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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM 10-K   (Mark One) ☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 OR  ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
 TO Commission File Number 001-38814   POSITIVE PHYSICIANS HOLDINGS, INC. (Exact name of Registrant as specified in its Charter)    Pennsylvania

83-0824448(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)100 Berwyn Park, Suite 220
850 Cassatt Road, Berwyn, PA

19312(Address of principal executive offices)

(Zip Code) Registrants telephone number, including area code: (888) 335 -5335 Securities registered pursuant to Section 12(b) of the Act:  Title of Class

Name of each exchangeCommon Stock, no par value

The NASDAQ Stock Market Securities registered pursuant to Section 12(g) of the Act: None   Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    YES  ☐    NO  ☒ Indicate by check mark if the Registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ☐    NO  ☒ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    YES  ☐    NO  ☒ Indicate by check mark whether the Registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the Registrant was required to submit such files).    YES  ☒    NO  ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405) is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.  Large accelerated filer

☐

Accelerated filer

☐Non-accelerated filer

☐

Smaller reporting company

☒Emerging growth company

☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    YES  ☐    NO  ☒ The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on June 30, 2018,
was $0. The number of shares of Registrants Common Stock outstanding as of March 31, 2019 was 3,615,500.




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Table of Contents  PagePART IItem 1.

Business


2Item 1A.

Risk Factors


15Item 1B.

Unresolved Staff Comments


15Item 2.

Properties


15Item 3.

Legal Proceedings


16Item 4.

Mine Safety Disclosures


16PART IIItem 5.

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


17Item 6.

Selected Financial Data


17Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations


17Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


52Item 8.

Financial Statements and Supplementary Data


53Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure


66Item 9A.

Controls and Procedures


66Item 9B.

Other Information


67PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


68Item 11.

Executive Compensation


74Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


75Item 13.

Certain Relationships and Related Transactions, and Director Independence


76Item 14.

Principal Accounting Fees and Services


78PART IVItem 15.

Exhibits, Financial Statement Schedules


78Item 16.

Form 10-K Summary


79  i




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PART I Forward-Looking Statements The
information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words believe, anticipate, estimate, expect,
project, target, goal, plan, may, seek, could, intend and similar expressions are intended to identify forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements include:  

statements of goals, intentions and expectations;  

statements regarding prospects and business strategy; and  

estimates of future costs, benefits and results. The forward-looking statements are subject to numerous assumptions, risks and uncertainties that could affect the actual outcome of future
events. All of these factors are difficult to predict and many are beyond our control. These important factors include those listed below:  

the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents;  

future economic conditions in the markets in which we compete that are less favorable than expected;  

the effect of legislative, judicial, economic, demographic and regulatory events in the jurisdictions where we do
business;  

our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions
or the expansion of our producer network;  

financial market conditions, including, but not limited to, changes in interest rates and the stock markets
causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;  

heightened competition, including specifically the intensification of price competition, the entry of new
competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;  

changes in general economic conditions, including inflation, unemployment, interest rates and other factors;  

estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses;  

changes in the coverage terms required by state laws, including higher limits;  

our inability to obtain regulatory approval of, or to implement, premium rate increases;  

our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us and to
collect amounts that we believe we are entitled to under such reinsurance;  

the potential impact on our reported net income that could result from the adoption of future accounting
standards issued by the Public Company Accounting Oversight Board or the Financial Accounting Standards Board or other standard-setting bodies;  1




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##### Table of Contents



unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;  

adverse litigation or arbitration results; and  

adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance
companies, including tax or accounting matters, limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products. Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially
from that expressed or implied by the forward-looking information. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated,
estimated, expected or projected. These forward-looking statements speak only as of the date of the report. The Company expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Companys
expectations with regard to any change in events, conditions or circumstances on which any such statement is based. Item 1. BUSINESS. Positive Physicians Holdings, Inc. (the Company) is a newly formed Pennsylvania business corporation 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 merged together to form Positive Physicians
Insurance Company, which is a wholly-owned subsidiary of the Company (Positive Insurance 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 Positive Insurance Company financial information in this Annual Report 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 claims-made, claims-made plus, tail, and occurrence-based medical malpractice insurance for healthcare
providers practicing in Delaware, Maryland, Michigan, New Jersey, Ohio, Pennsylvania, and South Carolina. Diversus Management, Inc. (Diversus Management) manages and administers essentially all of the operations of Positive Insurance
Company under the terms of a management agreement. Pursuant to the terms of the agreement, Diversus Management provides such administrative services to Positive Insurance Company in exchange for fees based on 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. At December 31, 2018, PPIX, PCA, and PIPE had combined total assets of $124.0 million and a surplus of $37.0 million. For the
year ended December 31, 2018, PPIX, PCA, and PIPE had combined total revenues of $24.6 million and a net loss of $5.4 million. The executive offices of the Company are located at 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312, and
its telephone number is 888-335-5335. The Companys web site address is www.positivephysicians.com. Information contained on such website is not incorporated
by reference into this Annual Report on Form 10-K, and such information should not be considered to be part of this Annual Report on Form 10-K.  2




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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 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 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. A claims-made plus policy is a modified claims-made policy combined with an extended reporting endorsement that covers a malpractice claim regardless of
when the claim is reported to the insurance carrier as long as the incident occurred within the policy period. 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. We offer a single policy form for physicians who are sole practitioners and for those who practice as part of a medical group or clinic. The
medical professional insurance for sole practitioners and for medical groups provides protection against the legal liability of the insureds for injury caused by or as a result of the performance of patient treatment, failure to treat, failure to
diagnose and related types of malpractice. Marketing and Distribution Our marketing philosophy is to sell profitable business in our core states, using a focused,
cost-effective distribution system. Our medical professional liability insurance (MPLI) products are currently sold through approximately 81 retail producers in our territories of
Pennsylvania, New Jersey, Ohio, Delaware, Maryland, South Carolina, and Michigan. All of these producers represent multiple insurance companies and are established businesses in the communities in which they operate. While we view our insureds as
our primary customer, we view our independent insurance producers as important partners because they are in a position to recommend either our insurance products or those of a competitor to their customers. We consider our relationships with these
producers to be good. We review our producers annually with respect to both premium volume and profitability. Our producers will be
monitored and supported primarily by our marketing employees, who have the principal responsibility for recruiting and training new producers. We hold annual seminars for producers and conduct training programs that provide both technical training
about our products and sales training about how to effectively market our products. Producers are compensated through a fixed base
commission. Agents receive commission as a percentage of premiums (generally 10% to 12%) as their primary compensation from us. No profit sharing commissions are paid to agents based upon the profitability of the business they produce. Our marketing efforts are further supported by our claims philosophy, which is designed to provide prompt and efficient service and claims
processing, resulting in a positive experience for producers and policyholders. We believe that these positive experiences result in higher policyholder retention and new business opportunities when communicated by producers and policyholders to
potential customers. While we rely on our independent agents for distribution and customer support, underwriting and claim handling responsibilities are retained by us. Many of our agents have had direct relationships with us for a number of years. Underwriting, Risk Assessment and Pricing Although we are willing to consider physicians in most specialties and classifications for insurance coverage, we recognize that certain
specialties present a higher exposure to frequency or severity of claims. Although the number of medical malpractice claims filed in Pennsylvania has decreased significantly since 2008, the severity of the claims brought has not decreased.
Accordingly, we rely heavily on individual risk characteristics in determining which medical professionals to whom we will offer coverage.  3




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Our underwriting philosophy is aimed at consistently generating profits through sound risk
selection and pricing discipline. Through the management and underwriting staff of Diversus Management, we regularly establish rates and rating classifications for our physician and medical group insureds based on losses and loss adjustment expense
experience that we have developed over the years and the losses and loss adjustment expenses experience for the entire medical professional liability market. We have various rating classifications based on practice location, medical specialty and
other liability factors. The nature of our business requires that we remain sensitive to the marketplace and the pricing strategies of
our competitors. Using the market information as our background, we normally set our prices based on our estimated future costs. From time to time, we may reduce or increase our discounts or apply a premium surcharge to achieve an appropriate
return. Pricing flexibility allows us to provide a fair rate commensurate with the assumed liability. If our pricing strategy cannot yield sufficient premium to cover our costs on a particular type of risk, we may determine not to underwrite that
risk. It is our philosophy not to sacrifice profitability for premium growth. We also encourage our insureds to adopt and practice loss
reduction methods and loss mitigation practices. Our integrated risk management platform can reduce claims occurring from lack of informed consent, surgical complications, or missed diagnoses. Similarly, required educational sessions for doctors and
other medical professionals regarding record keeping, patient follow-up and other basic practices can reduce the frequency of claims. Premium credits are provided to physicians in higher risk specialties who
take advantage of these loss reduction methods and loss mitigation practices. Medical professionals who do not commit to these practices and methods can be refused coverage. Our competitive strategy in underwriting is to provide very high-quality service to our producers and
insureds by responding quickly and effectively to information requests and policy submissions. Each policy undergoes the entire underwriting process prior to renewal. We maintain information on all aspects of our business, which is regularly
reviewed to determine both agency and policyholder profitability. Specific information regarding individual insureds is monitored to assist us in making decisions about policy renewals or modifications. Claims and Litigation Management Our
policies require us to provide a defense for our insureds in any suit involving a medical incident covered by the policy. The defense costs we incur are in addition to the limit of liability under the policy. Medical professional liability claims
often involve the evaluation of highly technical medical issues, severe injuries and conflicting expert opinions. Our claims management
philosophy involves: (i) closure of claims through prompt and thorough investigation of the facts related to the claim; (ii) equitable settlement of meritorious claims; (iii) vigorous defense of unfounded claims as to coverage,
liability or the amount claimed; and (iv) the use of mediation and arbitration combined, when appropriate, with agreements with plaintiffs counsel limiting the range of damage awards. Our claims team supports our underwriting strategy by
working to provide a timely, good faith claims handling response to our policyholders. Claims excellence is achieved by timely investigation and handling of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate case
reserves, and control of loss adjustment expenses. Claims on insurance policies are received directly from the insured or through our
independent producers. Our claims department supports our producer relationship strategy by working to provide a consistently responsive level of claim service to our policyholders. Positive Insurance Company is required by applicable insurance laws
and regulations to maintain reserves for payment of losses and loss adjustment expenses for reported claims and for claims incurred but not reported, arising from policies that have been issued. Generally, these laws and regulations require that we
provide for the ultimate cost of those claims, subject to our policy limits, without regard to how long it takes to settle them or the time value of money. We are also required to maintain reserves for extended reporting coverage we provide in the
event of a physicians death, disability and retirement, or DDR reserves, which are included in our loss reserves as a component of the incurred but not reported, or IBNR, reserves. The determination of reserves involves actuarial and
statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as
inflation and changing judicial theories of liability.  4




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Our actuaries utilize standard actuarial techniques to project ultimate losses based on our
paid and incurred loss information, as well as drawing from industry data. These projections are done using actual loss dollars and claim counts. We analyze loss trends and claims frequency and severity to determine our best estimate of the required
reserves. We then record this best estimate in Positive Insurance Companys financial statements. Our reserve methodology is discussed in greater detail in Managements Discussion and Analysis of Financial Condition and Results of
Operations  Critical Accounting Policies. We have contracts with Gateway Risk Services, LLC and Andrews Outsource
Solutions LLC, both of which are subsidiaries of Diversus, Inc., (Diversus) under which those companies provide claims processing and risk management services. Technology Diversus Management uses
commercially available software to provide the information management systems platform that runs its accounting, policy underwriting and issuance, and claims processing functions. These systems permit Diversus Management to integrate the accounting
and reporting functions of our insurance operations. We have adopted a disaster recovery plan tailored to meet our needs and geographic location. A portion of the operations of Diversus Management are managed in a cloud environment using an outside
service provider. Reinsurance Reinsurance Ceded. In accordance with insurance industry practice, we reinsure a portion of our exposure and pay 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;  

mitigate the effect of individual loss occurrences;  

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. We
provide 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. We retain the first $300,000 on all polices and
reinsurance covers the excess up to $1,000,000 that is not covered by the Pennsylvania MCARE Fund. Additionally, we provide coverage up to $2,000,000 per claim up to $4,000,000, but cede to reinsurers claims in excess of $1,000,000 up to
$3,000,000. 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 many 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 Maryland, Delaware, Ohio, New Jersey, Michigan, and South Carolina. We retain the first $300,000 on all polices, and reinsurance covers the excess up to
$1,000,000. If an insured in New Jersey requests, we retain the first $300,000 of risk and cede all coverage in excess of that to the reinsurer. We also purchase additional reinsurance coverage for clash, loss in excess of policy limits and extra contractual obligation claims.  5




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Reinsurance does not legally discharge the insurance company issuing the policy from primary
liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the company issuing the policy to the extent of the coverage ceded. 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. Hanover Re, our current reinsurance partner, has at least an A 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. Reinsurance Assumed. We generally do not assume risks from other insurance companies. However, we are required by statute to
participate in certain residual market pools. This participation requires us to assume business for exposures that are not insured in the voluntary marketplace. We participate in these residual markets pro rata on a market share basis, and as of
December 31, 2018, our participation was not material. Losses and Loss Adjustment Expenses We are required by applicable insurance laws and regulations to maintain reserves for payment of losses and loss adjustment expenses. These
reserves are established for both reported claims and for claims incurred but not reported (IBNR), arising from the policies we have issued. The laws and regulations require that provision be made for the ultimate cost of those claims without regard
to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims. The reserves
are set based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as inflation and changing judicial theories of liability. Estimating the ultimate liability for losses and loss adjustment expenses is an inherently uncertain process. Therefore, the reserve for
losses and loss adjustment expenses does not represent an exact calculation of that liability. Our reserve policy recognizes this uncertainty by maintaining reserves at a level providing for the possibility of adverse development relative to the
estimation process. We do not discount our reserves to recognize the time value of money. For a more detailed overview of our estimation process for reserves for losses and loss adjustment expenses see Managements Discussion and Analysis
of Financial Condition and Results of Operations  Loss and Loss Adjustment Expense Reserves. When a claim is reported to
us, our claims personnel establish a case reserve for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of our
claims staff. In estimating the appropriate reserve, our claims staff considers the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss, to the extent determinable at the
time. Case reserves are adjusted by our claims staff as more information becomes available and discovery progresses. It is our policy to settle each claim as expeditiously as possible. We maintain IBNR reserves to provide for already incurred claims that have not yet been reported and developments on reported claims. The IBNR
reserve is determined by estimating our ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and paid losses and loss adjustment expenses for reported claims. Each quarter, we compute our estimated ultimate liability using principles and procedures we have developed over several years. However,
because the establishment of loss reserves is an inherently uncertain process, we cannot assure you that ultimate losses will not exceed the established loss reserves. Adjustments in aggregate reserves, if any, are reflected in the operating results
of the period during which such adjustments are made.  6




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The following tables provide a reconciliation of beginning and ending unpaid losses and loss
adjustment expense reserve balances of Positive Insurance Company for the years ended December 31, 2018 and 2017, prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  Year Ended December 31,2018


2017Balance at January 1 (in thousands)

$
68,375


$
70,159Less: Reinsurance recoverable on liability for losses and loss adjustment expenses


8,586



11,226Add: Reinsurance recoverable on claims paid


1,197



4,355Net liability at January 1


60,986



63,288Losses and loss adjustment expenses incurred, net:Current year


15,525



16,976Prior years


4,058



(3,408
)Total incurred losses and loss adjustment expenses


19,583



13,568Less losses and loss adjustment expenses paid, net:Current year


714



905Prior years


19,412



14,965Total losses and loss adjustment expenses paid


20,126



15,870Net liability for liability for losses and loss adjustment expenses, at end of year


60,443



60,986Add: Reinsurance recoverable on liability for losses and loss adjustment expenses


7,956



8,586Less: Reinsurance recoverable on claims paid


6



1,197Liability for losses and loss adjustment expenses, December 31

$
68,393


$
68,375 The estimation process for determining the liability for unpaid losses and loss adjustment expenses inherently
results in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled or anticipated to be settled for amounts less than
originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled or anticipated to be settled for amounts greater than originally estimated (unfavorable or
adverse development). Reconciliation of Reserves for Losses and Loss Adjustment Expenses The following table sets forth information about Positive Insurance Companys incurred and paid loss development at December 31,
2018, net of reinsurance. The information about incurred and paid claims development for the years ended December 31, 2009 to December 31, 2016 is unaudited.  Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)AccidentYear


2009


2010


2011


2012


2013


2014


2015


2016


2017


20182009


$
21,789


$
19,033


$
19,166


$
17,998


$
17,904


$
18,069


$
19,409


$
20,275


$
21,120


$
21,3472010







18,592



15,072



15,710



14,490



12,665



11,901



10,774



11,288



10,5332011











19,524



18,783



18,591



21,175



21,079



21,030



21,329



20,5862012















20,305



18,496



18,813



19,107



18,478



19,744



19,5922013



















17,753



16,879



15,219



13,224



11,447



12,0222014























17,307



15,108



13,798



11,087



11,0622015



























19,999



17,785



16,494



16,3732016































18,465



18,861



21,3762017



































16,588



19,1432018







































15,161$
167,195  7




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Cumulative Losses and Loss Adjustment Expenses Paid, Net of Reinsurance (in thousands)Accident
Year

2009


2010


2011


2012


2013


2014


2015


2016


2017


20182009

$
518


$
2,232


$
5,670


$
10,165


$
12,493


$
14,308


$
15,783


$
17,888


$
19,354


$
20,6292010






464



1,721



4,162



6,312



6,883



7,774



8,328



9,621



9,9212011










578



1,888



5,047



12,117



16,911



17,774



18,870



19,7732012














1,002



2,621



5,637



9,772



14,376



17,365



17,8052013


















526



1,896



4,249



6,942



7,625



9,4702014






















417



1,676



4,069



6,448



7,7802015


























523



2,476



5,186



7,4462016






























944



3,818



9,6912017


































728



5,0572018






































499108,071All outstanding liabilities before 2009, net of reinsurance



769$
59,893 The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss
adjustment expenses for Positive Insurance Company at December 31, 2018 in the accompanying pro forma combined balance sheet is as follows:  Net outstanding liabilities for losses and loss adjustment expenses:Medical professional

$
59,893Liabilities for losses and loss adjustment expenses, net of reinsurance


59,893Reinsurance recoverable on unpaid claims:Medical professional


7,950Total reinsurance recoverable on unpaid claims


7,950Unallocated loss adjustment expenses


550Total gross liability for losses and loss adjustment expenses

$
68,393 Investments Our investments in debt securities are classified as available for sale and our equity securities are carried at fair value with unrealized
gains and losses reflected as a component of equity, net of taxes. The goal of our investment activities is to complement and support our overall mission. An important component of our operating results has been the return on invested assets. Our
investment objectives are (i) accumulation and preservation of capital, (ii) optimization, within accepted risk levels, of after-tax returns, (iii) assuring proper levels of liquidity,
(iv) providing for an acceptable and stable level of current income, (v) managing the maturities of our investment securities to reflect the maturities of our liabilities, and (vi) maintaining a quality portfolio which will help
attain the highest possible rating from A.M. Best. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Quantitative and Qualitative Information about Market Risk. In addition to any investments prohibited by the insurance laws and regulations of Pennsylvania, our investment policy prohibits the following
investments and investing activities:  

Commodities and futures contracts;  

Options (except covered call options);  

Interest-only, principal-only, and residual tranche collateralized mortgage obligations;  8




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##### Table of Contents



Foreign currency trading;  

Venture-capital investments;  

Securities lending;  

Portfolio leveraging, i.e., margin transactions; and  

Short selling. The Board of Directors of Positive Insurance Company reviews and approves our investment policy annually. The investment portfolio is managed by Positive Insurance Companys investment committee and Wilmington Trust, with the exception of
certain direct investments representing approximately 4.2% and 3.8% of the total portfolio at December 31, 2018 and December 31, 2017, respectively. The following table sets forth information concerning our investments (dollars in thousands).  December 31,2018


2017Cost orAmortized Cost(unaudited)


EstimatedFair Value(unaudited)


Cost orAmortized Cost(unaudited)


EstimatedFair Value(unaudited)Agencies not backed by the full faith and credit of the U.S. government

$
7,895


$
7,869


$
10,707


$
10,683U.S. Treasury securities


4,964



4,869



8,693



8,652States, territories and possessions


1,112



1,125



1,402



1,429Special revenue


13,231



13,292



13,859



13,977Industrial and miscellaneous


59,562



58,091



55,992



55,989Total debt securities


86,764



85,206



90,653



90,730Equity securities


7,569



7,267



7,076



7,867Total securities at fair value


94,333



92,473



97,729



98,597Limited partnerships


3,548



4,051



2,879



3,848Total

$
97,881


$
96,524


$
100,608


$
102,445 At December 31, 2018 and 2017, we had ownership interests in four limited partnerships. Our partnership
interests are measured at fair value using the partnerships net asset values as a practical expedient. At December 31, 2018, the fair value and cost basis of these investments was $4.0 million and $3.5 million, respectively. At
December 31, 2017, the fair value and cost basis of these investments was $3.8 million and $2.9 million, respectively.  9




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The following table summarizes the distribution of our portfolio of fixed maturity
investments as a percentage of total estimated fair value based on average credit rating assigned by Standard & Poors Corporation (S&P), Moodys and Fitch at December 31, 2018 (dollars in thousands) (unaudited).  December 31, 2018Rating

EstimatedFair Value


Percent ofTotal (1)Agencies not backed by the full faith and credit of the U.S. government

$
7,869



9.2
%U.S. Treasury securities


4,869



5.7
%AAA


3,100



3.6
%AA


15,782



18.5
%A


31,006



36.4
%BBB


22,190



26.0
%CCC


140



0.2
%Not rated


250



0.4
%$
85,206



100.0
%  (1)
Represents percent of fair value for classification as a percent of the total portfolio. The table below sets forth the maturity profile of our debt securities at December 31, 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 (dollars in thousands) (unaudited).  December 31, 2018Amortized Cost


EstimatedFair Value (1)Less than one year

$
7,094


$
6,550One through five years


50,676



47,893Five through ten years


27,618



29,362Greater than ten years


1,376



1,401Total debt securities

$
86,764


$
85,206  (1)
Debt securities are carried at fair value in our pro forma combined financial statements beginning on
page D-1. At December 31, 2018, the average maturity of our fixed maturity investment portfolio was
4.09 years and the average duration was 3.41 years. As a result, the fair value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may experience investment losses to the extent our
liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments. Our average cash and
invested assets, net investment income, and return on average cash and invested assets for the years ended December 31, 2018 and 2017 were as follows (dollars in thousands) (unaudited):  Year Ended December 31,2018


2017Average cash and invested assets

$
105,992


$
112,498Net investment income


1,015



2,130Return on average cash and invested assets


0.96
%


1.89
%  10




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##### Table of Contents

We use quoted values and other data provided by independent pricing services as inputs in
our process for determining fair values of our investments. The pricing services cover substantially all of the securities in our portfolio for which publicly quoted values are not available. The pricing services evaluations represent an exit
price, a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in markets that are active, quoted prices
for similar securities at the measurement date, or other inputs that are observable. Additionally, our investments in limited partnerships are priced based upon audited financial statements of the respective limited partnerships. The investment manager provides us with pricing information that we utilize, together with information obtained from independent pricing
services, to determine the fair value of our fixed maturity securities. After performing a detailed review of the information obtained from the pricing service, no adjustment was made to the values provided for the years ended December 31, 2018
and 2017. Competition The medical
professional liability insurance market is highly competitive. We compete with stock and mutual insurance companies, risk retention groups (RRGs), reciprocal exchanges, and other underwriting organizations. Our largest competitors in
Pennsylvania are PMSLIC/NORCAL Mutual Insurance Company, MedPro Group, Central Pennsylvania Physicians Risk Retention Group, and Medical Mutual of North Carolina. Most of these competitors have substantially greater financial, technical and
operating resources than we do and may be able to offer lower rates to policyholders or higher commissions to their producers. We compete
on a number of factors such as pricing, agency relationships, policy support, claim service, and market reputation. Like other writers of MPLI, our policy terms vary from state to state based on the maximum prescribed limits in each state, as
established by state law. We believe our company differentiates itself from many larger companies competing for this business by focusing on service and responsiveness. To compete successfully in the MPLI industry, we rely on our ability to: identify insureds that are most likely to produce an underwriting
profit; operate with a disciplined underwriting approach; practice prudent claims management; and provide services and competitive commissions to our independent agents. Regulation General. We are subject to extensive regulation, particularly at the state level. The method, extent and substance of such regulation varies by state,
but generally has its source in statutes that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to state insurance regulatory agencies who may then promulgate regulations. In
general, such regulation is intended for the protection of those who purchase or use insurance products, not the companies that write the policies. These laws and regulations have a significant impact on our business and relate to a wide variety of
matters including accounting methods, agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy forms, pricing, trade practices, reserve adequacy and underwriting standards. State insurance laws and regulations require Positive Insurance Company to file financial statements with state insurance departments
everywhere we do business, and the operations of Positive Insurance Company and its respective accounts are subject to examination by those departments at any time. Positive Insurance Company prepares statutory financial statements in accordance
with accounting practices and procedures prescribed or permitted by Pennsylvania. Pennsylvania generally conforms to National Association of Insurance Commissioners (NAIC) practices and procedures, so its examination reports and other filings
generally are accepted by other states.  11




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##### Table of Contents

Premium rate regulation varies greatly among jurisdictions and lines of insurance. In the
states in which Positive Insurance Company writes insurance, premium rates for the various lines of insurance are subject to either prior approval or limited review upon implementation. Positive Insurance Company intends to apply for approval to act
as a surplus lines carrier in those states where it believes sufficient business opportunities make providing surplus lines coverage to physicians and other healthcare providers in those states attractive. Positive Insurance Company also intends to
apply for approval to act as a reinsurer in those states where it believes sufficient business opportunities exist to provide quota share insurance to RRGs that are attractive acquisition targets. Examinations. Examinations are conducted by the Pennsylvania Insurance Department every three to five years. Past examinations did not result in any
adjustments to our financial position. In addition, there were no substantive qualitative matters indicated in the examination reports that had a material adverse impact on our operations. NAIC Risk-Based Capital Requirements. Pennsylvania and most other states have adopted the NAIC system of risk-based capital requirements that require insurance companies to
calculate and report information under a risk-based formula. These risk-based capital requirements attempt to measure statutory capital and surplus needs based on the
risks in a companys mix of products and investment portfolio. Under the formula, a company first determines its authorized control level risk-based capital. This authorized control level
takes into account (i) the risk with respect to the insurers assets; (ii) the risk of adverse insurance experience with respect to the insurers liabilities and obligations, (iii) the interest rate risk with respect to the
insurers business; and (iv) all other business risks and such other relevant risks as are set forth in the risk-based capital instructions. A companys total adjusted capital is the
sum of statutory capital and surplus and such other items as the risk-based capital instructions may provide. The formula is designed to allow state insurance regulators to identify weakly capitalized
companies. The requirements provide for four different levels of regulatory attention. The company action level is triggered
if a companys total adjusted capital is less than 2.0 times its authorized control level but greater than or equal to 1.5 times its authorized control level. At the company action level, the company must submit a comprehensive plan
to the regulatory authority that discusses proposed corrective actions to improve the capital position. The regulatory action level is triggered if a companys total adjusted capital is less than 1.5 times but greater than or
equal to 1.0 times its authorized control level. At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The
authorized control level is triggered if a companys total adjusted capital is less than 1.0 times but greater than or equal to 0.7 times its authorized control level; at this level the regulatory authority may take action
it deems necessary, including placing the company under regulatory control. The mandatory control level is triggered if a companys total adjusted capital is less than 0.7 times its authorized control level; at this level the
regulatory authority is mandated to place the company under its control. The capital level of Positive Insurance Company has never triggered any of these regulatory capital levels. We cannot assure you, however, that the capital requirements
applicable to Positive Insurance Company will not increase in the future. NAIC Ratios. The NAIC also has developed a set of 11 financial ratios referred to as the Insurance Regulatory Information System (IRIS). On the basis
of statutory financial statements filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an
acceptable range for each of the IRIS financial ratios. If four or more of its IRIS ratios fall outside the range deemed acceptable by the NAIC, an insurance company may receive inquiries from individual state insurance departments. Enterprise Risk Assessment. In 2012, the NAIC adopted the NAIC Amendments. The NAIC Amendments, when adopted by the various states, are designed to respond to perceived
gaps in the regulation of insurance holding company systems in the United States. One of the major changes is a requirement that an insurance holding company systems ultimate controlling person submit annually to its lead state insurance
regulator an enterprise risk report that identifies activities, circumstances or events involving one or more affiliates of an insurer that, if not remedied properly, are  12




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##### Table of Contents

likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. Beginning in 2016, Pennsylvania required
insurers domiciled in Pennsylvania to include an enterprise risk assessment in its annual report. Other changes include requiring a controlling person to submit prior notice to its domiciliary insurance regulator of its divestiture of control,
having detailed minimum requirements for cost sharing and management agreements between an insurer and its affiliates and expanding of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator. In
addition, in 2012 the NAIC adopted the Own Risk Solvency Assessment (ORSA) Model Act. The ORSA Model Act, when adopted by the various states, will require an insurance holding company systems chief risk officer to submit at least annually to
its lead state insurance regulator a confidential internal assessment appropriate to the nature, scale and complexity of an insurer, conducted by that insurer of the material and relevant risks identified by the insurer associated with an
insurers current business plan and the sufficiency of capital resources to support those risks. Although Positive Insurance Company is exempt from ORSA because of its size, Positive Insurance Company intends to incorporate those elements of
ORSA that it believes constitute best practices into its annual internal enterprise risk assessment. Market Conduct
Regulation. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities
of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities generally enforce these provisions through periodic market
conduct examinations. Guaranty Fund Laws. All states have guaranty fund laws under which insurers doing business in the state can be assessed to fund policyholder liabilities of
insolvent insurance companies. Under these laws, an insurer is subject to assessment depending upon its market share in the state of a given line of business. For the year ended December 31, 2018, PPIX, PCA, and PIPE incurred total assessment
expense in the amount of $36,000 pursuant to state insurance guaranty association laws. Positive Insurance Company establishes reserves
relating to insurance companies that are subject to insolvency proceedings when it is notified of assessments by the guaranty associations. We cannot predict the amount and timing of any future assessments on Positive Insurance Company under these
laws. See Managements Discussion and Analysis of Financial Condition and Results of Operations. Federal Regulation The U.S. federal government generally has not directly regulated the insurance industry except for certain areas of the market, such
as insurance for flood, nuclear and terrorism risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may impact the insurance industry, including tort reform, corporate governance and the
taxation of reinsurance companies. The Dodd-Frank Act established the Federal Insurance Office which is authorized to study, monitor and report to Congress on the insurance industry and to recommend that the
Financial Stability Oversight Council designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurers material financial distress or failure. In December 2013, the Federal Insurance Office
issued a report on alternatives to modernize and improve the system of insurance regulation in the United States, including by increasing national uniformity through either a federal charter or effective action by the states. Changes to federal
legislation and administrative policies in several areas, including changes in federal taxation, can also significantly impact the insurance industry and us. We are also subject to the Fair and Accurate Credit Transactions Act of 2003, or FACTA, and the Health Insurance Portability and
Accountability Act of 1996, or HIPPA, both of which require us to protect the privacy of our customers information, including health and credit information.  13




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##### Table of Contents

Sarbanes-Oxley Act of 2002. Enacted in 2002, the stated goals of the Sarbanes-Oxley Act of 2002, or SOX, are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We
became subject to most of the provisions of the SOX immediately after completion of our initial public offering. The SOX includes very
specific disclosure requirements and corporate governance rules and requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related regulations. Privacy. As mandated by
the Gramm-Leach-Bliley Act, states continue to promulgate and refine laws and regulations that require financial institutions, including insurance companies, to take
steps to protect the privacy of certain consumer and customer information relating to products or services primarily for personal, family or household purposes. A recent NAIC initiative that affected the insurance industry was the adoption in 2000
of the Privacy of Consumer Financial and Health Information Model Regulation, which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley
Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model
Regulation. Several states have now adopted similar provisions regarding the safeguarding of customer information. We have implemented procedures to comply with the Gramm-Leach-Bliley Acts related privacy requirements. OFAC. The Treasury
Departments Office of Foreign Asset Control (OFAC) maintains a list of Specifically Designated Nationals and Blocked Persons (the SDN List). The SDN List identifies persons and entities that the government believes are associated
with terrorists, rogue nations or drug traffickers. OFACs regulations prohibit insurers, among others, from doing business with persons or entities on the SDN List. If the insurer finds and confirms a match, the insurer must take steps to
block or reject the transaction, notify the affected person and file a report with OFAC. JOBS Act. We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), and we
may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, such as reduced public company reporting, accounting and corporate governance
requirements. We currently intend to avail ourselves of the reduced disclosure obligations regarding executive compensation. Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We will remain
an emerging growth company for up to five years following March 27, 2019, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1 billion, (ii) the date that we
become a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the Exchange Act), which would occur if the market value of our
common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than
$1 billion in non-convertible debt during the preceding three year period. In addition, as
an emerging growth company, we are exempt from Section 14A (a) and (b) of the Securities Exchange Act of 1934, which require shareholder approval of executive compensation and golden parachutes.  14




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##### Table of Contents

Dividends. Pennsylvania law sets the maximum amount of dividends that may be paid by an insurance company during any
twelve-month period after notice to, but without prior approval of, the Pennsylvania Insurance Department. This amount cannot exceed the greater of 10% of the insurance companys surplus as reported on
the most recent annual statement filed with the Pennsylvania Insurance Department, or the insurance companys statutory net income for the period covered by the annual statement as reported on such statement. The amount available for payment of
dividends by Positive Insurance Company in 2019 without prior approval is approximately $3.7 million. Extraordinary dividends in excess of the foregoing limitations may only be paid with prior notice to, and approval of, the
Pennsylvania Insurance Department. No dividends were paid for the years ended December 31, 2018 and 2017. Holding Company Laws. Most states, including Pennsylvania, have enacted legislation that regulates insurance holding company systems. Each insurance company
in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish certain information. This includes information concerning the operations of companies within the holding company group
that may materially affect the operations, management or financial condition of the insurers within the group. Pursuant to these laws, the Pennsylvania Insurance Department requires disclosure of material transactions involving an insurance company
and its affiliates, and requires prior notice and/or approval of certain transactions, such as extraordinary dividends distributed by the insurance company. Under these laws, the Pennsylvania Insurance Department will have the right to
examine us and Positive Insurance Company at any time. All transactions within our consolidated group affecting Positive Insurance
Company must be fair and equitable. Notice of certain material transactions between Positive Insurance Company and any person or entity in our holding company system will be required to be given to the Pennsylvania Insurance Department. Certain
transactions cannot be completed without the prior approval of the Pennsylvania Insurance Department. Approval of the state insurance
commissioner is required prior to any transaction affecting the control of an insurer domiciled in that state. In Pennsylvania, the acquisition of 10% or more of the outstanding voting securities of an insurer or its holding company is presumed to
be a change in control. Pennsylvania law also prohibits any person or entity from (i) making a tender offer for, or a request or invitation for tenders of, or seeking to acquire or acquiring any voting security of a Pennsylvania insurer if,
after the acquisition, the person or entity would be in control of the insurer, or (ii) effecting or attempting to effect an acquisition of control of or merger with a Pennsylvania insurer, unless the offer, request, invitation, acquisition,
effectuation or attempt has received the prior approval of the Pennsylvania Insurance Department. Item 1A. RISK FACTORS. Not Applicable. Item 1B. UNRESOLVED STAFF COMMENTS. None. Item 2. PROPERTIES. None  15




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##### Table of Contents

Item 3. LEGAL PROCEEDINGS. Positive Insurance Company is periodically subject to litigation in the normal course of its business. Based upon information presently
available to us, we do not consider any litigation to be material. However, given the uncertainties attendant to litigation, we cannot assure you that our results of operations and financial condition will not be materially adversely affected by any
litigation. Item 4. MINE SAFETY DISCLOSURES. Not Applicable.  16




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##### Table of Contents

PART II Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. On March 27, 2019, the Company completed its initial public offering. The Companys common stock trades on The NASDAQ
Capital Market under the symbol PPHI. As of March 31, 2019, there were approximately 329 registered holders of the Companys common stock. Dividends Payment of dividends on our
common stock is subject to determination and declaration by our board of directors. Our dividend policy will depend upon our financial condition, results of operations and future prospects. At present, we have no intention to pay dividends to our
shareholders. We cannot assure you that dividends will be paid, or if and when paid, that they will continue to be paid in the future. The order of 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 us to Insurance Capital Group, LLC or Enstar Holdings (US) LLC, without the prior approval of the Department, for a period of three years following the effective
date of the conversions. Unregistered Sales of Equity Securities The Company, PPIX, PCA, and PIPE entered into a Standby Stock Purchase Agreement dated June 1, 2018 with Insurance Capital Group, LLC
(ICG) in connection with the Companys anticipated initial public offering. Pursuant to the terms of that agreement, ICG agreed to purchase such number of shares in the Companys initial public offering that would result in at
least the minimum number of shares being sold in the offering. ICG subsequently agreed to permit Enstar Holdings (US) LLC (Enstar) to purchase 30% of the shares that Insurance Capital Group, LLC would otherwise purchase.
Contemporaneously with the completion of the Companys public offering on March 27, 2019, the Company issued a total of 2,499,500 shares to the standby purchasers at the public offering price of $10.00 per share. Use of Proceeds from Initial Public Offering of Common Stock The Registration Statement on Form S-1 (File
No. 333-229322) for the initial public offering of our common stock became effective on February 11, 2019. There has been no material change in the planned use of proceeds from our initial
public offering as described in our final prospectus filed with the SEC on February 20, 2019, pursuant to Rule 
424(b)(4). Item 6. SELECTED FINANCIAL DATA. Not Applicable. Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion is intended to provide a more comprehensive review of the Companys operating results and financial condition as
well as the operating results and financial condition for PPIX, PCA, and PIPE than can be obtained from reading the Financial Statements alone. The discussion should be read in conjunction with the Financial Statements and the notes thereto included
in Item 8. Financial Statements and Supplementary Data of the Company and Item 15. Exhibits for the financial statements and the notes thereto of PPIX, PCA, and PIPE. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Annual Report on Form 10-K constitutes forward-looking information that involves risk and uncertainties. Please see Forward-Looking Information for more
information.  17




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##### Table of Contents

Overview of the Company Positive Physicians Holdings, Inc. (Company) is a newly created Pennsylvania domiciled holding company formed to be the stock
holding company for Positive Physicians Insurance Company (Positive Insurance Company) following the conversions of PPIX, PCA, and PIPE from reciprocal insurance exchanges to stock insurance companies. The Company had minimal assets and
liabilities and had not engaged in any operations as of December 31, 2018. As part of the conversions, on March 27, 2019, PPIX
merged with and into PPIX Conversion Corp., PCA merged with and into PCA Conversion Corp., and PIPE merged with and into PIPE Conversion Corp. Accordingly, PPIX, PCA, and PIPE no longer exist. Immediately thereafter, PCA Conversion Corp. and PIPE
Conversion Corp. merged with and into PPIX Conversion Corp., which then changed its name to Positive Physicians Insurance Company, and became our single insurance company subsidiary and successor to PPIX, PCA and PIPE. Upon completion of the
offering, the shareholders equity of Positive Insurance Company is approximately $69.7 million. This increased capitalization should permit Positive Insurance Company to (i) increase direct premium volume to the extent competitive
conditions permit, (ii) increase net premium volume by decreasing reliance on reinsurance, and (iii) enhance investment income by increasing Positive Insurance Companys investment portfolio. Overview of PPIX PPIX was an
unincorporated exchange organized on April 20, 2004 and was licensed by the Commonwealth of Pennsylvania as a reciprocal insurance exchange. PPIX provided medical professional liability insurance consisting of claims-made, tail occurrence,
claims made plus, and occurrence policies to its subscribers (policyholders). On October 9, 2018, Positive Physicians Captive Insurance Company, a sponsored captive insurance company, was incorporated in the State of New Jersey and became a
wholly-owned subsidiary of PPIX. 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. PPIX marketed its medical professional liability insurance policies direct to physicians and through
independent producers to doctors and allied healthcare professionals who practice in Pennsylvania, Delaware, Maryland, New Jersey, and Ohio. For the year ended December 31, 2018, PPIX had direct premiums written of $15.6 million, net premiums earned of $13.1 million,
and net loss of $(63,000). At December 31, 2018, PPIX had total assets of $63.6 million and a surplus of $16.8 million. For the year ended December 31, 2017, PPIX had direct premiums written of $15.3 million, net premiums
earned of $12.3 million, and net loss of $(21,000). At December 31, 2017, PPIX had total assets of $67.2 million and a surplus of $17.5 million. PPIX was managed by Specialty Insurance Services, LLC (SIS), a Pennsylvania limited liability company, pursuant to the terms of an
Attorney-In-Fact Agreement between the exchange and SIS. Pursuant to the terms of the
Attorney-in-Fact Agreement, as amended, SIS provided underwriting and administrative services to PPIX based on a percentage not to exceed 25.0% of gross written
premiums, less return premiums. SIS, as the attorney-in-fact, had the power to direct the activities of PPIX that most significantly impact PPIXs economic
performance. Diversus acquired 100% of the ownership interests of SIS on January 1, 2017. Overview of PCA Professional Casualty Association was an unincorporated, reciprocal insurance association organized on April 16, 2003 and formed for the
purpose of insuring its subscribers against loss due to the imposition of legal liability. PCA provided medical professional liability insurance consisting of claims-made, tail occurrence and occurrence policies to its subscribers (policyholders).
PCA was managed by Professional Third Party, LP (PTP) a wholly-owned subsidiary of Diversus, pursuant to the terms of an Attorney-in-Fact Agreement between
PCA and PTP. PCA marketed its medical professional liability insurance policies through independent producers primarily to doctors and
allied healthcare providers who practice in Pennsylvania. In November 2015, PCA was granted a license to write insurance in Michigan and began writing policies in Michigan in the fourth quarter of 2015.  18




