Expected
Development
on
Reported
Claims
|
|
2010
|
|
$
|
18,592
|
|
|
$
|
15,072
|
|
|
$
|
15,710
|
|
|
$
|
14,490
|
|
|
$
|
12,665
|
|
|
$
|
11,901
|
|
|
$
|
10,774
|
|
|
$
|
11,288
|
|
|
$
|
10,533
|
|
|
$
|
10,836
|
|
|
|
43
|
|
2011
|
|
|
-
|
|
|
|
19,524
|
|
|
|
18,783
|
|
|
|
18,591
|
|
|
|
21,175
|
|
|
|
21,079
|
|
|
|
21,030
|
|
|
|
21,329
|
|
|
|
20,586
|
|
|
|
21,028
|
|
|
|
55
|
|
2012
|
|
|
-
|
|
|
|
-
|
|
|
|
20,305
|
|
|
|
18,496
|
|
|
|
18,813
|
|
|
|
19,107
|
|
|
|
18,478
|
|
|
|
19,744
|
|
|
|
19,592
|
|
|
|
21,124
|
|
|
|
280
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,753
|
|
|
|
16,879
|
|
|
|
15,219
|
|
|
|
13,224
|
|
|
|
11,447
|
|
|
|
12,022
|
|
|
|
12,349
|
|
|
|
231
|
|
2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,307
|
|
|
|
15,108
|
|
|
|
13,798
|
|
|
|
11,087
|
|
|
|
11,062
|
|
|
|
11,606
|
|
|
|
332
|
|
2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,999
|
|
|
|
17,785
|
|
|
|
16,494
|
|
|
|
16,373
|
|
|
|
15,830
|
|
|
|
900
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,465
|
|
|
|
18,861
|
|
|
|
21,376
|
|
|
|
22,528
|
|
|
|
2,208
|
|
2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,588
|
|
|
|
19,143
|
|
|
|
18,262
|
|
|
|
4,167
|
|
2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,161
|
|
|
|
16,990
|
|
|
|
5,911
|
|
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,438
|
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
165,991
|
|
|
|
|
|
|
|
Cumulative Losses and Loss Adjustment Expenses Paid, Net of Reinsurance (in thousands)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
December 31,
2019
|
Accident Year
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Cumulative
Number of
Reported
Claims
|
2010
|
|
$
|
464
|
|
|
$
|
1,721
|
|
|
$
|
4,162
|
|
|
$
|
6,312
|
|
|
$
|
6,883
|
|
|
$
|
7,774
|
|
|
$
|
8,328
|
|
|
$
|
9,621
|
|
|
$
|
9,921
|
|
|
$
|
10,166
|
|
|
160
|
2011
|
|
|
-
|
|
|
|
578
|
|
|
|
1,888
|
|
|
|
5,047
|
|
|
|
12,117
|
|
|
|
16,911
|
|
|
|
17,774
|
|
|
|
18,870
|
|
|
|
19,773
|
|
|
|
20,641
|
|
|
205
|
2012
|
|
|
-
|
|
|
|
-
|
|
|
|
1,002
|
|
|
|
2,621
|
|
|
|
5,637
|
|
|
|
9,772
|
|
|
|
14,376
|
|
|
|
17,365
|
|
|
|
17,805
|
|
|
|
19,672
|
|
|
196
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
526
|
|
|
|
1,896
|
|
|
|
4,249
|
|
|
|
6,942
|
|
|
|
7,625
|
|
|
|
9,470
|
|
|
|
10,962
|
|
|
157
|
2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
417
|
|
|
|
1,676
|
|
|
|
4,069
|
|
|
|
6,448
|
|
|
|
7,780
|
|
|
|
9,717
|
|
|
132
|
2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
523
|
|
|
|
2,476
|
|
|
|
5,186
|
|
|
|
7,446
|
|
|
|
11,758
|
|
|
132
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
944
|
|
|
|
3,818
|
|
|
|
9,691
|
|
|
|
13,320
|
|
|
181
|
2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
728
|
|
|
|
5,057
|
|
|
|
8,360
|
|
|
150
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
4,873
|
|
|
135
|
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,335
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,804
|
|
|
|
All outstanding liabilities before 2010, net of reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56,093
|
|
|
|
55
Reconciliation