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##### Table of Contents

For the year ended December 31, 2018, PCA had direct premiums written of
$6.3 million, net premiums earned of $7.1 million, and a net loss of $(4.5) million. At December 31, 2018, PCA had total assets of $36.0 million and a surplus of $9.0 million. For the year ended December 31, 2017,
PCA had direct premiums written of $7.7 million, net premiums earned of $7.5 million, and net income of $0.3 million. At December 31, 2017, PCA had total assets of $39.6 million and a surplus of $13.9 million. The net
loss for PCA in 2018 is attributed to more losses and loss adjustment expenses than originally recorded as well as a decrease in direct premiums written of $1.4 million due a decrease in extended reporting policies written and non-renewal of policies and limited new business growth. The loss in PCAs direct premiums written of $4.2 million in 2017 is attributed to loss of a major client, a decrease in extended reporting policies
written and non-renewals of policies, and limited new business growth. PTP was a Pennsylvania
corporation formed to operate as the attorney-in-fact for PCA pursuant to the terms of an agreement between PTP and PCA. Pursuant to the terms of the agreement, PTP
provided salaries and benefit expenses of the employees, rent and other occupancy expenses, supplies, and data processing services to PCA and paid certain expenses on behalf of PCA in exchange for 25% of the gross written premium. PTP, as the attorney-in-fact of PCA, had the power to direct the activities of PCA that most significantly impact PCAs economic performance by acting as the attorney-in-fact of PCA. Diversus acquired 100% of the ownership interests of PTP on June 4, 2014. Overview of PIPE PIPE was an
unincorporated exchange organized on March 14, 2005, and was licensed by the Commonwealth of Pennsylvania as a reciprocal insurance exchange. PIPE provided medical professional liability insurance consisting of claims-made, tail occurrence and
occurrence policies to its subscribers (policyholders). PIPE marketed its medical professional liability insurance policies through
independent producers to doctors and allied healthcare professionals who practice primarily in Pennsylvania. For the year ended
December 31, 2018, PIPE had direct premiums written of $3.4 million, net premiums earned of $3.4 million, and a net loss of $(0.8) million. At December 31, 2018, PIPE had total assets of $25.0 million and a surplus of
$11.2 million. For the year ended December 31, 2017, PIPE had direct premiums written of $3.6 million, net premiums earned of $3.1 million, and a net loss of $(60,000). At December 31, 2017, PIPE had total assets of
$26.6 million and a surplus of $12.3 million. The loss in PIPE direct premiums written of $0.2 million in 2018 is attributable to non-renewals of policies and limited new business growth. The
loss in PIPE direct premiums written of $0.6 million in 2017 is attributable to non-renewals of policies and limited new business growth. PIPE Management was a Pennsylvania corporation formed to operate as the
attorney-in-fact for PIPE pursuant to the terms of an attorney-in-fact agreement between
PIPE Management and PIPE. Pursuant to the terms of the agreement, PIPMC provided salaries and benefit expenses of the employees, rent and other occupancy expenses, supplies, and data processing services to PIPE and paid certain expenses on behalf of
PIPE for 25% of gross written premium. PIPE Management, as the attorney-in-fact of PIPE, had the power to direct the activities of PIPE that most significantly impact
PIPEs economic performance. Diversus acquired 100% of the ownership interests of PIPE Management on November 23, 2015. SIS, PTP, and PIPE Management merged into Diversus Management in connection with the conversions. Marketplace Conditions and Trends The
MPLI industry is affected by recurring industry cycles known as hard and soft markets. A soft cycle is characterized by intense competition resulting in lower pricing in order to compete for business. A hard market, generally
considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing. From approximately 2001 until approximately 2007, the Pennsylvania MPLI market experienced a hard market cycle. This resulted in the
creation of several alternative MPLI providers, such as PPIX, PCA, and PIPE. The MPLI market began to experience a soft cycle around the second quarter of 2008 due primarily to the large rate increases taken over the previous six years. That soft
cycle has continued and has been contributed to by the restructuring of the healthcare industry, partially as a result of the Affordable Care Act. This has resulted in significant price competition as the number of medical professionals practicing
independent of hospitals or large professional groups began to decline. According to a study prepared by the National Association of Insurance Commissioners (NAIC), MPLI direct premiums written have declined by 25.3% on a national basis
from 2006 to 2017 and have declined by 15.9% in Pennsylvania and 32.0% in New Jersey during this same time period. This has resulted in lower direct premiums written and lower operating profits for many MPLI carriers.  19




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##### Table of Contents

Principal Revenue and Expense Items Positive Insurance Company derives its revenue primarily from premiums earned, net investment income and net realized gains (losses) from
investments. Gross and net premiums written Gross premiums written is equal to direct and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference
between gross premiums written and premiums ceded or paid to reinsurers (ceded premiums written). Premiums earned Premiums earned are the earned portion of net premiums written. Gross premiums written include all premiums recorded by an insurance company
during a specified policy period. Insurance premiums on MPLI policies are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. At the end of each accounting period, the portion of the
premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy. The policies written by PPIX, PCA, and PIPE typically have a term of twelve months. Thus, for
example, for a policy that is written on July 1, 2018, one-half of the premiums would be earned in 2018 and the other half would be earned in 2019. Net investment income and net realized gains (losses) on investments We invest our surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid loss and loss adjustment
expenses) in cash, cash equivalents, and equity and debt securities. Investment income includes interest and dividends earned and net realized gains and losses on invested assets. With the adoption of an accounting standard as of January 1,
2018, unrealized gains and losses on equity securities previously classified as available-for-sale securities are included in net investment income. Prior to 2018, unrealized gains and losses on available-for-sale equity securities were charged or
credited to accumulated other comprehensive income (loss). We recognize realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed maturity securities) and recognize realized losses
when investment securities are written down as a result of an other than temporary impairment or sold for an amount less than their cost or amortized cost, as applicable. Our portfolio of investment securities is managed by Wilmington Trust and the
investment committee, who have discretion to buy and sell securities in accordance with the investment policy approved by Positive Insurance Companys board of directors. Our expenses consist primarily of: Losses
and loss adjustment expenses Losses and loss adjustment expenses represent the largest expense item and include: (1) claim
payments made, (2) estimates for future claim payments and changes in those estimates for prior periods, and (3) costs associated with investigating, defending and adjusting claims, including legal fees. Amortization of deferred policy acquisition costs and underwriting and administrative expenses Expenses incurred to underwrite risks are referred to as policy acquisition expenses and underwriting and administrative expenses. Policy
acquisition costs consist of commission expenses, premium taxes, and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred
and amortized over the effective period of the related insurance policies. Underwriting and administrative expenses consist of salaries, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately, and
payments to bureaus and assessments of statistical agencies for policy service and administration items such as rating manuals, rating plans and experience data.  20




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##### Table of Contents

Income taxes We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences
between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change
in tax rates is recognized in the period of the enactment date. Key Financial Measures We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial
performance based on results determined in accordance with GAAP, we utilize certain financial performance measures that are used in the property and casualty insurance industry and that we believe are valuable in managing our business and for
comparison to our peers. These financial performance measures are the expense ratio, losses and loss adjustment expense ratio, combined ratio, and the ratio of net written premiums to statutory surplus. We measure growth by monitoring changes in gross premiums written and net premiums written, and measure underwriting profitability by
examining losses and loss adjustment expense, underwriting expense and combined ratios. We also measure profitability by examining underwriting income (loss), net income (loss) and return on equity. Losses and loss adjustment expenses ratio The losses and loss adjustment expenses ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses incurred to
premiums earned. Positive Insurance Company measures the loss ratio on a policy year and calendar year loss basis to measure underwriting profitability. A policy year loss ratio measures losses and loss adjustment expenses for insured events
occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures losses and loss adjustment expenses for insured events occurring during a particular year
and the change in loss reserves from prior policy years as a percentage of premiums earned during that year. Expense ratio The expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and net underwriting and
administrative expenses (attributable to insurance operations) to premiums earned, and measures our operational efficiency in producing, underwriting and administering the companys insurance business. Combined ratio The combined ratio is the
sum of the losses and loss adjustment expenses ratio and the expense ratio and measures overall underwriting profit. If the combined ratio is below 100%, we are making an underwriting profit. If our combined ratio is at or above 100%, we are not
profitable without investment income and may not be profitable if investment income is insufficient. Net premiums written to statutory surplus ratio The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to
statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio, the greater the impact on surplus should pricing prove inadequate. Underwriting income (loss) Underwriting
income (loss) measures the pre-tax profitability of insurance operations. It is derived by subtracting losses and loss adjustment expense, amortization of deferred policy acquisition costs, and underwriting
and administrative expenses from earned premiums. Each of these items is presented as a caption in the respective statements of operations of PPIX, PCA and PIPE.  21




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##### Table of Contents

Net income (loss) and return on average equity We use net income (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net
income. In determining return on average equity for a given year, net income (loss) is divided by the average of the beginning and ending equity for that year. Critical Accounting Policies General The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of
appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our financial statements and related footnotes. Each exchange evaluated these estimates and assumptions on an
on-going basis based on historical developments, market conditions, industry trends and other information that it believed to be reasonable under the circumstances. There can be no assurance that actual
results will conform to our estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to
time. We believe the following policies are the most sensitive to estimates and judgments. Losses and Loss Adjustment Expenses We maintain reserves for the payment of claims (indemnity losses) and expenses related to adjusting those claims (loss adjustment expenses).
The loss reserves consist of case reserves, which are reserves for claims that have been reported to us, and reserves for claims that have been incurred but have not yet been reported and for the future development of case reserves. When a claim is reported to Diversus Management, its claims personnel establish a case reserve for the estimated amount of the ultimate
payment to the extent it can be determined or estimated. The amount of the loss reserve for the reported claim is based primarily upon a claim-by-claim evaluation of
coverage, liability, and injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is contested or settled individually based upon its merits, and some claims may take years to
resolve, especially if legal action is involved. Case reserves are reviewed on a regular basis and are updated as new information becomes available. In addition to case reserves, we maintain estimates of reserves for IBNR. These reserves include estimates for the future development of case
reserves. Some claims may not be reported for several years. As a result, the liability for unpaid losses and loss adjustment reserves includes significant estimates for IBNR. We utilize an independent actuary to assist with the estimation of our losses and loss adjustment expense reserves in the third and fourth
quarter of each calendar year. This actuary prepares estimates of the ultimate liability for unpaid losses and loss adjustment expenses based on established actuarial methods described below. Diversus Management reviews these estimates and
supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy. Diversus Management may
adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the financial statements. We accrue liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amount payable. We project our
estimate of ultimate losses and loss adjustment expenses by using the following actuarial methodologies:  

Actual versus Expected Model- The Actual versus Expected Model utilizes the actuarial point ultimate loss
and defense containment cost (DCC) estimates as of the prior reserve review which were adjusted based on the difference between actual and expected loss development during that prior reserve review and the current evaluation to arrive at
an updated actuarial point ultimate loss and DCC estimate. The method is dependent on the loss development factors used to determine the expected losses.  22




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##### Table of Contents



Bornhuetter-Ferguson Method (Paid and Incurred) - The Bornhuetter-Ferguson Method is a blended method
that explicitly takes into account both actual loss development to date and expected future loss emergence. This method is applied on both a paid loss development method and an incurred loss development method. This method uses the selected loss
development patterns from the two loss development methods to calculate the expected percentage of loss unpaid (or unreported). The expected future loss component of the method is calculated by multiplying earned premium for the given exposure
period by a selected a priori (i.e. deductive) loss ratio. The resulting dollars are then multiplied by the expected percentage of unpaid (or unreported) loss described above. This provides an estimate of future paid (or reported) losses
that is then added to actual paid (or incurred) loss data to produce estimated ultimate loss.  

Expected Loss Ratio Method - The Expected Loss Ratio Method utilizes some measure of anticipated losses
and does not consider actual losses. An expected loss ratio, a ratio of anticipated losses relative to some measure of exposure, is applied to that measure of exposure to determine estimated ultimate losses for each year. This method provides
stability over time because the ultimate loss estimates do not change unless the exposure measure changes. This is offset by a lack of responsiveness to actual loss experience.  

Frequency/Severity Method - The Frequency/Severity Method estimates ultimate losses by estimating a
frequency and a severity component. For each year, the actuary estimates ultimate claims costs and an ultimate average severity. The actuary then multiplies these two estimates together. The method is useful when the claim count development pattern
is more stable than the loss development pattern.  

Incurred Loss Development Method - The Incurred Loss Development Method utilizes historical incurred
loss (the sum of cumulative historical loss payments plus outstanding case reserves) patterns to estimate future losses. This method is often preferred over the paid method as it includes the additional information provided by the aggregation of
individual case reserves. The resulting loss development factors (LDFs) tend to be lower and more stable than those of the paid development method. However, the incurred development method may be affected by changes in case reserving practices and
any unusually large individual claims. The actuaries produce and review several indications of ultimate loss using this method based on various LDF selections. Diversus Management estimates IBNR reserves by first deriving an actuarially based estimate of the ultimate cost of total losses and loss
adjustment expenses incurred as of the financial statement date. Diversus Management then reduces the estimated ultimate losses and loss adjustment expenses by losses and loss adjustment expense payments and case reserves carried as of the financial
statement date. The actuarially determined estimate is based upon indications from one of the above actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses will vary depending on
the judgment of the actuary as to what is the most appropriate method for the MPLI business. Finally, Diversus Management considers other factors that impact reserves that are not fully incorporated in the actuarially based estimate, such as changes
in the external business environment and changes in internal company processes and strategy. The process of estimating loss reserves
involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, inflation, legal trends, and legislative changes, among
others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation is affected by the volume of claims, the potential severity of individual claims, the
determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the
application of various individual experiences and expertise to multiple sets of data and analyses. We continually refine our loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are
reported and settled. We consider all significant facts and circumstances known at the time loss reserves are established. Due to the
inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for losses and loss adjustment expense reserves may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid
losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. We reflect adjustments to loss reserves in the results of operations in the period the estimates are changed.  23




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##### Table of Contents

Our actuary determined a range of reasonable reserve estimates shown in the tables below,
which reflect the uncertainty inherent in the loss reserve process. This range does not represent the range of all possible outcomes. We believe that the actuarially-determined ranges represent reasonably likely changes in the loss and loss
adjustment expense estimates, however actual results could differ significantly from these estimates. The range was determined after a review of the output generated by the various actuarial methods utilized. The actuary reviewed the variance around
the select loss reserve estimates for each of the actuarial methods and selected reasonable low and high estimates based on its knowledge and judgment. In making these judgments the actuary typically assumed, based on its experience, that the larger
the reserve the less volatility. In addition, when selecting these low and high estimates, the actuary considered:  

Historical industry development experience in MPLI;  

Historical company development experience;  

Changes in the exchanges internal claims processing policies and procedures; and  

Trends and risks in claim costs, such as risk that medical cost inflation could increase. Our actuary is required to exercise a considerable degree of judgment in the evaluation of all of these and other factors in the analysis of
losses and loss adjustment expenses, and related range of anticipated losses. Because of the level of uncertainty impacting the estimation process, it is reasonably possible that different actuaries would arrive at different conclusions. The method
of determining the reserve range has not changed and the reserve range generated by the actuary is consistent with the observed development of our loss reserves over the last few years. The width of the range in reserves arises primarily because specific losses may not be known and reported for some period and the ultimate
losses paid and loss adjustment expenses incurred with respect to known losses may be larger than currently estimated. The ultimate frequency or severity of the claims can be very different than the assumptions we used in our estimation of ultimate
reserves for these exposures. Specifically, the following factors could impact the frequency and severity of claims, and therefore, the
ultimate amount of losses and loss adjustment expenses paid:  

The rate of increase in medical costs that underlie insured risks; and  

Impact of changes in laws or regulations. The estimation process for determining the liability for unpaid losses and loss adjustment expenses inherently results in adjustments each
year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled or resolved for amounts less than originally estimated or a reduction in the
estimate for unpaid losses and loss adjustment expense (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled or resolved for amounts greater than originally estimated or an
increase in the estimate for unpaid losses and loss adjustment expense (unfavorable development). PPIX Actuarial Ranges Although the range of loss estimates is determined by the exchanges actuary, the selection of the ultimate loss is based on information
unique to each policy year and the judgment and expertise of PPIXs management. The following table provides case and IBNR reserves
for losses and loss adjustment expenses of PPIX as of December 31, 2018 and December 31, 2017.  24




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##### Table of Contents

As of December 31, 2018 (unaudited)  CaseReserves


IBNRReserves


TotalReserves


Actuarially DeterminedRange of Estimates(dollars in thousands)

Low


HighMedical professional liability

$
12,244


$
16,993


$
29,237


$
27,855


$
32,869Other


















Total net reserves


12,244



16,993



29,237


$
27,855


$
32,869Reinsurance recoverables


749



4,677



5,426Gross reserves

$
12,993


$
21,670


$
34,663 As of December 31, 2017 (unaudited)  CaseReserves


IBNRReserves


TotalReserves


Actuarially DeterminedRange of Estimates(dollars in thousands)

Low


HighMedical professional liability

$
11,698


$
20,566


$
32,264


$
29,567


$
36,849Other


















Total net reserves


11,698



20,566



32,264


$
29,567


$
36,849Reinsurance recoverables


1,314



4,451



5,765Gross reserves

$
13,012


$
25,017


$
38,029 At December 31, 2018 and December 31, 2017, PPIXs total liability for losses and loss
adjustment expenses was $34.6 million and $38.0 million, respectively. During the years ended December 31, 2018 and 2018, PPIX had favorable developments of $2.9 million and $2.6 million, respectively. The favorable
development of $2.6 million during the year ended December 31, 2017 was primarily related to settlement of known claims below the amount for which they have been previously reserved, as well as additional revisions to the exchanges
estimate of its ultimate losses for the 2012 through 2015 accident years. The favorable development of $2.9 million during the year ended December 31, 2018 was primarily related to reductions of the ultimate losses for the 2010, 2011, and
2015 policy years which were offset by strengthening the ultimate loss reserves for the 2016 and 2017 policy years. As discussed earlier,
the estimation of PPIXs reserves is based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and
selecting the appropriate method, or combination of methods, to use for a given policy year. The ranges presented above represent the expected variability around the actuarially determined central estimate. Recent Variabilities of the Liability for Unpaid Losses and Loss Adjustment Expenses, Net of Reinsurance Recoverables  Dollars in thousands (unaudited)

2014


2015


2016


2017


2018As originally estimated

$
28,046


$
29,951


$
29,759


$
32,264


$
29,237As estimated at December 31, 2018


20,559



21,342



24,311



29,594



29,237Net cumulative redundancy (deficiency)

$
7,487


$
8,609


$
5,448


$
2,670


$
% redundancy (deficiency)


26.7
%


28.7
%


18.3
%


8.3
%



%  25




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##### Table of Contents

The table below summarizes the impact on PPIXs equity from changes in estimates of
unpaid losses and loss adjustment expenses as of December 31, 2018 (dollars in thousands) (unaudited):  Reserve Range for Unpaid
Loss and LAE

Aggregate Loss andLAE Reserve


Percentage Changein Equity (1)Low End

$
27,855



6
%Recorded

$
29,237



High End

$
32,869



(17
)%  (1)
Net of tax If the liability for losses and loss adjustment expenses were recorded at the high end of the actuarially-determined range, the liability for
losses and loss adjustment expenses would increase by $3.6 million. This increase in reserves would have the effect of decreasing net income and equity as of December 31, 2018 by $2.9 million. If the liability for losses and loss
adjustment expenses were recorded at the low end of the actuarially-determined range, the liability for losses and loss adjustment expenses at December 31, 2018 would be reduced by $1.4 million with a corresponding increase in net income
and equity of $1.1 million. If the liability for losses and loss adjustment expenses reserves were to adversely develop to the high
end of the range, approximately $3.6 million of anticipated future payments for the losses and loss adjustment expenses would be required to be paid, thereby affecting cash flows in future periods as the payments for losses are made. PCAs Actuarial Ranges Although the range of loss estimates is determined by the exchanges actuary, the selection of the ultimate loss is based on information
unique to each policy year and the judgment and expertise of PCAs management. The following table provides case and IBNR reserves
for losses and loss adjustment expenses of PCA as of December 31, 2018 and December 31, 2017. As of December 31, 2018 (unaudited)  CaseReserves


IBNRReserves


TotalReserves


Actuarially DeterminedRange of Estimates(dollars in thousands)

Low


HighMedical professional liability

$
11,839


$
8,100


$
19,939


$
19,052


$
22,245Other


















Total net reserves


11,839



8,100



19,939


$
19,052


$
22,245Reinsurance recoverables


811



1,416



2,227Gross reserves

$
12,650


$
9,516


$
22,166 As of December 31, 2017 (unaudited)  CaseReserves


IBNRReserves


TotalReserves


Actuarially DeterminedRange of Estimates(dollars in thousands)

Low


HighMedical professional liability

$
8,937


$
8,180


$
17,117


$
15,756


$
19,551Other


















Total net reserves


8,937



8,180



17,117


$
15,756


$
19,551Reinsurance recoverables


460



1,008



1,468Gross reserves

$
9,397


$
9,188


$
18,585  26




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##### Table of Contents

At December 31, 2018 and December 31, 2017, PCAs total liability for losses
and loss adjustment expenses was $22.2 million and $18.6 million, respectively. During the years ended December 31, 2018 and 2017, PCA experienced unfavorable and favorable developments of $(6.1) million and $0.4 million,
respectively. The favorable development of $0.4 million during the year ended December 31, 2017 was primarily related to re-estimation of unpaid losses and loss adjustment expenses on all claims-made
policy years. The unfavorable development of $(6.1) million during the year ended December 31, 2018 was primarily related to reserve strengthening in the 2015 ($400,000) occurrence policy year, the 2016 ($500,000) tail policy year and the 2017
($400,000) and 2014 through 2017 ($4,500,000) claims-made policy years. A majority of these changes in indications were related to PCAs new claims management team and a change in reserving philosophy of setting reserves at the expected value
as soon as possible when the liability is acknowledged. As discussed earlier, the estimation of PCAs reserves is based on several
actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or combination of methods, to
use for a given policy year. PCA did not determine the ranges of expected variability around the actuarially determined central estimate. Recent Variabilities of the Liability for Unpaid Losses and Loss Adjustment Expenses, Net of Reinsurance Recoverables  Dollars in thousands (unaudited)

2014


2015


2016


2017


2018As originally estimated

$
26,526


$
25,675


$
21,277


$
17,117


$
19,939As estimated at December 31, 2018


27,598



26,789



25,501



22,990



19,939Net cumulative redundancy (deficiency)

$
(1,072
)

$
(1,114
)

$
(4,224
)

$
(5,813
)

$
% redundancy (deficiency)


(4.0
)%


(4.3
)%


(19.9
)%


(33.8
)%



% The table below summarizes the impact on PCAs equity from changes in estimates of unpaid losses and loss adjustment
expenses as of December 31, 2018 (dollars in thousands) (unaudited):  Reserve Range for Unpaid
Loss and LAE

Aggregate Loss andLAE Reserve


Percentage Changein Equity (1)Low End

$
19,052



8
%Recorded

$
19,939



High End

$
22,245



(20
)%  (1)
Net of tax If the liability for losses and loss adjustment expenses were recorded at the high end of the actuarially-determined range, the losses and
loss adjustment expenses would increase by $2.3 million. This increase in reserves would have the effect of increasing net loss and decreasing equity as of December 31, 2018 by $1.8 million. If the liability for losses and loss
adjustment expense reserves were recorded at the low end of the actuarially-determined range, the liability for losses and loss adjustment expense reserves at December 31, 2018 would be reduced by $0.9 million with a corresponding decrease
in net loss and an increase in equity of $0.7 million. If the liability for losses and loss adjustment expenses were to adversely
develop to the high end of the range, approximately $2.3 million of anticipated future payments for the losses and loss adjustment expenses would be required to be paid, thereby affecting cash flows in future periods as the payments for losses
are made. PIPE Actuarial Ranges Although the range of loss estimates is determined by the exchanges actuary, the selection of the ultimate loss is based on information
unique to each policy year and the judgment and expertise of PIPEs management.  27




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##### Table of Contents

The following table provides case and IBNR reserves for losses and loss adjustment expenses
of PIPE as of December 31, 2018 and December 31, 2017. As of December 31, 2018 (unaudited)  CaseReserves


IBNRReserves


TotalReserves


Actuarially DeterminedRange of Estimates(dollars in thousands)

Low


HighMedical professional liability

$
6,658


$
4,608


$
11,266


$
10,763


$
12,709Other


















Total net reserves


6,658



4,608



11,266


$
10,763


$
12,709Reinsurance recoverables


54



243



297Gross reserves

$
6,712


$
4,851


$
11,563 As of December 31, 2017 (unaudited)  CaseReserves


IBNRReserves


TotalReserves


Actuarially DeterminedRange of Estimates(dollars in thousands)

Low


HighMedical professional liability

$
6,369


$
5,236


$
11,605


$
10,727


$
13,308Other


















Total net reserves


6,369



5,236



11,605


$
10,727


$
13,308Reinsurance recoverables






156



156Gross reserves

$
6,369


$
5,392


$
11,761 At December 31, 2018 and December 31, 2017, the total liability for losses and loss adjustment
expenses was $11.6 million and $11.8 million, respectively. During the years ended December 31, 2018 and 2017, PIPE had unfavorable and favorable developments of $(0.9) million and $0.3 million, respectively. The favorable
development of $0.3 million during the year ended December 31, 2017 was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2013 and 2014 policy years. The
unfavorable development of $(0.9) million during the year ended December 31, 2018 was primarily related to reserve strengthening in the 2015 ($1,000,000) occurrence policy year and the 2013 ($500,000) claims-made policy years. PIPE did realize
positive reserve development for the 2010-2012 occurrence policy years of $800,000. A majority of these changes in indications were related to PIPEs new claims management team and a change in reserving philosophy of setting reserves at the
expected value as soon as possible when the liability is acknowledged. As discussed earlier, the estimation of PIPEs reserves is
based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or
combination of methods, to use for a given policy year. The ranges presented above represent the expected variability around the actuarially determined central estimate.  28




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##### Table of Contents

Recent Variabilities of the Liability for Unpaid Losses and Loss Adjustment Expenses, Net of Reinsurance Recoverables  Dollars in thousands (unaudited)

2014


2015


2016


2017


2018As originally estimated

$
15,797


$
14,888


$
12,252


$
11,605


$
11,266As estimated at December 31, 2018


12,447



12,076



12,539



12,538



11,266Net cumulative redundancy (deficiency)

$
3,350


$
2,812


$
(287
)

$
(933
)

$
% redundancy (deficiency)


21.2
%


18.9
%


(2.3
)%


(8.0
)%



% The table below summarizes the impact on PIPEs equity from changes in estimates of unpaid losses and
loss adjustment expenses as of December 31, 2018 (dollars in thousands) (unaudited):  Reserve Range for Unpaid
Loss and LAE

Aggregate Loss andLAE Reserve


Percentage Changein Equity (1)Low End

$
10,763



4
%Recorded

$
11,266



High End

$
12,709



(10
)%  (1)
Net of tax If the liability for losses and loss adjustment expenses were recorded at the high end of the actuarially-determined range, the liability for
losses and loss adjustment expenses would increase by $1.4 million. This increase in reserves would have the effect of increasing net loss and decrease equity as of December 31, 2018 by $1.1 million. If the liability for losses and
loss adjustment expenses were recorded at the low end of the actuarially-determined range, the liability for losses and loss adjustment expenses at December 31, 2017 would be reduced by $0.5 million with corresponding increases in net
income and equity of $0.4 million. If the liability for losses and loss adjustment expenses reserves were to adversely develop to
the high end of the range, approximately $1.4 million of anticipated future payments for the losses and loss adjustment expenses would be required to be paid, thereby affecting cash flows in future periods as the payments for losses are made. Investments The fixed maturity
investments are classified as available-for-sale and equity securities of PPIX, PCA, and PIPE are carried at estimated fair value as determined by management based upon
quoted market prices or a recognized pricing service at the reporting date for those or similar investments. Limited partnership investments are measured at fair value using net asset values of the partnerships as a practical expedient. Changes in
unrealized investment gains or losses on fixed maturity available-for-sale investments, net of applicable income taxes, are reflected directly in equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income
(loss). Beginning with January 1, 2018, changes in unrealized investment gains or losses on equity investments are reflected in net investment income. For 2017, changes in unrealized investment gains or losses on previously classified
available-for-sale securities, net of applicable income taxes, are reflected directly in equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income (loss). Investment income is recognized when earned, and
capital gains and losses are recognized when investments are sold, or other-than-temporarily impaired.  29




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##### Table of Contents

Fair Value Measurements We use 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
(ASC Topic 820), 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 marketsLevel 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 the exchanges 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 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. 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. Because we are responsible for the determination of fair value, we perform analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. 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.  30




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##### Table of Contents

PPIX Investments The fair value and unrealized losses for PPIXs securities that were temporarily impaired as of December 31, 2018 and
December 31, 2017 are as follows:  Less than 12 months(dollars in thousands)


12 months or longer(dollars in thousands)


Total(dollars in thousands)Description of securities

FairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLossesDecember 31, 2018 (audited):U.S. Government and government agencies and authorities

$
3,515


$
6


$
5,828


$
124


$
9,343


$
130Industrial and miscellaneous


14,690



284



9,408



380



24,098



664Total fixed maturities


18,205



290



15,236



504



33,441



794Common stocks, unaffiliated


1,121



199



407



326



1,528



525Total temporarily impaired securities

$
19,326


$
489


$
15,643


$
830


$
34,969


$
1,319Less than 12 months(dollars in thousands)


12 months or longer(dollars in thousands)


Total(dollars in thousands)Description of securities

FairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLossesDecember 31, 2017 (audited):U.S. Government and government agencies and authorities

$
4,328


$
86


$
4,668


$
29


$
8,996


$
115Industrial and miscellaneous


9,474



128



1,699



7



11,173



135Total fixed maturities


13,802



214



6,367



36



20,169



250Common stocks, unaffiliated


795



48



231



231



1,026



279Total temporarily impaired securities

$
14,597


$
262


$
6,598


$
267


$
21,195


$
529 The table below presents the level within the fair value hierarchy generally utilized by PPIX to estimate the
fair value of assets disclosed on a recurring basis at December 31, 2018 (in thousands) (audited):  Total


Level 1


Level 2


Level 3Bonds

$
41,196


$



$
41,196


$
Common stocks

$
2,441


$
2,441


$



$
 The table below presents the level within the fair value hierarchy generally utilized by PPIX to estimate the
fair value of assets disclosed on a recurring basis at December 31, 2017 (in thousands) (audited):  Total


Level 1


Level 2


Level 3Bonds

$
43,786


$



$
43,786


$
Common stocks

$
2,807


$
2,807


$



$
 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.  31




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PPIX 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. PPIX 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 not more likely than not that we will be required to sell the
security, 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, the full amount of the
other-than-temporary impairment will be recognized in earnings. For the years ended December 31, 2018 and 2017, PPIX determined that
none of its 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. PCA Investments 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.
PCAs assessment of the significance of a particular item to the fair value measurement in its entirety required judgment, including the consideration of inputs specific to the asset or liability. The fair value and unrealized losses for PCAs securities that were temporarily impaired as of December 31, 2018 and
December 31, 2017 are as follows:  Less than 12 months(dollars in thousands)


12 months or longer(dollars in thousands)


Total(dollars in thousands)Description of securities

FairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLossesDecember 31, 2018 (audited):U.S. Government and government agencies and authorities

$
993


$
2


$
2,898


$
59


$
3,891


$
61Industrial and miscellaneous


8,274



159



9,281



311



17,555



470Total fixed maturities


9,267



161



12,179



370



21,446



531Common stocks, unaffiliated


1,094



147



167



18



1,261



165Total temporarily impaired securities

$
10,361


$
308


$
12,346


$
388


$
22,707


$
696  32




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##### Table of Contents

Less than 12 months(dollars in thousands)


12 months or longer(dollars in thousands)


Total(dollars in thousands)Description of securities

FairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLossesDecember 31, 2017 (audited):U.S. Government and government agencies and authorities

$
2,508


$
5


$
4,806


$
65


$
7,314


$
70Industrial and miscellaneous


7,514



58



3,212



32



10,726



90Total fixed maturities


10,022



63



8,018



97



18,040



160Common stocks, unaffiliated


187



5



214



4



401



9Total temporarily impaired securities

$
10,209


$
68


$
8,233


$
101


$
18,441


$
169 The table below presents the level within the fair value hierarchy generally utilized by PCA to estimate the
fair value of assets disclosed on a recurring basis at December 31, 2018 (in thousands) (audited):  Total


Level 1


Level 2


Level 3Bonds

$
24,523


$



$
24,523


$
Common stocks

$
3,016


$
3,016


$



$
 The table below presents the level within the fair value hierarchy generally utilized by PCA to estimate the
fair value of assets disclosed on a recurring basis at December 31, 2017 (in thousands) (audited):  Total


Level 1


Level 2


Level 3Bonds

$
25,714


$



$
25,714


$
Common stocks

$
3,241


$
3,241


$



$
 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. PCA
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. PCA 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. For the years ended December 31, 2018 and 2017, PCA determined that none of its 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.  33




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PIPE Investments The fair value and unrealized losses for PIPEs securities that were temporarily impaired as of December 31, 2018 and
December 31, 2017 are as follows:  Less than 12 months(dollars in thousands)


12 months or longer(dollars in thousands)


Total(dollars in thousands)Description of securities

FairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLossesDecember 31, 2018 (audited):U.S. Government and government agencies and authorities

$
798


$
9


$
2,125


$
53


$
2,923


$
62Industrial and miscellaneous


5,224



120



7,098



271



12,322



391Total fixed maturities


6,022



129



9,223



324



15,245



453Common stocks, unaffiliated


700



126



58



10



758



136Total temporarily impaired securities

$
6,722


$
255


$
9,281


$
334


$
16,003


$
589Less than 12 months(dollars in thousands)


12 months or longer(dollars in thousands)


Total(dollars in thousands)Description of securities

FairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLossesDecember 31, 2017 (audited):U.S. Government and government agencies and authorities

$
387


$
2


$
2,978


$
120


$
3,365


$
122Industrial and miscellaneous


6,920



54



1,707



12



8,627



66Total fixed maturities


7,306



56



4,685



132



11,992



188Common stocks, unaffiliated


187



6



98



3



285



9Total temporarily impaired securities

$
7,494


$
62


$
4,783


$
135


$
12,277


$
197 The table below presents the level within the fair value hierarchy generally utilized by PIPE to estimate the
fair value of assets disclosed on a recurring basis at December 31, 2018 (in thousands) (audited):  Total


Level 1


Level 2


Level 3Bonds

$
19,488


$



$
19,488


$
Common stocks

$
1,810


$
1,810


$



$
 The table below presents the level within the fair value hierarchy generally utilized by PIPE to estimate the
fair value of assets disclosed on a recurring basis at December 31, 2017 (in thousands) (audited):  Total


Level 1


Level 2


Level 3Bonds

$
21,229


$



$
21,229


$
Common stocks

$
1,820


$
1,820


$



$
 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.  34




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PIPE 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. PIPE 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. For the years ended December 31, 2018 and
2017, PIPE determined that none of its 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. Our management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical
procedures. Our management reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency
across securities in common sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than A by Moodys or S&P. If, after this review, management does not believe the pricing
for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In its review, management did not identify any such discrepancies for the years ended
December 31, 2018 and 2017; accordingly, no adjustments were made to the estimates provided by the pricing service for the years ended December 31, 2018 and 2017. The classification within the fair value hierarchy of ASC 820, Fair Value
Measurement, is then confirmed based on the final conclusions from the pricing review. Deferred Policy 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 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 policy acquisition costs. If the estimation of net realizable value indicates that the deferred
acquisition costs are not recoverable, they would be written off. At December 31, 2018 and December 31, 2017, PPIXs
deferred acquisition costs and the related unearned premium reserves were as follows (dollars in thousands):  December 31, 2018


December 31, 2017(audited)


(audited)Deferred acquisition costs

$
2,519


$
2,504Unearned premium reserves

$
7,979


$
8,211 At December 31, 2018 and December 31, 2017, PCAs deferred acquisition costs and the related
unearned premium reserves were as follows (dollars in thousands):  December 31, 2018


December 31, 2017(audited)


(audited)Deferred acquisition costs

$
1,093


$
1,189Unearned premium reserves

$
3,882


$
5,494  35




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At December 31, 2018 and December 31, 2017, PIPEs deferred acquisition costs
and the related unearned premium reserves were as follows (dollars in thousands):  December 30, 2018


December 31, 2017(audited)


(audited)Deferred acquisition costs

$
373


$
385Unearned premium reserves

$
1,342


$
1,609 Reinsurance Recoverable We cede reinsurance risk to other insurance companies. This arrangement allows us to reduce the net loss potential arising from large risks.
Reinsurance contracts do not relieve us of our obligation to our 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. Income Taxes We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences
between financial statement carrying amounts and the tax bases of its assets and liabilities. The effect of a change in tax rates is recognized in the period of the enactment date. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These
judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors
change. Any reduction in estimated future taxable income may require us to record a valuation allowance against its deferred tax assets. PPIX
Deferred Tax Assets PPIX had gross deferred tax assets of $1.0 million and $0.9 million at December 31, 2018 and
December 31, 2017, respectively. A valuation allowance is required to be established for any portion of the deferred tax asset for which PPIX believed it is more likely than not that it will not be realized. PPIX believed it is more likely than
not that all of the deferred tax assets will be realized. Accordingly, no valuation allowance had been established at December 31, 2018 and December 31, 2017. On December 22, 2017, the Tax Cuts and Jobs Act (the TCJA) was signed into law. Most of the provisions of this bill affect
corporate taxes paid in 2018 and beyond including reducing the top corporate tax rate from 34% to 21%. Under GAAP, however, deferred income taxes are estimated based upon expected tax rates enacted prior to the date of the financial statements.
Accordingly, PPIX measured its deferred income taxes at December 31, 2018 and December 31, 2017 using a tax rate of 21%. The effect on surplus was a decrease of approximately $81,000 for the year ended December 31, 2017. At December 31, 2018 and December 31, 2017, PPIX had no material unrecognized tax benefits or accrued interest and penalties.
Federal tax years 2015 through 2017 are open for examination. PCA Deferred Tax Assets PCA had gross deferred tax assets of $1.4 million and $0.5 million at December 31, 2018 and December 31, 2017,
respectively. At December 31, 2018 and 2017, PCA had unused net operating loss carryforwards of $3.9 million and $0, respectively. A valuation allowance is required to be established for any portion of the deferred tax asset for which PCA
believed it is more likely than not that it will not be realized. PCA believed it is more likely than not that all of the deferred tax assets will be realized. Accordingly, no valuation allowance had been established at December 31, 2018 and
December 31, 2017.  36




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Although most of the provisions of the TCJA does not affect corporate taxes paid until 2018
and beyond, under GAAP, deferred income taxes are estimated based upon expected tax rates enacted prior to the date of the financial statements. Accordingly, PCA measured its deferred income taxes at December 31,2018 and December 31, 2017
using a tax rate of 21%. The effect on surplus was a decrease of $63,000 for the year ended December 31, 2017. At December 31,
2018 and December 31, 2017, PCA had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2015 through 2017 are open for examination. PIPE Deferred Tax Assets PIPE had
gross deferred tax assets of $0.4 million and $0.3 million at December 31, 2018 and 2017, respectively. A valuation allowance is required to be established for any portion of the deferred tax asset for which PIPE believed it is more
likely than not that it will not be realized. PIPE believed it is more likely than not that all of the deferred tax assets will be realized. Accordingly, no valuation allowance had been established at December 31, 2018 and December 31,
2017. Although most of the provisions of the TCJA does not affect corporate taxes paid until 2018 and beyond, under GAAP deferred income
taxes are estimated based upon expected tax rates enacted prior to the date of the financial statements. Accordingly, PIPE measured its deferred income taxes at December 31, 2018 and December 31, 2017 using a tax rate of 21%. The effect on
surplus was a decrease of $94,000 for the year ended December 31, 2017. At December 31, 2018 and December 31, 2017, PIPE
had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2015 through 2017 are open for examination. Results of
Operations of PPIX Our results of operations are influenced by factors affecting the MPLI industry in general. The operating results
of the United States MPLI industry are subject to significant variations due to competition, changes in regulation, rising medical expenses, judicial trends, fluctuations in interest rates and other changes in the investment environment. Our premium levels and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the MPLI industry
historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced MPLI business. The markets we operate in, and the national
MPLI markets, are currently experiencing a soft market cycle. Therefore, it is generally unlikely that insurers will be able to increase their rates or profit margins. A soft market typically has a negative effect on premium growth, which can
include absolute reductions in premiums written.  37




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##### Table of Contents

The major components of PPIXs operating revenues and net income are as follows
(dollars in thousands):  Year Ended December 31,2018


2017Revenues:Net premiums earned

$
13,096


$
12,275Total revenues


13,096



12,275Expenses:Losses and loss adjustment expenses


6,673



7,733Underwriting expenses


6,893



5,787Underwriting loss


(470
)


(1,245
)Investment income, net of investment expenses


342



1,039Realized investment losses, net


(26
)


(66
)Interest expense


(10
)


(9
)Loss before income taxes


164



(281
)Income tax benefit


(101
)


(260
)Net loss

$
(63
)

$
(21
) Premiums Written and Premiums Earned Direct written premium for the year ended December 31, 2018 was $15.6 million as compared to $15.3 million for the year ended
December 31, 2017, or a 2% increase. Direct premium earned for the year ended December 31, 2018 was $15.8 million as compared to $14.6 million for the year ended December 31, 2017, or a 9% increase. Ceded premium earned for
the year ended December 31, 2018 was $2.7 million as compared to $2.3 million for the year ended December 31, 2017, or an increase of 20%. Net Investment Income The following
table sets forth PPIXs average cash and invested assets and investment income for the reported periods (dollars in thousands) (unaudited):  Year Ended December 31,2018


2017Average cash and invested assets

$
51,059


$
50,823Net investment income


342



1,039Return on average cash and invested assets


0.67
%


2.04
% Investment Income, Net of Expenses Net investment income for the year ended December 31, 2018 was $0.3 million as compared to $1.0 million for the year ended
December 31, 2017. The average monthly net investment income decreased from $87,000 during the year ended December 31, 2017 to $28,000 during the year ended December 31, 2018. For the year ended December 31, 2018, PPIX adopted an
accounting standard which requires that unrealized gains or losses for equity securities previously classified as available-for-sale securities for 2017 be recorded
against earnings of the exchange. The effect of adopting the accounting standard was to reduce net investment income by $0.8 million or a reduction of the average monthly net investment income amount for 2018 by $70,000. With the exclusion of
adopting the new accounting standard, the average monthly net investment income would have been $98,000 and the return on average cash and invested assets would have been 2.30% for the year ended December 31, 2018.  38




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##### Table of Contents

Realized Investment Gains (Losses), Net PPIX had net realized investment losses of $26,000 and $66,000 for the years ended December 31, 2018 and December 31, 2017,
respectively. PPIXs fixed maturity investments and equity investments are available-for-sale because it would, from time to time,
make sales of securities that are not impaired, consistent with its investment goals and policies. At December 31, 2018, PPIX had gross unrealized losses on fixed maturity securities of $794,000 as compared to a gross unrealized losses on fixed
maturity securities of $250,000 at December 31, 2017. Most of these unrealized losses were attributable to fluctuations in interest rates. PPIX 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. PPIX believed that the foregoing declines in fair value in its existing portfolio are most likely attributable to fluctuations in interest rates, and there
is no evidence the entire amortized cost basis will not be recovered. Underwriting Income (Loss) As discussed above, we evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to using
GAAP based performance measurements, we also utilize certain financial performance measures that are used widely in the property and casualty insurance industry and that we believe are valuable in managing our business and for comparison to our
peers. These financial performance measures are underwriting income, losses and loss adjustment expenses ratio, expense ratio, combined ratio, and net written premiums to statutory surplus ratio. Underwriting income (loss) measures the pretax profitability of a companys insurance business. It is derived by subtracting losses and
loss adjustment expenses, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these captions is presented in our statements of operations but not subtotaled. The sections
below provide more insight into the variances in the categories of losses and loss adjustment expenses and amortization of deferred policy acquisition costs and underwriting and administrative expense, which impact underwriting profitability. Losses and Loss Adjustment Expenses PPIXs losses and loss adjustment expenses ratio was 51.0% for the year ended December 31, 2018 as compared to 63.0% for the year
ended December 31, 2017. During the years ended December 31, 2018 and 2017, PPIX had favorable developments of
$2.9 million and $2.6 million, respectively. The favorable development of $2.6 million during the year ended December 31, 2017 was primarily related to settlement of known claims below the amount for which they have been
previously reserved, as well as additional revisions to PPIXs estimate of its ultimate losses for the 2012 through 2015 accident years. The favorable development of $2.9 million during the year ended December 31, 2018 was primarily
related to reductions of the ultimate losses for the 2010, 2011, and 2015 policy years which were offset by strengthening the ultimate loss reserves for the 2016 and 2017 policy years. As discussed in Critical Accounting Policies, the MPLI line of business is prone to variability in the loss reserving process due
to the extended period of time during which claims can be made. Adjustments to our original estimates resulting from claims are not made until the period in which there is reasonable evidence that an adjustment to the reserve is appropriate. Amortization of Deferred Policy Acquisition Costs and Underwriting and Administrative Expenses Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $6.9 million for the
year ended December 31, 2018 as compared to $5.8 million for the year ended December 31, 2017. PPIX had $229,000 and $0 in initial public offering and conversion costs that were expensed in 2018 and 2017, respectively, and are
included in underwriting and administrative expenses. Administrative costs are directly tied to the amount of premiums written by PPIX in a given period, because the fees payable to SIS were equal to 25% of the premiums written by PPIX.  39




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##### Table of Contents

Income (Loss) Before Income Taxes For the year ended December 31, 2018, PPIX had pre-tax loss of $(164,000) as compared to a pre-tax loss of $(281,000) for the year ended December 31, 2017. Income Tax Expense (Benefit) The provision for income taxes for the years ended December 31, 2018 and 2017 resulted in income tax benefits of $(101,000) and
$(260,000), respectively. PPIXs effective tax rate for the years ended December 31, 2018 and 2017 was 21% and 34%, respectively. Net Income
(Loss) For the year ended December 31, 2018, PPIX had a net loss of $(63,000) as compared to a net loss of ($21,000) for the year
ended December 31, 2017. Mandatory Assumed Reinsurance: We are required to participate in Pennsylvania Property and Casualty Insurance Guaranty Fund (PIGA), which was formed to pay claims on policies
issued by insolvent Pennsylvania domiciled property and casualty insurers. Each Pennsylvania domiciled property and casualty insurer pays PIGA an annual assessment based on its premiums written in Pennsylvania. PPIX incurred assessment fee expense
(income) of $44,000 and $(28,000) for the years ended December 31, 2018 and 2017, respectively. Financial Position of PPIX At December 31, 2018, PPIX had total assets of $63.6 million as compared as compared to $67.2 million at December 31, 2017.
The decrease in total assets of $3.6 million is primarily attributable to a decrease in total cash and invested assets by $3.5 million from December 31, 2017 to December 31, 2018 due to timing of investment in securities and net
unrealized losses recognized in 2018 as compared to net unrealized gains recognized in 2017. The decrease in total assets was offset by more premiums written in 2018 as compared to 2017 and an increase in premiums receivable by $0.4 million.
Reinsurance receivables also decreased by $0.4 million, which are attributable mainly to the timing of payments from reinsurers. At
December 31, 2018, PPIX had total liabilities of $46.8 million as compared to $49.7 million at December 31, 2017. The decrease in total liabilities of $2.9 million between December 31, 2017 to December 31, 2018 is
primarily attributable to a $3.4 million decrease in the liability for losses and loss adjustment expenses, a $0.2 million decrease in unearned and advance premiums, and a decrease in reinsurance payable of $0.3 million, which were
offset by a $0.5 million surplus note executed by PPIX during the year ended December 31, 2018. At December 31, 2018, PPIX
had total equity of $16.8 million as compared to $17.5 million at December 31, 2017. The change in equity during the year ended December 31, 2018 is attributable to comprehensive loss of $(696,000). The change in equity during
the year ended December 31, 2017 is related to comprehensive income of $652,000. Effect of Conversion on PPIX As a result of the conversion on March 27, 2019, PPIX merged with and into PPIX Conversion Corp., and PPIX no longer exists as a separate
company. Upon completion of the conversions of PPIX, PCA and PIPE on March 27, 2019, the combination of PPIX Conversion Corp., PIPE Conversion Corp., and PCA Conversion Corp., and the offering, the pro forma shareholders equity of
Positive Insurance Company was approximately $69.7 million. This increased capitalization should permit Positive Insurance Company to (i) increase direct premium volume to the extent competitive conditions permit, (ii) increase net
premium volume by decreasing reliance on reinsurance, and (iii) enhance investment income by increasing Positive Insurance Companys investment portfolio. Liquidity and Capital Resources of PPIX PPIX generated sufficient funds from its operations and maintained a high degree of liquidity in its investment portfolio to meet the demands
of claim settlements and operating expenses. The primary sources of funds were premium collections, investment earnings and maturing investments.  40




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##### Table of Contents

PPIX maintained investment and reinsurance programs that are intended to provide sufficient
funds to meet its obligations without forced sales of investments. PPIX maintained a portion of its investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds. The following table summarizes, as of December 31, 2018, PPIXs future payments under contractual obligations and estimated claims
and claims related payments for continuing operations.  Payments due by period(Dollars in thousands)Contractual Obligations

Total


Less than1 year


1-3 years


3-5 years


More than5 yearsEstimated gross losses & loss adjustment expense payments

$
34,663


$
659


$
8,219


$
15,328


$
10,457Total Contractual Obligations

$
34,663


$
659


$
8,219


$
15,328


$
10,457 The timing of the amounts of the gross losses and loss adjustment expense payments is an estimate based on
historical experience and the expectations of future payment patterns. However, the timing of these payments may vary from the amounts stated above. Cash flows from continuing operations for the years ended December 31, 2018 and 2017 were as follows (dollars in thousands):  Years Ended December 31,2018


2017(audited)


(audited)Cash flows (used in) provided by operating activities

$
(2,122
)

$
3,741Cash flows provided by (used in) investing activities


1,537



(6,082
)Cash flows provided by (used in) financing activities


440



(595
)Net decrease in cash and cash equivalents

$
(145
)

$
(2,936
) For the year ended December 31, 2018, cash flows from operations were $(2.1) million as compared to
$3.7 million for the year ended December 31, 2017. The decrease in cash flows from operating activities was primarily attributable to the timing of paid losses. For the year ended December 31, 2018, cash flows from investing
activities were $1.5 million as compared to $(6.1) million for the year ended December 31, 2017. The smaller decrease in cash flows from investing activities is primarily attributable to the time necessary to reinvest maturing securities.
For the year ended December 31, 2018, cash flows from financing activities were $0.4 million as compared $(0.6) million for the year ended December 31, 2017. The increase in cash flows from financing activities for 2018 is
attributable to execution of a $500,000 surplus note between PPIX and PIPE. The Companys principal source of liquidity will be
dividend payments from Positive Insurance Company. Positive Insurance Company will be restricted by the insurance laws of Pennsylvania as to the amount of dividends or other distributions it may pay to the Company. Positive Insurance Company may pay
dividends to us after notice to, but without prior approval of, the Pennsylvania Insurance Department in an amount not to exceed the greater of (i) 10% of the surplus of Positive Insurance Company as reported on its most recent annual statement
filed with the Pennsylvania Insurance Department, or (ii) the statutory net income of Positive Insurance Company for the period covered by such annual statement. Dividends in excess of this amount are considered extraordinary and
are subject to the approval of the Pennsylvania Insurance Department.  41




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##### Table of Contents

The amount available for payment of dividends from Positive Insurance Company after the
conversions without the prior approval of the Pennsylvania Insurance Department is approximately $3.7 million based upon the estimated pro forma statutory surplus of Positive Insurance Company. 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. These restrictions or any subsequently
imposed restrictions may affect our future liquidity. Upon completion of the offering on March 27, 2019, the Company is a public
company and is subject to the proxy solicitation, periodic reporting, insider trading and other requirements of the Exchange Act and to most of the provisions of the Sarbanes-Oxley Act of 2002. As a result, the Company anticipates incurring
significant increases in expenses related to accounting and legal services that will be necessary to comply with such requirements. We estimate that the cost of initial compliance with the requirements of the Sarbanes-Oxley Act will be approximately
$350,000 and that compliance with the ongoing requirements of the Exchange Act and the Sarbanes-Oxley Act will result in an increase of approximately $200,000 in annual operating expenses. Off-Balance Sheet Arrangements PPIX had no off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital reserves. Quantitative and Qualitative
Information about Market Risk Market Risk Market risk is the risk that a company will incur losses due to adverse changes in the fair value of financial instruments. We have exposure to
three principal types of market risk through our investment activities: interest rate risk, credit risk and equity risk. Our primary market risk exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any
derivative financial instruments for hedging, trading or speculative purposes. Interest Rate Risk Interest rate risk is the risk that a company will incur economic losses due to adverse changes in interest rates. Each exchanges
exposure to interest rate changes primarily results from its significant holdings of fixed rate investments. Fluctuations in interest rates have a direct impact on the fair value of these securities. The average duration of the fixed maturity securities in the investment portfolios of PPIX, PCA, and PIPE at December 31, 2018 was 3.34
years, 3.13 years, and 3.90 years, respectively. Each exchanges fixed maturity securities investments included U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental
authorities, and corporate bonds, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair value resulting from changes in interest rates. Each exchange carried these investments as
available for sale. This allowed the exchange to manage its exposure to risks associated with interest rate fluctuations through active review of its investment portfolio by its management, its investment adviser and its board of directors. Fluctuations in near-term interest rates could have an impact on each exchanges results of operations and cash flows. Certain of these
securities may have call features. In a declining interest rate environment these securities may be called by their issuer and replaced with securities bearing lower interest rates. If we are required to sell these securities in a rising interest
rate environment we may recognize losses. As a general matter, each exchange attempted to match the durations of its assets with the
durations of its liabilities. Each exchanges investment objectives included maintaining adequate liquidity to meet its operational needs, optimizing its after-tax investment income, and its after-tax total return, all of which were subject to the exchanges tolerance for risk.  42




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##### Table of Contents

The table below shows the interest rate sensitivity of PPIXs fixed maturity
investments measured in terms of fair value (which is equal to the carrying value for all of its investment securities that are subject to interest rate changes) at December 31, 2018 (unaudited):  Estimated Changein Fair Value


FairValueHypothetical Change in Interest
Rates

(Dollars in thousands)200 basis point increase

$
(2,944
)

$
38,252100 basis point increase


(1,470
)


39,725No change






41,195100 basis point decrease


1,461



42,657200 basis point decrease


2,935



44,130 The table below shows the interest rate sensitivity of PCAs fixed maturity investments measured in terms
of fair value (which is equal to the carrying value for all of its investment securities that are subject to interest rate changes) at December 31, 2018 (unaudited):  Estimated Changein Fair Value


Fair ValueHypothetical Change in Interest
Rates

(Dollars in thousands)200 basis point increase

$
(1,752
)

$
22,771100 basis point increase


(875
)


23,648No change






24,523100 basis point decrease


870



25,393200 basis point decrease


1,741



26,264 The table below shows the interest rate sensitivity of PIPEs fixed maturity investments measured in
terms of fair value (which is equal to the carrying value for all of its investment securities that are subject to interest rate changes) at December 31, 2018 (unaudited):  Estimated Changein Fair Value


FairValueHypothetical Change in Interest
Rates

(Dollars in thousands)200 basis point increase

$
(1,393
)

$
18,096100 basis point increase


(695
)


18,793No change






19,488100 basis point decrease


691



20,180200 basis point decrease


1,384



20,872 Credit Risk Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. Each
exchange addressed this risk by investing primarily in fixed maturity securities that were rated at least A by Moodys or an equivalent rating quality. Each exchange also independently, and through its outside investment manager,
monitored the financial condition of all of the issuers of fixed maturity securities in the portfolio. To limit its exposure to risk, each exchange employed diversification rules that limited the credit exposure to any single issuer or asset class.  43




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##### Table of Contents

Equity Risk Equity price risk is the risk that the exchange will incur economic losses on its equity securities due to adverse changes in equity prices. Impact of Inflation Increases in
the cost of medical procedures and related services can affect the losses that we may incur in connection with resolving claims under policies that we issue. These cost increases reduce profit margins to the extent that rate increases are not
implemented on an adequate and timely basis. We, like all insurance companies, establish insurance premiums levels before the amount of loss and loss expenses, or the extent to which inflation may impact these expenses, are known. Therefore, we
attempt to anticipate the potential impact of inflation when establishing rates. Because inflation has remained relatively low in recent years, financial results have not been significantly affected by it. Results of Operations of PCA PCAs
results of operations were influenced by factors affecting the MPLI industry in general. The operating results of the United States MPLI industry are subject to significant variations due to competition, regulation and changes in regulation, rising
medical expenses, judicial trends, fluctuations in interest rates and other changes in the investment environment. The major components
of PCAs operating revenues and net income are as follows (dollars in thousands):  Year Ended December 31,2018


2017Revenues:Net premiums earned

$
7,112


$
7,480Total revenues


7,112



7,480Expenses:Losses and loss adjustment expenses


9,990



4,012Underwriting expenses


3,428



3,501Underwriting loss


(6,306
)


(33
)Investment income, net of investment expenses


318



571Realized investment gains, net


10



13Interest expense






(31
)(Loss) income before income taxes


(5,978
)


520Income tax (benefit) expense


(1,468
)


209Net (loss) income

$
(4,510
)

$
311 Premiums Written and Premiums Earned Direct written premium for the year ended December 31, 2018 was $6.3 million as compared to $7.7 million for the year ended
December 31, 2017, or a 18% decrease. Direct premium earned for the year ended December 31, 2018 was $7.9 million as compared to $8.9 million for the year ended December 31, 2017, or a 11% decrease. Ceded premium earned for
the year ended December 31, 2018 was $0.8 million as compared to $1.4 million for the year ended December 31, 2017, or a 43% decrease.  44




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##### Table of Contents

Net Investment Income The following table sets forth PCAs average invested assets and investment income for the years ended December 31, 2018 and 2017
(dollars in thousands) (unaudited):  Year Ended December 31,2018


2017Average cash and invested assets

$
31,085


$
36,120Net investment income


318



571Return on average cash and invested assets


1.02
%


1.58
% Investment Income, Net of Expenses Net investment income for the year ended December 31, 2018 was $0.3 million as compared to $0.6 million for the year ended
December 31, 2017. The average monthly net investment income decreased from $48,000 for the year ended December 31, 2017 to $27,000 for the year ended December 31, 2018. For the year ended December 31, 2018, PCA adopted an
accounting standard which requires that unrealized gains or losses for equity securities previously classified as available-for-sale securities for 2017 be recorded
against earnings of the exchange. The effect of adopting the accounting standard was to reduce net investment income by $0.4 million or a reduction of the average monthly net investment income amount for 2018 by $35,000. With the exclusion of
adopting the new accounting standard, the average monthly net investment income would have been $62,000 and the return on average cash and invested assets would have been 2.38% for the year ended December 31, 2018. Realized Investment Gains (Losses), Net PCA had net realized gains of $10,000 for the year ended December 31, 2018 as compared to net realized gains of approximately $13,000 for
the year ended December 31, 2017. PCAs fixed maturity investments are available-for-sale because it would, from time to time,
make sales of securities that are not impaired, consistent with its investment goals and policies. At December 31, 2018, PCA had gross unrealized losses on fixed maturity securities of approximately $531,000 as compared to gross unrealized
losses on fixed maturity securities of approximately $160,000 at December 31, 2017. Most of these unrealized losses were attributable to an increase in interest rates. PCA 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. PCA believed that the foregoing declines in fair value in its existing portfolio are most likely attributable to short-term market
trends, and there is no evidence the entire amortized cost basis will not be recovered. Underwriting Income As discussed above, we evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to using
GAAP based performance measurements, we also utilize certain financial performance measures that are used widely in the property and casualty insurance industry. These financial performance measures are underwriting income (loss), losses and loss
adjustment expenses ratio, expense ratio, combined ratio, and net written premiums to statutory surplus ratio. Underwriting income
measures the pretax profitability of a companys insurance business. It is derived by subtracting losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned
premiums. Each of these captions is presented in our statements of operations but not subtotaled. The sections below provide more insight into the variances in the categories of losses and loss adjustment expenses and amortization of deferred policy
acquisition costs and underwriting and administrative expense, which impact underwriting profitability.  45




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##### Table of Contents

Losses and Loss Adjustment Expenses PCAs losses and loss adjustment expenses ratio was 140.5% for the year ended December 31, 2018 as compared to 53.6% for the year
ended December 31, 2017. The favorable development of $0.4 during the year ended December 31, 2017 was primarily related to re-estimation of unpaid losses and loss adjustment expenses on all claims-made policy years. The unfavorable development of $6.1 million during the year ended December 31, 2018 was primarily related to the
2015 to 2017 policy years based on changes in reserve indications from December 31, 2017. The unfavorable development of $(6.1) million during the year ended December 31, 2018 was primarily related to reserve strengthening in the 2015
($400,000) occurrence policy year, the 2016 ($500,000) tail policy year and the 2017 ($400,000) and 2014 through 2017 ($4,500,000) claims-made policy years. A majority of these changes in indications were related to PCAs new claims management
team and a change in reserving philosophy of setting reserves at the expected value as soon as possible when the liability is acknowledged. As discussed in Critical Accounting Policies, the MPL line of business is prone to variability in the loss reserving process due
to the extended period of time during which claims can be made. Adjustments to our original estimates resulting from claims are not made until the period in which there is reasonable evidence that an adjustment to the reserve is appropriate. Amortization of Deferred Policy Acquisition Costs and Underwriting and Administrative Expenses Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $3.4 million for the
year ended December 31, 2018 as compared to $3.5 million for the year ended December 31, 2017. PCA had $153,000 and $125,000 in initial public offering and conversion costs that were expensed in 2018 and 2017, respectively, and are
included in underwriting and administrative expenses. Administrative costs are directly tied to the amount of premiums written by PCA in a given period, because the fees payable to PTP were equal to 25% of the premiums written by PCA. Income (Loss) Before Income Taxes PCA
had a pre-tax loss of $(6.0) million for the year ended December 31, 2018 as compared to pre-tax income of $0.5 million for the year ended December 31,
2017. The decrease in income before income taxes between the years ended December 31, 2017 and 2018 is primary related due to a reduction in net premiums earned of $0.4 million and an increase in loss and loss adjustment expenses of
$6.0 million. Income Tax Expense (Benefit) For the year ended December 31, 2018, PCA had an income tax benefit of $(1.5) million as compared to an income tax expense of
$0.2 million for the year ended December 31, 2017. PCAs effective tax rate for the years ended December 31, 2018 and 2017 was 21% and 34%, respectively. Net Income (Loss) For the year ended
December 31, 2018, PCA had a net loss of $(4.5) million as compared to net income of $0.3 million for the year ended December 31, 2017. Mandatory Assumed Reinsurance Each
Pennsylvania domiciled property and casualty insurer pays PIGA an annual assessment based on its direct premiums written in Pennsylvania. PCA incurred assessment expense (income) of $(11,000) and $22,000 for the years ended December 31, 2018
and 2017, respectively. Financial Position of PCA At December 31, 2018, PCA had total assets of $36.0 million as compared to $39.6 million at December 31, 2017. Total assets
decreased by $3.6 million from December 31, 2017 and December 31, 2018. Total cash and invested assets decreased by $4.2 million from December 31, 2017 to December 31, 2018, due to the timing of receipt of reinsurance
receivables, lower premiums in 2018 as compared to 2017, an increase of loss  46




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##### Table of Contents

payments made from December 31, 2017 to December 31, 2018, and net unrealized losses recorded for 2018 as compared to net unrealized gains for 2017. Reinsurance receivables, which are
attributable mainly to the timing of payments from reinsurers, decreased by approximately $0.1 million from December 31, 2017 to December 31, 2018, while premiums receivable decreased by $0.3 million from December 31, 2017
to December 31, 2018, all of which were offset by an increase in deferred income taxes of $1.0 million from December 31, 2017 to December 31, 2018. At December 31, 2018, PCA had total liabilities of $27.0 million as compared to total liabilities of $25.7 million at
December 31, 2017. The increase in total liabilities of $1.3 million is primarily attributable to a $3.6 million increase in the liability for losses and loss adjustment expenses, a $2.0 million decrease in unearned and advance
premium, and a decrease in due to affiliates of $0.3 million. At December 31, 2018, PCA had total equity of $9.0 million
as compared to $13.9 million at December 31, 2017. The change in equity during the year ended December 31, 2018 is related to comprehensive loss of $(4.9) million. The change in equity during the year ended December 31, 2017 is
related to comprehensive income of $0.6 million. Liquidity and Capital Resources of PCA PCA generated sufficient funds from its operations and maintained a high degree of liquidity in its investment portfolio to meet the demands of
claim settlements and operating expenses. The primary sources of funds were premium collections, investment earnings, and maturing investments. PCA maintained investment and reinsurance programs that were intended to provide sufficient funds to meet its obligations without forced sales
of investments. PCA maintained a portion of its investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds. The following table summarizes, as of December 31, 2018 (unaudited), PCAs future payments and estimated claims and claims related
payments for continuing operations.  Payments due by period(Dollars in thousands)Contractual Obligations

Total


Less than1 year


1-3 years


3-5 years


More than5 yearsEstimated gross losses and loss adjustment expense payments

$
22,166


$
1,063


$
7,855


$
8,105


$
5,143Total Contractual Obligations

$
22,166


$
1,063


$
7,855


$
8,105


$
5,143 The timing of the amounts of the gross losses and loss adjustment expense payments is an estimate based on
historical experience and the expectations of future payment patterns. However, the timing of these payments may vary from the amounts stated above. Cash flows from continuing operations for the years ended December 31, 2018 and 2017 were as follows (dollars in thousands):  Year Ended December 31,2018


2017(audited)


(audited)Cash flows used in operating activities

$
(3,348
)

$
(5,566
)Cash flows provided by investing activities


244



4,518Cash flows used in financing activities






(500
)Net decrease in cash and cash equivalents

$
(3,104
)

$
(1,548
)  47




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##### Table of Contents

For the year ended December 31, 2018, cash flows from operating activities were $(3.3)
million as compared to $(5.6) million for the year ended December 31, 2017. This smaller negative cash flows from operating activities was primarily caused by the timing of paid losses and less premiums written in 2018 as compared to 2017. Cash
flows from investing activities were $0.2 million for the year ended December 31, 2018 as compared to $4.5 million for the year ended December 31, 2017, primarily reflecting the time needed to reinvest funds from maturing
securities. Cash flows from financing activities for the year ended December 31, 2018 was $0 as compared to $(0.5) million for the year ended December 31, 2017. For the year ended December 31, 2018, there were no cash flows from
financing activities. Off-Balance Sheet Arrangements of PCA PCA had no off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital reserves. Results of Operations of PIPE PIPEs results of operations were influenced by factors affecting the MPLI industry in general. The operating results of the
United States MPLI industry are subject to significant variations due to competition, changes in regulation, rising medical expenses, judicial trends, fluctuations in interest rates and other changes in the investment environment. The major components of PIPEs operating revenues and net income are as follows (dollars in thousands):  Year Ended December 31,2018


2017Revenues:Net premiums earned

$
3,380


$
3,148Total revenues


3,380



3,148Expenses:Losses and loss adjustment expenses


2,920



1,823Underwriting expenses


2,019



1,855Underwriting loss


(1,559
)


(530
)Investment income, net of investment expenses


355



520Realized investment gains, net


39



51Interest expense






(Loss) income before income taxes


(1,165
)


41Income tax (benefit) expense


(366
)


101Net loss

$
(799
)

$
(60
) Premiums Written and Premiums Earned Direct premium written for the year ended December 31, 2018 was $3.4 million as compared to $3.6 million for the year ended
December 31, 2017, or a 6% decrease. Direct premium earned for the year ended December 31, 2018 was $3.7 million as compared to $3.8 million for the December 31, 2017, or a 3% decrease. Direct ceded premium earned for the
year ended December 31, 2018 was $0.3 million as compared to $0.6 million for the year ended December 31, 2017, or a decrease of 51%.  48




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##### Table of Contents

Net Investment Income The following table sets forth PIPEs average cash and invested assets and investment income for the years ended December 31, 2018
and 2017 (dollars in thousands) (unaudited):  Year Ended December 31,2018


2017Average cash and invested assets

$
23,778


$
25,555Net investment income


355



521Return on average cash and invested assets


1.49
%


2.04
% Investment Income, Net of Expenses Net investment income for the year ended December 31, 2018 was $0.4 million as compared to $0.5 million for the year ended
December 31, 2017. The average monthly net investment income decreased from $43,000 during the year ended December 31, 2017 to $30,000 during the year ended December 31, 2018. For the year ended December 31, 2018, PIPE adopted an
accounting standard which requires that unrealized gains or losses for equity securities previously classified as available-for-sale securities for 2017 be recorded
against earnings of the exchange. The effect of adopting the accounting standard was to reduce net investment income by $0.3 million or a reduction of the average monthly net investment income amount for 2018 by $35,000. With the exclusion of
adopting the new accounting standard, the average monthly net investment income would have been $55,000 and the return on average cash and invested assets would have been 2.76% for the year ended December 31, 2018. Realized Investment Gains (Losses), Net PIPE had net realized gains of $39,000 for the year ended December 31, 2018 as compared to net realized gains of $51,000 for the year
ended December 31, 2017. PIPEs fixed maturity investments are available-for-sale because it would, from time to time, make
sales of securities that are not impaired, consistent with its investment goals and policies. At December 31, 2018, PIPE had gross unrealized losses on fixed maturity securities of approximately $453,000 as compared to gross unrealized losses
on fixed maturity securities of $188,000 at December 31, 2017. Most of these unrealized losses were attributable to fluctuations in interest rates. PIPE 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. PIPE believed that the foregoing declines in fair value in its existing portfolio are most likely attributable to fluctuations in interest rates, and
there is no evidence the entire amortized cost basis will not be recovered. Underwriting Income (Loss) Underwriting income (loss) measures the pretax profitability of a companys insurance business. It is derived by subtracting losses and
loss adjustment expenses, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these captions is presented in our statements of operations but not subtotaled. The sections
below provide more insight into the variances in the categories of losses and loss adjustment expenses and amortization of deferred policy acquisition costs and underwriting and administrative expense, which impact underwriting profitability. Losses and Loss Adjustment Expenses PIPEs losses and loss adjustment expenses ratio was 86.4% for the year ended December 31, 2018 as compared to 57.9% for the year
ended December 31, 2017. The favorable development of $0.3 million during the year ended December 31, 2017 was primarily
related to re-estimation of unpaid losses and loss adjustment expenses in the 2013 and 2014 policy years. The unfavorable development of $(0.9) million during the year ended December 31, 2018 was
primarily related to reserve strengthening in the 2015 ($1,000,000) occurrence policy year and the 2013 ($500,000) claims-made policy years. PIPE did realize positive reserve development for the 2010-2012 occurrence policy years of $800,000. A
majority of these changes in indications were related to PIPEs new claims management team and a change in reserving philosophy of setting reserves at the expected value as soon as possible when the liability is acknowledged.  49




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##### Table of Contents

As discussed in Critical Accounting Policies, the MPLI line of business is prone
to variability in the loss reserving process due to the extended period of time during which claims can be made. Adjustments to our original estimates resulting from claims are not made until the period in which there is reasonable evidence that an
adjustment to the reserve is appropriate. Amortization of Deferred Policy Acquisition Costs and Underwriting and Administrative Expenses Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $2.0 million for the
year ended December 31, 2018 as compared to $1.9 million for the year ended December 31, 2017. PIPE had $151,000 and $99,000 in initial public offering and conversion costs in 2017 and 2016, respectively, which are included in
underwriting and administrative expenses. Administrative costs are directly tied to the amount of premiums written by PIPE in a given period, because the fees payable to PIPE Management were equal to 25% of the premiums written by PIPE. Income (Loss) Before Income Taxes For
the year ended December 31, 2018, PIPE had a pre-tax loss of $(1.2) million as compared to pre-tax income of $41,000 for the year ended December 31,
2017. Income Tax Expense (Benefit) For the year ended December 31, 2018, PIPE had an income tax benefit of $(0.4) million as compared to an income tax expense of $101,000
for the year ended December 31, 2017. PIPEs effective tax rate for the years ended December 31, 2018 and 2017 was 21% and 34%, respectively. Net Income (Loss) For the year ended
December 31, 2018, PIPE had a net loss of $(0.8) million as compared to a net loss of $(60,000) for the year ended December 31, 2017. Mandatory Assumed Reinsurance: Each
Pennsylvania domiciled property and casualty insurer pays PIGA an annual assessment based on its premiums written in Pennsylvania. PIPE incurred assessment expense of $3,000 and 27,000 for the years ended December 31, 2018 and 2017,
respectively. Financial Position of PIPE At December 31, 2018, PIPE had total assets of $24.9 million as compared to $26.6 million at December 31, 2017. The
decrease in total assets of $1.7 million from December 31, 2017 and December 31, 2018 is primarily attributable to a decrease in total cash and invested assets by $2.5 million from December 31, 2017 to December 31,
2018, due to the timing of the receipt of reinsurance receivables, lower premium written in 2018 as compared to 2017, increased loss payments made in 2018 as compared to 2017, and net unrealized losses recorded for 2018 as compared to net unrealized
gains for 2017. Premiums receivable decreased from 2017 to 2018 by $168,000 and deferred acquisitions costs decreased by $12,000, all of which were offset by an increase in reinsurance receivables, which are attributable mainly to the timing of
payments from reinsurers, by $141,000, an increase in deferred income taxes of $131,000, and a surplus note receivable of $500,000 from PIPE to PPIX during the year ended December 31, 2018. At December 31, 2018, PIPE had total liabilities of $13.8 million as compared to $14.4 million at December 31, 2017. The
decrease in total liabilities of $0.6 million is primarily attributable to a $198,000 decrease in the liability for losses and loss adjustment expenses, a $505,000 decrease in unearned and advance premiums, and a decrease in due to affiliates
of $37,000, which were offset by an increase in reinsurance payable of $30,000 during the year ended December 31, 2018.  50




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At December 31, 2018, PIPE had total equity of $11.2 million as compared to
$12.3 million at December 31, 2017. The change in equity during the year ended December 31, 2018 is related to comprehensive loss of $(1.1) million. The change in equity during the year ended December 31, 2017 is related to
comprehensive income of $32,000. Liquidity and Capital Resources of PIPE PIPE generated sufficient funds from its operations and maintained a high degree of liquidity in its investment portfolio to meet the demands
of claim settlements and operating expenses. The primary sources of funds were premium collections, investment earnings and maturing investments. PIPE maintained investment and reinsurance programs that were intended to provide sufficient funds to meet its obligations without forced
sales of investments. PIPE maintained a portion of its investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds. The following table summarizes, as of December 31, 2018 (unaudited), PIPEs future payments under contractual obligations and
estimated claims and claims related payments for continuing operations.  Payments due by period(Dollars in thousands)Contractual Obligations

Total


Less than1 year


1-3 years


3-5 years


More than5 yearsEstimated gross losses & loss adjustment expense payments

$
11,266


$
634


$
3,556


$
2,281


$
4,795Total Contractual Obligations

$
11,266


$
634


$
3,556


$
2,281


$
4,795 The timing of the amounts of the gross losses and loss adjustment expense payments is an estimate based on
historical experience and the expectations of future payment patterns. However, the timing of these payments may vary from the amounts stated above. Cash flows from continuing operations for the years ended December 31, 2018 and 2017 were as follows (dollars in thousands):  Years Ended December 31,2018


2017(audited)


(audited)Cash flows used in operating activities

$
(1,272
)

$
(1,149
)Cash flows provided by (used in) investing activities


229



(5,142
)Cash flows provided by financing activities






Net decrease in cash and cash equivalents

$
(1,043
)

$
(6,291
) For the year ended December 31, 2018, cash flows from operations was ($1.3) million as compared to $(1.1)
million for the year ended December 31, 2017. The larger negative cash flows from operating activities was primarily attributable to the timing of paid losses and less premium written in 2018 as compared to 2017. For the year ended
December 31, 2018, cash flows from investing activities were $0.2 million as compared to $(5.1) million for the year ended December 31, 2017. The positive cash flows from investing activities is primarily attributable to the time
necessary to reinvest maturing securities and the execution of the surplus note receivable between PIPE and PPIX during the year ended December 31, 2018. For the years ended December 31, 2018 and 2017, there were no cash flows from
financing activities.  51




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Off-Balance Sheet Arrangements PIPE had no off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital reserves. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable.  52




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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. POSITIVE PHYSICIANS HOLDINGS, INC.  FINANCIAL STATEMENTS (with Report of Independent Registered Public Accounting Firm) FOR THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  53




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POSITIVE PHYSICIANS HOLDINGS, INC.   FINANCIAL STATEMENTS (with Report of Independent Registered Public Accounting Firm) FOR THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018 INDEX  PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMFINANCIAL STATEMENTS:


55Balance sheet


56Statement of income


57Statement of cash flows


58Notes to financial statements


59  54




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LOGO REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the board of directors of Positive Physicians Holdings, Inc: Opinion on the Financial Statements We have audited the
accompanying balance sheet of Positive Physicians Holdings, Inc (the Company) as of December 31, 2018, the related statements of income, and cash flows, for the period from May 1, 2018 (date of inception) to December 31,
2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018,
and the results of its operations and its cash flows for the period from May 1, 2018 (date of inception) to December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Baker Tilly Virchow Krause, LLP We have served as the
Companys auditor since 2018. Milwaukee, Wisconsin April 24, 2019  55




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POSITIVE PHYSICIANS HOLDINGS, INC.   BALANCE SHEET DECEMBER 31, 2018  2018ASSETSDeferred registration costs

$
261,207TOTAL ASSETS

$
261,207LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Due to affiliates

$
261,207TOTAL LIABILITIES


261,207STOCKHOLDERS EQUITY


TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
261,207 See notes to financial statements.  56




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POSITIVE PHYSICIANS HOLDINGS, INC.   STATEMENT OF INCOME FOR THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  2018REVENUES:Revenues

$
TOTAL REVENUES


EXPENSES:Operating expenses


TOTAL EXPENSES


NET INCOME


RETAINED EARNINGS, beginning of period


RETAINED EARNINGS, end of period

$
 See notes to financial statements.  57




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POSITIVE PHYSICIANS HOLDINGS, INC.   STATEMENT OF CASH FLOWS FOR THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  2018CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
NET CASH PROVIDED BY OPERATING ACTIVITIES


CASH FLOWS FROM FINANCING ACTIVITIES:Deferred registration costs


(261,207
)Due to affiliates


261,207NET CASH PROVIDED BY FINANCING ACTIVITIES


NET CHANGE IN CASH


CASH, beginning of period


CASH, end of period

$
 See notes to financial statements.  58




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POSITIVE PHYSICIANS HOLDINGS, INC.   NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  1.
Organization and Operations: Positive Physicians Holdings, Inc. (Company) is a newly created Pennsylvania domiciled holding company formed to be the stock
holding company for Positive Physicians Insurance Company (PIC) following the conversions of Positive Physicians Insurance Exchange, Professional Casualty Association, and Physicians Insurance Program Exchange from reciprocal
insurance exchanges to stock insurance companies pursuant to the Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act
(Conversion Act). The Company was incorporated under the laws of the Commonwealth of Pennsylvania on May 1, 2018. The Company has had no significant operations and has not engaged in any business to date. Positive Physicians Insurance Exchange (PPIX) was a subscriber-owned, reciprocal insurance exchange. PPIX received its Certificate
of Authority on April 20, 2004 from the Commonwealth of Pennsylvania Insurance Department (Department) and commenced operations on July 1, 2004. On May 1, 2011, the PPIX expanded its operations and was issued a Certificate
of Authority by the New Jersey Department of Banking and Insurance. PPIX continued to expand its operation and was issued Certificates of Authority by the Delaware Department of Insurance, Ohio Department of Insurance, and Maryland Department of
Insurance on February 13, 2013, March 25, 2013, and April 30, 2014, respectively. PPIXs primary business is to provide medical professional liability insurance consisting of claims-made, tail occurrence, and occurrence policies
to its subscribers. The members of PPIX consisted exclusively of PPIXs subscribers. Underwriting is based on the applicants specialty, location, and claims history. PPIX was managed by Specialty Insurance Services, LLC (SIS),
a Pennsylvania limited liability company, pursuant to the terms of an Attorney-In-Fact Agreement between PPIX and SIS, effective March 10, 2004. Pursuant to the
terms of the amended agreement, SIS provided underwriting and administrative services to PPIX based on a percentage not to exceed 25% for gross written premium, less return premium. On October 9, 2018, Positive Physicians Captive Insurance Company, a sponsored captive insurance company, was incorporated in the State of
New Jersey and became a wholly-owned subsidiary of PPIX. 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 the Exchange. Effective October 16, 2018, the Exchange entered into a reinsurance agreement with Keystone. Professional Casualty Association (PCA) was an unincorporated, subscriber-owned exchange organized on April 16, 2003. PCA
received its Certificate of Authority on June 26, 2003 and was licensed by the Department as a reciprocal insurance exchange. Additionally, PCA was licensed as an admitted carrier on November 2, 2015 by the Michigan Department of Insurance
and Financial Services. PCAs primary business is to provide medical professional liability insurance consisting of claims-made, tail occurrence, and occurrence policies to its subscribers. The members of PCA consisted exclusively of PCAs
subscribers. Underwriting is based on the applicants specialty, location, and claims history. PCA was managed by Professional Third Party, LP (PTP) pursuant to the terms of an Attorney-In-Fact Agreement between PCA and PTP, effective April 16, 2003. Pursuant to the terms of the agreement, PTP provided salaries and benefit expenses of the employees, rent and other occupancy
expenses, supplies, and data processing services to PCA and pays certain expenses on behalf of PCA in exchange for 25% of the gross written premium. Physicians Insurance Program Exchange (PIPE) is an unincorporated, subscriber-owned, exchange organized on March 14,
2005. The Exchange received its Certificate of Authority on August 24, 2005 and was licensed by the Department as a reciprocal insurance exchange. Additionally, PIPE was licensed as an admitted carrier on October 15, 2013 by the South
Carolina Department of Insurance. PIPEs primary business is to provide medical professional liability insurance consisting of claims-made and occurrence basis policies to health care providers practicing in the Commonwealth of Pennsylvania.
The members of PIPE consisted exclusively of PIPEs subscribers.  59




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POSITIVE PHYSICIANS HOLDINGS, INC.   NOTES TO FINANCIAL STATEMENTS FOR
THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  1.
Organization and Operations (continued): Underwriting is based on the applicants specialty, location and claims history. PIPE was managed by Physicians Insurance Program
Management Company (PIPMC) pursuant to the terms of an Attorney-In-Fact Agreement between PIPE and PIPMC, effective August 24, 2005. Pursuant to the
terms of the agreement, PIPMC provided salaries and benefit expenses of the employees, rent and other occupancy expenses, supplies, and data processing services to PIPE and pays certain expenses on behalf of PIPE for 25% of gross written premium. Diversus, Inc. (Diversus) is a Delaware domiciled holding company which was formed to aggregate specialty insurance business
in the medical professional insurance market. Diversus was initially formed in Bermuda as DSN Holdings, Ltd. on December 28, 2012. SIS, PTP, and PIPMC are wholly-owned subsidiaries of Diversus. SIS, PTP, and PIPMC had the power to direct the
activities that most significantly impact the economic performance of PPIX, PCA, and PIPE, respectively.    Diversus Management, Inc. (DMI), a wholly-owned subsidiary of Diversus, provided services to PPIX, PCA, and
PIPE. As the Company is scheduled not to have any full-time employees, after completion of the conversions and the offerings, DMI will manage the daily operations of the Company and its wholly-owned subsidiary, PIC, which will be the successor to
PPIX, PCA, and PIPE. DMI currently provides the staff and resources to SIS, PTP, and PIPMC under intercompany arrangements. The attorneys-in-fact will be merged into DMI
and will cease to exist as separate entities upon completion of the conversions and offerings as discussed in Note 3 and 4. Insurance
Capital Group, LLC (ICG) is a Delaware domiciled holding company that was organized on January 8, 2018, for the purpose of acquiring and making investments in businesses across targeted sectors, with a focus on sponsored insurance
company demutualizations and other complex conversion transactions.  2.
Summary of Significant Accounting Policies and Principles: Basis of Presentation The
Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Use of Estimates The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in these financial statements and
notes. Actual results could differ from these estimates and such differences could be material.  3.
Plans of Conversion: PPIX, PCA, and PIPE were reciprocal insurance exchanges. As such, they had no shareholders, but did have subscribers or members. The
subscribers of PPIX, PCA, and PIPE were their policyholders. Unlike shareholders, the subscribers had no voting rights with respect to the governance of their respective exchange. All of the decision making authority relating to the operations and
governance of a reciprocal insurance exchange resided in the attorney-in-fact, which under the organizational documents of PPIX, PCA, and PIPE, could only be terminated
with the mutual agreement of the attorney-in-fact and the respective exchange. The subscribers only had such voting rights as were required by Pennsylvania law,
including the right to vote to approve the conversion from reciprocal insurance exchange to stock form. In addition, unlike shares held by shareholders, the memberships in PPIX, PCA, and PIPE were not transferable and did not exist separate from the
related insurance policy issued by the exchange. Therefore, these membership rights were extinguished when a policyholder canceled or did not renew its policy or the policy is otherwise terminated.  60




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POSITIVE PHYSICIANS HOLDINGS, INC.   NOTES TO FINANCIAL STATEMENTS FOR
THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  3.
Plans of Conversion (continued): The Conversion Act requires the reciprocal insurance exchange to adopt a plan of conversion that grants each eligible subscriber
nontransferable subscription rights to purchase a portion of the capital stock of the converted stock company. Such rights, in the aggregate, must give the eligible subscribers the right, prior to the right of any other person, to purchase 100% of
the capital stock of the converted stock company. The Conversion Act also requires that the plan of conversion provide that if the eligible subscribers do not purchase all the shares being offered, the remaining shares must be sold in a public
offering or a private placement with the approval of the Department. On June 1, 2018, SIS adopted a plan of conversion by which PPIX
would convert from a reciprocal insurance exchange to a stock insurance company by merging with and into PPIX Conversion Corp. Following the conversion, PPIX Conversion Corp. became a wholly-owned subsidiary of the Company. The affirmative vote of
at least two-thirds of the votes cast by subscribers of PPIX as of June 1, 2018, is necessary to approve the plan of conversion at a special meeting of the subscribers which was held on March 25,
2019. On June 1, 2018, PTP adopted a plan of conversion by which PCA would convert from a reciprocal insurance exchange to a stock
insurance company by merging with and into PCA Conversion Corp. Following the conversion, PCA Conversion Corp. became a wholly-owned subsidiary of the Company. The affirmative vote of at least two-thirds of
the votes cast by subscribers of PCA as of June 1, 2018, is necessary to approve the plan of conversion at a special meeting of the subscribers which was held on March 25, 2019. On June 1, 2018, PIPMC adopted a plan of conversion by which PIPE would convert from a reciprocal insurance exchange to a stock insurance
company by merging with and into PIPE Conversion Corp. Following the conversion, PIPE Conversion Corp. became a wholly owned subsidiary of the Company. The affirmative vote of at least two-thirds of the votes
cast by subscribers of PIPE as of June 1, 2018, is necessary to approve the plan of conversion at a special meeting of the subscribers which was held on March 25, 2019. In connection with the completion of the conversions, all of the outstanding shares of common stock shares of PPIX Conversion Corp., PCA
Conversion Corp., and PIPE Conversion Corp. are to be issued to the Company, and they will then become wholly-owned stock subsidiaries of the Company. Contemporaneously with the completion of the conversions and the mergers, PCA Conversion Corp. and
PIPE Conversion Corp. will merge with and into PPIX Conversion Corp., which will change its name to Positive Physicians Insurance Company. PIC will then be the Companys sole subsidiary. On February 5, 2019, the Department approved the conversion plans of PPIX, PCA, and PIPE. The conversions from reciprocal insurance
exchanges to stock insurance companies took place on March 27, 2019. On the same date, PCA Conversion Corp. and PIPE Conversion Corp. merged with and into PPIX Conversion Corp. and the resulting company was renamed was Positive Physicians
Insurance Company.  4.
Conversion Offering: As part of the conversions of PPIX, PCA, and PIPE, the Company is scheduled to offer between 3,570,000 shares and 4,830,000 shares of its
common stock at a price of $10 per share. The offering is to commence in two phases: (1) subscription offering and (2) community offering.  61