The reconciliation for the net incurred and paid loss development tables to the liability for losses and LAE at December 31, 2019 in the accompanying balance sheet is as follows:
|
|
2019
|
|
Net outstanding liabilities for losses and loss adjustment
expenses:
|
|
|
|
|
Medical professional
|
|
$
|
56,092,840
|
|
Liabilities for losses and loss adjustment expenses, net of
Reinsurance
|
|
|
56,092,840
|
|
Reinsurance recoverable on unpaid claims:
|
|
|
|
|
Medical professional
|
|
|
7,515,135
|
|
Total reinsurance recoverable on unpaid claims
|
|
|
7,515,135
|
|
Total gross liability for losses and loss adjustment expenses
|
|
$
|
63,607,975
|
|
Losses Duration Information
The following is supplemental information about average historical claims duration at December 31, 2019:
|
|
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Accident Year
|
|
Year 1
|
|
|
Year 2
|
|
|
Year 3
|
|
|
Year 4
|
|
|
Year 5
|
|
|
Year 6
|
|
|
Year 7
|
|
|
Year 8
|
|
|
Year 9
|
|
|
Year 10
|
|
Medical Professional
|
|
|
4.3
|
%
|
|
|
13.6
|
%
|
|
|
19.1
|
%
|
|
|
20.8
|
%
|
|
|
15.7
|
%
|
|
|
11.6
|
%
|
|
|
8.9
|
%
|
|
|
8.4
|
%
|
|
|
3.4
|
%
|
|
|
2.3
|
%
|
Positive Insurance Company uses a combination of the Actual versus Expected Method, Bornhuetter-Ferguson Method, Expected Loss Ratio Method, Frequency/Severity Method, and the Incurred Loss Development Method in order to estimate its liability for losses and LAE. Following the conversions and merger which were completed on March 27, 2019, the Company changed its approach by aggregating its data, previously under PPIX, PCA, and PIPE, and performing a single loss reserve analysis, as opposed to three separate loss reserve analyses. The Company used combined development patterns based on PPIX, PCA, and PIPE experience for claims-made development factors, but derived occurrence development factors strictly based on former PPIX experience. Tail policy development factors were derived from the occurrence factors. Management does not believe that the effects of these changes had a material impact on the Company’s estimates. The year-end loss reserve analysis also assumes that the Company will no longer utilize Andrews Outsource Solutions LLC to provide claims processing and risk management services following 2020, a measure which is expected to reduce the amount of LAE incurred in subsequent periods. If this action is not taken, then the Company’s reserves for loss adjustment expenses would increase as a result. There were no other significant changes in the methodologies and assumptions used to develop the liabilities for losses and LAE during the year ended December 31, 2019.
On December 12, 2014, PPIX entered into a loan agreement with a financial institution with proceeds totaling $300,000 to finance the development of a new policy system. The loan is secured by the equipment purchased with the proceeds received. The loan is being repaid on a monthly basis from January 2016 through December 2020 with interest calculated on the unpaid principal balance at a rate of 4% per annum. At December 31, 2019 and 2018, the balance of the note payable was $64,858 and $127,327, respectively, and the Company remains compliant with all loan covenants.