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POSITIVE PHYSICIANS HOLDINGS, INC.   NOTES TO FINANCIAL STATEMENTS FOR
THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  4.
Conversion Offering (continued): Under the subscription offering phase, the eligible subscribers of PPIX, PCA, and PIPE as of June 1, 2018 have the right to purchase
shares of common stock in the offering subject to the limitation that no eligible subscriber can, together with its affiliates, purchase more than 5,000 shares in the offering and to the allocation of shares in the event of an oversubscription, as
defined. Under the community offering phase, shares of common stock will be offered to certain stockholders of Diversus and to ICG and
Enstar Holdings (US) LLC (Enstar), the majority stockholder of Diversus. Unlike the subscription offering, except for ICG and Enstar, purchasers in the community offering do not have any right to purchase shares in the offering, and
their orders are subordinate to the rights of the purchasers in the subscription offering. Holders of Diversuss common stock are
permitted to purchase that number of shares that have a purchase price equal to 33% of the purchase price such stockholder paid for such stockholders shares of Diversus common stock. Holders of Diversuss preferred stock are
permitted to purchase that number of shares that have a purchase price equal to 10% of the purchase price such stockholder paid for such stockholders shares of Diversus preferred stock. However, the stockholders of Diversus (excluding
Enstar) collectively cannot purchase more than 5% of the total number of shares available after giving effect to the shares sold in the subscription offering and no Diversus stockholder (other than Enstar) may purchase, together his or her
affiliates, more than 25,000 shares of the Companys common stock. On June 8, 2018, the Company entered into the standby stock
purchase agreement with ICG. Subject to the terms and conditions of the standby stock purchase agreement, ICG has agreed to purchase from the Company at a price of $10 per share such number of shares as is necessary in the community offering phase
for the minimum of 3,570,000 shares to be sold as required under the plan of conversion. ICG, however, has the right to purchase additional shares from the Company up the offering maximum of 4,830,000 shares. ICG, as the standby purchaser, has
agreed to permit Enstar to purchase 30% of the shares that ICG would otherwise purchase in the offering pursuant to a governance agreement entered between ICG and Enstar. The standby purchasers right to purchase shares in the offering is subject to the rights of eligible subscribers to purchase in the
subscription offering phase. If purchasers in the subscription offering phase subscribe to purchase all of the 4,830,000 shares offered hereby, ICG, Enstar, and Diversus stockholders will be unable to purchase shares in the offering. Additionally,
if purchasers in the subscription offering subscribe to purchase 2,415,000 shares or more, ICG will not be able to purchase a majority of the number of shares in the offering. Accordingly, ICGs ownership percentage of the Companys common
stock after the completion of the offering will range from 0% to 60%. ICG has agreed to loan up to $750,000 to the Company to fund
expenses the Company would incur in connection with the conversion and the offerings. The Company has issued an exchangeable note to ICG in connection with such credit facility. The outstanding principal balance of the exchangeable note will
automatically convert into shares of the Companys common stock at a price of $10 per share upon completion of the offerings. The shares issued upon the conversion of the exchangeable note will count towards the minimum number of shares that
must be sold in the offerings. Enstar has agreed with ICG that Enstar will fund 30% of the advances made under the exchangeable note. At December 31, 2018, there was no outstanding balance of the exchangeable note.  62




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POSITIVE PHYSICIANS HOLDINGS, INC.   NOTES TO FINANCIAL STATEMENTS FOR
THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  4.
Conversion Offering (continued): During the year ended December 31, 2018, PPIX, PCA, and PIPE paid for certain conversion and securities offering costs on behalf of the
Company. The amount due to the exchanges at December 31, 2018 was $261,207. The effective date for the Securities and Exchange
Commission Form S-1 Registration Statement for the initial public offering of Holdings was February 11, 2019. The offering was completed on March 27, 2019. A total of 3,615,500 shares of the
Companys common stock were sold in the offering resulting in gross proceeds of $36,155,000. The Company is listed on the NASDAQ Capital Market under the symbol of PPHI.  5.
Management Services Agreement During 2018, each of the exchanges paid a management fee equal to 25% of its gross written premium to its respective attorney-in-fact. The Company and PIC have entered into a management agreement with DMI that will be effective upon completion of the conversions and the offerings. The new
management agreement will be for a term of seven years and will automatically be renewed for one year at each anniversary date of the agreement so that the remaining term of the agreement will always between six to seven years. However, the
management agreement may be terminated by either party under certain circumstances. Underwriting decisions will be made by the officers of PIC. Additionally, the board of directors of PIC will have enhanced oversight and approval rights over the
services provided and decisions made by DMI on PICs behalf. The new management agreement is subject to approval by the Department. Under the new management agreement, PIC will incur a base management fee based upon a percentage of its gross written premium, less return
premium. Beginning in 2019, the fee will be reduced from the 2018 rate of 25% of gross written premium to 12%. The base management fee percentage will subsequently decline to 11% for 2020 and 10% for 2021. At January 1, 2022, the base
management fee percentage will thereafter be set at 9%. If by December 31, 2019, Holdings has not acquired one or more additional insurance entities with additional annual gross written premium of at least $10,000,000 and that become subject to
the management agreement, the reduction in fees scheduled for 2020 will be deferred by one year. The agreement also provides for a performance management fee reflecting the profitability of PIC based upon the ratio of PICs losses and loss
adjustment expenses and other underwriting expenses to net earned premium. In consideration for the new management agreement that provides for reduced management fees, the Company will make a one-time payment
of $10,0000,000 from the proceeds of the offering to Diversus.  63




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POSITIVE PHYSICIANS HOLDINGS, INC.   NOTES TO FINANCIAL STATEMENTS FOR
THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  6.
Credit Facility to Diversus: The Company has agreed to provide a $6,000,000 credit facility to Diversus to provide working capital. Diversus may borrow up to $500,000 at
any time and may borrow additional amounts at any time after the completion of the conversions and the offering. 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 to be convertible into common stock shares of Diversus at a price of $1 per share at the option of Diversus. At December 31, 2018, there was no outstanding balance of
the credit facility.  7.
Option Agreement: Upon completion of the conversions of PPIX, PCA, and PIPE and the securities offering, the Company and Diversus entered into an option
agreement on March 27, 2019 whereby either party has the option to cause Diversus 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 two years after completion of the conversions of the exchanges and ending 54 months after the completion of the conversions, or (2) if earlier than two years after the completion of the
conversions, then such date that ICG 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s common stock. In regard 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s common stock shares immediately prior to the effective date of the merger.  8.
Equity: The Company is authorized to issue 10,000,000 shares of no-par value common stock. At December 31,
2018, there were no shares of common stock issued and outstanding. Payment of dividends on the Companys common stock is subject to
the determination of the Companys board of directors. Additionally, Pennsylvania law sets the maximum amount of dividends that may be paid by PIC during the twelve-month period after notice to, but without prior approval of, the Department.
This amount cannot exceed the greater of (1) 10% of the Companys surplus as reported on the most recent annual statement filed with the Department, or (2) the Companys statutory net income for the period covered by the annual
statement as reported on such statement. The order of the 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 ICG or Enstar without the prior approval of the Department, for a period of three years following the effective date of the conversions.  9.
Subsequent Events: Subsequent events have been evaluated through the date the financial statements were available to be issued.  64




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POSITIVE PHYSICIANS HOLDINGS, INC.   NOTES TO FINANCIAL STATEMENTS FOR
THE PERIOD FROM MAY 1, 2018 (DATE OF INCEPTION) TO DECEMBER 31, 2018  9.
Subsequent Events (continued): As discussed in Notes 3 and 4, on February 5, 2019 the Department approved the conversion plans of PPIX, PCA, and PIPE. The effective date
for the Securities and Exchange Commission Form S-1 Registration Statement for the initial public offering of Holdings was February 11, 2019. The subscribers of PPIX, PCA, and PIPE approved the
conversions from reciprocal insurance exchanges to stock insurance companies on March 25, 2019. The conversions from reciprocal insurance exchanges to stock insurance companies took place on March 27, 2019. On the same date, PCA Conversion
Corp. and PIPE Conversion Corp. merged with and into PPIX Conversion Corp. and the resulting company was renamed Positive Physicians Insurance Company. Further, on March 27, 2018, the offering was completed. A total of 3,615,500 shares of the
Companys common stock were sold in the offering, resulting in gross proceeds of $36,155,000. Additionally, as discussed in Note 7, on March 27, 2019 the Company and Diversus entered into an option agreement for the possible merger of
the Company and Diversus.  65




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##### Table of Contents

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. None. Item 9A. CONTROLS AND PROCEDURES. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Disclosure Controls and Procedures The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that required information is recorded, processed, summarized and reported within the
required timeframe as specified in the SECs rules and forms of the SEC. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to the Companys
management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures at December 31, 2018. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance
level, as of December 31, 2018. Managements Report on Internal Control Over Financial Reporting This annual report does not include a report of managements assessment regarding internal control over financial reporting or an
attestation of the Companys registered public accounting firm due to a transition period rule of the SEC for newly public companies. Attestation Report of the Registered Public Accounting Firm This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting as required by Section 404(b) of the Sarbanes Oxley Act of 2002. Because we qualify as an emerging growth company under the JOBS Act, managements report was not subject to attestation by our independent registered public
accounting firm.  66




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##### Table of Contents

Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) during the year ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting. Item 9B. OTHER INFORMATION. None.  67




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##### Table of Contents

PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Directors and Officers Our board of
directors consists of Paul M. J. Brockman, William E. Hitselberger, Craig A. Huff, Stephen J. Johnson, Duncan McLaughlin, Scott C. Penwell, Matthew T. Popoli, Lewis S. Sharps, M.D., and James L. Zech, each of
whom also serves as a director of Positive Insurance Company. Each of the directors serves a term of one year, is elected annually, and will hold office until his successor has been elected and qualified or until his earlier death, resignation or
removal. Annually, the director nominees are reviewed and proposed by the nominating/governance committee and are selected by the board of directors. ICG and Enstar have entered into an agreement that, among other things, affects the nomination and
election of our directors. See  Board Governance. Our executive officers are elected annually and, subject to the terms
of their respective employment agreements, will hold office until their respective successors have been elected and qualified or until death, resignation or removal by the board of directors. The following table sets forth certain information regarding our current directors.  Age atMarch 31, 2019

DirectorSince (1)

Position with Positive PhysiciansHoldings, Inc.Dr. Lewis S. Sharps, M.D.

69

2018

President, CEO, and DirectorScott C. Penwell

66

2018

DirectorWilliam E. Hitselberger

61

2018

DirectorStephen J. Johnson

64

2018

DirectorJames L. Zech

61

2018

DirectorPaul M. J. Brockman

46

2019

DirectorDuncan McLaughlin

48

2019

DirectorCraig A. Huff

54

2019

DirectorMatthew T. Popoli

43

2019

Director  (1)
Indicates year first elected as a director of Positive Physicians Holdings, Inc. The business experience of each nonemployee director for at least the past five years is set forth below. Lewis S. Sharps, M. D. Dr. Sharps
founded Positive Physicians Insurance Exchange in 2002 and has served as the CEO and President since its inception. In 2017 he became the CEO of Diversus Management and the President of Diversus Inc. Dr. Sharps attended medical school and
completed his orthopaedic residency training at Thomas Jefferson University. He is a Fellow of The American Orthopaedic Society and The American Orthopaedic Association. He founded and managed multiple health care related companies and developed
numerous instrument patents for minimally invasive spine surgery. Dr. Sharps served as President of the Pennsylvania Orthopaedic Society (POS) from 1999 to 2000. He was also instrumental in the creation of the Political Action Committee (PAC)
of POS and was Chairman of the PAC from 1993 to 2011. During that time, the POS PAC became a major factor in Pennsylvania politics, protecting the long-term needs of the medical and orthopaedic communities.
His experience and insights as a spine surgeon have greatly benefitted our risk management and claim management platform. He is a strong advocate of integrated risk management, whereby the medical malpractice insurer partners with the
insureds and trains their in-house staff as to the benefits of notifying Positive Insurance Company of any unforeseen events and then working aggressively to resolve the issue.  68




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##### Table of Contents

Dr. Sharps has also been instrumental in developing technologies that promote patient
safety in the operating room and continues to stress the need for integrated risk management in the freestanding outpatient office environment. Scott
C. Penwell Scott C. Penwell, Esq., is an attorney who has practiced corporate, securities and insurance law for 35 years and
is a member of the law firm of Penwell, Bowman + Curran LLC. Prior to that Mr. Penwell was an associate and partner at Duane Morris LLP from 1981 to 2004, a partner at Stevens & Lee, PC, from 2004 to 2012, and a partner at
Rhoads & Sinon, LLP from 2012 to 2017. In addition to practicing law, he has served on the boards of directors of numerous companies including banks, mutual funds and technology companies. He also founded and has served as a director and
corporate officer of two insurance companies. From 1987 until its sale in 2014, he was a director and corporate secretary of Eastern Alliance Insurance Company, a publicly traded, national insurance company, and from 2010 until its sale in 2017, he
was a director and Chairman of the Board of Directors of Great Falls Insurance Company, a regional insurance company that writes insurance in the northeastern United States. Mr. Penwell has been Chairman of the Business Law Section of the
Pennsylvania Bar Association and a member of the attorney advisory committees of both the Pennsylvania Corporation Bureau and the Pennsylvania Securities Commission. Mr. Penwell received his BA from Rutgers University, his MA from Villanova
University and his JD from Temple Law School, where he was Editor-in-Chief of Temple Law Review. Stephen J. Johnson Stephen J.
Johnson is a Insurance Financial and Regulatory Specialist with the law firm of Stradley Ronon Stevens & Young, LLP. Prior to joining Stradley Ronon in 2016, Mr. Johnson served as Deputy Insurance Commissioner for the Pennsylvania
Insurance Departments Office of Corporate and Financial Regulation from 1998-2015 where he oversaw the Bureau of Company Licensing and Financial Analysis and the Bureau of Financial Examinations. Before
that Mr. Johnson served as Director of the Bureau of Financial Examinations where he oversaw a team of examiners and exam managers who conducted on-site reviews of the financial health of nearly
300 insurance companies in Pennsylvania, as well as continuing care retirement communities. Stephen also worked as Chief of the Financial Analysis Division in the Office of Corporate and Financial Regulation, supervising the departments
financial analysts and overseeing the analysis and review of financial statements filed by Pennsylvanias licensed insurance companies. Before joining the Insurance Department, Stephen worked at the Pennsylvania Securities Commission as Chief
Analyst and at the Department of Auditor General as a Field Auditor. He also worked as an Audit Supervisor for the accounting firm Laventhol and Horwath. Mr. Johnson has been involved with numerous committees, task forces and financial working
groups of the National Association of Insurance Commissioners (NAIC), including the Statutory Accounting Principles Working Group, which he has been involved with since its founding in 1994, and the Financial Analysis Working Group, of which he was
appointed chair in 2011. Mr. Johnson has nearly 30 years experience in the insurance industry and is a certified public accountant. James L. Zech James L. Zech is a co-founder and President of High Ridge Capital and has served in this position since its formation in 1995. In this connection, Mr. Zech has served as a director of Max Re Capital, the James River Group,
Eastern Insurance Holdings, Front Royal Group, Acordia Inc., Old American Holdings, SelectQuote, Inc., and Insurance Data Systems. From 1988 through 1995, Mr. Zech was an investment banker covering the insurance industry. From 1988 through
1992, Mr. Zech was a member of the Insurance Group of Donaldson, Lufkin & Jenrette Securities Corporation. In 1992, Mr. Zech joined S.G. Warburg & Co. Inc. to form a U.S. Insurance Group as part of
Warburgs worldwide financial institutions practice. From 1984 through 1988, Mr. Zech was with American Independent Reinsurance Company where he served as Corporate Secretary and Counsel (1984-1985)
and Chairman and CEO (1986-1988). From 1982 through 1984, Mr. Zech was a corporate attorney with the New York law firm of Simpson Thacher & Bartlett. Mr. Zech has a B.S. degree in
economics from the Wharton School of the University of Pennsylvania (1979) and J.D. degree from New York University School of Law (1982).  69




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##### Table of Contents

William E. Hitselberger William E. Hitselberger is the Chief Financial Officer of Sutton National Insurance Company, a property and casualty insurance company
formed in 2019. Prior thereto, Mr. Hitselberger was the Treasurer of Castlepoint National Insurance Company from July 2016 through December 2018 and the Chief Financial Officer and Executive Vice President of Tower Group
International, Ltd. (formerly, Tower Group Inc.) since March 15, 2010 and served as its Principal Accounting Officer during that time. Mr. Hitselberger joined the Tower Group International on December 8, 2009 as Senior Vice President.
Mr. Hitselberger served as Executive Vice President of PMA Companies, Inc. (formerly, PMA Capital Corporation) from April 2004 to December 8, 2009. He served as Senior Vice President, Chief Financial Officer, and Treasurer of PMA
Companies, Inc. from June 2002 to December 8, 2009. Mr. Hitselberger is a Certified Public Accountant and Chartered Financial Analyst. Mr. Hitselberger graduated from the University of Pennsylvania, where he received a B.S. in
Economics in 1980. Matthew T. Popoli Matthew T. Popoli is a Founder and Chief Executive Officer of Insurance Capital Group, with 20 years of insurance industry experience
with a specialized focus on sponsored demutualizations and similar complex conversion transactions. Prior to founding Insurance Capital Group, Mr. Popoli was a partner and Senior Managing Director at Reservoir Capital Group, which he joined in
2005, and led its financial services investing activities until when he left Reservoir in May 2018 to join ICG. Previously, Mr. Popoli was a Principal at Capital Z Partners and began his career as an investment banker in the insurance
group at Morgan Stanley & Co. Mr. Popoli is a graduate of Amherst College, where he received a B.A. in Economics. Craig A. Huff Craig A. Huff is a Founder and Managing Partner of Insurance Capital Group and Co-Founder and Co-CEO of Reservoir Capital Group. Mr. Huff has served as Co-CEO of Reservoir Capital Group since August 1, 2004. Mr. Huff serves on the boards of many of
Reservoir portfolio companies in industries such as energy, power, insurance, and aircraft leasing and was instrumental in the formation and development of a variety of hedge funds and private investment firms. Prior to founding Reservoir,
Mr. Huff was a partner at Ziff Brothers Investments and, prior to business school, served in the U.S. Navy as a nuclear submarine officer and nuclear engineer. Mr. Huff is a graduate of Abilene Christian University and Harvard
Business School. Paul M. J. Brockman Paul M. J. Brockman was appointed President & Chief Executive Officer of Enstar (US) Inc. in 2016, and continues to serve as its
president. He served as Chief Operating Officer of Enstar (US) Inc. from 2014-2016. Enstar is a Bermuda based company that specializes in the acquisition and run-off of
insurance policy portfolios that had approximately $15.2 billion in assets at June 30, 2018. From 2012-2014, he served as Senior Vice President, Head of Commutations in the US. Before joining Enstar,
he worked as Head of Reinsurance for Resolute Management Services UK Ltd. and prior to that at Equitas. Duncan McLaughlin Duncan McLaughlin is a Director of Cranmore (EU) Ltd, a United Kingdom affiliate of Enstar. Cranmore is a specialist insurance and reinsurance
audit and consultancy firm with six worldwide offices. From 2012 to 2018, Mr. McLaughlin was a Senior Vice President of Enstar (US) Inc. in the United States and prior to that Mr. Duncan was a Director of Enstar (EU) Limited in the United
Kingdom. Mr. Duncan joined Enstar Group in 2000 and has over 25 years of experience in the reinsurance business. Board Governance Enstar and ICG have agreed that the number of members of the board of directors of the Company shall be nine, and that six of such members
shall be designated by ICG and two of such members shall be designated by Enstar. They have also agreed that one of the directors designated by ICG shall be elected as the Chairman of the Board, one of the directors designated by Enstar shall be
elected as the Vice Chairman, and that the Chief Executive Officer of the Company will be a member of the board of directors. The agreement also provides that at least five directors must be present at any meeting to constitute a quorum.  70




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##### Table of Contents

The agreement between ICG and Enstar provides that any of the following actions by the
Company or any of its subsidiaries must be approved in writing by both ICG and Enstar:  

the creation, incurrence, or guarantee of indebtedness in excess of $1,000,000, other than (i) borrowings
under credit facilities previously approved by ICG and Enstar, and (ii) indebtedness contemplated by the standby stock purchase agreement among the Company and ICG;  

authorization or issuance of shares of capital stock of the Company or any of its subsidiaries or securities
convertible into, or exercisable or exchangeable for, such shares of capital stock;  

the distribution of cash or other property to shareholders of the Company on other than a pro rata basis;  

the repurchase by the Company of any shares of its capital stock if either ICG or Enstar is not provided with the
opportunity to participate in such repurchase on a pro rata basis;  

any acquisition of any business in which the aggregate consideration paid would exceed $1,000,000;  

any disposal, whether in a single or a series of related transactions, by merger, consolidation, sale or
otherwise, of (i) any asset of the Company or any of its subsidiaries with a fair market value greater than $1,000,000, or (ii) all or substantially all of the capital stock of any subsidiary of the Company, excluding sales of investments
in connection with the management of the investment portfolios of the Company or any of its subsidiaries;  

an election to dissolve or liquidate the Company or any of its subsidiaries, or to file bankruptcy or similar
proceedings;  

making or changing any material election in respect of taxes, adopting or changing in any material respect any
accounting method in respect of taxes, settling or compromising any material claim or assessment in respect of taxes, or filing any amended tax return that is reasonably likely to result in a material increase in liability in respect of taxes;  

initiating, conducting, or settling any legal or regulatory proceeding or threatened legal or regulatory
proceeding, excluding claims under insurance policies in the ordinary course of business, for an amount in excess of $1,000,000;  

creating any new subsidiary of the Company that is not wholly-owned by
the Company;  

amending, altering, waiving or repealing any provision of the articles of incorporation, bylaws, or other
organizational documents of the Company or any of its subsidiaries in a manner that would negatively impact the economic, voting or other rights of either ICG or Enstar in a material manner; and  

entering into or becoming a party to any transaction with an employee, officer, or director of the Company or any
subsidiary or any other party related to any such person except for transactions arising in the ordinary course of business or such transactions that are conducted on an arms-length basis. ICG and Enstar have also agreed that for so long as Enstar continues to own the shares of Company common stock
purchased in the offering, ICG will use commercially reasonable efforts to cause the Company to consider a proposal from Enstar with respect to any reinsurance proposed to be purchased by the Company or any of its subsidiaries. In connection with
this agreement, Enstar agreed to dismiss litigation brought by Enstar against Diversus and its directors that sought to enjoin Diversus from entering into the transaction with ICG contemplated by the standby stock purchase agreement.  71




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##### Table of Contents

Executive Management The Company is a newly formed insurance holding company and currently does not have any employees other than Lewis S. Sharps, M.D. The
Company has entered into a management services agreement with Diversus Management that became effective upon completion of the Companys initial public offering. Pursuant to the management services agreement, officers of Diversus Management
will be responsible for the day to day management of the Company and will provide such management, financial accounting, and other services as the Company may require. Such services will include preparing all annual, quarterly and current reports
required to be filed with the SEC and all annual, quarterly and other reports required to be filed with the Pennsylvania Insurance Department and any other regulatory agencies. The officers of Diversus Management identified below, who are also
officers of the Company, have been identified in the management services agreement as the officers who will be responsible for providing such services to the Company. Officers LewisS.
Sharps is the President and Chief Executive Officer of Diversus Management and the President and Chief Executive Officer of the Company. Daniel Payne, age 50, is the Treasurer and Vice-President of Diversus, Inc. and is the
Chief Financial Officer of the Company. He is also the Chief Financial Officer and Treasurer of Diversus Management, Inc. and Positive Insurance Company and the Treasurer of Andrews Outsource Solutions LLC and Gateway Risk Services LLC, which are
subsidiaries of Diversus, Inc. He is a veteran of the U.S. Air Force and has over 20 years of experience in the insurance industry as an agent, external auditor, consultant and employee. Mr. Payne has done consulting work for several
RRGs and began working with PIPE at its inception in 2005. As a former partner in the CPA firm, Read Martin & Slickman, CPAs, Mr. Payne worked in a variety of business environments, including insurance, governmental, aviation, banking,
nonprofit, manufacturing, and wholesale and retail entities. Mr. Payne also provided individual, trust and corporate tax services for clients along with investment management and insurance services. He remains a registered investment adviser
representative and insurance agent for property, casualty and life. He is a Certified Public Accountant (Georgia) and a Certified Financial Planner. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), requires the Companys directors,
executive officers and beneficial owners of more than 10 percent of the common stock of the Company to file reports of ownership and changes in ownership with the SEC and NASDAQ. Copies of these reports must also be furnished to
the Company. The Company had no class of shares registered under the Exchange Act during 2018. Accordingly, no person was required to file reports under Section 16(a) with respect to the Companys common stock during the
year ended December 31, 2018. Code of Ethics and Business Conduct The Company has adopted a Code of Ethics and Business Conduct, which is designed to help directors, officers and employees maintain ethical
behavior and resolve ethical issues in an increasingly complex global business environment. The Code of Ethics and Business Conduct applies to all directors, officers and employees, including the Chief Executive Officer, the Chief Financial
Officer, and any other employee. The Code of Conduct covers topics including, but not limited to, ethical behavior, conflicts of interest, corporate opportunities, confidentiality of information and compliance with laws and regulations. A copy
of our Code of Ethics and Business Conduct is available at the Companys website under the Investor Relations section at www.positivephysicians.com. Any amendments to the Code of Ethics and Business Conduct will be posted on the
website, and any waiver that applies to a director or executive officer will be disclosed in accordance with the rules of the SEC and NASDAQ. Audit Committee. The Company has a standing Audit Committee composed exclusively of independent directors. The members of the Audit
Committee are William E. Hitselberger (Chair), Stephen Johnson, James L. Zech, and Scott C. Penwell. The Companys board of directors has determined that Mr. Hitselberger is an audit committee financial expert within the meaning of SEC
regulations. Under the independence criteria utilized by the  72




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##### Table of Contents

NASDAQ listing rules, the Audit Committee members must meet additional criteria to be deemed independent. An Audit Committee member may not, other than in his or her capacity as a member of the
Committee, the board of directors, or any other board of directors committee (i) accept directly or indirectly any consulting, advisory, or other compensatory fee from the Company other than the receipt of fixed amounts of compensation
under a retirement plan (including deferred compensation) for prior service with the Company (provided such compensation is not contingent in any way on continued service); or (ii) be an affiliated person of the Company as defined in Exchange
Act Rule 10A-3(e)(1) ). The Audit Committee is responsible for:  

the selection, retention, oversight and termination of our independent registered public accounting firm;  

approving the non-audit services provided by the independent registered
public accounting firm;  

reviewing the results and scope of the audit and other services provided by our independent registered public
accounting firm;  

approving the estimated cost of the annual audit;  

establishing procedures to facilitate the receipt, retention and treatment of complaints received from third
parties regarding accounting, internal accounting controls, or auditing matters;  

establishing procedures to facilitate the receipt, retention, and treatment of confidential, anonymous
submissions of concerns regarding questionable accounting or auditing matters by Company employees;  

reviewing and approve all related party transactions and transactions raising potential conflicts of interest;  

reviewing the annual financial statements and the results of the audit with management and the independent
registered public accounting firm;  

reviewing with management and the independent registered public accounting firm the adequacy of our system of
internal control over financial reporting, including their effectiveness at achieving compliance with any applicable laws or regulations;  

reviewing with management and the independent registered public accounting firm the significant recommendations
made by the independent registered public accounting firm with respect to changes in accounting procedures and internal control over financial reporting; and  

reporting to the board of directors on the results of its review and make such recommendations as it may deem
appropriate.  73




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##### Table of Contents

Item 11. EXECUTIVE COMPENSATION. Compensation of Executive Officers The
officers of the Company did not receive any compensation for their services as officers of the Company, PPIX, PCA, or PIPE during 2018. The Company has agreed to pay Lewis S. Sharps, M.D. an annual salary of $135,000 for his services as
President and Chief Executive Officer of the Company. Dr. Sharps will also be entitled to receive an annual cash bonus equal to the sum of 2.5% of the after-tax statutory net income of Positive Insurance
Company plus 2.5% of all dividends paid by the Company to its shareholders. In addition, the Company has agreed to grant stock options to Dr. Sharps on the date that is six months after the completion of the Companys initial public
offering. The number of shares covered by such stock options will be equal to 3% of the number of shares of the Company that are outstanding immediately after completion of the offering. Such options will vest in equal monthly installments over a
three and one-half year period following the grant date for such options. One third of such
options will vest upon achievement of each of the following milestones: (i) Positive Insurance Company attaining an A- rating from A.M. Best, (ii) the completion of acquisitions by
the Company, Positive Insurance Company, or any other subsidiary of the Company of risk bearing entities, including RRGs, stock and mutual insurance companies, reciprocal insurance exchanges, and reinsurance transactions and loss portfolio transfers
with total acquired statutory surplus of $50 million or more, and (iii) purchasers of shares in the offering who continue to hold such shares achieving a 300% return on their investment (including all dividends and proceeds from sales of
shares of Company common stock and any other distributions to shareholders of the Company). The exercise price for all of the stock options granted to Dr. Sharps will be equal to the fair market value of the Companys stock on the date
such options are granted. Upon the sale by Dr. Sharps of any shares of common stock underlying such stock options, the Company will pay to Dr. Sharps in cash the amount equal to the number of shares sold and the amount by which the
exercise price for the applicable stock options exceeds $10.00 per share. The Company intends to adopt an equity incentive plan that will
permit the Company to issue stock options and shares of restricted stock in an aggregate amount equal to ten percent of the number of shares of the Company that are outstanding immediately after completion of the offering. The stock options granted
to Dr. Sharps will be counted towards the number of shares restricted stock and stock options that can be granted under such plan. The Company intends to adopt such plan six months or later after completion of the offering. Summary Compensation Table The following
table sets forth information regarding the total annual compensation received by our named executive officers from the Company, PPIX, PCA, and PIPE, collectively, for each of the fiscal years ended December 31, 2018 and 2017.  Name and Principal Position

Year


Salary($)


Bonus($)


StockAwards($)


OptionAwards($)


NonequityIncentive PlanCompensation($)


NonqualifiedDeferredCompensationEarnings($)


All OtherCompensation($) (1)


Total($)Lewis S. Sharps, M. D. President and CEO


2018


$
-0-














$







$



$
-0-2017



-0-



























-0-Daniel A. Payne
CFO


2018


$
-0-














$







$



$
-0-2017



-0-



























-0- Director Compensation The directors of the Company did not receive any compensation for their service as directors of the Company during 2018. The Company will pay
Messrs. Johnson, Hitselberger, Penwell, and Zech a flat annual fee of $25,000 for board of directors meeting attendance in person or participation by telephone, regardless of the number of such meetings. No additional compensation is paid
for attending committee meetings. Each director will be entitled to be reimbursed for all reasonable out-of-pocket expenses incurred in connection with attending
meetings of the board of directors and of any committees of which such director is a member.  74




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##### Table of Contents

The following table sets forth information regarding the total annual compensation paid by
the Company, PPIX, PCA, and PIPE, collectively, during the fiscal year ended December 31, 2018 to the nonemployee directors who serve as directors of the Company.  Name

Fees earnedor paid incash ($)


Stockawards ($)


Optionawards ($)


Non-equityincentive plancompensation ($)


Change inpension valueand nonqualifieddeferredcompensationearnings


All othercompensation ($)


Total ($)William E. Hitselberger

$























$
Stephen J. Johnson

$























$
Scott C. Penwell

$























$
James L. Zech

$























$
Paul M. J. Brockman1)

$























$
Craig A. Huff(1)

$























$
Duncan McLaughlin(1)

$























$
Matthew T. Popoli(1)

$























$
  (1)
Messrs. Brockman, Huff, McLaughlin, and Popoli were not directors of the Company, PPIX, PCA, or PIPE during
2018. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS. The following table sets forth information regarding the beneficial ownership of our common shares as of March 31, 2019
by:  

each of our directors;  

each of our named executive officers; and  

all of our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the
securities. In computing the number of common shares beneficially owned by a person and the percentage ownership of that person, we deemed outstanding common shares subject to options or other convertible or exercisable securities held by that
person that are currently exercisable or convertible or exercisable or convertible within 60 days of March 31, 2019. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person.
The percentage of beneficial ownership is based on 3,615,500 common shares outstanding. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all common shares shown as beneficially owned by them. Unless otherwise indicated, the address of each of the individuals
and entities named below is c/o Positive Physicians Holdings, Inc., 100 Berwyn Park, Suite 220, 850 Cassatt Road, Berwyn, Pennsylvania 19312.  75




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##### Table of Contents

Name and Address of Beneficial Owner

Number


PercentNamed Executive Officers and Directors:Lewis S. Sharps, M. D.


50,000



1.4
%Paul M. J. Brockman1


0



*William E. Hitselberger


0



*Craig A. Huff2


0



*Stephen J. Johnson


0



*Duncan McLaughlin1


0



*Scott C. Penwell


0



*Matthew T. Popoli2


0



*James L. Zech


0



*Daniel A. Payne


0



*All Executive Officers and Directors as a Group (8 persons)


50,000



1.4
%  1
Mr. Brockman and Mr. McLaughlin disclaim beneficial ownership of any shares owned by Enstar Holdings
(US) LLC. 2
Mr. Huff and Mr. Popoli disclaim beneficial ownership of any shares owned by Insurance Capital Group,
LLC. *
Represents beneficial ownership of less than 1%. Principal Shareholders Based on filings
made under Section 13(d) and Section 13(g) of the Securities Exchange Act of 1934 (the Exchange Act), as of April 18, 2019, the only persons known by us to be beneficial owners of five percent or more of the
outstanding shares of our common stock were as follows:  Name and Address of
Beneficial Owner

Number of SharesBeneficially Owned


Percent of OutstandingCommon StockInsurance Capital Group, LLC
767 Fifth Avenue, 16th Floor
New York, NY 10153


2,277,753



63.0
%Enstar Holdings (US) LLC
150 2nd Ave N 3rd Floor,
St. Petersburg, Florida 33701


976,180



27.0
% Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. We have not engaged in any transactions with, loaned money to or incurred any indebtedness to, or otherwise proposed to engage in transactions
with, loan money to or incur any indebtedness to, any related person, promoter or control person in an amount that in the aggregate exceeds $120,000. We maintain a written policy which discourages our officers and directors from having a financial interest in any transaction between the
Company or any of its subsidiaries and a third party. When we engage in transactions involving our officers, directors or employees, their immediate family members, or affiliates of these parties, our officers, directors and employees are required
to give notice to us of their interest in such a transaction and refrain from participating in material negotiations or decisions with respect to that transaction. Directors with an interest in such a transaction are expected to disqualify themselves from any vote by the board of directors regarding the
transaction.  76




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##### Table of Contents

When considering whether we should engage in a transaction in which our officers, directors
or employees, their immediate family members, or affiliates of these parties, may have a financial interest, our board of directors considers the following factors:  

whether the transaction is fair and reasonable to us;  

the business reasons for the transaction;  

whether the transaction would impair the independence of a director;  

whether the transaction presents a conflict of interest, taking into account the size of the transaction, the
financial position of the director, officer or employee, the nature of their interest in the transaction and the ongoing nature of the transaction; and  

whether the transaction is material, taking into account the significance of the transaction in light of all the
circumstances. Director Independence In order to determine which of our directors are independent, we have elected to utilize the standards for independence established under the
NASDAQ listing standards. Under this standard, an independent director is a person other than an executive officer or employee of the Company or one of its subsidiaries or any other individual having a relationship which, in the opinion of the board
of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons will not be considered independent:  

a director who is, or at any time during the past three years was, employed by us;  

a director who accepted, or who has a spouse, parent, child or sibling, whether by blood, marriage or adoption,
or any other person who resides in his home, hereinafter referred to as a Family Member, who accepted any compensation from us in excess of $120,000 during any period of twelve consecutive months within the three years preceding the
determination of independence (other than compensation for board or board committee service; compensation paid to a Family Member who is an employee (other than an executive officer) of the Company or one of its subsidiaries; or benefits under a tax
qualified retirement plan, or non-discretionary compensation);  

a director who is a Family Member of an individual who is, or at any time during the past three years was,
employed by us as an executive officer;  

a director who is, or has a Family Member who is, a partner in, or a controlling shareholder or an executive
officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipients consolidated gross revenues for that year, or
$200,000, whichever is more (excluding payments arising solely from investments in our securities or payments under non-discretionary charitable contribution matching programs);  

a director of the Company who is, or has a Family Member who is, employed as an executive officer of another
entity where at any time during the past three (3) years any of our executive officers served on the compensation committee of such other entity; or  

a director who is, or has a Family Member who is, a current partner of our outside auditor, or was a partner or
employee of the Companys outside auditor who worked on our audit at any time during any of the past three (3) years.  77




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Under these criteria, all directors except Lewis S. Sharps, M.D. are independent.
Pennsylvania insurance law requires that one-third of the members of each committee of the board be independent, except for the audit, nominating, and compensation committees, which may only include
independent directors. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Under the Audit Committees charter, the Committee is responsible for the selection of the Companys independent registered public
accounting firm. The Committee also evaluates and monitors the auditors qualifications, performance and independence. This evaluation includes a review and evaluation of the lead partner of the independent registered public accounting firm.
The Committee also takes into account the opinion of the Companys management. More can be learned about the Committees responsibility with respect to the independent registered public accounting firm in the Committees charter,
which is available on the Companys website at www.positivephysicians.com under the heading Committee Charters on the Investor Relations page. The Audit Committee unanimously selected Baker Tilly Virchow Krause, LLP as the Companys independent registered public accounting firm
for 2018 and 2019. Audit Fees Fees
pertaining to services rendered to the Company, PCA, and PIPE by Baker Tilly Virchow Krause, LLP during the years ended December 31, 2018 and 2017 and to PPIX by EisnerAmper, LLP during the year ended December 31, 2017 were as follows:  Year ended December 31,2018


2017Audit fees

$
228,924


$
223,426Audit related fees


91,723



79,679Tax fees


19,500



4,000All other fees






Total fees:

$
340,147


$
307,105 The audit and audit related fees shown above for 2018 include the fees of Baker Tilly Virchow Krause, LLP
related to the review of the September 30, 2018 financial statements of PPIX, PCA and PIPE and the delivery of comfort letters to the Companys placement agent, which were completed in connection with the Companys initial public
offering. No tax fees are shown for 2017 for PCA or PIPE with respect to such accounting firms because the Companys taxes were handled by another independent registered public accounting firm. The Audit Committee maintains a policy requiring that it pre-approves all audit and permitted non-audit services provided by Baker Tilly Virchow Krause, LLP. None of the non-audit services provided in 2017 or 2018 were
pre-approved by the Audit Committee because the Committee did not exist prior to March 27, 2019. The Audit Committee has considered whether, and determined that, the provision of the non-audit services reflected above is compatible with maintaining Baker Tilly Virchow Krause, LLPs independence. PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) See Item 8 for the Index to Financial Statements of Positive Physicians
Holdings, Inc. (b) Index to 2018 Financial Statements of Positive Physicians Insurance Exchange on page A-2. (c) Index to Financial Statements of Professional Casualty Association on page B-2. (d) Index to Financial Statements of Physicians Insurance Program Exchange on page C-2. (e) Index to Pro-Forma Combining Financial Statements of Positive Physicians Holdings, Inc., on page D-2 (f) Index to 2017/2016 Financial Statements of Positive Physicians Insurance Exchange on page E-2  78




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POSITIVE PHYSICIANS INSURANCE EXCHANGE  CONSOLIDATED
FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  A-1




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   CONSOLIDATED FINANCIAL STATEMENTS (with report of independent registered public accounting firm) YEAR ENDED DECEMBER 31, 2018 INDEX  PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


A-3CONSOLIDATED FINANCIAL STATEMENTS:Consolidated balance sheet


A-4Consolidated statement of operations and comprehensive loss


A-5Consolidated statement of members equity


A-6Consolidated statement of cash flows


A-7Notes to consolidated financial statements


A-8  A-2




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LOGO REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the board of directors of Positive Physicians Insurance Exchange: Opinion on the Financial Statements We have audited the
accompanying consolidated balance sheet of Positive Physicians Insurance Exchange (the Company) as of December 31, 2018, the related consolidated statements of operations and comprehensive loss, members equity, and cash flows,
for the year ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of
America. Basis for Opinion These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys consolidated financial statements based on our audit. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Effect of Adopting New Accounting Standard As discussed
in Note 2 to the financial statements, the Company has changed its method of accounting for unrealized holding gains and losses on equity securities in 2018 due to the adoption of Financial Accounting Standards Board Accounting Standards Update
2016-01,Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. /s/ Baker Tilly Virchow Krause, LLP We have served as the
Companys auditor since 2018. Milwaukee, Wisconsin April 24, 2019  A-3




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   CONSOLIDATED BALANCE SHEET DECEMBER 31, 2018  2018ASSETSAvailable-for-sale
bond securities, at fair value(Amortized cost of $41,907,055)

$
41,195,608Equity securities, at fair value(Cost of $2,783,103)


2,441,316Equity securities, at net asset value


3,696,840Total investments


47,333,764Cash and cash equivalents


1,964,477Accrued investment income


318,997Premiums receivable


5,247,957Reinsurance recoverable


5,431,752Reinsurance premiums receivable


313,632Income taxes recoverable


110,149Deferred acquisition costs


2,518,789Deferred income taxes


299,778Due from affiliate


84,286TOTAL ASSETS

$
63,623,541LIABILITIES AND MEMBERS EQUITYLIABILITIES:Losses and loss adjustment expenses

$
34,663,484Unearned premiums


7,978,836Reinsurance payable


1,116,900Accounts payable, accrued expenses, and other liabilities


1,750,372Note payable


127,327Surplus note payable to affiliate


500,000Due to affiliates


650,191TOTAL LIABILITIES


46,787,110MEMBERS EQUITY:Contributed capital


5,482,997Retained earnings


11,915,477Accumulated other comprehensive loss


(562,043
)TOTAL MEMBERS EQUITY


16,836,431TOTAL LIABILITIES AND MEMBERS EQUITY

$
63,623,541 See notes to consolidated financial statements.  A-4




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS YEAR ENDED DECEMBER 31, 2018  2018REVENUES:Net premium earned

$
13,096,418Net investment income


315,598TOTAL REVENUES


13,412,016EXPENSES:Losses and loss adjustment expenses, net


6,673,451Other underwriting expenses


6,892,975Interest expense


9,597TOTAL EXPENSES


13,576,023LOSS BEFORE PROVISION FOR INCOME TAXES


(164,007
)PROVISION FOR INCOME TAXES


(101,417
)NET LOSS


(62,590
)OTHER COMPREHENSIVE LOSS:Unrealized holding losses on available-for-sale securities, net of income tax benefit of
$168,243


(637,894
)Reclassification adjustments for net realized loss included in net loss


4,979TOTAL OTHER COMPREHENSIVE LOSS


(632,915
)COMPREHENSIVE LOSS

$
(695,505
) See notes to consolidated financial statements.  A-5




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   CONSOLIDATED STATEMENT OF MEMBERS EQUITY YEAR ENDED DECEMBER 31, 2018  ContributedCapital


RetainedEarnings


AccumulatedOtherComprehensiveIncome (Loss)


Total MembersEquityBalance, January 1, 2018

$
5,482,997


$
11,160,278


$
888,661


$
17,531,936Net loss






(62,590
)






(62,590
)Other comprehensive loss










(632,915
)


(632,915
)Reclassification of unrealized gain on equity securities, net of income taxes, from accumulated
other comprehensive income with the adoption of ASU 2016-01






817,789



(817,789
)


Balance, December 31, 2018

$
5,482,997


$
11,915,477


$
(562,043
)

$
16,836,431 See notes to consolidated financial statements.  A-6




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2018  2018CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(62,590
)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Deferred income taxes


(173,067
)Net realized loss on sales of investments


25,570Unrealized loss on equity securities


830,123Amortization of bond premiums


181,528Depreciation expense


50,000Changes in operating assets and liabilities:Accrued investment income


(16,209
)Premiums receivable


(412,955
)Reinsurance recoverable


685,637Reinsurance premiums receivable


(313,632
)Income taxes recoverable


464,177Deferred acquisition costs


(14,788
)Due from affiliate


(84,286
)Liability for losses and loss adjustment expenses


(3,365,225
)Unearned premiums


(232,644
)Reinsurance payable


(291,518
)Accounts payable, accrued expenses, and other liabilities


409,048Due to affiliates


198,506NET CASH USED IN OPERATING ACTIVITIES


(2,122,285
)CASH FLOWS FROM INVESTING ACTIVITIES:Investments:Proceeds from sales and maturities


6,603,916Purchases


(5,067,259
)NET CASH PROVIDED BY INVESTING ACTIVITIES


1,536,657CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of note payable


(59,895
)Proceeds from surplus note payable to affiliate


500,000NET CASH PROVIDED BY FINANCING ACTIVITIES


440,105NET CHANGE IN CASH AND CASH EQUIVALENTS


(145,523
)CASH AND CASH EQUIVALENTS, beginning of year


2,110,000CASH AND CASH EQUIVALENTS, end of year

$
1,964,477SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid for the year

$
6,620 See notes to consolidated financial statements.  A-7




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  1.
Organization and Operations: Positive Physicians Insurance Exchange (the Exchange) is a subscriber-owned, reciprocal insurance exchange. The Exchange received
its Certificate of Authority on April 20, 2004 and is licensed by the Commonwealth of Pennsylvania Insurance Department (Department). On May 1, 2011, the Exchange expanded its operations and was issued a Certificate of
Authority by the New Jersey Department of Banking and Insurance (New Jersey Department). The Exchange continued to expand its operations and was issued Certificates of Authority by the Delaware Department of Insurance, Ohio Department of
Insurance, and Maryland Department of Insurance on February 13, 2013, March 25, 2013, and April 30, 2014, respectively. The Exchanges primary business is to provide medical professional liability insurance consisting of
claims-made, tail occurrence, and occurrence policies to health care providers practicing in the Commonwealth of Pennsylvania, New Jersey, Delaware, Ohio, and Maryland. On October 9, 2018, Positive Physicians Captive Insurance Company (PPCIC), a sponsored captive insurance company, was
incorporated in the State of New Jersey and became a wholly-owned subsidiary of the Exchange. 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 the Exchange. As the Exchange is not the primary beneficiary of Keystone, the financial position and results of operations of Keystone for the period from October 9, 2018 to
December 31, 2018 are not included in the accompanying financial statements. Effective October 16, 2018, the Exchange entered into a reinsurance agreement with Keystone. The Exchange is managed by Specialty Insurance Services, LLC (SIS), a Pennsylvania limited liability company, pursuant to the terms
of an Attorney-In-Fact Agreement between the Exchange and SIS, effective March 10, 2004. Pursuant to the terms of the amended agreement as discussed in Note 12, SIS
provides underwriting and administrative services to the Exchange based on a percentage not to exceed 25.0% for gross written premiums, less return premiums. SIS has the power to direct the activities of the Exchange that most significantly impact the Exchange economic performance by acting as the
common attorney-in-fact and decision maker for the subscribers at the Exchange. SIS is a wholly-owned subsidiary of Diversus, Inc. (Diversus), a Delaware
domiciled holding company, effective as of January 1, 2017.  2.
Summary of Significant Accounting Policies: Basis of Presentation The Exchange prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America (GAAP). Principles of Consolidation The consolidated financial statements include the accounts of the Exchange and its wholly-owned subsidiary. All intercompany assets,
liabilities, revenues, and expenses between the Exchange and PPCIC have been eliminated in the consolidated financial statements. 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 Exchanges principal estimates include the liability
for losses and loss adjustment expenses, deferred acquisition costs, other-than-temporary impairments of investments, valuation of deferred tax assets, and premium deficiency reserves.  A-8




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Cash and Cash Equivalents The Exchange 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). Prior to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as of January 1, 2018,
investments in equity securities were classified as available-for-sale securities, stated at fair value, and unrealized holding gains and losses, net of related tax
effects, were recorded directly to accumulated other comprehensive income (loss). With the adoption of ASU 2016-01, investments in equity securities are still stated at fair value but unrealized holding gains
and losses are credited or charged to net income (loss) as incurred. The Exchange has ownership interests in four limited partnership
equity hedge funds. The Exchanges partnership interests are measured at fair value using the funds net asset values as a practical expedient. Unrealized holding gains and losses are credited or charged to net income (loss) as incurred.
There are no unfunded commitments related to these investments. The investment strategy, fair values at December 31, 2018, lockup periods, and redemption frequencies and notice periods are as follows for these investments:  Investment Strategy

Fair Value


LockupPeriod

RedemptionFreguency

RedemptionNoticePeriodLong-term equities fund

$
913,476


Expired

Quarterly

90 dayGlobal short/long-term equity fund


669,427


None

Monthly

30 dayShort/long-term equity fund in financial institutions


611,090


Expired

Quarterly

45 dayGlobal opportunities fund in bonds and equities


1,502,847


Expired

Quarterly

60 day$
3,696,840 Realized gains and losses on sales of equity and fixed maturity securities are recognized into income based
upon the specific identification method. Interest and dividends are recognized as earned. The Exchange considers short-term investments to
be short-term, highly liquid investments that are less than one year in term to the dates of maturities at the purchase dates that they present insignificant risk of changes in value due to changing interest rates. The Exchange regularly evaluates all its investments based on current economic conditions, credit loss experience, and other specific
developments. If there is a decline in a securities 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. 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. For equity securities in an unrealized loss position where fair value is
not expected to be recovered to the securitys cost basis in a reasonable time period, or where management does not expect to hold the security for a period of time sufficient to allow for a recovery to the securitys cost basis, an OTTI
is deemed to have occurred, and a loss is recognized in earnings.  A-9




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Deferred Acquisition Costs Deferred acquisition costs consist of costs that vary with and are directly related to the successful acquisition of new and renewal insurance
contracts. These costs, which primarily consist of sales commissions, management fees, and premium taxes, are deferred and amortized as premiums are earned over the applicable policy term. Equipment Equipment was
recorded at cost. Depreciation and amortization were provided using the straight-line method over the estimated useful life of the assets. The estimated useful life of the equipment and software was three years. The equipment was fully depreciated
at December 31, 2018. 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 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. The Exchange offers 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 an Exchange policyholder for least five years. An extended reporting endorsement policy reserve is required to assure that premiums are not earned prematurely. The Exchange has this reserve actuarially determined
with the balance included in unearned premiums. The extended reporting endorsement policy reserve amounted to $820,803 at December 31, 2018. 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 losses and loss adjustment expenses in the accompanying consolidated balance sheets. The Exchange has not recorded any premium deficiency reserves as of December 31, 2018. The analysis of premium deficiency
reserves was completed as of December 31, 2018. The Exchange does not consider anticipated investment income when calculating the premium deficiency reserves. Reinsurance The Exchange
cedes insurance risk to other insurance companies. This arrangement allows the Exchange to minimize the net loss potential arising from large risks. Reinsurance contracts do not relieve the Exchange of its obligation to its subscribers. 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.  A-10




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Conversion Costs The Exchange incurred direct consulting and other costs related to the conversion from a reciprocal insurance exchange to a stock form of
ownership and as part of offering securities offering by the currently planned parent company as further discussed in Note 11. During the year ended December 31, 2018, conversion and securities offering costs that are not expected to be charged
against the gross proceeds of the offering are included in other underwriting expenses in the accompanying statement of operations and comprehensive loss as incurred. Revenue Recognition Premiums of the Exchange 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 Exchange records an advance premium liability
in lieu of written premium. Comprehensive Loss Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments 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 balance
sheets. Such items, along with net loss, are components of comprehensive loss, and are reflected in the accompanying consolidated statement of operations and comprehensive loss. Reclassifications of realized gains and losses on sales of investments and out of accumulated other comprehensive loss are recorded in net
investment income in the accompanying consolidated statement of operations and comprehensive loss. Income Taxes The Exchange 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 the Exchanges consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between
the consolidated 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 Exchange records net deferred tax assets to the
extent it believes these assets will more likely than not be realized. In making such determination, the Exchange considers all available positive and negative evidence, including future reversal of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operations. The Exchange recognizes interest and penalties related to
unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations and comprehensive loss. Accrued interest and penalties are included within the related tax liability line in the accompanying
consolidated balance sheet. Recently Adopted Accounting Pronouncements The Exchange adopted the provisions of ASU 2016-01 for the year ended December 31, 2018. The
amendments in this ASU require among other things that equity investments to be measured at fair value (excluding those equity securities measured at fair value using net asset value as a practical expedient) with changes in fair value recognized in
net income, 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  A-11




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  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 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 $817,789 were
reclassified from accumulated other comprehensive income to retained earnings as presented in the accompanying consolidated statement of members equity for the year ended December 31, 2018. Recently Issued Accounting Pronouncements New accounting rules and disclosure requirements can impact the results and the comparability of the Exchanges consolidated financial
statements. The following recently issued accounting pronouncements are relevant to the Exchanges consolidated financial statements: ASU 2016-13: 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  A-12




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. At this time, management is evaluating the potential impact of ASU 2016-13 in
the Exchanges consolidated financial statements.  3.
Concentrations of Credit Risk: Financial instruments that potentially subject the Exchange 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 the Exchanges invested assets. Cash and cash equivalents are deposited with financial institutions which balances fluctuate in excess of federally insured limits. If the financial institutions were
not to honor their contractual liability to the Exchange, then the Exchange could incur losses. Management is of the opinion that there is low risk because of the financial strength of the respective financial institutions. The Exchange is also subject to concentrations of credit risks through short-term money market investments. The credit risk related to
short-term money market investments is minimized by the Exchange by investing in money market funds secured by U.S. government securities or repurchase agreements secured by U.S. government securities. Insureds consist of healthcare providers in which no one insured accounted for over 20% of premiums receivable or gross written premium as of
and for the year ended December 31, 2018. At December 31, 2018, the Exchange had reinsurance balances recoverable of $5,431,752 and reinsurance payable to the reinsurers of $1,116,900 for unpaid losses and loss adjustment expenses,
contingent commissions receivable, and unearned premiums with various reinsurers, one of which is an authorized reinsurer domiciled outside of the United States of America. The authorized, domestic reinsurers have A.M. Best ratings of A or better.
As discussed in Note 1, the Exchange has a reinsurance agreement with Keystone, an affiliated company.  4.
Variable Interest Entity: The Exchange is a reciprocal insurance exchange domiciled in Pennsylvania, for which SIS serves as attorney-in-fact. SIS holds a variable interest in the Exchange due to the absence of decision-making capabilities by the equity owners (subscribers/policyholders) of the Exchange and due to the significance
of the management fee the Exchange pays to SIS as its decision maker. As a result, SIS is deemed to have a controlling financial interest in the Exchange and is considered to be its primary beneficiary. All medical professional liability insurance operations are owned by the Exchange, and SIS functions solely as the management company. SIS has not provided any additional financial or other support to the Exchange for any of the reporting periods presented. At December 31,
2018, there are no explicit or implicit arrangements that would require SIS to provide future financial support to the Exchange.  A-13




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  5.
Investments: The Exchanges equity and fixed maturity securities are stated at fair value, which is the price that would be received to sell the asset
in an orderly transaction between willing market participants as of the measurement date. The Exchange uses various valuation techniques
and assumptions when estimating fair value, which are in accordance with accounting principles for fair value measurement of assets and liabilities that are recognized or disclosed in the financial statements on a recurring basis. These principles
establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are
defined as follows: Level 1 - Quoted (unadjusted) prices for identical assets in active markets. Level 2 - Other observable inputs, either directly or indirectly, including:  

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. The estimated fair values of equity and fixed maturity securities are based on quoted market prices where available. The Exchange obtains 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. As the Exchange is responsible for the determination of fair value, it performs analyses on the
prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. 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. The
Exchanges 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.  A-14




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Amortized cost/cost, gross unrealized gains, gross unrealized losses, and fair value of fixed
maturity and equity securities by major security type for the results of the Exchange at December 31, 2018 are as follows:  AmortizedCost/Cost


GrossUnrealizedGains


GrossUnrealizedLosses


Fair ValueDecember 31, 2018U.S. government

$
5,105,355


$



$
103,777


$
5,001,578States, territories, and possessions


911,411



3,903



897



914,417Subdivisions of states, territories, and possessions


9,874,472



71,771



25,272



9,920,971Industrial and miscellaneous


26,015,817



6,281



663,456



25,358,642Total bonds


41,907,055



81,955



793,402



41,195,608Common stocks


2,783,103



183,346



525,133



2,441,316$
44,690,158


$
265,301


$
1,318,535


$
43,636,924 At December 31, 2018, maturities of investments in bond securities are as follows:  AmortizedCost/Cost


Fair ValueDue in less than one year

$
3,049,548


$
2,519,305Due after one year to five years


26,158,004



23,744,418Due after five years to ten years


12,699,503



14,931,885$
41,907,055


$
41,195,608  A-15




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Realized gains and losses are determined using the specific identification method. During the
year ended December 31, 2018, proceeds from maturity and sales and gross realized gains and losses on securities are:  2018Proceeds

$
6,603,916Gross gains


54,150Gross losses


79,720The components of net investment income are as follows:2018Bonds

$
1,069,187Cash and short-term investments


8,042Common stocks


144,469Other


5,730Net loss on sales of investments


(25,570
)Unrealized loss on equity securities


(830,123
)371,735Less investment expenses


56,137Net investment income

$
315,598 In connection with the adoption of ASU 2016-01 at January 1, 2018,
the following are the net losses recognized for equity securities that are included in net loss for the year ended December 31, 2018:  2018Total net loss recognized during the year

$
(850,713
)Net loss on sales during the year


(20,590
)Net unrealized loss recognized during the year

$
(830,123
)  A-16




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  The following table shows gross unrealized losses and fair value of the Exchanges
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 MonthsFair Value


Unrealized LossesU.S. government

$
495,758


$
1,263States, territories, and possessions


410,416



897Subdivisions of states, territories, and possessions


2,608,394



4,141Industrial and miscellaneous


14,690,196



283,485Common stocks


1,120,791



198,990$
19,325,555


$
488,776Greater than 12 MonthsFair Value


Unrealized LossesU.S. government

$
4,505,820


$
102,514States, territories, and possessions






Subdivisions of states, territories, and possessions


1,322,893



21,131Industrial and miscellaneous


9,407,802



379,971Common stocks


406,793



326,143$
15,643,308


$
829,759TotalsFair Value


Unrealized LossesU.S. government

$
5,001,578


$
103,777States, territories, and possessions


410,416



897Subdivisions of states, territories, and possessions


3,931,287



25,272Industrial and miscellaneous


24,097,998



663,456Common stocks


1,527,584



525,133$
34,968,863


$
1,318,535 At December 31, 2018, the Exchange had 271 securities in unrealized loss positions of less than 12 months
with a combined gross unrealized loss of $488,776 and 100 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $829,759.  A-17




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  The unrealized losses on investments in U.S. government and agency securities, state
securities, and corporate debt securities at December 31, 2018 were primarily caused by general economic conditions and not by unfavorable changes in credit ratings associated with these securities. The Exchange evaluates impairment at each
reporting period for each of the securities where the fair value of the investment is less than its carrying value. The contractual cash flows of the U.S. government and agency obligations are guaranteed either by the U.S. government or an agency of
the U.S. government. It is expected that the securities would not be settled at a price less than the carrying value of the investment, and the Exchange does not intend to sell the investment until the unrealized loss is fully recovered. The
Exchange evaluated the credit ratings of the state and agency obligations and corporate obligations, noting whether a significant deterioration since purchase or other factors that may indicate an other-than-temporary-impairment such as the length
of time and extent to which fair value has been less than cost, the financial condition, and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer and the Insurance  A-18




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Exchanges intent to sell the investment. The management of the Exchange determined that there were no investments which were other-than-temporarily-impaired as of and for the year ended
December 31, 2018. The table below presents the level within the fair value hierarchy generally utilized by the Exchange to estimate
the fair value of assets disclosed on a recurring basis at December 31, 2018:  Total


Level 1


Level 2


Level 3U.S. government

$
5,001,578


$



$
5,001,578


$
States, territories, and possessions


914,417







914,417



Subdivisions of states, territories and possessions


9,920,971







9,920,971



Industrial and miscellaneous


25,358,642







25,358,642



Total bonds


41,195,608







41,195,608



Common stocks


2,441,316



2,441,316







$
43,636,924


$
2,441,316


$
41,195,608


$
  A-19




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  6.
Deferred Acquisition Costs: The following table summarizes the components of deferred acquisition costs for the year ended December 31, 2018:  2018Balance, beginning of year

$
2,504,001Amount capitalized during the year


5,020,219Amount amortized during the year


5,005,431Balance, end of year

$
2,518,789  7.
Reinsurance: In January 1, 2015, the Exchange entered into an annual loss and clash reinsurance contract. The contract applies to policies written by
the Exchange for insureds with medical practices within the states of Pennsylvania, New Jersey, Ohio, Delaware, and Maryland. Under the terms of the agreement, Coverage A has a retention of $700,000 in excess of $300,000. For Medical Care
Availability and Reduction of Error Fund (MCARE) eligible insureds in Pennsylvania, the policy limits are $500,000 ultimate net loss per each claim, insured, and policy and $1,500,000 in the aggregate. For those defined specialties not
covered under MCARE, policy limits are $1,000,000 ultimate net loss per each claim, insured, and policy and $3,000,000 in the aggregate. The contract also has Clash coverage provision (Coverage B) providing $600,000 in coverage subject to a
$2,200,000 aggregate. Coverage C has a retention of $1,000,000 in excess of $1,000,000. The reinsurers maximum liability during the annual contract period was $25,000,000 for Coverages A and B and $2,000,000 for Coverage C. On January 1, 2016, the Exchange entered into a two-year excess of loss and clash reinsurance
contract. The contract applies to policies written by the Exchange for insureds with medical practices within the states of Pennsylvania, New Jersey, Ohio, Delaware, and Maryland. Coverages under the contract are the same as the January 2015
contract described above except for the following changes: (1) The reinsurers maximum liability during the annual contract period shall be 550% of ceded reinsurance premium or $5,000,000, whichever is greater, for Coverages A and B; and
(2) Coverages A and B are subject to a deductible of $1,250,000 or 12% of net subject earned premium, whichever is greater. The contract terminated on December 31, 2017. On January 1, 2018, the Exchange entered into a reinsurance contract with JLT Re (North America), Inc. (JLT). Under the terms
of the agreement, reinsurance is ceded by the Exchange. For MCARE eligible insureds in Pennsylvania, the reinsurance liability is $200,000 in excess of $300,000 per claim. For insured individuals not covered by MCARE, the reinsurance liability is
$700,000 in excess of $300,000 per claim. For insureds in other states with policy limits of $200,000 per claim, the reinsurer liability is $100,000 in excess of $100,000 per claim. For insureds with policy limits in excess of $200,000 per claim,
not exceeding $1,000,000 per claim, the reinsurance liability is $700,000 in excess of $300,000. The reinsurance contract has a two-year term and expires on January 1, 2020. Premiums ceded to the reinsurers are subject to adjustment based on the terms of the reinsurance agreement. Initially, a deposit or provisional
premium is ceded to the reinsurers, which is periodically adjusted, and set equal to 7.5% of the gross net earned premium income for the period from January 1, 2016 through January 1, 2018, subject to a minimum premium of $650,000.  A-20




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  The effect of reinsurance on premiums written, amounts earned, and losses and loss adjustment
expenses incurred for the year ended December 31, 2018 is as follows:  2018Premiums written:Direct

$
15,586,230Ceded


3,036,088Premiums written, net of reinsurance

$
12,550,142Premiums earned:Direct

$
15,818,872Ceded


2,722,454Premiums earned, net of reinsurance

$
13,096,418Losses and loss adjustment expenses incurred:Direct

$
6,430,711Ceded


(242,740
)Losses and loss adjustment expenses incurred, net of reinsurance

$
6,673,451  A-21




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  8.
Losses and Loss Adjustment Expenses: Activity in the liability for losses and loss adjustment expenses for the year ended December 31, 2018 are summarized as follows:  2018Losses and loss adjustment expenses, beginning of year

$
38,028,709Less: Reinsurance recoverable, beginning of year


6,117,389Add: Reinsurance recoverable, claims paid, beginning of year


352,285Losses and loss adjustment expenses, beginning of year


32,263,605Incurred related to:Current year


9,596,259Prior years


(2,922,808
)Total incurred


6,673,451Paid related to:Current year


398,770Prior years


9,300,763Total paid


9,699,533Losses and loss adjustment expenses, end of yearnet


29,237,523Add: Reinsurance recoverable, end of year


5,431,752Less: Recoverable on claims paid


5,791Losses and loss adjustment expenses, end of yeargross

$
34,663,484 The liability for loss and loss adjustment expenses at December 31, 2018 was $34,663,484. For the year
ended December 31, 2018, $9,300,763 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
favorable development of $2,922,808 during the year ended December 31, 2018 was primarily related to reductions of the ultimate losses for the 2010, 2011, and 2015 policy years which were offset by strengthening the ultimate loss reserves for
the 2016 and 2017 policy years.  A-22




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Incurred and Paid Loss Development Information - Unaudited The following information about incurred and paid loss development at December 31, 2018, net of reinsurance, as well as cumulative claim
frequency and the total of incurred-but-not-reported liabilities, plus expected development on report claims included within the
net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2009 to
December 31, 2017, is presented as supplementary information and is unaudited.  Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)(Unaudited)





As of December 31, 2018AccidentYear


2009


2010


2011


2012


2013


2014


2015


2016


2017


2018


Total
ofIncurred-But-Not-ReportedLiabilities Plus ExpectedDevelopment on ReportedClaims


CumulativeNumber ofReportedClaims2009


$
3,899


$
3,792


$
3,939


$
3,607


$
3,426


$
2,856


$
2,718


$
2,548


$
2,503


$
2,323



75



32010







4,875



4,191



4,961



4,521



4,158



3,671



3,265



2,937



2,252



22



12011











5,329



5,473



5,456



5,221



4,948



4,276



4,447



3,864



128



22012















6,258



5,956



5,946



5,643



5,405



6,410



6,430



170



112013



















6,547



6,722



6,199



5,625



5,224



4,947



359



192014























6,353



6,034



5,562



4,278



3,952



643



162015



























8,173



7,575



6,992



5,009



1,332



162016































8,136



7,502



8,166



2,200



452017



































10,184



10,864



4,994



452018







































9,397



6,999



58$
57,204Cumulative Paid Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)(Unaudited)AccidentYear


2009


2010


2011


2012


2013


2014


2015


2016


2017


20182009


$
58


$
312


$
530


$
829


$
1,291


$
1,577


$
1,656


$
1,573


$
1,602


$
1,9422010







30



255



466



871



1,410



1,531



1,736



1,911



2,1872011











69



366



903



1,959



3,400



2,988



3,273



3,4092012















83



464



901



1,870



3,775



5,193



5,4782013



















50



236



950



2,306



2,617



3,2792014























42



292



766



1,792



2,6972015



























79



381



1,162



2,1482016































193



807



3,3972017



































400



3,4282018







































22828,193All outstanding liabilities before 2009, net of reinsurance



227Liabilities for losses and loss adjustment expenses, net of reinsurance


$
29,238  A-23




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Reconciliation The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses at
December 31, 2018 in the accompanying balance sheet is as follows:  2018Net outstanding liabilities for losses and loss adjustment expenses:Medical professional

$
29,237,523Liabilities for losses and loss adjustment expenses, net of reinsurance


29,237,523Reinsurance recoverable on unpaid claims:Medical professional


5,425,961Total reinsurance recoverable on unpaid claims


5,425,961Total gross liability for losses and loss adjustment expenses

$
34,663,484 Actuarial Assumptions and Methodologies The Exchange uses a combination of the Actual versus Expected Method, Bornhuetter-Ferguson Method, Expected Loss Ratio Method,
Frequency/Severity Method, and the Loss Development Method in order to estimate its liability for losses and loss adjustment expenses. There were no significant changes in the methodologies and assumptions used to develop the liabilities for losses
and loss adjustment expenses for the year ended December 31, 2018. Losses Duration Information The following is supplemental information about average historical claims duration at December 31, 2018:  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 10Medical professional


1.9
%


9.6
%


14.2
%


20.9
%


23.3
%


8.5
%


6.1
%


2.6
%


6.8
%


14.6
%  9.
Note Payable: On December 12, 2014, the Exchange 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%. At December 31, 2018, the balance of the note was $127,327. At December 31, 2018, the Exchange was in compliance with all loan covenants. Future maturities of the note for the succeeding years are as follows at December 31, 2018:  Year ending December 31,2019

$
62,3852020


64,942$
127,327  A-24




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  10.
Income Taxes: The components of the Exchanges income tax provision for the year ended December 31, 2018 are as follows:  2018Current provision

$
71,650Deferred tax provision


(173,067
)$
(101,417
) The Exchanges U.S. federal statutory income tax rate applicable to ordinary income was 21% for the year
ended December 31, 2018. The income tax provision differs from that computed by applying federal statutory rate to loss before income taxes for the year ended December 31, 2018 is summarized as follows:  2018Expected tax provision at federal statutory rate

$
(34,441
)Tax exempt income, net of proration


(38,234
)Dividends received deduction, net of proration


(10,540
)Deferred adjustments


(22,053
)Other


3,851Net income tax provision

$
(101,417
)  A-25




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Deferred taxes are provided for the temporary differences between financial reporting
purposes and the income tax purposes of the Exchanges assets and liabilities. At December 31, 2018, the components of the Exchanges net deferred income taxes consisted of the following:  2018Deferred tax assets:Discount of unearned premiums

$
321,939Discount of advance premiums


16,919Discount of losses and loss adjustment expenses


561,439Unrealized loss on investments


72,387Guaranteed fund assessment


28,675Other


28Total deferred tax assets


1,001,387Deferred tax liabilities:Deferred acquisition costs


528,946TCJA transitional adjustment


169,324Unrealized gain on investments


Other


3,339Total deferred tax liabilities


701,609Net deferred tax asset (liability)

$
299,778 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, 2018, management determined that it is more likely than not that all of the deferred tax assets will be realized by the Exchange in future years. Accordingly, the Exchange did not record a valuation allowance against its deferred
tax assets at December 31, 2018. At December 31, 2018, there were no unused operating loss carryforwards available to offset
future taxable income. The Exchange has applied the provisions of ASC 740, Income Taxes, for the year ended December 31, 2018.
ASC 740 prescribes a recognition threshold and measurement attribute with respect to uncertainty in income tax positions. In applying ASC 740, the Exchange has evaluated its various tax positions taken during the year ended December 31, 2018.
The Exchange 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 Exchange 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 amounts of unrecognized tax
benefits.  A-26




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  The Exchange did not recognize any interest and penalties in the accompanying consolidated
statement of operations and comprehensive loss for the year ended December 31, 2018. The Exchange remains subject to examination by the Internal Revenue Service for tax years 2015 through 2017. On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Most of the provisions of this bill did not affect
corporate taxes paid until 2018 and beyond including reducing the top corporate tax rate from 34% to 21%. However, based upon applicable statutory accounting rules deferred income taxes are estimated based upon expected tax rates enacted prior to
the date of the financial statements. Accordingly, the Exchange has measured its deferred income taxes at December 31, 2017 using a tax rate of 21%. Additionally, as part of the enactment of TCJA, 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 Exchange recorded as a
component of net deferred tax asset at December 31, 2017 a resulting difference amount of $105,261, the gross amount of $501,243 of which is being amortized into taxable income beginning in 2018. During the year ended December 31, 2018,
the 2017 discount reserve difference was subsequently revised due to changes in the corporate bond yield curve published by the IRS resulting in an adjusted gross amount of $921,493. During the year ended December 31, 2018, the amount amortized
into taxable income was $115,187. At December 31, 2018, the deferred tax liability related to TCJA transitional adjustment was $169,324 and is included as a component of net deferred tax asset.  11.
Related Party Transactions: SIS, as the Attorney-In-Fact for the subscribers to the
Exchange, is responsible for the exchange of reciprocal insurance contracts among the subscribers and for managing the business of the Exchange as set forth in the
Attorney-In-Fact Agreement. Pursuant to the terms of the agreement, SIS provides underwriting and administrative services to the Exchange based on a percentage not to
exceed 25.0% for gross written premiums, less return premiums. The Attorney-In-Fact Agreement is in effect for an indefinite term, subject only to the right of the
Exchange and SIS to terminate this Agreement by mutual agreement. Management fee expense incurred by the Exchange in accordance with the Attorney-In-Fact Agreement for
the year ended December 31, 2018 was $3,896,557. Management fee is included in other underwriting expenses in the accompanying statement of operations and comprehensive loss . At December 31, 2018, the Exchange owed SIS
$261,476 for these services and is included in due to affiliates in the accompanying consolidated balance sheet. The Attorney-In-Fact Agreement was amended effective January 1, 2017 to increase the management fee percentage from 24.5% of gross written premiums to 25.0% of gross written
premiums. Additionally, the agreement was further amended whereby the management fee charged by SIS to the Exchange is to no longer include payments to agents and other sales commissions as components of the fee. Total amount of broker commissions
incurred by the Exchange during the year ended December 31, 2018 was $1,316,013 and is included in other underwriting expenses in the accompanying consolidated statement of operations and comprehensive loss.  A-27




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  On June 1, 2018, SIS adopted a Plan of Conversion (the Plan) to convert the
Exchange from a reciprocal inter-insurance exchange to a stock form of ownership pursuant to the Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock
Conversion Act. Under the Plan, the Exchange would merge with Professional Casualty Association (the Association) and Physicians Insurance Program Exchange (PIPE), Pennsylvania reciprocal inter-insurance exchanges, and
would become a wholly-owned subsidiary of Positive Physicians Holdings, Inc., a newly formed Pennsylvania business corporation (Holdings). As part of the Plan, as amended, Holdings will offer and sell its common stock to subscribers of
the Exchange, the Association, and PIPE as well as to other interested investors. Other than eligible stockholders of Diversus, it is not expected that Diversus would be a direct or indirect purchaser of common stock in the offering. The Plan was
subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the Plan, the Exchange incurred conversion and securities offering costs of $312,902 during the year ended December 31, 2018, of which $228,656 was included
in other underwriting expenses in the accompanying consolidated statement of operations and comprehensive loss. At December 31, 2018, the amount due from Holdings related to these conversion and securities offering costs was $84,246
and is presented as due from affiliate in the accompanying consolidated balance sheet. On February 5, 2019, the
Department approved the Plan. The effective date for the Securities and Exchange Commission Form S-1 Registration Statement for the initial public offering of Holdings was February 11, 2019. The offering
took place on March 27, 2019. The Exchange and Andrews Outsource Solutions, LLC (AOS), a wholly-owned subsidiary of
Diversus, entered into an agreement in April 2017, whereby AOS is to provide litigation management services and paralegal support services to the Exchange. During the year ended December 31, 2018, the Exchange incurred litigation management
services of $544,000 related to this agreement; such amount is included in losses and loss adjustment expenses in the accompanying consolidated statement of operations and comprehensive loss. At December 31, 2018, there was no
amount due to AOS related to these services. The Exchange has an agreement with Gateway Risk Services, Inc. (Gateway), a
wholly-owned subsidiary of Diversus, whereby Gateway provides the Exchange with specialty services for claims administration. Gateway manages the claims process on behalf of the Exchange. The Exchange incurred and paid fees related to services
provided by Gateway totaling $135,000 for the year ended December 31, 2018; such amount is included in losses and loss adjustment expenses in the accompanying consolidated statement of operations and comprehensive loss. There was no
amount due to Gateway at December 31, 2018.  A-28




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  On October 16, 2018, PPCIC entered into a surplus note agreement with PIPE whereby PIPE
advanced $500,000 to PPCIC. Under the terms of the note, outstanding advances bear interest at 3%, payable in monthly interest installments of $3,750 and principal is due on the maturity date on October 1, 2028. All monthly payments of interest
and principal payments are subject to the approval of the New Jersey Department. During the year ended December 31, 2018, PPCIC incurred interest expense of $3,139, the amount is due at December 31, 2018, and is included in due to
affiliates in the accompanying consolidated balance sheet. At December 31, 2018, the Exchange had a payable to Keystone in the
amount of $383,255 for ceded premiums on behalf of the owner of Keystone and insured of the Exchange for the year ended December 31, 2018 and is included in due to affiliates in the accompanying consolidated balance sheet. During the year ended December 31, 2018, expenses of the Exchange were initially paid by PIPE. At December 31, 2018, the amount due
to PIPE was $3,321, and is included in due to affiliates in the accompanying consolidated balance sheet. As discussed in Note
7, on January 1, 2018 the Exchange entered into a reinsurance contract with JLT. JLT and SIS co-brokered the contract. JLT is to be compensated by the reinsurers through commissions, and JLT, in turn,
will pay a portion of the commission to SIS. During the year ended December 31, 2018, SIS earned commission income of $55,277 related to this agreement.  12.
Management Agreement: The Exchange and PPCIC have an agreement with Strategic Risk Solutions (VT), Inc. (SRS), an unrelated company, whereby SRS
provides accounting, administrative, and regulatory services to both entities. The Exchange incurred fees related to services provided by SRS totaling $107,509, for the year ended December 31, 2018. The amount due to SRS at December 31,
2018 was $2,167.  13.
Assessments: The Exchange is aware of various insurance entities insolvencies that produced business in the Commonwealth of Pennsylvania. The Exchange
has received assessments for its pro-rata share of the cost of such insolvencies from the Pennsylvania Property and Casualty Insurance Guaranty Fund. Statutory accounting principles require the Exchange to
provide a liability for the full cost of such insolvencies up to the maximum annual assessment limit (2.0%). Based upon the available
information, the Exchange has provided a gross liability of $136,547 at December 31, 2018 for guaranty fund assessments and is included in accounts payable, accrued expenses, and other liabilities in the accompanying consolidated
balance sheet. The Exchange has not recorded applicable premium tax credits at December 31, 2018 related to guaranty assessments. Total guaranty fund expense, net of prior years refunds and premium tax credits, for the year ended
December 31, 2018 was $43,682.  A-29




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  MCARE 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. The Exchange 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 balance sheet, and no income is recognized by the
Exchange. At December 31, 2018, the Exchange had liabilities of $433,130 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. The Exchange 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
balance sheet, and no income is recognized by the Exchange. At December 31, 2018, the Exchange had liabilities of $36,777 for amounts collected on behalf NJPIGA.  14.
Statutory Information: Accounting principles used to prepare statutory financial statements differ from those used to prepare 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 the Exchange are prepared in accordance with accounting practices prescribed by the 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 allowance valuation; (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 and
amortized over the term of the policies; (4) the carrying value of bonds are based on NAIC ratings whereas GAAP requires bonds to be valued based on whether management intends to hold the bonds 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 limited to those temporary deductible differences
which are expected to reverse within three years, whereas under GAAP, no such limitation exists; and (7) ceded reinsurance amounts (unearned premiums and estimated loss recoverables) are shown net of the related liability, whereas presented on
a gross basis and reflected as an asset for GAAP. The Department has adopted certain prescribed accounting practices that differ from
those found in the NAIC statutory accounting practices. Specifically, the Department prescribes 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 SAP, the unearned premiums would not be reduced by the management fees paid relate to unearned premiums reserve.  A-30




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  Statutory net income and surplus and other funds of the Exchange as determined in accordance
with SAP prescribed or permitted by the Department for the year ended December 31, 2018 are as follows:  2018Statutory net income

$
597,233Statutory surplus and other funds


16,821,008 A reconciliation of statutory surplus and other funds between NAIC statutory accounting practices and practices
prescribed by the Department are as follows:  2018Statutory surplus and other funds prescribed by the
Department

$
16,821,008State prescribed practices:Unearned management fees


(1,789,508
)Statutory surplus and other funds per NAIC
statutory accounting practices

$
15,031,500 In accordance with Pennsylvania law, the Exchange is required to maintain minimum subscribers surplus of
$1,125,000. Additionally, Pennsylvania law sets the maximum amount of dividends that may be paid by the Exchange during any twelve-month period after notice to, but without the approval of, the Department. This amount cannot exceed the greater of
(1) 10% of the Exchanges surplus as reported on its most recent annual statement filed with the Department or (2) the Exchanges statutory net income for the period covered by the annual statement as reported on such statement.
During the year ended December 31, 2018, no dividends were declared or paid by the Exchange. The Exchange 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 the Exchanges total adjusted capital, as defined by the NAIC, to its authorized control level RBC. At December 31, 2018, the Exchanges RBC exceeded minimum RBC requirements. Note 15: Subsequent Events Subsequent events
have been evaluated through April 24, 2019, which is the date the consolidated financial statements were available to be issued. As
discussed in Note 12, on February 5, 2019 the Department approved the Plan. The effective date of the S-1 for the initial public offering of Holdings was February 11, 2019. The offering took place on
March 27, 2019.  A-31




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION - FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  B-1




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   FINANCIAL STATEMENTS (with report of independent registered public accounting firm) YEARS ENDED DECEMBER 31, 2018 AND 2017 INDEX  PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


B-3FINANCIAL STATEMENTS:Balance sheets


B-4Statements of operations and comprehensive (loss) income


B-5Statements of members equity


B-6Statements of cash flows


B-7Notes to financial statements


B-8   B-2




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##### Table of Contents

LOGO REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the board of directors of Professional Casualty Association: Opinion on the Financial Statements We have audited the
accompanying balance sheets of Professional Casualty Association (the Company) as of December 31, 2018 and 2017, the related statements of operations and comprehensive (loss) income, members equity, and cash flows, for each of
the years then ended, and the related notes (collectively referred to as the  financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion. Effect of Adopting New Accounting Standard As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for unrealized holding gains and losses on equity
securities in 2018 due to the adoption of Financial Accounting Standards Board Accounting Standards Update 2016-01,Financial Instruments-Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. /s/ Baker Tilly Virchow Krause, LLP We have served as the Companys auditor since 2014. Milwaukee, Wisconsin April 24, 2019  B-3




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   BALANCE SHEETS DECEMBER 31, 2018 AND 2017  2018


2017ASSETSAvailable-for-sale
bond securities, at fair value (Amortized cost of $25,043,747 and $25,795,187)

$
24,522,706


$
25,714,469Equity securities, at fair value (Cost of $2,934,515 and $2,758,755)


3,016,174



3,240,787Equity security, at net asset value


130,432



Short-term investments, at fair value


149,948



Total investments


27,819,260



28,955,256Cash and cash equivalents


1,146,235



4,250,022Accrued investment income


172,559



139,058Premiums receivable


1,189,326



1,447,712Reinsurance recoverable


2,227,068



2,312,019Unearned ceded premiums


203,585



549,304Income taxes recoverable


761,855



353,968Deferred acquisition costs


1,093,314



1,189,364Deferred income taxes


1,094,106



102,362Due from affiliate


88,333



Other assets


162,208



260,684TOTAL ASSETS

$
35,957,849


$
39,559,749LIABILITIES AND MEMBERS EQUITYLIABILITIES:Losses and loss adjustment expenses

$
22,165,916


$
18,584,712Unearned premiums


3,882,068



5,494,355Reinsurance payable


45,988



Accounts payable, accrued expenses, and other liabilities


861,943



1,347,964Due to affiliates, net


5,179



278,370TOTAL LIABILITIES


26,961,094



25,705,401MEMBERS EQUITY:Contributed capital


2,348,988



2,348,988Retained earnings


7,059,388



11,188,322Accumulated other comprehensive (loss) income


(411,621
)


317,038TOTAL MEMBERS EQUITY


8,996,755



13,854,348TOTAL LIABILITIES AND MEMBERS EQUITY

$
35,957,849


$
39,559,749 See notes to financial statements.  B-4




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME YEARS ENDED DECEMBER 31, 2018 AND 2017  2018


2017REVENUES:Net premium earned

$
7,111,761


$
7,480,452Net investment income


329,172



584,026TOTAL REVENUES


7,440,933



8,064,478EXPENSES:Losses and loss adjustment expenses, net


9,990,048



4,012,280Other underwriting expenses


3,428,395



3,500,447Interest expense






31,250TOTAL EXPENSES


13,418,443



7,543,977(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES


(5,977,510
)


520,501PROVISION FOR INCOME TAXES


(1,467,771
)


209,278NET (LOSS) INCOME


(4,509,739
)


311,223OTHER COMPREHENSIVE (LOSS) INCOME:Unrealized holding (losses) gains on available-for-sale securities, net of income tax benefit
(expense) of $92,468 and ($133,601)


(340,754
)


272,576Reclassification adjustments for net realized gain Included in net (loss) income


(7,100
)


(13,233
)TOTAL OTHER COMPREHENSIVE (LOSS) INCOME


(347,854
)


259,343COMPREHENSIVE (LOSS) INCOME

$
(4,857,593
)

$
570,566 See notes to financial statements.  B-5




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   STATEMENTS OF MEMBERS EQUITY YEARS ENDED DECEMBER 31, 2018 AND 2017  ContributedCapital


RetainedEarnings


AccumulatedOtherComprehensiveIncome (Loss)


Total MembersEquityBalance, January 1, 2017

$
2,348,988


$
10,929,270


$
5,524


$
13,283,782Net income






311,223







311,223Other comprehensive income










259,343



259,343Reclassification of tax effects from accumulated other comprehensive income related to passage of
TCJA






(52,171
)


52,171



Balance, December 31, 2017

$
2,348,988


$
11,188,322


$
317,038


$
13,854,348Net loss






(4,509,739
)






(4,509,739
)Other comprehensive loss










(347,854
)


(347,854
)Reclassification of unrealized gain on equity securities, net of income taxes, from accumulated
other comprehensive income with the adoption of ASU 2016-01






380,805



(380,805
)


Balance, December 31, 2018

$
2,348,988


$
7,059,388


$
(411,621
)

$
8,996,755 See notes to financial statements.  B-6




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2018 AND 2017  2018


2017CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income

$
(4,509,739
)

$
311,223Adjustments to reconcile net (loss) income to net cash used in operating activities:Deferred income taxes


(899,276
)


180,933Net realized gain on sales of investments


(10,433
)


(13,233
)Unrealized loss on equity securities


422,320



Amortization of bond premiums


23,608



87,129Amortization expense


27,756



Changes in operating assets and liabilities:Accrued investment income


(33,501
)


(2,674
)Premiums receivable


258,386



(666,779
)Reinsurance recoverable


84,951



153,261Unearned ceded premiums


345,719



54,543Income taxes recoverable


(407,887
)


28,345Deferred acquisition costs


96,050



29,360Due from affiliate


(88,333
)