The components of the Company’s income tax provision for the years ended December 31, 2019 and 2018 are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current income tax benefit
|
|
$
|
(14,678
|
)
|
|
$
|
(814,609
|
)
|
Deferred income tax expense (benefit)
|
|
|
21,664
|
|
|
|
(1,120,719
|
)
|
Provision for income taxes
|
|
$
|
6,986
|
|
|
$
|
(1,935,328
|
)
|
56
The Company’s U.S. federal statutory income tax rate applicable to ordinary income was 21% for the years ended December 31, 2019 and 2018. The income tax provision differs from that computed by applying federal statutory rate to loss before income taxes for the years ended December 31, 2019 and 2018; those income tax rate differences are summarized as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Expected tax provision at federal statutory rate
|
|
$
|
(48,713
|
)
|
|
$
|
(1,534,437
|
)
|
Tax exempt interest income
|
|
|
(48,428
|
)
|
|
|
(49,051
|
)
|
Dividends received deduction
|
|
|
(21,421
|
)
|
|
|
(23,438
|
)
|
Non-deductible conversion costs
|
|
|
136,439
|
|
|
|
-
|
|
Change in enacted tax rates
|
|
|
-
|
|
|
|
(343,929
|
)
|
Other
|
|
|
(10,891
|
)
|
|
|
15,527
|
|
Provision for income taxes
|
|
$
|
6,986
|
|
|
$
|
(1,935,328
|
)
|
Deferred income taxes are provided for temporary differences between the consolidated and combined financial statements and the tax basis of the Company’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. At December 31, 2019 and 2018, the Company’s deferred income taxes consisted of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Discount of unearned premiums
|
|
$
|
487,274
|
|
|
$
|
530,428
|
|
Discount of advance premiums
|
|
|
85,139
|
|
|
|
55,638
|
|
Discount of losses and loss adjustment expenses
|
|
|
978,379
|
|
|
|
1,113,670
|
|
Guaranty fund assessment
|
|
|
40,890
|
|
|
|
36,027
|
|
Net operating loss carryforward
|
|
|
756,063
|
|
|
|
811,703
|
|
Capital loss carryforward
|
|
|
-
|
|
|
|
34,558
|
|
Unrealized loss on investments
|
|
|
-
|
|
|
|
250,592
|
|
Other
|
|
|
14,754
|
|
|
|
28
|
|
Total deferred tax assets
|
|
|
2,362,499
|
|
|
|
2,832,644
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
542,742
|
|
|
|
836,891
|
|
TCJA transitional adjustment
|
|
|
224,943
|
|
|
|
314,446
|
|
Unrealized gain on investments
|
|
|
678,322
|
|
|
|
—
|
|
Accrual of bond market discount
|
|
|
19,070
|
|
|
|
3,338
|
|
Other
|
|
|
5,838
|
|
|
|
1,878
|
|
Total deferred tax liabilities
|
|
|
1,470,915
|
|
|
|
1,156,553
|
|
Deferred income taxes, net
|
|
$
|
891,584
|
|
|
$
|
1,676,091
|
|
At December 31, 2019 and 2018, the Company had unused net operating loss (“NOL”) carryforwards of $3,600,298 and $3,865,253, respectively, which will begin to expire in 2038, if unused. At the time of the conversions and merger, the Company had unused NOLs of $4,313,198, which are subject to limitations under Section 382 of the Internal Revenue Code and are limited in the amount that can be utilized in any one year. The Company also has AMT credits of $14,754, which are expected to be fully utilized by 2021. Refer to Note 16, Subsequent Events, for the effects on the NOL carryforwards resulting from the Coronavirus Aid, Relief, and Economic Security Act.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. At December 31, 2019 and 2018, management determined that it is more likely than not that all of the deferred tax assets will be realized by the Company in future years. Accordingly, the Company did not record a valuation allowance against its deferred tax assets at December 31, 2019 and 2018.
57
The Company has applied the provisions of ASC 740, Income Taxes, for the years ended December 31, 2019 and 2018. ASC 740 prescribes a recognition threshold and measurement attribute with respect to uncertainty in income tax positions. In applying ASC 740, the Company has evaluated its various tax positions taken during the years ended December 31, 2019 and 2018. The Company has determined that based solely on the technical merits, each tax position on a current and deferred basis has a more-likely-than-not probability that the tax position will be sustained by taxing authorities. The Company is not presently under audit by any taxing authority and there are no other uncertainties and events that are reasonably possible in the next year that would cause a significant change in the amount of unrecognized tax benefits.