147,754Other assets


87,031



(87,982
)Liability for losses and loss adjustment expenses


3,581,204



(4,417,079
)Unearned premiums


(1,612,287
)


(1,211,753
)Reinsurance payable


45,988



Accounts payable, accrued expenses, and other liabilities


(486,021
)


(437,083
)Due to affiliates, net


(273,191
)


278,370NET CASH USED IN OPERATING ACTIVITIES


(3,347,655
)


(5,565,665
)CASH FLOWS FROM INVESTING ACTIVITIES:Investments:Proceeds from sales and maturities


8,400,183



16,725,323Purchases


(8,140,004
)


(12,123,961
)Other assets


(16,311
)


(83,610
)NET CASH PROVIDED BY INVESTING ACTIVITIES


243,868



4,517,752CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of subordinated notes payable






(500,000
)NET CASH USED IN FINANCING ACTIVITIES






(500,000
)NET CHANGE IN CASH AND CASH EQUIVALENTS


(3,103,787
)


(1,547,913
)CASH AND CASH EQUIVALENTS, beginning of year


4,250,022



5,797,935CASH AND CASH EQUIVALENTS, end of year

$
1,146,235


$
4,250,022SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid for the year

$



$
31,250 See notes to financial statements.  B-7




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  1.
Organization and Operations: Professional Casualty Association (Association) is an unincorporated, subscriber-owned exchange organized on April 16, 2003.
The Association received its Certificate of Authority on June 26, 2003 and is licensed by the Commonwealth of Pennsylvania Insurance Department (Department) as a reciprocal insurance exchange. Additionally, the Association was
licensed as an admitted carrier on November 2, 2015 by the Michigan Department of Insurance and Financial Services. The Associations primary business is to provide medical professional liability insurance consisting of claims-made, tail
occurrence, and occurrence policies to its subscribers. The members of the Association consist exclusively of the Associations subscribers. Underwriting is based on the applicants specialty, location, and claims history. The Association is managed by Professional Third Party, LP (PTP) pursuant to the terms of an Attorney-In-Fact Agreement between the Association and PTP, effective April 16, 2003. Pursuant to the terms of the agreement, PTP provides salaries and benefit expenses of the employees, rent and other
occupancy expenses, supplies, and data processing services to the Association and pays certain expenses on behalf of the Association in exchange for 25% of the gross written premium. PTP has the power to direct the activities of the Association that most significantly impact the Association economic performance by acting as
the common attorney-in-fact and decision maker for the subscribers at the Association. PTP is a wholly-owned subsidiary of Diversus, Inc. (Diversus), a
Delaware domiciled holding company, effective as of June 4, 2014.  2.
Summary of Significant Accounting Policies: Basis of Presentation The
Association prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). Use of Estimates The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and notes. Actual results could differ from these estimates and such
differences could be material. The Associations principal estimates include the liability for losses and loss adjustment expenses, deferred acquisition costs, other-than-temporary impairments of investments, valuation of deferred tax assets,
and premium deficiency reserves. Cash and Cash Equivalents The Association 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).  B-8




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PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Prior to the adoption of Financial Accounting Standards Board (FASB) Accounting
Standards Update (ASU) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities, as of January 1, 2018, investments in equity securities were classified as available-for-sale securities, stated at fair value, and unrealized
holding gains and losses, net of related tax effects, were recorded directly to accumulated other comprehensive income. With the adoption of ASU 2016-01, investments in equity securities are still stated at
fair value but unrealized holding gains and losses are credited or charged to net income (loss) as incurred. The Association has an
ownership interest in a limited partnership equity hedge fund. The fund has a short-term and long-term equity investment strategy that specializes in securities of financial institutions. The Associations interest in the fund is measured at
fair value using the funds net asset value as a practical expedient. Unrealized holding gains and losses are credited or charged to net income (loss) as incurred. After an initial one-year lockup period, the investment may be redeemed
quarterly with a 45-day notice. There are no unfunded commitments related to the investment. The investment is presented as equity security, at net asset value in the accompanying balance sheets. Realized gains and losses on sales of equity and fixed maturity securities are recognized into income based upon the specific identification
method. Interest and dividends are recognized as earned. The Association considers short-term investments to be short-term, highly liquid
investments that are less than one year in term to the dates of maturities at the purchase dates that they present insignificant risk of changes in value due to changing interest rates. The Association regularly evaluates all its investments based on current economic conditions, credit loss experience, and other specific
developments. If there is a decline in a securities 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. 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 (loss) income. 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. For equity securities in an unrealized loss position where fair
value is not expected to be recovered to the securitys cost basis in a reasonable time period, or where management does not expect to hold the security for a period of time sufficient to allow for a recovery to the securitys cost basis,
an OTTI is deemed to have occurred, and a loss is recognized in earnings. Deferred Acquisition Costs Deferred acquisition costs consist of costs that vary with and are directly related to the successful acquisition of new and renewal insurance
contracts. These costs primarily consist of sales commissions, management fees, and premium taxes, are deferred, and amortized as premiums are earned over the applicable policy term.  B-9




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  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 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. The Association offers 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 an Association policyholder for least five years. An extended reporting endorsement policy reserve is required to assure that premiums are not earned prematurely. The Association has this reserve actuarially
determined with the balance included in unearned premiums. The extended reporting endorsement policy reserve amounted to $1,074,000 and $2,263,158 at December 31, 2018 and 2017, respectively. 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 losses and loss adjustment expenses in the accompanying balance sheets. The Association has not recorded any premium deficiency reserves as of December 31, 2018 or 2017. The analysis of premium deficiency
reserves was completed as of December 31, 2018 and 2017. The Association does not consider anticipated investment income when calculating the premium deficiency reserves. Reinsurance The
Association cedes reinsurance risk to other insurance companies. This arrangement allows the Association to minimize the net loss potential arising from large risks. Reinsurance contracts do not relieve the Association of its obligation to its
subscribers. 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.  B-10




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Conversion Costs The Association incurred direct consulting and other costs related to the conversion from a reciprocal insurance exchange to a stock form of
ownership and as part of offering of securities by the currently planned parent company as further discussed in Note 10. Conversion and securities offering costs that are not anticipated to be reimbursed by the currently planned parent company are
included in other underwriting expenses in the accompanying statements of operations and comprehensive (loss) income as incurred. Additionally, the Association has paid costs related to offering of securities by the formerly planned
parent company. These costs were charged to the Association and required reimbursement from the formerly planned parent company. However, given the termination of the original offering (as discussed in Note 10), these costs have been written off and
are included in other underwriting expenses in the accompanying statements of operations and comprehensive (loss) income for the year ended December 31, 2017. Revenue Recognition Premiums of the Association 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 Association records an advanced premium
liability in lieu of written premium. Comprehensive (Loss) Income Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments 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 balance
sheets. Such items, along with net (loss) income, are components of comprehensive income (loss), and are reflected in the accompanying statements of operations and comprehensive (loss) income. Reclassifications of realized gains and losses on sales of investments out of accumulated other comprehensive income (loss) are recorded in
investment income in the accompanying statements of operations and comprehensive (loss) income. Income Taxes The Association 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 the Associations financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the
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 Association records net deferred tax assets to the extent it
believes these assets will more likely than not be realized. In making such determination, the Association considers all available positive and negative evidence, including future reversal of existing taxable temporary differences, projected future
taxable income, tax planning strategies and recent financial operations. The Association recognizes interest and penalties related to
unrecognized tax benefits within the income tax expense line in the accompanying statements of operations and comprehensive (loss) income. Accrued interest and penalties are included within the related tax liability line in the accompanying balance
sheets.  B-11




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PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Recently Adopted Accounting Pronouncements The Association adopted the provisions of ASU 2016-01 for the year ended December 31, 2018. The
amendments in this ASU require among other things that equity investments to be measured at fair value (excluding those equity securities measured at fair value using net asset value as a practical expedient) with changes in fair value recognized in
net income, 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 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 $380,805 were reclassified from accumulated other comprehensive income to retained
earnings as presented in the accompanying statement of members equity for the year ended December 31, 2018. The Association
adopted the provisions of FASB ASU 2015-09, Disclosures about Short-Duration Contracts, addressing enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and
the unpaid claims liability roll-forward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent information about an insurance entitys initial claim estimates and
subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. The adoption of this ASU for the year ended December 31, 2017 did not have material impact on
the financial statements. The Association adopted the provisions of ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Incomeduring the year ended December 31, 2017.The amendments in this ASU allow a reclassification from accumulated other comprehensive income to
members equity for stranded tax effects resulting from passage of the Tax Cuts and Jobs Act (TCJA). In connection with the adoption of ASU 2018-02, the Association adopted the policy option
available under ASU 2018-02 of reclassifying the income tax effects related to change in tax rates from accumulated other comprehensive income to members equity during the year ended December 31,
2017. The adoption of this ASU for the year ended December 31, 2017 did not have material impact on the financial statements.  B-12




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Recently Issued Accounting Pronouncements New accounting rules and disclosure requirements can impact the results and the comparability of the Associations financial statements.
The following recently issued accounting pronouncements are relevant to the Associations financial statements: ASU 2016-13: 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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. At this time, management is evaluating the potential impact of ASU
2016-13 in the Associations financial statements. Reclassifications Certain previously reported amounts have been reclassified to conform to the presentation used in the December 31, 2017 financial
statements. Such reclassifications had no impact on members equity or net (loss) income.  3.
Concentrations of Credit Risk: Financial instruments which potentially expose the Association to concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments, non-U.S. government bonds, premium balances receivable, and balances recoverable from reinsurers. Non-U.S. government bonds are diversified and
no one investment accounts for greater than 5% of the Associations invested assets. The Association maintains its cash in bank deposit accounts that, at times, may exceed the federally insured limits. The Association has not experienced any
losses from bank accounts. Management is of the opinion that there is low risk because of the financial strength of the respective financial institutions. The Association is also subject to concentrations of credit risk through short-term money market investments. The credit risk related to
short-term investments is minimized by the Association investing in money market funds secured by U.S. government securities or repurchase agreements secured by U.S. government securities. Insureds consist of healthcare providers in which no one insured accounted over 20% of premiums receivable or gross written premium as of and
for the years ended December 31, 2018 and 2017. At December 31, 2018 and 2017, the Association had reinsurance balances recoverable of $2,227,068 and $2,312,019, respectively, and reinsurance payable to reinsurers of $45,988 and $0,
respectively, for unpaid losses and loss adjustment expenses, contingent commissions receivable, and unearned premiums with four reinsurers, one of which is an authorized reinsurer domiciled outside of the United States of America. The authorized,
domestic reinsurers have A.M. Best ratings of A or better.  B-13




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  4.
Variable Interest Entity: The Association is a reciprocal insurance exchange domiciled in Pennsylvania, for which PTP serves as attorney-in-fact. PTP holds a variable interest in the Association due to the absence of decision-making capabilities by the equity owners (subscribers/policyholders) of the Association and due to the
significance of the management fee the Association pays to PTP as its decision maker. As a result, PTP is deemed to have a controlling financial interest in the Association and is considered to be its primary beneficiary. All medical professional liability insurance operations are owned by the Association, and PTP functions solely as the management company. PTP has not provided financial or other support to the Association for any of the reporting periods presented. At December 31, 2018 and
2017, there are no explicit or implicit arrangements that would require PTP to provide future financial support to the Association.  5.
Investments: The Associations equity and fixed maturity securities are stated at fair value, which is the price that would be received to sell the
asset in an orderly transaction between willing market participants as of the measurement date. The Association uses various valuation
techniques and assumptions when estimating fair value, which are in accordance with accounting principles for fair value measurement of assets and liabilities that are recognized or disclosed in the financial statements on a recurring basis. These
principles establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels
are defined as follows: Level 1 - Quoted (unadjusted) prices for identical assets in active markets. Level 2 - Other observable inputs, either directly or indirectly, including:  

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.);  

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.  B-14




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The estimated fair values of equity and fixed maturity are based on quoted market prices
where available. The Association obtains 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. As the Association is responsible for the
determination of fair value, it performs analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. 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. The Associations 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 investments by major security type of the Association at December 31, 2018 and 2017 are as follows:  AmortizedCost/Cost


GrossUnrealizedGains


GrossUnrealizedLosses


Fair ValueDecember 31, 2018U.S. government

$
4,097,623


$
852


$
61,351


$
4,037,124Subdivisions of states, territories, and possessions


840,210



4,645







844,855Industrial and miscellaneous


20,105,9140



4,974



470,161



19,640,727Total bonds


25,043,747



10,471



531,512



24,522,706Common stocks


2,934,515



246,770



165,111



3,016,174$
27,978,262


$
257,241


$
696,623


$
27,538,880  AmortizedCost/Cost


GrossUnrealizedGains


GrossUnrealizedLosses


Fair ValueDecember 31, 2017U.S. government

$
6,693,770


$
560


$
67,765


$
6,626,565Subdivisions of states, territories, and possessions


915,000







1,912



913,088Industrial and miscellaneous


18,186,417



78,498



90,099



18,174,816Total bonds


25,795,187



79,058



159,776



25,714,469Common stocks


2,758,755



491,752



9,720



3,240,787$
28,553,942


$
570,810


$
169,496


$
28,955,256  B-15




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  At December 31, 2018, maturities of investments in bond securities are as follows:  AmortizedCost/Cost


Fair ValueDue in less than one year

$
2,420,813


$
2,413,413Due after one year to five years


14,258,820



14,003,835Due after five years to ten years


8,364,114



8,105,458$
25,043,747


$
24,522,706 Realized gains and losses are determined using the specific identification method. During the years ended
December 31, 2018 and 2017, proceeds from maturity and sales and gross realized gains and losses on securities are:  2018


2017Proceeds

$
8,400,183


$
16,725,323Gross gains


59,236



46,147Gross losses


48,803



32,914 The components of net investment income are as follows:  2018


2017Bonds

$
635,369


$
578,219Cash and short-term investments


40,539



19,529Common stocks


103,226



81,298Limited partnerships


1,231



Net gain on sales of investments


10,433



13,233Unrealized loss on equity investments


(422,320
)


368,478



692,279Less investment expenses


39,306



108,253Net investment income

$
329,172


$
584,026 In connection with the adoption of ASU 2016-01 at January 1, 2018,
the following are the net gains and losses recognized for equity investments that are included in net loss for the year ended December 31, 2018:  2018Total net loss recognized during the year

$
(418,987)Net gain on sales of equity investments during the year


3,333Net unrealized loss recognized during the year

$
(422,320)  B-16




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The following table shows gross unrealized losses and fair value of the Associations
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 MonthsFair Value


Unrealized LossesU.S. government

$
993,433


$
2,438Industrial and miscellaneous


8,273,516



159,459Common stocks


1,093,538



146,701$
10,360,487


$
308,598Greater than 12 MonthsFair Value


Unrealized LossesU.S. government

$
2,897,807


$
58,913Industrial and miscellaneous


9,281,312



310,702Common stocks


167,040



18,410$
12,346,159


$
388,025TotalsFair Value


Unrealized LossesU.S. government

$
3,891,240


$
61,351Industrial and miscellaneous


17,554,828



470,161Common stocks


1,260,578



165,111$
22,706,646


$
696,623 At December 31, 2018, the Association had 174 securities in unrealized loss positions of less than 12
months with a combined gross unrealized loss of $308,598 and 79 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $388,025.  B-17




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The following table shows gross unrealized losses and fair value of the Associations
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,
2017:  Less than 12 MonthsFair Value


Unrealized LossesU.S. government

$
2,508,225


$
4,733Subdivisions of states, territories, and possessions






Industrial and miscellaneous


7,514,041



58,048Common stocks


186,528



5,446$
10,208,794


$
68,227Greater than 12 MonthsFair Value


Unrealized LossesU.S. government

$
3,893,144


$
63,032Subdivisions of states, territories and possessions


913,088



1,912Industrial and miscellaneous


3,212,135



32,051Common stocks


214,313



4,274$
8,232,680


$
101,269TotalsFair Value


Unrealized LossesU.S. government

$
6,401,369


$
67,765Subdivision of states, territories, & possessions


913,088



1,912Industrial and miscellaneous


10,726,176



90,099Common stocks


400,841



9,720$
18,441,474


$
169,496 At December 31, 2017, the Association had 69 securities in unrealized loss positions of less than 12
months with a combined gross unrealized loss of $68,227 and 47 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $101,269. The unrealized losses on investments in U.S. government and agency securities, state securities, and corporate debt securities at
December 31, 2018 and 2017 were primarily caused by general economic conditions and not by unfavorable changes in credit ratings associated with these securities. The Association evaluates impairment at each reporting period for each of the
securities where the fair value of the investment is less than its carrying value. The contractual cash flows of the U.S. government and agency obligations are guaranteed either by the U.S. government or an agency of the U.S. government. It is
expected that the securities would not be settled at a price less than the carrying value of the investment, and the Association does not intend to sell the investment until the unrealized loss is fully recovered. The Association evaluated the
credit ratings of the state and agency obligations and corporate obligations, noting whether a significant deterioration since  B-18




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  purchase or other factors that may indicate an other-than-temporary-impairment such as the length of time and extent to which fair value has been less than cost, the financial condition, and
near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer and the Associations intent to sell the investment. Management of the Association determined that there were no
investments which were other-than-temporarily-impaired as of and for the years ended December 31, 2018 and 2017. The table below
presents the level within the fair value hierarchy generally utilized by the Association to estimate the fair value of assets disclosed on a recurring basis at December 31, 2018:  Total


Level 1


Level 2


Level 3U.S. government

$
4,037,124


$



$
4,037,124


$
Subdivisions of states, territories, and possessions


844,855







844,855



Industrial and miscellaneous


19,640,727







19,640,727



Total bonds


24,522,706







24,522,706



Common stocks


3,016,174



3,016,174







$
27,538,880


$
3,016,174


$
24,522,706


$
 The table below presents the level within the fair value hierarchy generally utilized by the Association to
estimate the fair value of assets disclosed on a recurring basis at December 31, 2017:  Total


Level 1


Level 2


Level 3U.S. government

$
6,626,565


$



$
6,626,565


$
Subdivisions of states, territories, and possessions


913,088







913,088



Industrial and miscellaneous


18,174,816







18,174,816



Total bonds


25,714,469







25,714,469



Common stocks


3,240,787



3,240,787







$
28,955,256


$
3,240,787


$
25,714,469


$
  6.
Deferred Acquisition Costs: The following table summarizes the components of deferred acquisition costs for the years ended December 31, 2018 and 2017:  2018


2017Balance, beginning of year

$
1,189,364


$
1,218,724Amount capitalized during the year


2,352,535



2,583,099Amount amortized during the year


2,448,585



2,612,459Balance, end of year

$
1,093,314


$
1,189,364  B-19




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  7.
Reinsurance: On January 1, 2016, the Association and the Physicians Insurance Program Exchange (Exchange), a Pennsylvania reciprocal
inter-insurance exchange, entered into a consolidated reinsurance contract with Guy Carpenter & Co, LLC. Under the terms of the agreement, reinsurance is ceded by the Association and the Exchange. For Medical Care Availability and Reduction
of Error Fund (MCARE) eligible insureds in Pennsylvania, the reinsurance liability is $200,000 in excess of $300,000 per claim. For insured individuals not covered by MCARE, the reinsurance liability is $500,000 in excess of $500,000 per
claim. Stand-alone Clinics, Health Care Organizations and Dental Professional Liability insureds, not covered by MCARE, are reinsured at limits of $700,000 in excess of $300,000 per claim. For insureds in South Carolina and Michigan with policy
limits of $200,000 per claim, the reinsurer liability is $100,000 in excess of $100,000 per claim. For insureds with policy limits in excess of $200,000 per claim, not exceeding $1,000,000 per claim, the reinsurance liability is $700,000 in excess
of $300,000. The reinsurance contract had a two-year term and was terminated on December 31, 2017. On January 1, 2018, the Association and the Exchange entered into separate reinsurance contracts with JLT Re (North America), Inc.
(JLT). Under the terms of the agreements, reinsurance is ceded by the Association and the Exchange. For MCARE eligible insureds in Pennsylvania, the reinsurance liability is $200,000 in excess of $300,000 per claim. For insured
individuals not covered by MCARE, the reinsurance liability is $700,000 in excess of $300,000 per claim. For insureds in South Carolina and Michigan with policy limits of $200,000 per claim, the reinsurer liability is $100,000 in excess of $100,000
per claim. For insureds with policy limits in excess of $200,000 per claim, not exceeding $1,000,000 per claim, the reinsurance liability is $700,000 in excess of $300,000. The reinsurance contracts have a
two-year term and expire on January 1, 2020. The effect of reinsurance on premiums written,
amounts earned, and losses incurred for the years ended December 31, 2018 and 2017 is as follows:  2018


2017Premiums written:Direct

$
6,311,346


$
7,683,787Ceded


466,154



1,360,550Premiums written, net of reinsurance

$
5,845,192


$
6,323,237Premiums earned:Direct

$
7,923,634


$
8,895,545Ceded


811,873



1,415,093Premiums earned, net of reinsurance

$
7,111,761


$
7,480,452Losses and loss adjustment expenses incurred:Direct

$
12,388,564


$
4,702,804Ceded


2,398,516



690,524Losses and loss adjustment expenses incurred, net of reinsurance

$
9,990,048


$
4,012,280  B-20




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  8.
Losses and Loss Adjustment Expenses: Activity in the liability for losses and loss adjustment expenses for the years ended December 31, 2018 and 2017 is summarized as follows:  2018


2017Loss and loss adjustment expenses, beginning of year - gross

$
18,584,712


$
23,001,791Less: Reinsurance recoverable, beginning of year


2,312,019



2,465,280Add: Reinsurance recoverable, claims paid, beginning of year


844,288



740,158Losses and loss adjustment expenses, beginning of year- net


17,116,981



21,276,669Incurred related to:Current year


3,867,284



4,435,280Prior years


6,122,764



(423,000
)Total incurred


9,990,048



4,012,280Paid related to:Current year


186,677



310,857Prior years


6,981,504



7,861,111Total paid


7,168,181



8,171,968Losses and loss adjustment expenses, end of year - net


19,938,848



17,116,981Add: Reinsurance recoverable, end of year


2,227,068



2,312,019Less: Reinsurance recoverable, claims paid, end of year






844,288Losses and loss adjustment expenses, end of year - gross

$
22,165,916


$
18,584,712 The liability for losses and loss adjustment expenses at December 31, 2018 and 2017 were $22,165,916 and
$18,584,712, respectively. For the years ended December 31, 2018 and 2017, $6,981,504 and $7,861,111, 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 favorable development of $423,000 during the year ended December 31, 2017 was primarily related to re-estimation of unpaid losses
and loss adjustment expenses on all claims-made policy years. The unfavorable development of $6,122,764 during the year ended December 31, 2018 was primarily related to reserve strengthening in the 2015 ($400,000) occurrence policy year, the
2016 ($500,000) tail policy year and the 2017 ($400,000) and 2014 through 2017 ($4,500,000) claims-made policy years. A majority of these changes in indications were related to the Associations new claims management team and a change in
reserving philosophy of setting reserves at the expected value as soon as possible when the liability is acknowledged.  B-21




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Incurred and Paid Loss Development Information - Unaudited The following information about incurred and paid loss development at December 31, 2018, net of reinsurance, as well as cumulative claim
frequency and the total of incurred-but-not-reported liabilities, plus expected development on report claims included within the
net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2009 to
December 31, 2017, is presented as supplementary information and is unaudited.  Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)


As of December 31, 2018(unaudited)AccidentYear

2009


2010


2011


2012


2013


2014


2015


2016


2017


2018


Total
ofIncurred-But-Not-ReportedLiabilities Plus ExpectedDevelopment on ReportedClaims


CumulativeNumber ofReportedClaims2009

$
13,591


$
11,440


$
10,624


$
9,767


$
9,791


$
9,712


$
10,438


$
11,064


$
11,196


$
11,602







1082010






8,455



6,567



6,443



5,740



4,990



4,563



4,461



5,127



5,269



5



1002011










9,459



9,537



9,471



11,602



11,928



11,982



12,428



12,589



7



702012














9,877



9,364



9,553



10,064



10,146



10,420



10,619



109



842013


















7,818



7,057



6,270



5,536



5,040



5,353



152



982014






















7,403



5,924



5,989



5,672



5,957



509



862015


























8,374



7,292



6,500



7,286



1,127



682016






























7,529



7,873



9,548



1,563



662017


































4,378



6,224



2,151



712018






































3,773



2,472



46$
78,220Cumulative Losses and Loss Adjustment Expenses Paid, Net of Reinsurance (in thousands)(unaudited)AccidentYear

2009


2010


2011


2012


2013


2014


2015


2016


2017


20182009

$
408


$
1,605


$
4,028


$
7,214


$
7,956


$
8,282


$
9,507


$
10,240


$
11,057


$
11,6022010






267



963



2,065



3,078



3,671



3,851



3,981



4,986



4,9972011










398



1,132



2,802



8,926



10,356



11,098



11,795



12,4642012














423



1,500



3,240



5,736



8,617



9,811



9,9332013


















406



1,336



2,715



4,191



4,435



4,9962014






















285



1,017



2,884



4,094



4,3952015


























381



1,802



3,197



4,1102016






























512



2,475



4,5132017


































302



1,5172018






































167$
58,694All outstanding liabilities before 2009, net of reinsurance



83Liabilities for losses and loss adjustment expenses, net of reinsurance


$
19,609  B-22




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Reconciliation The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses at
December 31, 2018 in the accompanying balance sheet is as follows:  2018Net outstanding liabilities for losses and loss adjustment expenses:Medical professional

$
19,608,690Liabilities for losses and loss adjustment expenses, net of reinsurance


19,608,690Reinsurance recoverable on unpaid claims:Medical professional


2,227,068Total reinsurance recoverable on unpaid claims


2,227,068Unallocated loss adjustment expenses


330,158Total gross liability for losses and loss adjustment expenses

$
22,165,916 Actuarial Assumptions and Methodologies The Association uses a combination of the Actual versus Expected Method, Bornhuetter-Ferguson Method, Frequency/Severity Method, and the Loss
Development Method in order to estimate its liability for losses and loss adjustment expenses. There were no significant changes in the methodologies and assumptions used to develop the liabilities for losses and loss adjustment expenses as of
December 31, 2018 and 2017. Losses Duration Information The following is supplemental information about average historical claims duration at December 31, 2018:  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 10Medical professional


4.8
%


14.3
%


21.1
%


25.6
%


11.0
%


6.8
%


6.5
%


10.2
%


3.6
%


4.7
%  9.
Income Taxes: The components of the Associations income tax provision for the years ended December 31, 2018 and 2017 are as follows:  2018


2017Current provision

$
(568,495
)

$
28,345Deferred tax provision


(899,276
)


180,933$
(1,467,771
)

$
209,278  B-23




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The Associations U.S. federal statutory income tax rate applicable to ordinary income
was 21% and 34% for the years ended December 31, 2018 and 2017, respectively. The income tax provision differs from that computed by applying federal statutory rate to (loss) income before income taxes for the years ended December 31, 2018
and 2017 is summarized as follows:  2018


2017Expected tax provision at federal statutory rate

$
(1,255,277
)

$
176,970Permanent and other differences


(9,706
)


27,125Deferred adjustments


(6,640
)


(58,182
)Change in enacted tax rates


(219,872
)


63,366Alternative minimum tax


23,607



Other


117



Net income tax provision

$
(1,467,771
)

$
209,279 Deferred taxes are provided for the temporary differences between financial reporting purposes and the income
tax purposes of the Associations assets and liabilities. At December 31, 2018 and 2017, the components of the Associations net deferred tax assets consisted of the following:  2018


2017Deferred tax assets:Discount of unearned premiums

$
154,496


$
207,692Discount of advance premiums


18,400



30,365Discount of losses and loss adjustment expenses


352,602



266,541Guaranty fund assessment


5,041



16,757Net operating loss carryforward


811,703



Unrealized loss on investments
Capital loss carryforward


96,879



Total deferred tax assets


1,439,121



521,355Deferred tax liabilities:Deferred acquisition costs


229,596



249,766TCJA transitional adjustment


114,004



83,753Other items


1,415



1,198Unrealized gains on investments






84,276Total deferred tax liabilities


345,015



418,993Net deferred tax assets

$
1,094,106


$
102,362 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.  B-24




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  At December 31, 2018 and 2017, management determined that it is more likely than not
that all the deferred tax assets will be realized by the Association in future years. Accordingly, the Association did not record a valuation allowance against its deferred tax assets at December 31, 2018 and 2017. At December 31, 2018, the Association had unused operating loss carryforwards of $3,865,253 which can be utilized to offset taxable income
in future years. The utilization of these losses expires in 2038. There were no unused operating loss carryforwards at December 31, 2017. The Association has applied the provisions of ASC 740, Income Taxes, for the years ended December 31, 2018 and 2017. ASC 740
prescribes a recognition threshold and measurement attribute with respect to uncertainty in income tax positions. In applying ASC 740, the Association has evaluated its various tax positions taken during the years ended December 31, 2018 and
2017. The Association 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 Association 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 amounts of
unrecognized tax benefits. The Association did not recognize any interest and penalties in the accompanying statements of operations and
comprehensive (loss) income for the years ended December 31, 2018 and 2017. The Association remains subject to examination by the Internal Revenue Service for tax years 2015 through 2017. On December 22, 2017, TCJA was signed into law. Most of the provisions of this bill will not affect corporate taxes paid until 2018 and
beyond including reducing the top corporate tax rate from 34% to 21%. However, based upon accounting principles generally accepted in the United States of America, deferred income taxes are estimated based upon expected tax rates enacted prior to
the date of the financial statements. Accordingly, the Association has measured its deferred income taxes at December 31, 2017 using a tax rate of 21%. The effect on members equity was a decrease of $63,366, which is reported as a
component of deferred income tax expense of $63,366. Additionally, as part of the enactment of TCJA, 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 Association recorded as a component of net deferred tax asset at December 31, 2017 a resulting difference amount of $83,753, the gross amount of $398,825 of which is being amortized into taxable income beginning
in 2018. During the year ended December 31, 2018, the 2017 discount reserve difference was subsequently revised due to changes in the corporate bond yield curve published by the IRS resulting in an adjusted gross amount of $620,429. During the
year ended December 31, 2018, the amount amortized into taxable loss was $77,554. At December 31, 2018, the deferred tax liability related to TCJA transitional adjustment was $114,004 and is included as a component of net deferred tax
asset.  B-25




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  10.
Related Party Transactions: PTP, as the attorney-in-fact for the subscribers to the
Association, is responsible for the exchange of reciprocal insurance contracts among the subscribers and for managing the business of the Association as set forth in the
Attorney-In-Fact Agreement. Pursuant to the terms of the agreement, PTP provides salaries, and benefit expenses of the employees, rent and other occupancy expenses,
supplies, and data processing services to the Association and pays certain expenses on behalf of the Association in exchange for 25% of the gross written premium. The
Attorney-In-Fact Agreement is in effect for an indefinite term, subject only to the right of the Association and PTP to terminate this Agreement by mutual agreement.
Management fee expense incurred by the Association in accordance with the Attorney-In-Fact Agreement with PTP for the years ended December 31, 2018 and 2017 were
$1,577,837 and $1,920,949, respectively. Additionally, during the years ended December 31, 2018 and 2017, the Association incurred commission expenses from services provided by PTP totaling $31,404 and $33,164,
respectively.    Management fee and commission expenses are included in other underwriting expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2018 and 2017, the
Association owed PTP $5,179 and $267,045, respectively, for these services and are included in due to affiliates in the accompanying balance sheets. At December 31, 2016, the Association had subordinated promissory notes to the former owners of PTP in the total amount of $500,000, interest
carried at 5%, and maturing on March 31, 2017. All the subordinated promissory notes were issued in exchange for cash from the original note holders and the notes were carried at face value. The notes were subordinated to all policyholders and
general creditor obligations of the Association, and all payments of interest and principal were subject to prior approval of the Department.    During the year ended December 31, 2017, the Association received permission
from the Department to pay principal and interest of $500,000 and $31,250, respectively. On July 27, 2015, PTP had adopted a previous
plan of conversion to convert the Association from a reciprocal inter-insurance exchange to a stock form of ownership pursuant to the Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act (the Act). Under the previous plan of conversion, the Association would have merged with the Exchange and would have become a wholly-owned subsidiary of
Professional Casualty Holdings, Inc. (PCH), a newly formed Pennsylvania business corporation. As part of the previous plan of conversion, PCH would have offered and sold its common stock to subscribers of the Association and of the
Exchange as well as to other interested investors. With the adoption of the current plan of conversion between the Association, the Exchange, and Positive Physicians Insurance Exchange (PPIX), a Pennsylvania reciprocal inter-insurance
exchange, in June 2018 as discussed below, the previous plan of conversion was discontinued. In connection with the previous plan, the Association incurred conversion and securities offering costs of $0 and $125,180 during the years ended
December 31, 2018 and December 31, 2017, respectively, and are included in other underwriting expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2017, the Association had
a payable of $7,426 to Diversus related to these conversion and securities offering costs and is included due to affiliates in the accompanying balance sheet. There was no payable to Diversus at December 31, 2018 related to the
previous plans of conversion. On June 1, 2018, PTP adopted a Plan of Conversion (the Plan) to convert the Association
from a reciprocal inter-insurance exchange to a stock form of ownership pursuant to the Act. Under the Plan, the Association would merge with the Exchange and PPIX and would become a wholly-owned  B-26




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  subsidiary of Positive Physicians Holdings, Inc. (Holdings), a newly formed Pennsylvania business corporation. As part of the Plan, as amended, Holdings will offer and sell its common
stock to subscribers of the Association, the Exchange, and PPIX as well as to other interested investors. Other than eligible stockholders of Diversus, it is not expected that Diversus would be a direct or indirect purchaser of common stock in the
offering. The Plan was subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the proposed plan, the Exchange incurred conversion and securities offering costs of $241,272 during the year ended December 31, 2018,
of which $152,939 was included in other underwriting expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2018, the amount due from Holdings related to these conversion and
securities offering costs was $88,333 and is presented as due from affiliate in the accompanying balance sheet. On
February 5, 2019, the Department approved the Plan. The effective date for the Securities and Exchange Commission Form S-1 Registration Statement (S-1)
for the initial public offering of Holdings was February 11, 2019. The offering was completed on March 27, 2019. The Association
and Andrews Outsource Solutions, LLC (AOS), a wholly-owned subsidiary of Diversus, entered into an agreement, with the Form D filing approved by the Department on December 17, 2015, whereby AOS is to provide litigation management
services to the Association consisting of developing, implementing, and monitoring the litigation practices and strategy of the handling of specific medical professional liability lawsuits and claims. In April 2017, the litigation management
services agreement between AOS and the Association was amended, with the Form D filing approved by the Department on April 6, 2017, whereby the fee structure of charges by AOS to the Association for each case is based upon the relationship with
each respective attorney ranging from $300 to $500 per case per month rather than a flat fee of $500 per case per month. During the years ended December 31, 2018 and 2017, the Association incurred litigation management services of $441,100 and
$521,000, respectively, related to this agreement; such amounts are included in losses and loss adjustment expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2018 and 2017, there
was no amount due to AOS related to these services. In April 2017, the Association and Gateway Risk Services, Inc. (Gateway),
a wholly-owned subsidiary of Diversus, entered into an agreement, with the Form D filing approved by the Department on April 6, 2017, whereby Gateway is to provide defense and cost containment services to the Association that were formerly
provided by PTP to the Association prior to the effective date of the agreement. During the years ended December 31, 2018 and 2017, the Association incurred services totaling $115,000 and $84,714, respectively, related to this agreement; such
amounts are included in losses and loss adjustment expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2018 and 2017, there was no amount due to Gateway related to these services. During the year ended December 31, 2017, Diversus Management, Inc. (DMI), a wholly-owned subsidiary of Diversus, and PPIX
paid for certain expenses on behalf of the Association. Additionally, DMI makes cash disbursements on behalf of each attorney-in-fact subsidiary of Diversus and invoices
the respective attorney-in-fact for these transactions. At December 31, 2017, the amounts due to DMI and PPIX by the Association were $3,549 and $350, respectively,
and are included due to affiliates in the accompanying balance sheets. There was no amount due to DMI and PPIX by the Association at December 31, 2018.  B-27




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  As discussed in Note 7, on January 1, 2018 the Association entered into a reinsurance
contract with JLT. JLT and Specialty Insurance Services, LLC (SIS), a wholly-owned subsidiary of Diversus, co-brokered the contract. JLT is to be compensated by the reinsurers through commissions,
and JLT, in turn, will pay a portion of the commission to SIS. During the year ended December 31, 2018, SIS earned commission income of $14,178 related to this agreement. As discussed in Note 7, the Association and the Exchange entered into a consolidated reinsurance contract effective as of January 1, 2016.
Guy Carpenter and International Specialty Brokers, Ltd. (ISBL), a former wholly-owned subsidiary of Diversus, co-brokered the contract. Guy Carpenter was compensated by the reinsurers through
commissions and Guy Carpenter, in turn, paid a portion of the commissions to ISBL. During the year ended December 31, 2017, ISBL earned commission income of $52,387 related this arrangement. During the year ended December 31, 2017, Healthcare Professional Services, Inc. (HPSI), a former wholly-owned subsidiary of
Diversus, provided wholesale brokerage services to the Association in the amount of $39,273.  11.
Assessments: The Association is aware of various insurance entities insolvencies that produced business in the Commonwealth of Pennsylvania. The
Association has received assessments for its pro-rata share of the cost of such insolvencies from the Pennsylvania Property and Casualty Insurance Guaranty Fund. Statutory accounting principles require the
Association to provide a liability for the full cost of such insolvencies up to the maximum annual assessment limit (2.0%). Based upon the
available information, the Association has provided a gross liability of $24,000 and $79,793 at December 31, 2018 and 2017, respectively, for guaranty fund assessments and are included in accounts payable, accrued expenses, and other
liabilities in the accompanying balance sheets. The Association has not recorded applicable premium tax credits at December 31, 2018 and 2017, respectively related to guaranty assessments. Total guaranty fund expense, net of prior
years refunds and premium tax credits for the years ended December 31, 2018 and 2017 was $(10,998) and $21,663, respectively. MCARE 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. The Association 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 balance sheets, and no income is recognized by the Association. The Association had liabilities of
$101,838 and $250,000 for MCARE assessments at December 31, 2018 and 2017, respectively, for amounts collected on behalf of MCARE.  B-28




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  12.
Statutory Information: Accounting principles used to prepare statutory financial statements differ from those used to prepare 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 the Association are prepared in accordance with accounting practices prescribed by the Department. Financial statements prepared under statutory accounting principles focus on solvency of the insurer and generally provide a more conservative
approach than under GAAP. These accounting practices differ 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) nonadmitted assets must be excluded through a charge to surplus, while on a GAAP basis nonadmitted assets are included in the balance sheet net of any allowance valuation;
(3) acquisition costs, such as commissions, premium taxes and other items, have been charged to operations when incurred, whereas GAAP requires capitalization of these expenses and amortized over the term of the policies; (4) the carrying
value of bonds are based on NAIC ratings whereas GAAP requires bonds to be valued based on whether management intends to hold the bonds 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; and (6) Ceded reinsurance amounts (unearned premiums and estimated loss recoverable) are shown net of the related liability, whereas presented on a gross basis and
reflected as an asset for GAAP. The Department has adopted certain prescribed accounting practices that differ from those found in the
NAIC statutory accounting practices. Specifically, the Department prescribes 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 SAP, the unearned premiums would not be reduced by the management fees paid related to unearned premiums reserve. Statutory net (loss) income and surplus and other funds of the Association as determined in accordance with SAP prescribed or permitted by the
Department for the years ended December 31, 2018 and 2017 are as follows:  2018


2017Statutory net (loss) income

$
(4,996,396
)

$
566,492Statutory surplus and other funds


8,963,342



13,590,554 A reconciliation of statutory surplus and other funds between NAIC statutory accounting practices and practices
prescribed by the Department are as follows:  2018


2017Statutory surplus and other funds prescribed by
the Department

$
8,963,342


$
13,590,554State prescribed practices:Unearned management fees


(702,017
)


(807,794
)Statutory surplus and other funds per NAIC statutory accounting practices

$
8,261,325


$
12,782,760  B-29




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##### Table of Contents

PROFESSIONAL CASUALTY ASSOCIATION   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  In accordance with Pennsylvania law, the Association is required to maintain minimum
subscribers surplus of $1,125,000. Additionally, Pennsylvania law sets the maximum amount of dividends that may be paid by the Association during any twelve-month period after notice to, but without the approval of, the Department. This amount
cannot exceed the greater of (1) 10% of the Associations surplus as reported on its most recent annual statement filed with the Department or (2) the Associations statutory net income for the period covered by the annual statement
as reported on such statement. During the years ended December 31, 2018 and 2017, no dividends were declared or paid by the Association. The Association 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 the Associations total adjusted capital, as defined
by the NAIC, to its authorized control level RBC. At December 31, 2018 and 2017, the Associations RBC exceeded minimum RBC requirements.  Note 13:
Subsequent Events Subsequent events have been evaluated through April 24, 2019, which is the date the financial statements were available to be issued. As discussed in Note 10, on February 5, 2019 the Department approved the Plan. The effective date of the
S-1 for the initial public offering of Holdings was February 11, 2019. The offering was completed on March 27, 2019.  B-30




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE  FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  C-1




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   FINANCIAL STATEMENTS (with report of independent registered public accounting firm) YEARS ENDED DECEMBER 31, 2018 AND 2017 INDEX  PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


C-3FINANCIAL STATEMENTS:Balance sheets


C-4Statements of operations and comprehensive (loss) income


C-5Statements of members equity


C-6Statements of cash flows


C-7Notes to financial statements


C-8  C-2




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##### Table of Contents

LOGO REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the board of directors of Physicians Insurance Program Exchange: Opinion on the Financial Statements We have audited the
accompanying balance sheets of Physicians Insurance Program Exchange (the Company) as of December 31, 2018 and 2017, the related statements of operations and comprehensive (loss) income, members equity, and cash flows,
for the years then ended, and the related notes (collectively referred to as the  financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion. Effect of Adopting New Accounting Standard As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for unrealized holding gains and losses on equity
securities in 2018 due to the adoption of Financial Accounting Standards Board Accounting Standards Update 2016-01,Financial Instruments-Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. /s/ Baker Tilly Virchow Krause, LLP We have served as the Companys auditor since 2014. Milwaukee, Wisconsin April 24, 2019  C-3




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   BALANCE SHEETS DECEMBER 31, 2018 AND 2017  2018


2017ASSETSAvailable-for-sale
bond securities, at fair value (Amortized cost of $19,812,852 and $21,161,640)

$
19,488,355


$
21,229,056Equity securities, at fair value (Cost of $1,851,192 and $1,580,248)


1,809,604



1,819,637Equity securities, at net asset value


224,127



131,798Short-term investments, at fair value


224,001



Total investments


21,746,087



23,180,491Cash and cash equivalents


792,908



1,836,204Accrued investment income


138,796



136,854Premiums receivable


185,889



353,793Reinsurance recoverable


297,223



156,443Unearned ceded premiums


56,162



171,573Income taxes recoverable


425,753



189,233Deferred acquisition costs


373,090



384,957Deferred income taxes


282,207



151,578Surplus note to affiliate


500,000



Due from affiliate


88,628



Other assets


49,970



83,036TOTAL ASSETS

$
24,936,713


$
26,644,162LIABILITIES AND MEMBERS EQUITYLIABILITIES:Losses and loss adjustment expenses