The Company did not recognize any interest and penalties in the accompanying consolidated and combined statements of operations for the years ended December 31, 2019 and 2018, respectively.
Additionally, as part of the enactment of the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017, property and casualty insurance companies are required to use Internal Revenue Service (“IRS”) prescribed factors to determine the loss discount. From the date of the passage of the new law, the IRS is using a corporate bond yield curve to determine the discount factors and property and casualty insurance companies are no longer allowed to use their own historical payment patterns to determine their discount factors. Transition rules require that property and casualty insurance companies recalculate the 2017 reserve discount as if the 2018 tax reform rules had been in effect at the time of the passage of the new law, compare it to the actual 2017 reserve discount, and amortize the difference into taxable income over eight years beginning in 2018. As a result of this comparison, the Company recorded as a component of deferred income taxes at December 31, 2017 a resulting tax-effected difference amount of $201,439, for which the pre-tax amount of $959,235 is being amortized into taxable income beginning in 2018. During 2019, the IRS issued additional regulations related to the 2017 reserve discount resulting in an adjusted pre-tax amount of $1,249,684. At December 31, 2019 and 2018, the deferred tax liability related to the TCJA transitional adjustment was $224,943 and $314,446, respectively, and is included as a component of deferred income taxes.
11.
|
Related Party Transactions
|
Positive Insurance Company is managed by Diversus Management. Prior to March 27, 2019, Diversus Management, through former attorneys-in-fact of PPIX, PCA, and PIPE, earned management fees at 25% of gross written premiums of the exchanges. Concurrent with the acquisition of PPIX, PCA, and PIPE and the initial public offering on March 27, 2019, Positive Insurance Company and Diversus Management entered into a new management agreement, effective March 27, 2019, whereby Diversus Management provides administrative services to Positive Insurance Company in exchange for fees based on a percentage of Positive Insurance Company’s gross written premium, less return premium. Under the new agreement, Diversus Management earns management fees at 12%. Diversus Management may also earn quarterly performance management fees based on Positive Insurance Company’s combined ratio and net earned premiums. No quarterly performance fees were payable under the terms of the agreement at December 31, 2019.
Management fees for 2019 and 2018 are recorded in other underwriting expenses in the consolidated and combined statements of operations, respectively. Positive Insurance Company incurred management fees for the respective periods, as follows:
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|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Management fees
|
|
$
|
4,361,977
|
|
|
$
|
6,330,762
|
|
In connection with the execution of the new management agreement with Diversus Management, the Company paid Diversus $10,000,000 to execute the agreement. Such payment is presented as “Prepaid management fee” in the accompany consolidated balance sheet at December 31, 2019 and is amortized on a straight-line basis over a period of seven years. During the year ended December 31, 2019, the Company incurred amortization expense of $1,071,429, which is recorded in other underwriting expenses in the consolidated statement of operations.
Positive Insurance Company has contracts with Gateway Risk Services, LLC and Andrews Outsource Solutions LLC, both of which are wholly owned subsidiaries of Diversus, under which those companies provide claims processing and risk management services. Fees incurred by Positive Insurance Company under these contracts for 2019 and 2018 were recorded in other underwriting expenses in the consolidated and combined statements of operations, respectively, as follows:
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Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Claims processing and risk management services
|
|
$
|
1,648,100
|
|
|
$
|
1,585,400
|
|
58
Additionally, the former attorney-in-fact of PCA earned commissions related to our gross written premium and other accounts. Beginning March 27, 2019, these commissions were paid to Specialty Insurance Agency, LLC, a wholly owned subsidiary of Diversus. These commissions for 2019 and 2018 are recorded in other underwriting expenses in the consolidated and combined statements of operations, respectively. Positive Insurance Company incurred related commission expenses for the respective periods, as follows:
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Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Commissions
|
|
$
|
131,618
|
|
|
$
|
176,753
|
|
The Company and Diversus entered into a loan agreement dated March 27, 2019 to provide a $6,000,000 credit facility to Diversus for working capital purposes. Diversus may borrow in one or more advances up to $5,500,000 under a term loan and up to $500,000 under a revolving loan. Outstanding borrowings under the credit facility will bear interest at 8%, will be unsecured, and will be subordinate to the existing senior debt and other commercial loan obligations of Diversus. The loan is convertible into common stock shares of Diversus at a price of $1 per share at the option of the Company. At December 31, 2019, there was no outstanding balance on the credit facility.
The Company is authorized to issue 10,000,000 shares of $0.01 par value common stock. At December 31, 2018, there were no shares of common stock issued and outstanding. In connection with the completion of the initial public offering on March 27, 2019, 3,615,500 shares of the Company’s common stock were issued. At December 31, 2019, 3,615,500 shares of common stock remain issued and outstanding.
On September 27, 2019, the Company granted its Chief Executive Officer options to purchase 216,930 shares of common stock at an exercise price of $12.01 per share, which was the closing sale price of the Company’s common stock on the date the options were granted. Of the total options, 108,465 shares will vest in equal monthly installments over a three-and-one-half year period following September 27, 2019, and the remaining 108,465 shares will vest upon the achievement by the Company of certain milestones. All vested option shares shall be exercisable for eight years from the date of vesting. The stock-based compensation expense incurred by the Company during the year ended December 31, 2019 was not significant.
The holding company has cash and other liquid assets aggregating $16,843,126 at December 31, 2019. The holding company’s principal source of future liquidity will be dividend payments from Positive Insurance Company, which is restricted by the insurance laws and regulations of the Commonwealth of Pennsylvania as to the amount of dividends or other distributions it may pay to the Company.
An order by the Pennsylvania Insurance Department approving the conversions of PPIX, PCA, and PIPE prohibits the declaration or payment of any dividend, return of capital, or other distribution by the Company to Insurance Capital Group, LLC and Enstar Holdings (US) LLC, the two principal stockholders of the Company, or any other shareholder without the prior approval of the Pennsylvania Insurance Department, for a period of three years following the effective date of the conversions. Additionally, by the order of the Pennsylvania Insurance Department, Positive Insurance Company cannot pay a dividend to the Company for a period of three years following the effective date of the conversions without the approval of the Pennsylvania Insurance Department.
Prior to its payment of any dividend, Positive Insurance Company will be required to provide notice of the dividend to the Pennsylvania Insurance Department. This notice must be provided to the Pennsylvania Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The Pennsylvania Insurance Department has the power to limit or prohibit dividends if Positive Insurance Company is in violation of any law or regulation.
As discussed in Note 1, the conversions of PPIX, PCA, and PIPE to stock insurance companies and the simultaneous acquisition of these companies resulted in the issuance of the Company’s common stock at March 27, 2019. The weighted average number of common shares outstanding was 3,615,500 for the year ended December 31, 2019. For the period prior to the date of the conversions, the net common shares issued in the initial public offering were assumed to be outstanding since January 1, 2019.