$
11,562,933


$
11,761,133Unearned premiums


1,341,722



1,609,252Reinsurance payable


40,139



10,661Accounts payable, accrued expenses, and other liabilities


796,554



922,001Due to affiliates, net


40,334



77,470TOTAL LIABILITIES


13,781,682



14,380,517MEMBERS EQUITY:Contributed capital


8,050,850



8,050,850Retained earnings


3,360,533



3,970,419Accumulated other comprehensive (loss) income


(256,352
)


242,376TOTAL MEMBERS EQUITY


11,155,031



12,263,645TOTAL LIABILITIES AND MEMBERS EQUITY

$
24,936,713


$
26,644,162 See notes to financial statements.  C-4




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME YEARS ENDED DECEMBER 31, 2018 AND 2017  2018


2017REVENUES:Net premium earned

$
3,379,655


$
3,147,916Net investment income


394,014



571,463TOTAL REVENUES


3,773,669



3,719,379EXPENSES:Losses and loss adjustment expenses, net


2,919,719



1,823,071Other underwriting expenses


2,019,277



1,855,102TOTAL EXPENSES


4,938,996



3,678,173(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES


(1,165,327
)


41,206PROVISION FOR INCOME TAXES


(366,140
)


101,394NET LOSS


(799,187
)


(60,188
)OTHER COMPREHENSIVE (LOSS) INCOME:Unrealized holding (losses) gains on available-for-sale securities, net of income tax benefit
(expense) of $82,253 and $(104,314)


(263,199
)


143,108Reclassification adjustments for net realized gain included in net loss


(46,228
)


(50,671
)Total other comprehensive (loss) income


(309,427
)


92,437COMPREHENSIVE (LOSS) INCOME

$
(1,108,614
)

$
32,249 See notes to financial statements.  C-5




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   STATEMENTS OF MEMBERS EQUITY YEARS ENDED DECEMBER 31, 2018 AND 2017  ContributedCapital


RetainedEarnings


AccumulatedOtherComprehensiveIncome (Loss)


Total MembersEquityBalance, January 1, 2017

$
8,050,709


$
4,070,492


$
110,054


$
12,231,255Subscription fees


141











14141Net loss






(60,188
)






(60,188
)Other comprehensive income










92,437



92,437Reclassification of tax effects from accumulated other comprehensive income related to passage of
TCJA






(39,885
)


39,885



Balance, December 31, 2017

$
8,050,850


$
3,970,419


$
242,376


$
12,263,645Net loss






(799,187
)






(799,187
)Other comprehensive loss










(309,427
)


(309,427
)Reclassification of unrealized gain on equity securities, net of income taxes, from accumulated
other comprehensive income with the adoption of ASU 2016-01






189,301



(189,301
)


Balance, December 31, 2018


$8,050,850


$
3,360,533


$
(256,352
)

$
11,155,031 See notes to financial statements.  C-6




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2018 AND 2017  2018


2017CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(799,187
)

$
(60,188
)Adjustments to reconcile net loss to net cash used in operating activities:Deferred income taxes


(48,376
)


131,414Net realized gain on sales of investments


(39,393
)


(50,671
)Unrealized loss on equity securities


305,075



Amortization of bond premiums


40,722



66,290Amortization expense


16,356



Changes in operating assets and liabilities:Accrued investment income


(1,942
)


(13,981
)Premiums receivable


167,904



105,002Reinsurance recoverable


(140,780
)


(65,575
)Unearned ceded premiums


115,411



23,261Income taxes recoverable


(236,520
)


(125,986
)Deferred acquisition costs


11,867



37,353Due from affiliate


(88,628
)


Other assets


24,583



(9,391
)Liability for losses and loss adjustment expenses


(198,200
)


(581,915
)Unearned premiums


(267,530
)


(143,419
)Reinsurance payable


29,478



(61,082
)Accounts payable, accrued expenses, and other liabilities


(125,447
)


(148,289
)Due to affiliates, net


(37,136
)


(252,104
)NET CASH USED IN OPERATING ACTIVITIES


(1,271,743
)


(1,149,281
)CASH FLOWS FROM INVESTING ACTIVITIES:Investments:Proceeds from sales and maturities


5,056,598



5,489,626Purchases


(4,320,278
)


(10,580,515
)Issuance of surplus note to affiliate


(500,000
)


Other assets


(7,873
)


(51,010
)NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES


228,447



(5,141,899
)CASH FLOWS FROM FINANCING ACTIVITIES:Subscription fees received






141NET CASH PROVIDED BY FINANCING ACTIVITIES






141NET CHANGE IN CASH AND CASH EQUIVALENTS


(1,043,296
)


(6,291,039
)CASH AND CASH EQUIVALENTS, beginning of year


1,836,204



8,127,243CASH AND CASH EQUIVALENTS, end of year

$
792,908


$
1,836,204SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Income taxes paid for the year

$



$
215,406 See notes to financial statements.  C-7




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  1.
Organization and Operations: Physicians Insurance Program Exchange (Exchange) is an unincorporated, subscriber-owned, exchange organized on March 14,
2005. The Exchange received its Certificate of Authority on August 24, 2005 and is licensed by the Commonwealth of Pennsylvania Insurance Department ( Department) as a reciprocal insurance exchange. Additionally, the Exchange was
licensed as an admitted carrier on October 15, 2013 by the South Carolina Department of Insurance. The Exchanges primary business is to provide medical professional liability insurance consisting of claims-made, tail occurrence, and
occurrence policies to health care providers practicing in the Commonwealth of Pennsylvania. The members of the Exchange consist exclusively of the Exchanges subscribers. Underwriting is based on the applicants specialty, location and
claims history. The Exchange is managed by Physicians Insurance Program Management Company (PIPMC) pursuant to the terms
of an Attorney-In-Fact Agreement between the Exchange and PIPMC, effective August 24, 2005. Pursuant to the terms of the agreement, PIPMC provides salaries and
benefit expenses of the employees, rent and other occupancy expenses, supplies, and data processing services to the Exchange and pays certain expenses on behalf of the Exchange for 25% of gross written premium. PIPMC has the power to direct the activities of the Exchange that most significantly impact the Exchange economic performance by acting as the
common attorney-in-fact and decision maker for the subscribers at the Exchange. PIPMC is a wholly-owned subsidiary of Diversus, Inc. (Diversus), a Delaware
domiciled holding company, effective as of November 23, 2015.  2.
Summary of Significant Accounting Policies: Basis of Presentation The
Exchange prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). Use of Estimates The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and notes. Actual results could differ from these estimates and such
differences could be material. The Exchanges principal estimates include the liability for losses and loss adjustment expenses, deferred acquisition costs, other-than-temporary impairments of investments, valuation of deferred tax assets, and
premium deficiency reserves. Cash and Cash Equivalents The Exchange 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). Prior to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as of January 1, 2018,
investments in equity securities were classified as available-for-sale securities, stated at fair value, and unrealized holding gains and losses, net of related tax
effects, were recorded directly to accumulated other comprehensive income (loss). With the adoption of ASU 2016-01, investments in equity securities are still stated at fair value but unrealized holding gains
and losses are credited or charged to net income (loss) as incurred.  C-8




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The Exchange has ownership interests in two limited partnership equity hedge funds. The
Exchanges interests are measured at fair value using the funds net asset values as a practical expedient. Unrealized holding gains and losses are credited or charged to net income (loss) as incurred. There are no unfunded commitments
related to these investments. The investments are presented as equity securities, at net asset value in the accompanying balance sheets. The first fund with a fair value of $137,173 has a short-term and long-term global equity investment
strategy. Investments may be redeemed from the fund on a monthly basis with a 30-day notice, subject to certain restrictions at the discretion of the general partner, and there is no lockup period related to the investment. The second fund with a
fair value of $86,954 also has a short-term and long-term equity investment strategy that specializes in investments in financial institutions. After an initial one-year lockup period that expires in 2019, the investment in the second fund may be
redeemed quarterly with a 45-day notice. Realized gains and losses on sales of equity and fixed maturity securities are recognized into
income based upon the specific identification method. Interest and dividends are recognized as earned. The Exchange considers short-term
investments to be short-term, highly liquid investments that are less than one year in term to the dates of maturities at the purchase dates that they present insignificant risk of changes in value due to changing interest rates. The Exchange regularly evaluates all its investments based on current economic conditions, credit loss experience, and other specific
developments. If there is a decline in a securities 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. 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. For equity securities in an unrealized loss position where fair
value is not expected to be recovered to the securitys cost basis in a reasonable time period, or where management does not expect to hold the security for a period of time sufficient to allow for a recovery to the securitys cost basis,
an OTTI is deemed to have occurred, and a loss is recognized in earnings. Deferred Acquisition Costs Deferred acquisition costs consist of costs that vary with and are directly related to the successful acquisition of new and renewal insurance
contracts. These costs primarily consist of sales commissions, management fees, and premium taxes, are deferred, and amortized as premiums are earned over the applicable policy term. 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.  C-9




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The uncertainties involved with the reserving process include internal factors, such as changes in claims handling procedure, as well 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. The Exchange offers 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 an Exchange policyholder for least five years. An extended reporting endorsement policy reserve is required to assure that premiums are not earned prematurely. The Exchange has this reserve actuarially determined
with the balance included in unearned premiums. The extended reporting endorsement policy reserve amounted to $365,000 and $600,000 at December 31, 2018 and 2017, respectively. 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 losses and loss adjustment expenses in the accompanying balance sheets. The Exchange has not recorded any premium deficiency reserves as of December 31, 2018 or 2017. The analysis of premium deficiency reserves
was completed as of December 31, 2018 and 2017. The Exchange does not consider anticipated investment income when calculating the premium deficiency reserves. Reinsurance The Exchange
cedes insurance risk to other insurance companies. This arrangement allows the Exchange to minimize the net loss potential arising from large risks. Reinsurance contracts do not relieve the Exchange of its obligation to its subscribers. 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. Conversion Costs The
Exchange incurred direct consulting and other costs related to the conversion from a reciprocal insurance exchange to a stock form of ownership and as part of offering of securities by the currently planned parent company as further discussed in
Note 10. Conversion and securities offering costs that are not anticipated to be reimbursed by the currently planned parent company are included in other underwriting expenses in the accompanying statements of operations and
comprehensive (loss) income as incurred. Additionally, the Exchange has paid costs related to offering of securities by the formerly planned parent company. These costs were charged to the Exchange and required reimbursement from the formerly
planned parent company. However, given the termination of the original offering (as discussed in Note 10), these costs have been written off and are included in other underwriting expenses in the accompanying statements of operations and
comprehensive (loss) income for the year ended December 31, 2017. Revenue Recognition Premiums of the Exchange 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 Exchange records an advanced premium liability
in lieu of written premium. Comprehensive (Loss) Income Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments 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 balance
sheets. Such items, along with net (loss) income, are components of comprehensive income (loss), and are reflected in the accompanying statements of operations and comprehensive (loss) income.  C-10




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Reclassifications of realized gains and losses on sales of investments and out of accumulated
other comprehensive income (loss) are recorded in investment income in the accompanying statements of operations and comprehensive (loss) income. Income Taxes The Exchange
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 the Exchanges financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the 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 Exchange records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such
determination, the Exchange considers all available positive and negative evidence, including future reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial operations. The Exchange recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying
statements of operations and comprehensive (loss) income. Accrued interest and penalties are included within the related tax liability line in the accompanying balance sheets. Recently Adopted Accounting Pronouncements The Exchange adopted the provisions of ASU 2016-01 for the year ended December 31, 2018. The
amendments in this ASU require among other things that equity investments to be measured at fair value (excluding those equity securities measured at fair value using net asset value as a practical expedient) with changes in fair value recognized in
net income, 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 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 $189,301 were reclassified from accumulated other comprehensive income to retained
earnings as presented in the accompanying statement of members equity for the year ended December 31, 2018. The Exchange
adopted the provisions of FASB ASU 2015-09, Disclosures about Short-Duration Contracts, addressing enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and
the unpaid claims liability roll-forward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent  C-11




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  information about an insurance entitys initial claim estimates and subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing,
frequency, and severity of claims. The adoption of this ASU for the year ended December 31, 2017 did not have material impact on the financial statements. The Exchange adopted the provisions of ASU 2018-02, Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Incomeduring the year ended December 31, 2017.The amendments in this ASU allow a reclassification from accumulated other comprehensive income to members equity for stranded tax effects
resulting from passage of the Tax Cuts and Jobs Act (TCJA). In connection with the adoption of ASU 2018-02, the Exchange adopted the policy option available under ASU
2018-02 of reclassifying the income tax effects related to change in tax rates from accumulated other comprehensive income to members equity during the year ended December 31, 2017. The adoption of
this ASU for the year ended December 31, 2017 did not have material impact on the financial statements. Recently Issued Accounting
Pronouncements New accounting rules and disclosure requirements can impact the results and the comparability of the Exchanges
financial statements. The following recently issued accounting pronouncements are relevant to the Exchanges financial statements: ASU 2016-13: 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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. At this time, management is evaluating the potential impact of ASU 2016-13 in the Exchanges financial statements. Reclassifications Certain
previously reported amounts have been reclassified to conform to the presentation used in the December 31, 2017 financial statements. Such reclassifications had no impact on members equity or net loss.  3.
Concentrations of Credit Risk: Financial instruments that potentially subject the Exchange 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 the Exchanges invested assets. The Exchange maintains its cash in bank deposit accounts that, at times, may exceed the federally insured limits. The Exchange has not experienced any losses from bank
accounts. Management is of the opinion that there is low risk because of the financial strength of the respective financial institutions.  C-12




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The Exchange is also subject to concentrations of credit risks through short-term money
market investments. The credit risk related to short-term money market investments is minimized by the Exchange by investing in money market funds secured by U.S. government securities or repurchase agreements secured by U.S. government securities. Insureds consist of healthcare providers in which no one insured accounted for over 20% of premiums receivable or gross written premium as
of and for the years ended December 31, 2018 and 2017. At December 31, 2018 and 2017, the Exchange had reinsurance balances recoverable of $297,223 and $156,443, respectively, and reinsurance payable to the reinsurer of $40,139 and
$10,661, respectively, for unpaid losses and loss adjustment expenses, contingent commissions receivable, and unearned premiums with one authorized reinsurer, which is domiciled outside of the United States of America. Premiums receivable include amounts due from a premium financing company that are paid within 30 days of the effective date of the insurance
policy. Management is of the opinion there is minimal risk due to the premium financing company accepting all recourse for nonpayment by the subscriber.  4.
Variable Interest Entity: The Exchange is a reciprocal insurance exchange domiciled in Pennsylvania, for which PIPMC serves as attorney-in-fact. PIPMC holds a variable interest in the Exchange due to the absence of decision-making capabilities by the equity owners (subscribers/policyholders) of the Exchange and due to the
significance of the management fee the Exchange pays to PIPMC as its decision maker. As a result, PIPMC is deemed to have a controlling financial interest in the Exchange and is considered to be its primary beneficiary. All medical professional liability insurance operations are owned by the Exchange, and PIPMC functions solely as the management company. PIPMC has not provided financial or other support to the Exchange for any of the reporting periods presented. At December 31, 2018 and
2017, there are no explicit or implicit arrangements that would require PIPMC to provide future financial support to the Exchange.  5.
Investments: The Exchanges equity and fixed maturity securities are stated at fair value, which is the price that would be received to sell the asset
in an orderly transaction between willing market participants as of the measurement date. The Exchange uses various valuation techniques
and assumptions when estimating fair value, which are in accordance with accounting principles for fair value measurement of assets and liabilities that are recognized or disclosed in the financial statements on a recurring basis. These principles
establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are
defined as follows: Level 1 - Quoted (unadjusted) prices for identical assets in active markets. Level 2 - Other observable inputs, either directly or indirectly, including:  

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.);  C-13




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  

Inputs other than quoted prices that are observable for the asset (interest rates, yield curves, volatilities,
default rates, etc.);  

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. The estimated fair values of equity and fixed maturity securities are based on quoted market prices where available. The Exchange obtains 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. As the Exchange is responsible for the determination of fair value, it performs analyses on the
prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. 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. The
Exchanges 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 investments by major security type for the results of
the Exchange at December 31, 2018 and 2017 are as follows:  AmortizedCost/Cost


GrossUnrealizedGains


GrossUnrealizedLosses


Fair ValueDecember 31, 2018U.S. government

$
3,656,123


$
86,502


$
43,571


$
3,699,054States, territories, and possessions


200,468



10,594







211,062Subdivisions of states, territories, and possessions


2,516,008



29,549



19,319



2,526,238Industrial and miscellaneous


13,440,253



2,775



391,027



13,052,001Total bonds


19,812,852



129,420



453,917



19,488,355Common stocks


1,851,192



94,410



135,998



1,809,604$
21,664,044


$
223,830


$
589,915


$
21,297,959  C-14




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  AmortizedCost/Cost


GrossUnrealizedGains


GrossUnrealizedLosses


Fair ValueDecember 31, 2017U.S. government

$
4,940,661


$
147,753


$
44,877


$
5,043,537States, territories, and possessions


200,490



15,866







216,356Subdivisions of states, territories, and possessions


3,205,666



54,515



77,223



3,182,958Industrial and miscellaneous


12,814,823



37,455



66,073



12,786,205Total bonds


21,161,640



255,589



188,173



21,229,056Common stocks


1,580,248



247,978



8,589



1,819,637$
22,741,888


$
503,567


$
196,762


$
23,048,693 At December 31, 2018, maturities of investments in bond securities are as follows:  AmortizedCost/Cost


Fair ValueDue in less than one year

$
1,623,905


$
1,617,154Due after one year to five years


10,259,473



10,144,327Due after five years to ten years


6,554,339



6,324,553Due after ten years


1,375,135



1,402,321$
19,812,852


$
19,488,355 Realized gains and losses are determined using the specific identification method. During the years ended
December 31, 2018 and 2017, proceeds from maturity and sales and gross realized gains and losses on securities are:  2018


2017Proceeds

$
5,056,598


$
5,489,626Gross gains


93,587



98,767Gross losses


54,194



48,096  C-15




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The components of net investment income are as follows:  2018


2017Bonds

$
606,990


$
510,632Cash and short-term investments


15,960



26,662Common stocks


69,041



58,073Limited partnerships


2,061



2,684Net gain on sales of investments


39,393



50,671Unrealized loss on equity investments


(305,075
)


428,370



648,722Less investment expenses


34,356



77,259Net investment income

$
394,014


$
571,463 In connection with the adoption of ASU 2016-01 at January 1, 2018,
the following are the net gains and losses recognized for equity investments that are included in net loss for the year ended December 31, 2018:  2018Total net loss recognized during the year

$
(283,344
)Net gain on sales of equity investments during the year


21,731Net unrealized loss recognized during the year

$
(305,075
)  C-16




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The following table shows gross unrealized losses and fair value of the Exchanges
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 MonthsFair Value


Unrealized LossesU.S. government

$
267,830


$
1,820Subdivisions of states, territories, and possessions


530,256



7,588Industrial and miscellaneous


5,223,704



120,373Common stocks


700,199



125,691$
6,721,989


$
255,472Greater than 12 MonthsFair Value


Unrealized LossesU.S. government

$
1,455,155


$
41,751Subdivision of states, territories, and possessions


670,277



11,731Industrial and miscellaneous


7,098,101



270,654Common stocks


57,464



10,307$
9,280,997


$
334,443TotalsFair Value


Unrealized LossesU.S. government

$
1,722,985


$
43,571Subdivision of states, territories, and possessions


1,200,533



19,319Industrial and miscellaneous


12,321,805



391,027Common stocks


757,663



135,988$
16,002,986


$
589,915 At December 31, 2018, the Exchange had 173 securities in unrealized loss positions of less than 12 months
with a combined gross unrealized loss of $255,472 and 99 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $334,443.  C-17




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The following table shows gross unrealized losses and fair value of the Exchanges
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,
2017:  Less than 12 MonthsFair Value


Unrealized LossesU.S. government

$
259,329


$
1,404Subdivisions of states, territories, and possessions


127,479



646Industrial and miscellaneous


6,919,636



53,723Common stocks


187,070



6,100$
7,493,514


$
61,873Greater than 12 MonthsFair Value


Unrealized LossesU.S. government

$
2,087,424


$
43,473Subdivisions of states, territories, and possessions


890,308



76,577Industrial and miscellaneous


1,707,035



12,350Common stocks


98,136



2,489$
4,782,903


$
134,889TotalsFair Value


Unrealized LossesU.S. government

$
2,346,753


$
44,877Subdivisions of states, territories, and possessions


1,017,787



77,223Industrial and miscellaneous


8,626,671



66,073Common stocks


285,206



8,589$
12,276,417


$
196,762 At December 31, 2017, the Exchange had 89 securities in unrealized loss positions of less than 12 months
with a combined gross unrealized loss of $61,873 and 71 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $134,889. The unrealized losses on investments in U.S. government and agency securities, state securities, and corporate debt securities at
December 31, 2018 and 2017 were primarily caused by general economic conditions and not by unfavorable changes in credit ratings associated with these securities. The Association evaluates impairment at each reporting period for each of the
securities where the fair value of the investment is less than its carrying value. The contractual cash flows of the U.S. government and agency obligations are guaranteed either by the U.S. government or an agency of the U.S. government. It is
expected that the securities would not be settled at a price less than the carrying value of the investment, and the Exchange does not intend to sell the investment until the unrealized loss is fully recovered. The Exchange evaluated the credit
ratings of the state and agency obligations and corporate obligations, noting whether a significant deterioration since purchase or other factors that may indicate an other-than-temporary-impairment such as the length of time and extent to which
fair value has been less than cost, the financial condition, and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer and the Exchanges intent to sell the investment.
Management of the Exchange determined that there were no investments which were other-than-temporarily-impaired as of and for the years ended December 31, 2018 and 2017.  C-18




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The table below presents the level within the fair value hierarchy generally utilized by the
Exchange to estimate the fair value of assets disclosed on a recurring basis as of December 31, 2018:  Total


Level 1


Level 2


Level 3U.S. government

$
3,699,054


$



$
3,699,054


$
States, territories, and possessions


211,062







211,062



Subdivisions of states, territories and possessions


2,526,238







2,526,238



Industrial and miscellaneous


13,052,001







13,052,001



Total bonds


19,488,355







19,488,355



Common stocks


1,809,604



1,809,604







$
21,297,959


$
1,809,604


$
19,488,355


$
 The table below presents the level within the fair value hierarchy generally utilized by the Exchange to
estimate the fair value of assets disclosed on a recurring basis as of December 31, 2017:  Total


Level 1


Level 2


Level 3U.S. government

$
5,043,537


$



$
5,043,537


$
States, territories, and possessions


216,356







216,356



Subdivisions of states, territories and possessions


3,182,958







3,182,958



Industrial and miscellaneous


12,786,205







12,786,205



Total bonds


21,229,056







21,229,056



Common stocks


1,819,637



1,819,637







$
23,048,693


$
1,819,637


$
21,229,056


$
  C-19




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  6.
Deferred Acquisition Costs: The following table summarizes the components of deferred acquisition costs for the years ended December 31, 2018 and 2017:  2018


2017Balance, beginning of year

$
384,957


$
422,310Amount capitalized during the year


1,272,882



1,370,230Amount amortized during the year


1,284,749



1,407,583Balance, end of year

$
373,090


$
384,957  7.
Reinsurance: Effective January 1, 2016, the Exchange and Professional Casualty Association (the Association), a Pennsylvania reciprocal
inter-insurance exchange, entered into an annual consolidated reinsurance contract with Guy Carpenter & Co, LLC. Under the terms of the agreement, reinsurance is ceded by the Association and the Exchange. For Medical Care Availability and
Reduction of Error Fund (MCARE) eligible insureds in Pennsylvania, the reinsurance liability is $200,000 in excess of $300,000 per claim. For insured individuals not covered by MCARE, the reinsurance liability is $500,000 in excess of
$500,000 per claim. Stand-alone Clinics, Health Care Organizations and Dental Professional Liability insureds, not covered by MCARE, are reinsured at limits of $700,000 in excess of $300,000 per claim. For insureds in South Carolina and Michigan
with policy limits of $200,000 per claim, the reinsurer liability is $100,000 in excess of $100,000 per claim. For insureds with policy limits in excess of $200,000 per claim, not exceeding $1,000,000 per claim, the reinsurance liability is $700,000
in excess of $300,000. The reinsurance contract had a two-year term and was terminated on December 31, 2017. On January 1, 2018, the Exchange and the Association entered into separate reinsurance contracts with JLT Re (North America), Inc.
(JLT). Under the terms of the agreements, reinsurance is ceded by the Exchange and the Association. For MCARE eligible insureds in Pennsylvania, the reinsurance liability is $200,000 in excess of $300,000 per claim. For insured
individuals not covered by MCARE, the reinsurance liability is $700,000 in excess of $300,000 per claim. For insureds in South Carolina and Michigan with policy limits of $200,000 per claim, the reinsurer liability is $100,000 in excess of $100,000
per claim. For insureds with policy limits in excess of $200,000 per claim, not exceeding $1,000,000 per claim, the reinsurance liability is $700,000 in excess of $300,000. The reinsurance contracts have a
two-year term and expire on January 1, 2020.  C-20




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The effect of reinsurance on premiums written, amounts earned, and losses and loss adjustment
expenses incurred for the years ended December 31, 2018 and 2017 is as follows:  2018


2017Premiums written:Direct

$
3,425,473


$
3,647,265Ceded


197,937



619,507Premiums written, net of reinsurance

$
3,227,536


$
3,027,758Premiums earned:Direct

$
3,693,003


$
3,790,684Ceded


313,348



642,768Premiums earned, net of reinsurance

$
3,379,655


$
3,147,916Losses and loss adjustment expenses incurred:Direct

$
3,060,499


$
1,888,646Ceded


140,780



65,575Losses and loss adjustment expenses incurred, net of reinsurance

$
2,919,719


$
1,823,071  C-21




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  8.
Losses and Loss Adjustment Expenses: Activity in the liability for losses and loss adjustment expenses for the years ended December 31, 2018 and 2017 are summarized as
follows:  2018


2017Losses and loss adjustment expenses, beginning of year - gross

$
11,761,133


$
12,343,048Less: Reinsurance recoverable, beginning of year


156,443



90,868Losses and loss expense reserves, beginning of year  net


11,604,690



12,252,180Incurred related to:Current year


2,061,854



2,163,071Prior years


857,865



(340,000
)Total incurred


2,919,719



1,823,071Paid related to:Current year


128,751



29,623Prior years


3,129,948



2,440,938Total paid


3,258,699



2,470,561Losses and loss adjustment expenses, end of year  net


11,265,710



11,604,690Add: Reinsurance recoverable, end of year


297,223



156,443Losses and loss adjustment expenses, end of year - gross

$
11,562,933


$
11,761,133 The liability for losses and loss adjustment expenses at December 31, 2018 and 2017 were $11,562,933 and
$11,761,133, respectively. For the years ended December 31, 2018 and 2017, $3,129,948 and $2,440,938, 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 favorable development of $340,000 during the year ended December 31, 2017 was primarily related to re-estimation of unpaid losses
and loss adjustment expenses in the 2013 and 2014 policy years. The unfavorable development of $857,865 during the year ended December 31, 2018 was primarily related reserve strengthening in the 2015 ($1,000,000) occurrence policy year and the
2013 ($500,000) claims-made policy years. The Exchange did realize positive reserve development for the 2010-2012 occurrence policy years of $800,000. A majority of these changes in indications were related to the Exchanges new claims
management team and a change in reserving philosophy of setting reserves at the expected value as soon as possible when the liability is acknowledged.  C-22




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Incurred and Paid Loss Development InformationUnaudited The following information about incurred and paid loss development as of December 31, 2018, net of reinsurance, as well as cumulative
claim frequency and the total of incurred-but-not-reported liabilities, plus expected development on report claims included
within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31,
2009 to December 31, 2017, is presented as supplementary information and is unaudited.  Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)(unaudited)





As of December 31, 2018AccidentYear

2009


2010


2011


2012


2013


2014


2015


2016


2017


2018


Total
ofIncurred-But-Not-ReportedLiabilitiesPlusExpectedDevelopmenton
ReportedClaims


CumulativeNumber ofReportedClaims2009

$
4,299


$
3,801


$
4,603


$
4,624


$
4,687


$
5,501


$
6,253


$
6,663


$
7,421


$
7,422


$
17



22010






5,262



4,314



4,306



4,229



3,517



3,667



3,048



3,224



3,012



11



12011










4,736



3,773



3,664



4,352



4,203



4,772



4,454



4,133



44



42012














4,170



3,176



3,314



3,400



2,927



2,914



2,543



68



32013


















3,388



3,100



2,750



2,063



1,183



1,722



68



52014






















3,551



3,150



2,247



1,137



1,153



155



72015


























3,452



2,918



3,002



4,078



745



162016






























2,800



3,486



3,662



960



122017


































2,026



2,055



1,214



132018






































1,991



1,300



12$
31,771Cumulative Losses and Loss Adjustment Expenses Paid, Net of Reinsurance (in thousands)(unaudited)AccidentYear

2009


2010


2011


2012


2013


2014


2015


2016


2017


20182009

$
52


$
315


$
1,112


$
2,122


$
3,246


$
4,449


$
4,620


$
6,075


$
6,695


$
7,0852010






167



503



1,631



2,363



1,802



2,392



2,611



2,724



2,7372011










111



390



1,342



1,232



3,155



3,688



3,802



3,9002012














496



657



1,496



2.166



1,984



2,361



2,3942013


















70



324



584



445



573



1,1952014






















90



367



419



562



6882015


























63



293



827



1,1882016






























239



536



1,7812017


































26



1122018






































104$
21,184All outstanding liabilities before 2009, net of reinsurance



460Liabilities for losses and loss adjustment expenses, net of reinsurance


$
11,047  C-23




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  Reconciliation The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses at
December 31, 2018 in the accompanying balance sheet is as follows:  2018Net outstanding liabilities for losses and loss adjustment expenses:Medical professional

$
11,046,603Liabilities for losses and loss adjustment expenses, net of reinsurance


11,046,603Reinsurance recoverable on unpaid claims:Medical professional


297,223Total reinsurance recoverable on unpaid claims


297,223Unallocated loss adjustment expenses


219,107Total gross liability for losses and loss adjustment expenses

$
11,562,933 Actuarial Assumptions and Methodologies The Exchange uses a combination of the Actual versus Expected Method, Bornhuetter-Ferguson Method, Frequency/Severity Method, and the Loss
Development Method in order to estimate its liability for losses and loss adjustment expenses. There were no significant changes in the methodologies and assumptions used to develop the liabilities for losses and loss adjustment expenses as of
December 31, 2018 and 2017. Losses Duration Information The following is supplemental information about average historical claims duration at December 31, 2018:  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 10Medical professional


5.5
%


9.4
%


21.4
%


10.7
%


9.0
%


19.9
%


3.4
%


8.6
%


4.4
%


5.3
%  9.
Income Taxes: The components of the Exchanges income tax provision for the years ended December 31, 2018 and 2017 are as follows:  2018


2017Current provision

$
(317,764
)

$
(30,020
)Deferred tax provision


(48,376
)


131,414$
(366,140
)

$
101,394  C-24




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The Exchanges U.S. federal statutory income tax rate applicable to ordinary income was
21% and 34% for the years ended December 31, 2018 and 2017, respectively. The income tax provision differs from that computed by applying federal statutory rate to (loss) income before income taxes for the years ended December 31, 2018 and
2017 is summarized as follows:  2018


2017Expected tax provision at federal statutory rate

$
(244,719
)

$
14,010Permanent and other difference


(14,010
)


5,242Deferred adjustments


23,453



(15,955
)Alternative minimum tax






4,262Change in enacted tax rates


(130,864
)


93,835Net income tax provision

$
(366,140
)

$
101,394 Deferred taxes are provided for the temporary differences between financial reporting purposes and the income
tax purposes of the Exchanges assets and liabilities. At December 31, 2018 and 2017, the components of the Exchanges net deferred income taxes consisted of the following:  2018


2017Deferred tax assets:Discount of unearned premiums

$
53,993


$
60,382Discount of advance premiums


20,319



25,263Discount of losses and loss adjustment expenses


199,629



177,136Capital loss carryforward


34,558



41,774Guaranty fund assessment


2,311



5,692Unrealized loss on investments


81,326



Total deferred tax assets


392,136



310,247Deferred tax liabilities:Deferred acquisition costs


78,349



80,841TCJA transitional adjustment


31,118



12,425Other items


462



410Unrealized gain on investments






64,993Total deferred tax liabilities


109,929



158,669Net deferred tax asset

$
282,207


$
151,578 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, 2018 and 2017, management determined that it is more likely than not that all the deferred tax assets will be realized by the Exchange in future years. Accordingly, the Exchange did not record a valuation allowance against its
deferred tax assets at December 31, 2018 and 2017.  C-25




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  At December 31, 2018 and 2017, the Exchange had $164,566 and $198,923, respectively, of
unused capital loss carryforwards available to offset future taxable income and no unused operating loss carryforwards. The Exchange has
applied the provisions of ASC 740, Income Taxes, for the years ended December 31, 2018 and 2017. ASC 740 prescribes a recognition threshold and measurement attribute with respect to uncertainty in income tax positions. In applying ASC
740, the Exchange has evaluated its various tax positions taken during the years ended December 31, 2018 and 2017. The Exchange 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 Exchange 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 amounts of unrecognized tax benefits. The Exchange
did not recognize any interest and penalties in the accompanying statements of operations and comprehensive (loss) income for the years ended December 31, 2018 and 2017. The Exchange remains subject to examination by the Internal Revenue
Service for tax years 2015 through 2017. On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Most
of the provisions of this bill did not affect corporate taxes paid until 2018 and beyond including reducing the top corporate tax rate from 34% to 21%. However, based upon applicable statutory accounting rules deferred income taxes are estimated
based upon expected tax rates enacted prior to the date of the financial statements. Accordingly, the Exchange has measured its deferred income taxes at December 31, 2017 using a tax rate of 21%. The effect on members equity was a
decrease of $93,835, which is reported as a component of deferred income tax expense of $93,835. Additionally, as part of the enactment of
TCJA, 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 Exchange recorded as a component of net deferred tax asset at December 31, 2017 a resulting difference amount of $12,425, the gross amount of $59,167 of which is being
amortized into taxable income beginning in 2018. During the year ended December 31, 2018, the 2017 discount reserve difference was subsequently revised due to changes in the corporate bond yield curve published by the IRS resulting in an
adjusted gross amount of $169,350. During the year ended December 31, 2018, the amount amortized into taxable income was $21,169. At December 31, 2018, the deferred tax liability related to TCJA transitional adjustment was $31,118 and is
included as a component of net deferred tax asset.  10.
Related Party Transactions: PIPMC, as the attorney-in-fact for the subscribers to the
Exchange, is responsible for the exchange of reciprocal insurance contracts among the subscribers and for managing the business of the Exchange as set forth in the
Attorney-In-Fact Agreement. Pursuant to the terms of the agreement, PIPMC provides salaries, and benefit expenses of the employees, rent and other occupancy expenses,
supplies, and data processing services to the Exchange and pays certain expenses on behalf of the Exchange for 25% of gross written premium. The Attorney-In-Fact
Agreement is in effect for an indefinite term, subject only to the right of the Exchange and PIPMC to terminate this Agreement by mutual agreement. Management fee expense incurred by the Exchange in accordance with the
Attorney-In-Fact Agreement for the years ended December 31, 2018 and 2017 was $856,368 and $911,816, respectively, and are included in other underwriting
expenses in the accompanying statements of operations and  C-26




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  comprehensive (loss) income. At December 31, 2018 and 2017, the Exchange owed PIPMC $35,201 and $73,365, respectively, for these services and are included in due to affiliates in
the accompanying balance sheets. On July 30, 2015, the Board of Directors of the Exchange had adopted a previous plan of conversion
to convert the Exchange from a reciprocal inter-insurance exchange to a stock form of ownership pursuant to the Pennsylvania Medical Professional Liability Reciprocal
Exchange-to-Stock Conversion Act (Act). Under the previous plan of conversion, the Exchange would have merged with the Association and would have become a
wholly-owned subsidiary of Professional Casualty Holdings, Inc., a newly formed Pennsylvania business corporation (PCH). As part of the previous plan of conversion, PCH would have offered and sold its common stock to subscribers of the
Exchange and of the Association and to other interested investors. With the adoption of the current plan of conversion between the Exchange, the Association, and Positive Physicians Insurance Exchange (PPIX), a Pennsylvania reciprocal
inter-insurance exchange, in June 2018 as discussed below, the previous plan of conversion was discontinued. In connection with the previous plan of conversion, the Exchange incurred conversion and securities offering costs of $0 and $98,852 during
the years ended December 31, 2018 and 2017, respectively, and are included in other underwriting expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2017, the Exchange had a
payable of $7,425 to Diversus related to these conversion and securities offering costs and is included in due to affiliates in the accompanying balance sheet. There was no payable to Diversus at December 31, 2018 related to the
previous plan of conversion. On June 1, 2018, PIPMC adopted a Plan of Conversion (the Plan) to convert the Exchange from
a reciprocal inter-insurance exchange to a stock form of ownership pursuant to the Act. Under the Plan, the Exchange would merge with the Association and PPIX and would become a wholly-owned subsidiary of Positive Physicians Holdings, Inc., a newly
formed Pennsylvania business corporation (Holdings). As part of the Plan, as amended, Holdings will offer and sell its common stock to subscribers of the Exchange, the Association, and PPIX as well as to other interested investors. Other
than eligible stockholders of Diversus, it is not expected that Diversus would be a direct or indirect purchaser of common stock in the offering. The Plan was subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the
proposed plan, the Exchange incurred conversion and securities offering costs of $239,614 during the year ended December 31, 2018, of which $150,986 was included in other underwriting expenses in the accompanying statements of
operations and comprehensive (loss) income. At December 31, 2018, the amount due from Holdings related to these conversion and securities offering costs was $88,628 and is presented as due from affiliate in the accompanying balance
sheet. On February 5, 2019, the Department approved the Plan. The effective date for the Securities and Exchange Commission Form S-1 Registration Statement (S-1) for the initial public offering of Holdings was February 11, 2019. The offering was completed on March 27, 2019. In connection with the acquisition of PIPMC by Diversus on November 23, 2015, Diversus acquired through its subsidiary, PTP, certain
medical insurance accounts from affiliates of PIPMC. During the years ended December 31, 2018 and 2017, PTP provided services related to these contracts totaling $143,860 and $177,358, respectively, to the Exchange and are included in
other underwriting expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2018 and 2017, the amount due to PTP related to these services was $8,454 and $8,177, respectively, and are
included in due to affiliates in the accompanying balance sheets. The Exchange and Andrews Outsource Solutions, LLC
(AOS), a wholly-owned subsidiary of Diversus, entered into an agreement, with the Form D filing approved by the Department on February 17, 2016, whereby AOS is to provide litigation management services to the Exchange consisting of
developing, implementing, and monitoring the litigation practices and strategy of the handling of specific medical professional liability lawsuits and claims. In April 2017, the litigation management services agreement between AOS and the Exchange
was amended,  C-27




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  with the Form D filing approved by the Department on April 6, 2017, whereby the fee structure of charges by AOS to the Exchange for each case is based upon relationship with each respective
attorney ranging from $300 to $500 per case per month rather than a flat fee of $500 per case per month. During the years ended December 31, 2018 and 2017, the Exchange incurred litigation management services of $292,800 and $303,900,
respectively, related to this agreement; such amounts are included in losses and loss adjustment expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2018 and 2017, there was no
amount due to AOS related to these services. In April 2017, the Exchange and Gateway Risk Services, Inc. (Gateway), a
wholly-owned subsidiary of Diversus, entered into an agreement, with the Form D filing approved by the Department on April 6, 2017, whereby Gateway is to provide defense and cost containment services to the Exchange that were formerly provided
by PIPMC to the Exchange prior to the effective date of the agreement. During the years ended December 31, 2018 and 2017, the Exchange incurred services totaling $57,500 and $42,335, respectively, related to this agreement; such amounts are
included in losses and loss adjustment expenses in the accompanying statements of operations and comprehensive (loss) income. At December 31, 2018 and 2017, there was no amount due to Gateway related to these services. On October 16, 2018, the Exchange entered into a surplus note agreement with Positive Physicians Captive Insurance Company (the
Captive), a wholly-owned subsidiary of PPIX, whereby the Exchange advanced $500,000 to the Captive. Under the terms of the note, outstanding borrowings bear interest at 3%, payable in monthly interest installments of $3,750 and principal
is due on the maturity date on October 1, 2028. All monthly payments of interest and principal payments are subject to the approval of the New Jersey Department of Banking and Insurance. During the year ended December 31, 2018, the
Exchange earned interest income of $3,139, the amount is due at December 31, 2018, and is included in accrued investment income in the accompanying balance sheet. The balance of the surplus note at December 31, 2018 was
$500,000. During the years ended December 31, 2018 and 2017, the Exchange paid for expenses on behalf of PPIX or PPIX collected
premiums on behalf of the Exchange. At December 31, 2018 and 2017, the amounts due from PPIX were $3,321 and $15,046, respectively, and are included in due to affiliates in the accompanying balance sheets. During the year ended December 31, 2017, Diversus Management, Inc. (DMI), a wholly-owned subsidiary of Diversus, paid for
certain expenses on behalf of the Exchange. Additionally, DMI makes cash disbursements on behalf of each attorney-in-fact subsidiary of Diversus and invoices the
respective attorney-in-fact for these transactions. At December 31, 2017, the amount due to DMI by the Exchange was $3,549 and is included in due to
affiliates in the accompanying balance sheet. There was no amount due to DMI at December 31, 2018. As discussed in Note 7, on
January 1, 2018 the Exchange entered into a reinsurance contract with JLT. JLT and Specialty Insurance Services, LLC (SIS), a wholly-owned subsidiary of Diversus, co-brokered the contract. JLT
is to be compensated by the reinsurer through commissions, and JLT, in turn, will pay a portion of the commission to SIS. During the year ended December 31, 2018, SIS earned commission income of $5,514 related to this agreement. As discussed in Note 7, the Exchange and the Association entered into a consolidated reinsurance contract effective as of January 1, 2016.
Guy Carpenter and International Specialty Brokers, Ltd (ISBL), a former wholly-owned subsidiary of Diversus, co-brokered the contract. Guy Carpenter was compensated by the reinsurer through
commissions and Guy Carpenter, in turn, paid a portion of the commissions to ISBL. During the year ended December 31, 2017, ISBL earned commission income of $73,458 related this arrangement.  C-28




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##### Table of Contents

PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  During the year ended December 31, 2017, Healthcare Professional Services, Inc.
(HPSI), a former wholly-owned subsidiary of Diversus, provided wholesale brokerage services to the Exchange in the amount of $4,629.  11.
Assessments: The Exchange is aware of various insurance entities insolvencies that produced business in the Commonwealth of Pennsylvania. The Exchange
has received assessments for its pro-rata share of the cost of such insolvencies from the Pennsylvania Property and Casualty Insurance Guaranty Fund. Statutory accounting principles require the Exchange to
provide a liability for the full cost of such insolvencies up to the maximum annual assessment limit (2.0%). Based upon the available
information, the Exchange has provided a gross liability of $11,003 and $27,106 at December 31, 2018 and 2017, respectively, for guaranty fund assessments and are included in accounts payable, accrued expenses, and other liabilities
in the accompanying balance sheets. The Exchange has not recorded applicable premium tax credits at December 30, 2018 and 2017 related to guaranty assessments. Total guaranty fund expense, net of prior years refunds and premium tax
credits, for the years ended December 31, 2018 and 2017 was $2,939 and $27,106, respectively. MCARE 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. The Exchange
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
balance sheets, and no income is recognized by the Exchange. The Exchange had liabilities of $143,268 and $209,819 for MCARE assessments at December 31, 2018 and 2017, respectively, for amounts collected on behalf of MCARE.  12.
Statutory Information: Accounting principles used to prepare statutory financial statements differ from those used to prepare 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 the Exchange are prepared in accordance with accounting practices prescribed by the Department. Financial statements prepared under statutory accounting principles focus on solvency of the insurer and generally provide a more conservative
approach than under GAAP. These accounting practices differ 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 allowance valuation; (3) acquisition costs, such as commissions, premium taxes and other items, have been charged to operations when incurred, whereas GAAP requires capitalization of these expenses
and amortized over the term of the policies; (4) the carrying value of bonds are based on NAIC ratings whereas GAAP requires bonds to be valued based on whether management intends to hold the bonds 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; and (6) Ceded reinsurance amounts (unearned premiums and estimated loss recoverables) are shown net of
the related liability, whereas presented on a gross basis and reflected as an asset for GAAP.  C-29