59
The following table presents a reconciliation of the numerators and denominators that were used in the basic and diluted per share computations for the Company’s common stock:
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Year Ended
December 31,
|
|
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2019
|
|
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2018
|
Basic earnings per common share:
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|
|
|
|
|
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Numerator:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(238,951
|
)
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|
N/A
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Denominator:
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
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3,615,500
|
|
|
N/A
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Basic earnings per common share
|
|
$
|
(0.07
|
)
|
|
N/A
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In the event a property and casualty insurer operating in a jurisdiction where Positive Insurance Company also operates becomes or is declared insolvent, state insurance regulations provide for the assessment of other insurers to fund any capital deficiency of the insolvent insurer. Generally, this assessment is based upon the ratio of an insurer’s voluntary premiums written to the total premiums written for all insurers in that particular jurisdiction. The Company receives such assessments from the Pennsylvania Property and Casualty Insurance Guaranty Association for which it accrued liabilities of $194,715 and $171,550 at December 31, 2019 and 2018, respectively. These accruals are included in accounts payable, accrued expenses, and other liabilities in the accompanying consolidated and combined balance sheets. Positive Insurance Company has not recorded applicable premium tax credits at December 31, 2019 and 2018 related to guaranty assessments. Total guaranty fund expense, net of prior years’ refunds and premium tax credits, for the years ended December 31, 2019 and 2018 was $70,076 and $35,623, respectively.
The Pennsylvania MCARE Fund is a special fund established by the Commonwealth of Pennsylvania to ensure reasonable compensation for persons injured due to medical negligence. Healthcare providers who render 50% or more of his or her healthcare business or practice within Pennsylvania are required to obtain statutory excess professional liability coverage with MCARE by paying a certain percentage (assessment) of the prevailing primary premium charged by the Pennsylvania Professional Liability Joint Underwriting Association to MCARE. Positive Insurance Company assesses its policyholders as required by MCARE in addition to collecting the premium assessed. The assessments collected from policyholders are included in accounts payable, accrued expenses, and other liabilities in the accompanying consolidated and combined balance sheets, and no income is recognized by Positive Insurance Company. At December 31, 2019 and 2018, Positive Insurance Company had liabilities of $340,851 and $678,236, respectively, for amounts collected on behalf of MCARE.
The New Jersey Property-Liability Insurance Guaranty Association (“NJPIGA”) was created by the State of New Jersey to provide a safety net for policyholders and claimants of insolvent property-casualty insurance companies. Positive Insurance Company assesses its policyholders as required by NJPIGA in addition to collecting the premium assessed. The assessments collected from policyholders are included in accounts payable, accrued expenses, and other liabilities in the accompanying consolidated and combined balance sheets, and no income is recognized by Positive Insurance Company. At December 31, 2019 and 2018, Positive Insurance Company had liabilities of $40,301 and $36,777, respectively, for amounts collected on behalf of NJPIGA.
15.
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Statutory Information
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Accounting principles used to prepare statutory financial statements differ from those used to prepare these consolidated financial statements under GAAP. Prescribed statutory accounting practices (“SAP”) include state laws, regulations, and general administration rules, as well as a variety of publications from the National Association of Insurance Commissioners (“NAIC”). The statutory financial statements of Positive Insurance Company are prepared in accordance with SAP prescribed by the Pennsylvania Insurance Department.
Financial statements prepared under SAP focus on solvency of the insurer and generally provide a more conservative approach than under GAAP. These accounting practices differ significantly in the following respects from GAAP: (1) assets must be included in the statutory balance sheet at “admitted asset value,” whereas GAAP requires historical cost or, in certain instances, fair value; (2) “non-admitted assets” must be excluded through a charge to surplus, while on a GAAP basis “non-admitted assets” are included in the balance sheet net of any valuation allowance; (3) acquisition costs, such as commissions, management fees, premium taxes, and other items, have been charged to operations when incurred, whereas GAAP requires capitalization of these expenses, which are amortized over the term of the policies; (4) the carrying value of fixed maturity securities are based on NAIC ratings, whereas GAAP requires fixed maturity securities to be valued based on whether management intends to hold the securities to maturity; (5) changes in deferred income taxes are reported directly to surplus, whereas changes to deferred income taxes are reflected in the statement of income for GAAP; (6) deferred tax assets, net of any valuation allowance, are subject to an admissibility calculation, whereas under GAAP, no such calculation exists; and (7) ceded reinsurance amounts (unearned premiums and estimated unpaid loss recoverables) are shown net of the related liability, whereas they are presented on a gross basis and reflected as an asset for GAAP.
60
The Pennsylvania Insurance Department.has adopted certain prescribed accounting practices that differ from those found in NAIC SAP. Specifically, the Pennsylvania Insurance Department permits the deduction of management fees related to unearned premiums from unearned premiums reserve and charging operations on a pro-rata basis over the period covered by these policies; whereas under NAIC SAP, the unearned premiums would not be reduced by the management fees paid related to unearned premiums reserve. With the conversions of PPIX, PCA, and PIPE from reciprocal insurance exchanges into stock insurance companies as of March 27, 2019, the prescribed practice of deducting management fees related to unearned premiums from unearned premiums reserve is no longer applicable to Positive Insurance Company.
Statutory net income (loss) and surplus and other funds as determined in accordance with SAP prescribed or permitted by the Pennsylvania Insurance Department for the years ended December 31, 2019 and 2018 are as follows:
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Year Ended
December 31,
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|
|
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2019
|
|
|
2018
|
|
Statutory net income (loss)
|
|
$
|
1,359,223
|
|
|
$
|
(4,937,935
|
)
|
Statutory surplus and other funds
|
|
|
39,415,264
|
|
|
|
36,535,665
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|
A reconciliation of statutory surplus and other funds between NAIC SAP and practices prescribed by the Pennsylvania Insurance Department for the years ended December 31, 2019 and 2018 are as follows:
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|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Statutory surplus and other funds prescribed by the
Department
|
|
$
|
39,415,264
|
|
|
$
|
36,535,665
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|
State prescribed practices:
|
|
|
|
|
|
|
|
|
Unearned management fees
|
|
|
-
|
|
|
|
(2,735,711
|
)
|
Statutory surplus and other funds per NAIC statutory
accounting practices
|
|
$
|
39,415,264
|
|
|
$
|
33,799,954
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Positive Insurance Company is subject to minimum risk-based capital (“RBC”) requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances and various levels of risk activity. Regulatory compliance is determined by a ratio of Positive Insurance Company’s total adjusted capital, as defined by the NAIC, to its authorized control level RBC. At December 31, 2019 and 2018, our RBC exceeded minimum RBC requirements.
Subsequent events have been evaluated through May 14, 2020, which is the date the consolidated and combined financial statements were available to be issued.
Subsequent events impacting the Company include the following:
Effects of COVID-19
The Company’s operations and business have experienced disruptions due to the conditions surrounding the COVID-19 pandemic spreading throughout the United States. These disruptions include, but are not limited to, office closures and difficulties in maintaining operational continuance during remote operations required by illness, social quarantining, and work from home orders currently in force. The Company’s management has devoted substantial time and attention to assessing the potential impact of COVID-19 and those events on the Company’s operations and financial position and developing operational and financial plans to address those matters.
As a result of the COVID-19 pandemic, the Company anticipates that premiums will decrease due to policy endorsements associated with doctors electing to work part time, take a leave of absence or retire. In addition, our insureds may elect to temporarily change specialties. For example, a doctor may choose to drop from orthopedic surgery to office-only status due to the lack of elective surgeries. The Company has received notification for such requests from our policyholders which will go into effect on June 30, 2020.
In terms of collections, prior to the pandemic, the Company’s policy was to cancel any insurance policies for which premiums had not been received within 60 days subsequent to policy effective date, with notice of intent to cancel sent to the insured after 30 days post-inception date. As a result of COVID-19, the Company has updated this policy and suspended cancellations of insurance
61
contracts resulting from non-payment of premium until June 30, 2020 for invoices due after April 1, 2020. Through May 11, 2020, the amount of premium payment deferrals is about $817,000.
With respect to claims, Positive Insurance Company’s policyholder base mainly consists of physicians, their corporations and medical groups. During the COVID-19 pandemic, on-site visits to doctors have declined and been replaced by an increase in telehealth/virtual office visits. Since the COVID-19 pandemic resulted in government-issued work from home orders, the Company has seen the number of new claims reported begin to decrease.
Investments
The Company’s investment portfolio has experienced significant fluctuations in fair value as a result of the market volatility due to the COVID-19 pandemic. The following tables reflect the changes in our investment portfolio since December 31, 2019.
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|
Amortized Cost/Cost
|
|
|
Gross Unrealized Gains, Net
|
|
|
Fair Value
|
|
May 8, 2020 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
9,172,746
|
|
|
$
|
190,297
|
|
|
$
|
9,363,043
|
|
States, territories, and possessions
|
|
|
1,091,178
|
|
|
|
47,775
|
|
|
|
1,138,953
|
|
Subdivisions of states, territories, and possessions
|
|
|
12,313,961
|
|
|
|
358,989
|
|
|
|
12,672,950
|
|
Industrial and miscellaneous
|
|
|
68,391,118
|
|
|
|
1,727,660
|
|
|
|
70,118,778
|
|
Total fixed maturity securities
|
|
|
90,969,003
|
|
|
|
2,324,721
|
|
|
|
93,293,724
|
|
Equity securities
|
|
|
6,446,067
|
|
|
|
(66,457
|
)
|
|
|
6,379,610
|
|
Short-term investments
|
|
|
2,231,703
|
|
|
|
(9
|
)
|
|
|
2,231,694
|
|
Total investments
|
|
|
99,646,773
|
|
|
|
2,258,255
|
|
|
|
101,905,028
|
|
Cash and cash equivalents
|
|
|
19,924,270
|
|
|
|
-
|
|
|
|
19,924,270
|
|
|
|
$
|
119,571,043
|
|
|
$
|
2,258,255
|
|
|
$
|
121,829,298
|
|
|
|
Amortized Cost/Cost
|
|
|
Gross Unrealized Gains, Net
|
|
|
Fair Value
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
10,689,829
|
|
|
$
|
61,733
|
|
|
$
|
10,751,562
|
|
States, territories, and possessions
|
|
|
1,096,638
|
|
|
|
46,385
|
|
|
|
1,143,023
|
|
Subdivisions of states, territories, and possessions
|
|
|
12,440,863
|
|
|
|
382,002
|
|
|
|
12,822,865
|
|
Industrial and miscellaneous
|
|
|
69,445,114
|
|
|
|
1,585,478
|
|
|
|
71,030,592
|
|
Total fixed maturity securities
|
|
|
93,672,444
|
|
|
|
2,075,598
|
|
|
|
95,748,042
|
|
Equity securities
|
|
|
6,602,462
|
|
|
|
1,154,504
|
|
|
|
7,756,966
|
|
Short-term investments
|
|
|
1,169,472
|
|
|
|
-
|
|
|
|
1,169,472
|
|
Total investments
|
|
|
101,444,378
|
|
|
|
3,230,102
|
|
|
|
104,674,480
|
|
Cash and cash equivalents
|
|
|
20,988,081
|
|
|
|
-
|
|
|
|
20,988,081
|
|
|
|
$
|
122,432,459
|
|
|
$
|
3,230,102
|
|
|
$
|
125,662,561
|
|
CARES Act
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act includes certain income tax-related law changes that the Company believes will have a material effect on its deferred income taxes in 2020. The most significant effect on the Company’s deferred income taxes is expected to be due to changes in the Federal net operating loss carryback provisions which will allow the Company to carryback NOLs originating in 2018 and 2019 to prior tax years with corporate income tax rates of 34% (as opposed to forward to future tax years with corporate income tax rates of 21%). The Company estimates that this change will result in additional Federal income tax refunds of approximately $1.1 million during 2020 and will reduce the Company’s NOL by about $3.1 million, or about $650,000 tax-effected.
62