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PHYSICIANS INSURANCE PROGRAM EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017  The Department has adopted certain prescribed accounting practices that differ from those
found in the NAIC statutory accounting practices. Specifically, the Department prescribes 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 SAP, the unearned premiums would not be reduced by the management fees paid relate to unearned premiums reserve. Statutory net (loss) income and surplus and other funds of the Exchange as determined in accordance with SAP prescribed or permitted by the
Department for the years ended December 31, 2018 and 2017 are as follows:  2018


2017Statutory net (loss) income

$
(538,773
)

$
170,560Statutory surplus and other funds


11,251,315



12,037,248 A reconciliation of statutory surplus and other funds between NAIC statutory accounting practices and practices
prescribed by the Department are as follows:  2018


2017Statutory surplus and other funds prescribed by the Department

$
11,251,315


$
12,037,248State prescribed practices:Unearned management fees


(244,180
)


(252,313
)Statutory surplus and other funds per NAIC statutory accounting practices

$
11,007,135


$
11,784,935 In accordance with Pennsylvania law, the Exchange is required to maintain minimum subscribers surplus of
$1,125,000. Additionally, Pennsylvania law sets the maximum amount of dividends that may be paid by the Exchange during any twelve-month period after notice to, but without the approval of, the Department. This amount cannot exceed the greater of
(1) 10% of the Exchanges surplus as reported on its most recent annual statement filed with the Department or (2) the Exchanges statutory net income for the period covered by the annual statement as reported on such statement.
During the years ended December 31, 2018 and 2017, no dividends were declared or paid by the Exchange. The Exchange 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 the Exchanges total adjusted capital, as defined by the NAIC, to its authorized control level RBC. At December 31, 2018 and 2017, the Exchanges RBC exceeded minimum RBC requirements. Note 13: Subsequent Events Subsequent
events have been evaluated through April 24, 2019, which is the date the financial statements were available to be issued. As discussed in
Note 10, on February 5, 2019, the Department approved the Plan. The effective date of the S-1 for the initial public offering of Holdings was February 11, 2019. The offering was completed on
March 27, 2019.  C-30




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POSITIVE PHYSICIANS HOLDINGS, INC.  PRO FORMA COMBINING FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2018  D-1




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POSITIVE PHYSICIANS HOLDINGS, INC.   PRO FORMA COMBINING FINANCIAL STATEMENTS YEAR ENDING DECEMBER 31, 2018 INDEX  PagePro forma combining balance sheet


D-3Pro forma combining statement of income


D-4  D-2




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##### Table of Contents

POSITIVE PHYSICIANS HOLDINGS, INC.   PRO FORMA COMBINING BALANCE SHEET DECEMBER 31, 2018  PPIX


PCA


PIPE


PPHI


Pro Formaand OtherAdjustments


PositivePhysiciansHoldings, IncPro FormaCombinedAssets:Total investments, cash, and cash equivalents

$
49,298


$
28,965


$
22,539


$



$
32,705


$
133,507Premiums and other receivables


5,677



2,124



750







(3
)


8,548Reinsurance receivable


5,745



2,227



297











8,269Deferred acquisition costs


2,519



1,093



373











3,985Deferred tax assets


300



1,094



282











1,676Other assets


84



455



695



261



(761
)


734Total assets

$
63,623


$
35,958


$
24,936


$
261


$
31,941


$
156,719Liabilities:Losses and loss adjustment expenses

$
34,663


$
22,166


$
11,563


$



$



$
68,392Unearned and advance premiums


8,473



4,236



1,705











14,414Notes payable


627















(500
)


127Other liabilities


3,024



559



513



261



(264
)


4,093Total liabilities


46,787



26,961



13,781



261



(764
)


87,026Stockholders equity:Common stock


















36



36Additional paid-in capital


















48,552



48,552Contributed surplus


5,483



2,349



8,051







(15,883
)


Retained earnings


11,915



7,060



3,360











22,335Accumulated other comprehensive loss


(562
)


(412
)


(256
)










(1,230
)Total stockholders equity


16,836



8,997



11,155







32,705



69,693Total liabilities and stockholders equity

$
63,539


$
35,953


$
24,896


$
261


$
32,025


$
156,674Pro forma shareholders equity per share





















$
19.52  D-3




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##### Table of Contents

POSITIVE PHYSICIANS HOLDINGS, INC.   PRO FORMA COMBINING STATEMENT OF INCOME YEAR ENDING DECEMBER 31, 2018  PositivePhysiciansPro Forma


Holdings, Incand Other


Pro FormaPPIX


PCA


PIPE


PPHI


Adjustments


CombinedRevenue:Net premiums earned

$
13,096


$
7,112


$
3,380


$



$



$
23,588Net investment income


316



329



394







(3
)


1,036Total Revenue


13,412



7,441



3,774







(3
)


24,624Expenses:Losses and loss adjustment expenses


6,673



9,990



2,920











19,583Other underwriting expenses


6,893



3,428



2,019











12,340Interest expense and fees


10















(3
)


7Total Expenses


13,576



13,418



4,939







(3
)


31,930Loss before income taxes


(164
)


(5,977
)


(1,165
)










(7,306
)Income tax benefit


(101
)


(1,467
)


(366
)










(1,934
)Net loss

$
(63
)

$
(4,510
)

$
(799
)

$



$



$
(5,372
)Loss per share data:Net loss per share of common stock





















$
(1.50
)Shares considered outstanding in calculating pro forma net loss per share






















3,570,000   D-4




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND
2016  E-1




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   FINANCIAL STATEMENTS (with report
of independent auditors) YEARS ENDED DECEMBER 31, 2017 AND 2016 INDEX  PageINDEPENDENT AUDITORS REPORT


E-3FINANCIAL STATEMENTS:Balance sheets


E-4Statements of operations and comprehensive income


E-5Statements of subscribers surplus


E-6Statements of cash flows


E-7Notes to financial statements


E-8  E-2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Subscribers of Positive
Physicians Insurance Exchange Opinion on the Financial Statements We have audited the accompanying balance sheets of Positive Physicians Insurance Exchange (the Company) as of December 31, 2017 and 2016, and the
related statements of operations and comprehensive income, subscribers surplus, and cash flows for each of the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in
accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ EisnerAmper LLP We have served as the Companys
auditor since 2005. EISNERAMPER LLP Iselin, New Jersey January 22, 2019  E-3




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   BALANCE SHEETS DECEMBER 31, 2017 AND 2016  2017


2016ASSETSInvestments in
available-for-sale securities:Bonds (Amortized cost of $43,696,584 and $39,368,291)

$
43,786,294


$
39,155,303Common stocks (Cost of $2,737,328 and $2,505,194)


2,806,613



2,491,165Other invested assets


4,115,892



2,134,822Total investments


50,708,799



43,781,290Cash and cash equivalents


2,110,000



5,045,589Accrued investment income


302,788



277,588Premiums receivable


4,835,002



3,731,615Reinsurance recoverable


6,117,389



8,670,162Income taxes recoverable


574,326



133,099Deferred acquisition costs


2,504,001



1,713,784Deferred income taxes






559,874EDP equipment and software


50,000



150,000Due from affiliate


350



TOTAL ASSETS

$
67,202,655


$
64,063,001LIABILITIES AND SUBSCRIBERS SURPLUSLIABILITIES:Losses and loss adjustment expenses

$
38,028,709


$
34,814,118Unearned premiums


8,211,480



7,435,311Reinsurance payable


1,408,418



3,256,107Accounts payable, accrued expenses, and other liabilities


1,341,324



885,090Deferred income taxes


41,531



Note payable


187,222



244,767Surplus note payable to affiliate






537,000Due to affiliate


452,035



10,463TOTAL LIABILITIES


49,670,719



47,182,856SUBSCRIBERS SURPLUS:Paid-in and contributed surplus


5,482,997



5,482,997Unassigned surplus


11,160,278



11,358,997Accumulated other comprehensive income


888,661



38,151TOTAL SUBSCRIBERS SURPLUS


17,531,936



16,880,145TOTAL LIABILITIES AND SUBSCRIBERS SURPLUS

$
67,202,655


$
64,063,001 See notes to financial statements.  E-4




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2017 AND 2016  2017


2016REVENUES:Net premium earned

$
12,274,965


$
8,590,608TOTAL REVENUES


12,274,965



8,590,608EXPENSES:Losses and loss adjustment expenses


7,732,526



3,919,503Other underwriting expenses


5,786,751



4,391,058TOTAL EXPENSES


13,519,277



8,310,561NET INVESTMENT INCOME


971,833



1,183,210(LOSS) INCOME FROM OPERATIONS


(272,479
)


1,463,257INTEREST EXPENSE


8,653



52,543(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES


(281,132
)


1,410,714PROVISION FOR INCOME TAXES


(260,491
)


585,557NET (LOSS) INCOME


(20,641
)


825,157OTHER COMPREHENSIVE INCOME (LOSS):Unrealized holding gains (losses) on available-for-sale securities, net of income tax (expense) benefit of $(362,876) and $32,387


606,144



(5,161
)Reclassification adjustments for net realized loss (gain) included in net (loss) income


66,288



(57,709
)TOTAL OTHER COMPREHENSIVE INCOME (LOSS)


672,432



(62,870
)COMPREHENSIVE INCOME

$
651,791


$
762,287 See notes to financial statements.  E-5




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   STATEMENTS OF SUBSCRIBERS SURPLUS YEARS ENDED DECEMBER 31, 2017 AND 2016  Paid-in andContributedSurplus


UnassignedSurplus


AccumulatedOtherComprehensiveIncome


Total SubscribersSurplusBalance, January 1, 2016

$
5,482,997


$
10,533,840


$
101,021


$
16,117,858Net income






825,157







825,157Other comprehensive loss










(62,870
)


(62,870
)Balance, December 31, 2016


5,482,997



11,358,997



38,151



16,880,145Net loss






(20,641
)






(20,641
)Other comprehensive income










672,432



672,432Reclassification of tax effects from accumulated other comprehensive income related to passage of
Tax Cuts and Jobs Act






(178,078
)


178,078



Balance, December 31, 2017

$
5,482,997


$
11,160,278


$
888,661


$
17,531,936 See notes to financial statements.  E-6




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017 AND 2016  2017


2016CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income

$
(20,641
)

$
825,157Adjustments to reconcile net (loss) income to net cash provided by operating activities:Deferred income taxes


206,755



108,516Net realized losses (gains) on sales of investments


66,288



(57,709
)Amortization of bond premiums


154,948



176,613Depreciation expense


100,000



100,000Changes in operating assets and liabilities:Accrued investment income


(25,200
)


(16,765
)Premiums receivable


(1,103,387
)


(278,544
)Reinsurance recoverable


2,552,773



(2,551,720
)Reinsurance premiums receivable






207,713Income taxes recoverable


(441,227
)


(133,099
)Deferred acquisition costs


(790,217
)


(153,299
)Other assets






11,129Due from affiliate


(350
)


Liability for losses and loss adjustment expenses


3,214,591



(1,255,186
)Unearned premiums


776,169



880,813Reinsurance payable


(1,847,689
)


3,256,107Income taxes payable






(162,333
)Accounts payable, accrued expenses, and other liabilities


456,234



470,081Due to affiliate


441,572



(206,457
)NET CASH PROVIDED BY OPERATING ACTIVITIES


3,740,619



1,221,017CASH FLOWS FROM INVESTING ACTIVITIES:Investments:Proceeds from sales and maturities


2,742,245



15,542,979Purchases


(8,823,908
)


(17,086,824
)NET CASH USED IN INVESTING ACTIVITIES


(6,081,663
)


(1,543,845
)CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of note payable


(57,545
)


(55,233
)Repayment of surplus note payable to affiliate


(537,000
)


NET CASH USED IN FINANCING ACTIVITIES


(594,545
)


(55,233
)NET CHANGE IN CASH AND CASH EQUIVALENTS


(2,935,589
)


(378,061
)CASH AND CASH EQUIVALENTS, beginning of year


5,045,589



5,423,650CASH AND CASH EQUIVALENTS, end of year

$
2,110,000


$
5,045,589SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid for the year

$
19,115


$
52,543Income taxes paid for the year

$



$
792,000 See notes to financial statements.  E-7




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  1.
Organization and Operations: Positive Physicians Insurance Exchange (the Exchange) is a subscriber-owned, reciprocal insurance exchange formed for the purpose
of insuring its subscribers against loss due to the imposition of legal liability as set forth in the Insurance Association Law of the Commonwealth of Pennsylvania. The Exchange provides medical professional liability insurance coverage on an
occurrence and claims made basis to its subscribers. The Exchange received its certificate of authority on April 20, 2004 from the Commonwealth of Pennsylvania and commenced operations on July 1, 2004. On May 1, 2011, the Exchange
expanded operations and was issued a certificate of authority by the New Jersey Department of Banking and Insurance. The Exchange continued to expand its operation and was issued certificates of authority by the Delaware Department of Insurance,
Ohio Department of Insurance, and Maryland Department of Insurance on February 13, 2013, March 25, 2013, and April 30, 2014, respectively. The Exchange is managed by Specialty Insurance Services, LLC (SIS), a Pennsylvania limited liability company, pursuant to the terms
of an Attorney-In-Fact Agreement between the Exchange and SIS, effective March 10, 2004. Pursuant to the terms of the amended agreement as discussed in Note 12, SIS
provides underwriting and administrative services to the Exchange based on a percentage not to exceed 25.0% for gross written premiums, less return premiums. SIS has the power to direct the activities of the Exchange that most significantly impact the Exchange economic performance by acting as the
common attorney-in-fact and decision maker for the subscribers at the Exchange. SIS is a wholly-owned subsidiary of Diversus, Inc. (Diversus), a Delaware
domiciled holding company, effective as of January 1, 2017.  2.
Summary of Significant Accounting Policies and Principles: Basis of Presentation The
Exchange prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). Use of Estimates The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and notes. Actual results could differ from these estimates and such
differences could be material. The Exchange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 Exchange considers cash and cash equivalents to be cash on hand, depository bank accounts, and short-term, highly liquid investments that
are both readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value due to changing interest rates. Investments Investments
in fixed maturity and equity 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 securities are recorded directly to accumulated other comprehensive income. Realized gains and losses on sales of available-for-sale securities are recognized into income based upon the specific identification method. Interest and dividends are recognized as earned. The Exchange 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 securities 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.  E-8




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Other-than-temporary-impairments (OTTI) of debt securities are separated into credit and
noncredit-related amounts when there are credit-related losses associated with the impaired debt 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. For equity securities in an unrealized loss position where fair
value is not expected to be recovered to the securitys cost basis in a reasonable time period, or where management does not expect to hold the security for a period of time sufficient to allow for a recovery to the securitys cost basis,
an OTTI is deemed to have occurred, and a loss is recognized in earnings. Other Investments The Exchange has an ownership in four limited partnerships. The Exchanges partnership interests are carried on the equity method, which
approximates the Exchanges equity in the underlying net assets of the partnerships. Equity income or loss is credited or charged, as appropriate, to the statements of operations and comprehensive income. The investments in the limited
partnerships are presented as other invested assets in the accompanying balance sheets. Deferred Acquisition Costs Deferred acquisition costs consist of costs that vary with and are directly related to the successful acquisition of new and renewal insurance
contracts. These costs, which primarily consist of sales commissions, management fees, and premium taxes, are deferred and amortized as premiums are earned over the applicable policy term. Equipment Equipment is
recorded at cost. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets. The estimated useful life of equipment is three years. 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 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.  E-9




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  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 losses and loss adjustment expenses in the accompanying balance sheets. The Exchange has not recorded any premium deficiency reserves as of December 31, 2017 or 2016. The analysis of premium deficiency reserves
was completed as of December 31, 2017. The Exchange did not consider anticipated investment income when calculating the premium deficiency reserves. Reinsurance The Exchange
cedes reinsurance risk to other insurance companies. This arrangement allows the Exchange to minimize the net loss potential arising from large risks. Reinsurance contracts do not relieve the Exchange of its obligation to its subscribers.
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. The reinsurance contracts provide for return
premium based on the actual loss experience of the written and reinsured business. The Exchange estimates the amounts to be recorded for return premium based on the terms set forth in the reinsurance contract. In preparing the financial statements, management makes estimates of amounts recoverable from the reinsurers, which include consideration of
amounts, if any, estimated to be uncollectible based on an assessment of factors including the creditworthiness of the reinsurers. Management believes that no provision for uncollectible reinsurance recoverable from the reinsurers is needed. Revenue Recognition Premiums of the Exchange 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 Exchange records an advance premium liability
in lieu of written premium. Premiums ceded pursuant to reinsurance agreements are netted against earned and unearned direct premiums based on the term of the underlying policy. Comprehensive Income Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component in the subscribers surplus section of the accompanying balance sheets. Such items, along with net income (loss), are components of
comprehensive income and are reflected in the accompanying statements of operations and comprehensive income. Reclassifications of
realized gains and losses on sales of investments out of accumulated other comprehensive income are recorded in investment income in the accompanying statements of operations and comprehensive income. Income Taxes The Exchange
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 the Exchanges financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the 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 Exchange records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such
determination, the Exchange considers all available positive and negative evidence, including future reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  E-10




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  The Exchange recognizes interest and penalties related to unrecognized tax benefits within
the income tax expense line in the accompanying statements of operations and comprehensive income. Accrued interest and penalties are included within the related tax liability line in the accompanying balance sheets. Recently Adopted Accounting Pronouncements The Exchange adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU or
Update) 2015-09, Disclosures about Short-Duration Contracts, addressing enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and the unpaid
claims liability roll-forward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent information about an insurance entitys initial claim estimates and subsequent
adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. This adoption did not have a material impact to the financial statements. The Exchange elected to early adopt the provisions of ASU 2018-02, Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income.The amendments in this Update allow a reclassification from accumulated other comprehensive income to unassigned surplus for stranded tax effects resulting from passage of the Tax Cuts and
Jobs Act. In connection with the adoption of ASU 2018-02, the Exchange has adopted the policy option available under ASU 2018-02 of reclassifying the income tax effects
related to change in tax rates from accumulated other comprehensive income to unassigned surplus during the year ended December 31, 2017. This adoption did not have a material impact to the financial statements. Recently Issued Accounting Pronouncements New accounting rules and disclosure requirements can impact the results and the comparability of the Exchanges financial statements. The
following recently issued accounting pronouncements are relevant to the Exchanges financial statements: ASU 2016-13: 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, and 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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.    At this time, management is evaluating the potential impact of ASU 2016-13 in the Exchanges financial statements. ASU
2016-01: In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The amendments in this Update require among other things that equity investments to be measured at fair value with changes in fair value recognized in net income, simplify the impairment
assessment of equity  E-11




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  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 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. The ASU is effective for annual periods beginning after December 15,
2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material impact on the financial statements. Reclassifications Certain
previously reported amounts have been reclassified to conform to the presentation used in the December 31, 2017 financial statements. Such reclassifications had no impact on subscribers surplus or net loss.  3.
Concentrations of Credit Risk: Financial instruments which potentially subject the Exchange to concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments, non-U.S. government bonds, equity securities, premiums receivable, and balances recoverable from reinsurers. Non-U.S. government bonds are
diversified and no one investment accounts for a significant portion of the Exchanges invested assets. The Exchange maintains its cash in bank deposit accounts that, at times, may exceed the federally insured limits. The Exchange has not
experienced any losses from bank accounts. Insureds consist of healthcare providers in which no one insured accounted for over 20% of
premiums receivable at December 31, 2017 and 2016. At December 31, 2017 and 2016, the Exchange had reinsurance balances recoverable of $5,765,104 and $5,055,257, respectively, for unpaid losses and loss adjustment expenses due from
reinsurers. At December 31, 2017 and 2016, the Exchange had reinsurance payable to reinsurers of $1,408,418 and $3,256,107, respectively, for premiums ceded under the reinsurance agreements. The authorized, domestic and international reinsurers
have A.M. Best ratings of A or better.  4.
Variable Interest Entity: The Exchange is a reciprocal insurance exchange domiciled in Pennsylvania, for which SIS serves as attorney-in-fact. SIS holds a variable interest in the Exchange due to the absence of decision-making capabilities by the equity owners (subscribers/policyholders) of the Exchange and due to the significance
of the management fee the Exchange pays to SIS as its decision maker. As a result, SIS is deemed to have a controlling financial interest in the Exchange and is considered to be its primary beneficiary. All medical professional liability insurance operations are owned by the Exchange, and SIS functions solely as the management company. SIS had surplus notes with the Exchange in the total amount of $537,000 at December 31, 2016. On January 4, 2017, the Exchange repaid
the balance of the surplus notes and the related accrued interest to SIS. SIS has not provided any additional financial or other support to the Exchange for any of the reporting periods presented. At December 31, 2017 and 2016, there are no
explicit or implicit arrangements that would require SIS to provide future financial support to the Exchange.  E-12




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  5.
Investments: The Exchanges available-for-sale securities are stated at
fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date. The Exchange uses various valuation techniques and assumptions when estimating fair value, which are in accordance with accounting principles
for fair value measurement of assets and liabilities that are recognized or disclosed in the financial statements on a recurring basis. These principles establish a three-level valuation hierarchy for disclosure of fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 - Quoted (unadjusted) prices for identical assets in active markets. Level 2 - Other observable inputs, either directly or indirectly, including:  

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. The estimated fair values of bonds and common stocks are based on quoted market prices where available. The Exchange obtains 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. As the Exchange is responsible for the determination of fair value, it performs analyses on the prices received from
the pricing service to determine whether the prices are reasonable estimates of fair value. 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. The Exchanges
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.  E-13




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Amortized cost/cost, gross unrealized gains, gross unrealized losses, and fair value of
investments by major security type for the results of the Exchange at December 31, 2017 and 2016 are as follows:  AmortizedCost/Cost


GrossUnrealizedGains


GrossUnrealizedLosses


Fair ValueDecember 31, 2017U.S. government

$
7,765,977


$
138


$
101,417


$
7,664,698States, territories, and possessions


1,202,008



10,979







1,212,987Subdivisions of states, territories, and possessions


9,737,894



156,666



13,486



9,881,074Industrial and miscellaneous


24,990,705



171,809



134,979



25,027,535Total bonds


43,696,584



339,592



249,882



43,786,294Common stocks


2,737,328



348,136



278,851



2,806,613$
46,433,912


$
687,728


$
528,733


$
46,592,907  AmortizedCost/Cost


GrossUnrealizedGains


GrossUnrealizedLosses


Fair ValueDecember 31, 2016U.S. government

$
8,785,743


$
998


$
113,466


$
8,673,275States, territories, and possessions


1,224,034



4,254



5,934



1,222,354Subdivisions of states, territories, and possessions


9,998,373



73,743



56,240



10,015,876Industrial and miscellaneous


19,360,141



94,481



210,824



19,243,798Total bonds


39,368,291



173,476



386,464



39,155,303Common stocks


2,505,194



188,619



202,648



2,491,165$
41,873,485


$
362,095


$
589,112


$
41,646,468 At December 31, 2017, maturities of investments in bond securities are as follows:  AmortizedCost/Cost


Fair ValueDue in less than one year

$
4,878,222


$
4,868,400Due after one year to five years


20,829,218



20,794,915Due after five years to ten years


17,989,144



18,122,979$
43,696,584


$
43,786,294  E-14




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Realized gains and losses are determined using the specific identification method. During the
years ended December 31, 2017 and 2016, proceeds from maturity and sales and gross realized gains and losses on securities are:  2017


2016Proceeds

$
2,742,245


$
15,542,979Gross gains


54,887



135,826Gross losses


121,175



78,117 The components of net investment income are as follows:  2017


2016Bonds

$
951,246


$
875,994Cash and short-term investments


3,907



3,136Common stocks


142,033



131,660Limited partnerships






200,000Net (loss) gain on sales of investments, net of tax of $0 and $19,621


(66,288
)


38,0881,030,898



1,248,878Less investment expenses


59,065



65,668Net investment income

$
971,833


$
1,183,210  E-15




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  The following table shows gross unrealized losses and fair value of the Exchanges
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,
2017:  Less than 12 MonthsFair Value


Unrealized LossesU.S. government

$
3,875,717


$
82,023Subdivisions of states, territories, and possessions


452,316



3,780Industrial and miscellaneous


9,474,229



128,102Common stocks


795,147



47,812$
14,597,409


$
261,717Greater than 12 MonthsFair Value


Unrealized LossesU.S. government

$
3,779,791


$
19,394Subdivisions of states, territories, and possessions


888,309



9,706Industrial and miscellaneous


1,698,530



6,877Common stocks


230,876



231,039$
6,597,506


$
267,016TotalsFair Value


Unrealized LossesU.S. government

$
7,655,508


$
101,417Subdivisions of states, territories, and possessions


1,340,625



13,486Industrial and miscellaneous


11,172,759



134,979Common stocks


1,026,023



278,851$
21,194,915


$
528,733 At December 31, 2017, the Exchange had 59 securities in unrealized loss positions of less than 12 months
with a combined gross unrealized loss of $261,717 and 16 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $267,016.  E-16




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POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  The following table shows gross unrealized losses and fair value of the Exchanges
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,
2016:  Less than 12 MonthsFair Value


Unrealized LossesU.S. government

$
4,005,510


$
96,442States, territories, and possessions


650,944



5,934Subdivisions of states, territories, and possessions


3,489,633



44,080Industrial and miscellaneous


6,612,642



192,912Common stocks


399,877



9,498$
15,158,606


$
348,866Greater than 12 MonthsFair Value


Unrealized LossesU.S. government

$
3,781,371


$
17,024States, territories, and possessions






Subdivision of states, territories, and possessions


401,394



12,160Industrial and miscellaneous


3,768,084



17,912Common stocks


445,488



193,150$
8,396,337


$
240,246TotalsFair Value


Unrealized LossesU.S. government

$
7,786,881


$
113,466States, territories, and possessions


650,944



5,934Subdivision of states, territories, and possessions


3,891,027



56,240Industrial and miscellaneous


10,380,726



210,824Common stocks


845,365



202,648$
23,554,943


$
589,112 At December 31, 2016, the Exchange had 64 securities in unrealized loss positions of less than 12 months
with a combined gross unrealized loss of $348,866 and 24 securities in unrealized loss positions of greater than 30 months with a combined gross unrealized loss of $240,246.  E-17




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  The table below presents the level within the fair value hierarchy generally utilized by the
Exchange to estimate the fair value of assets disclosed on a recurring basis at December 31, 2017:  Total


Level 1


Level 2


Level 3U.S. government

$
7,664,698


$



$
7,664,698


$
States, territories, and possessions


1,212,987







1,212,987



Subdivisions of states, territories and possessions


9,881,074







9,881,074



Industrial and miscellaneous


25,027,535







25,027,535



Total bonds


43,786,294







43,786,294



Common stocks


2,806,613



2,806,613







$
46,592,907


$
2,806,613


$
43,786,294


$
 The table below presents the level within the fair value hierarchy generally utilized by the Exchange to
estimate the fair value of assets disclosed on a recurring basis at December 31, 2016:  Total


Level 1


Level 2


Level 3U.S. government

$
8,673,275


$



$
8,673,275


$
States, territories, and possessions


1,222,354







1,222,354



Subdivisions of states, territories and possessions


10,015,876







10,015,876



Industrial and miscellaneous


19,243,798







19,243,798



Total bonds


39,155,303







39,155,303



Common stocks


2,491,165



2,491,165







$
41,646,468


$
2,491,165


$
39,155,303


$
 There were no transfers of financial assets or liabilities between Level 1, Level 2, and Level 3
during the years ended December 31, 2017 and 2016.  E-18




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  6.
Deferred Acquisition Costs: The following table summarizes the components of deferred acquisition costs for the years ended December 31, 2017 and 2016:  2017


2016Balance, beginning of year

$
1,713,784


$
1,560,485Amount capitalized during the year


5,058,137



3,533,008Amount amortized during the year


4,267,920



3,379,709Balance, end of year

$
2,504,001


$
1,713,784  7.
Reinsurance: The Exchange has entered into various reinsurance agreements since November 1, 2003. Coverage under these agreements indemnify the
Exchange up to a maximum limit of $250,000 in excess of $250,000 per each medical claim for the period from November 1, 2003 through January 1, 2010 and January 1, 2011 through January 1, 2013 with additional coverage of $150,000
in excess of $100,000 per medical claim for the period from February 1, 2008 through January 1, 2010. For the period from January 1, 2010 through January 1, 2011, the Exchange entered into a reinsurance agreement which
indemnified the Exchange up to a maximum limit of $300,000 in excess of $200,000 per each medical claim. For the period January 1,
2013 to January 1, 2015, the Exchange entered into a reinsurance agreement which indemnified the Exchange up to a maximum limit of $200,000 in excess of $300,000 per each claim, with additional coverage of $500,000 in excess of $500,000 per
claim for those Pennsylvania policies not covered by Medical Care Availability and Reduction of Error Fund (MCARE) and all New Jersey, Delaware, and Ohio policies. On January 1, 2015, the Exchange entered into an annual loss and clash reinsurance contract. The contract applies to policies written by
the Exchange for insureds with medical practices within the states of Pennsylvania, New Jersey, Ohio, Delaware, and Maryland. Under the terms of the agreement, Coverage A has a retention of $700,000 in excess of $300,000. For MCARE eligible insureds
in Pennsylvania, the policy limits are $500,000 ultimate net loss per each claim, insured, and policy and $1,500,000 in the aggregate. For those defined specialties not covered under MCARE, policy limits are $1,000,000 ultimate net loss per each
claim, insured, and policy and $3,000,000 in the aggregate. The contract also has Clash coverage provision (Coverage B) providing $600,000 in coverage subject to a $2,200,000 aggregate. Coverage C has a retention of $1,000,000 in excess of
$1,000,000. The reinsurers maximum liability during the annual contract period was $25,000,000 for Coverages A and B and $2,000,000 for Coverage C. On January 1, 2016, the Exchange entered into a two-year excess of loss and clash reinsurance
contract. The contract applies to policies written by the Exchange for insureds with medical practices within the states of Pennsylvania, New Jersey, Ohio, Delaware, and Maryland. Coverages under the contract are the same as the January 2015
contract described above except for the following changes: (1) The reinsurers maximum liability during the annual contract period shall be 550% of ceded reinsurance premium or $5,000,000, whichever is greater, for Coverages A and B; and
(2) Coverages A and B are subject to a deductible of $1,250,000 or 12% of net subject earned premium, whichever is greater. The contract terminated on January 1, 2018.  E-19




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Premiums ceded to the reinsurers are subject to adjustment based on the terms of the
reinsurance agreement. Initially, a deposit or provisional premium is ceded to the reinsurers, which is periodically adjusted, and set equal to 7.5% of the gross net earned premium income for the period from January 1, 2016 through
January 1, 2018, subject to a minimum premium of $650,000. The effect of reinsurance on premiums written, amounts earned and losses
and loss adjustment expenses incurred for the years ended December 31, 2017 and 2016 is as follows:  2017


2016Premiums written:Direct

$
15,327,496


$
13,798,821Ceded


2,276,362



4,327,200Premiums written, net of reinsurance

$
13,051,134


$
9,471,621Premiums earned:Direct

$
14,551,327


$
12,917,808Ceded


2,276,362



4,327,200Premiums earned, net of reinsurance

$
12,274,965


$
8,590,608Losses and loss adjustment expenses incurred:Direct

$
9,567,678


$
6,471,541Ceded


1,835,152



2,552,038Losses and loss adjustment expenses incurred, net of reinsurance

$
7,732,526


$
3,919,503  8.
Equipment: The Exchanges equipment consisted of the following at December 31, 2017 and 2016:  2017


2016EDP equipment and software

$
300,000


$
300,000Less accumulated depreciation and amortization


250,000



150,000$
50,000


$
150,000 Depreciation and amortization expense for each of the years ended December 31, 2017 and 2016 was $100,000.  E-20




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  8.
Losses and Loss Adjustment Expenses: Activity in the liability for losses and loss adjustment expenses for the years ended December 31, 2017 and 2016 are summarized as
follows:  2017


2016Losses and loss adjustment expenses, beginning of year

$
34,814,118


$
36,069,304Less: Reinsurance recoverable, beginning of year


8,670,162



6,118,442Add: Reinsurance recoverable, claims paid, beginning of year


(3,614,905
)


(319
)Losses and loss adjustment expenses, beginning of year


29,758,861



29,951,181Incurred related to:Current year


10,377,591



8,346,007Prior years


(2,645,065
)


(4,426,504
)Total incurred


7,732,526



3,919,503Paid related to:Current year


564,039



377,891Prior years


4,663,743



3,733,932Total paid


5,227,782



4,111,823Losses and loss adjustment expenses, end of year - net


32,263,605



29,758,861Add: Reinsurance recoverable, end of year


6,117,389



8,670,162Less: Recoverable on claims paid


(352,285
)


(3,614,905
)Losses and loss adjustment expenses, end of year - gross

$
38,028,709


$
34,814,118 The liability for losses and loss adjustment expenses at December 31, 2017 and 2016 were $38,028,709 and
$34,814,118, respectively. For the years ended December 31, 2017 and 2016, $4,663,743 and $3,733,932, respectively, has been paid for incurred claims attributable to insured events of prior periods.Original estimates are increased or
decreased, as additional information becomes known regarding individual claims. During the years ended December 31, 2017 and 2016, the Exchange had favorable developments of $2,645,065 and $4,426,504, respectively, as a result of settlement of
known claims below the amount for which they have been previously reserved, as well as additional revisions to the Exchanges estimate of its ultimate losses for the 2012 through 2015 accident years. During the years ended December 31,
2017 and 2016, based on the low level of claims outstanding, as well as favorable development on the settlement of known claims relating to these accident years, the Exchange revised its estimate of the ultimate losses for the 2012 through 2015
accident years and reduced the corresponding reserve for incurred but not reported claims, contributing to the positive development on prior accident years during the years ended December 31, 2017 and 2016.  E-21




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Incurred and Paid Loss Development Information - Unaudited The following information about incurred and paid loss development at December 31, 2017, net of reinsurance, as well as cumulative claim
frequency and the total of incurred-but-not-reported liabilities, plus expected development on report claims included within the
net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2008 to
December 31, 2016, is presented as supplementary information and is unaudited.  Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)


As of December 31, 2017AccidentYear


2008


2009


2010


2011


2012


2013


2014


2015


2016


2017


Total
ofIncurred-But-Not-ReportedLiabilitiesPlusExpectedDevelopmenton ReportedClaims


CumulativeNumber ofReportedClaims2008


$
4,216


$
4,758


$
4,708


$
5,085


$
4,666


$
4,011


$
3,774


$
3,473


$
2,798


$
2,276


$
60



492009







3,899



3,792



3,939



3,607



3,426



2,856



2,718



2,548



2,503



518



572010











4,875



4,191



4,961



4,521



4,158



3,671



3,265



2,937



830



482011















5,329



5,473



5,456



5,221



4,948



4,276



4,447



380



552012



















6,258



5,956



5,946



5,643



5,405



6,410



242



712013























6,547



6,722



6,199



5,625



5,224



912



572014



























6,353



6,034



5,562



4,278



1,385



422015































8,173



7,575



6,992



4,219



322016



































8,136



7,502



4,175



682017







































10,184



7,744



53$
52,753Cumulative Paid Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)AccidentYear


2008


2009


2010


2011


2012


2013


2014


2015


2016


20172008


$
32


$
363


$
685


$
999


$
1,659


$
1,866


$
1,940


$
1,959


$
1,969


$
1,9852009







58



312



530



829



1,291



1,577



1,656



1,573



1,6022010











30



255



466



871



1,410



1,531



1,736



1,9112011















69



366



903



1,959



3,400



2,988



3,2732012



















83



464



901



1,870



3,775



5,1932013























50



236



950



2,306



2,6172014



























42



292



766



1,7922015































79



381



1,1622016



































193



8072017







































400$
20,742All outstanding liabilities before 2008, net of reinsurance



253Liabilities for losses and loss adjustment expenses, net of reinsurance


$
32,264  E-22




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Reconciliation The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses at
December 31, 2017 in the accompanying balance sheet is as follows:  2017Net outstanding liabilities for losses and loss adjustment expenses:Medical professional

$
32,263,605Liabilities for losses and loss adjustment expenses, net of reinsurance


32,263,605Reinsurance recoverable on unpaid claims:Medical professional


5,765,104Total reinsurance recoverable on unpaid claims


5,765,104Total gross liability for losses and loss adjustment expenses

$
38,028,709 Actuarial Assumptions and Methodologies The Exchange uses a combination of the Actual versus Expected Method, Bornhuetter-Ferguson Method, Expected Loss Ratio Method,
Frequency/Severity Method, and the Loss Development Method in order to estimate its liability for losses and loss adjustment expenses. There were no significant changes in the methodologies and assumptions used to develop the liabilities for losses
and loss adjustment expenses for the years ended December 31, 2017 and 2016. Losses Duration Information The following is supplemental information about average historical claims duration at December 31, 2017:  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 10Medical professional


1.7
%


7.4
%


10.6
%


18.3
%


22.3
%


7.5
%


4.9
%


1.2
%


0.8
%


0.7
%  10.
Note Payable: On December 12, 2014, the Exchange 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 assets purchased with the proceeds received. The loan is being repaid on a monthly basis from January 2016 through January 2020 with interest calculated on the unpaid principal
balance at a rate of 4%. At December 31, 2017 and 2016, the balance of the note was $187,222 and $244,767, respectively. At December 31, 2017 and 2016, the Exchange was in compliance with all loan covenants.  Year ending December 31,2018

$
59,9092019


62,3852020


64,928$
187,222  E-23




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  11.
Income Taxes: The components of the Exchanges income tax provision for the years ended December 31, 2017 and 2016 are as follows:  2017


2016Current provision

$
(467,246
)

$
477,041Deferred tax provision


206,755



108,516$
(260,491
)

$
585,557 The Exchanges U.S. federal statutory income tax rate applicable to ordinary income was 34% for the years
ended December 31, 2017 and 2016. The income tax provision differs from that computed by applying federal statutory rate to (loss) income before income taxes for the years ended December 31, 2017 and 2016 is summarized as follows:  2017


2016Expected tax provision at federal statutory rate

$
(95,585
)

$
479,643Tax exempt income, net of proration


(72,521
)


(73,087
)Dividends received deduction


(7,204
)


(8,406
)Correction of prior years amounts


(59,472
)


187,407Change in enacted tax rates


(25,709
)


Net income tax provision

$
(260,491
)

$
585,557  E-24




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Deferred taxes are provided for the temporary differences between financial reporting
purposes and the income tax purposes of the Exchanges assets and liabilities. At December 31, 2017 and 2016, the components of the Exchanges net deferred income taxes consisted of the following:  2017


2016Deferred tax assets:Discount of unearned premiums

$
344,882


$
505,601Discount of advance premiums


20,054



35,738Discount of losses and loss adjustment expenses


512,300



666,449Total deferred tax assets


877,236



1,207,788Deferred tax liabilities:Deferred acquisition costs


525,840



582,687Tax Act transitional adjustment


105,261



Unrealized gain on investments


287,666



65,227Total deferred tax liabilities


918,767



647,914Net deferred tax (liability) asset

$
(41,531
)

$
559,874 In assessing the realization of deferred tax assets, management considers 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 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, 2017 and 2016, management determined that it is more likely than not that all of the deferred tax assets will be realized by the Exchange in future years. Accordingly, the Exchange did not record a valuation allowance against its
deferred tax assets at December 31, 2017 and 2016. At December 31, 2017 and 2016, there were no unused operating loss
carryforwards available to offset future taxable income. The Exchange has applied the provisions of ASC 740, Income Taxes, for the
years ended December 31, 2017 and 2016. ASC 740 prescribes a recognition threshold and measurement attribute with respect to uncertainty in income tax positions. In applying ASC 740, the Exchange has evaluated its various tax positions taken
during the years ended December 31, 2017 and 2016. The Exchange 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 Exchange 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 amounts of unrecognized tax benefits. The Exchange did not recognize any interest and penalties in the
accompanying statements of operations and comprehensive income for the years ended December 31, 2017 and 2016. The Exchange remains
subject to examination by the Internal Revenue Service for tax years 2014 through 2016.  E-25




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  On December 22, 2017, U.S. government enacted comprehensive tax legislation commonly
referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act made broad and significant changes to the U.S. tax code that affects the year ended December 31, 2017, including, but not limited to, a decrease in the federal
statutory rate from 34% to 21%. As a result, the Exchanges deferred tax items are measured at an effective rate of 21% at December 31, 2017. The Exchange recorded an increase in unassigned surplus of $25,709 due to re-measurement of the December 31, 2017 deferred tax assets and liabilities. Additionally, as part
of the enactment of the Tax Act, 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 will
use a corporate bond yield curve to determine the discount factors and property and casualty insurance companies will no longer be 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 and compare the amount to the actual 2017 reserve discount. The difference will be amortized into
taxable income over eight years beginning in 2018. As a result, the Exchange calculated a difference of $105,261, which will be amortized into taxable income beginning in 2018. The Exchange has completed the accounting for the impact of the Tax Act as of December 31, 2017 and has recorded no provisional amounts.  12.
Related Party Transactions: SIS, as the Attorney-In-Fact for the subscribers to the
Exchange, is responsible for the exchange of reciprocal insurance contracts among the subscribers and for managing the business of the Exchange as set forth in the
Attorney-In-Fact Agreement. These management functions include, but are not limited to, underwriting and administrative services to the Exchange based on a percentage
not to exceed 25.0% for gross written premiums, less return premiums. The Attorney-In-Fact Agreement is in effect for an indefinite term, subject only to the right of
the Exchange and SIS to terminate this Agreement by mutual agreement. Management fee expense incurred by the Exchange in accordance with the Attorney-In-Fact Agreement
for the years ended December 31, 2017 and 2016 was $3,831,874 and $3,506,249, respectively. Additionally, during the year ended December 31, 2017, the Exchange incurred commission expense from services provided by SIS totaling $30,306. At
December 31, 2017 and 2016, the Exchange owed to SIS $429,770 and $0, respectively, for these services which is included in due to affiliates in the accompanying balance sheets. The Attorney-In-Fact Agreement was amended effective
January 1, 2017 to increase the management fee percentage from 24.5% of gross written premiums to 25.0% of gross written premiums. Additionally, the agreement was further amended whereby the management fee charged by SIS to the Exchange is to
no longer include payments to agents and other sales commissions as components of the fee. Total amount of broker commissions incurred by the Exchange during the year ended December 31, 2017 was $1,386,157; such amount is included in
other underwriting expenses in the accompanying statement of operations and comprehensive income. As discussed in Note 4. SIS
has surplus notes with the Exchange in the total amount of $537,000 at December 31, 2016. In 2009, the Exchange entered into two surplus agreements with SIS in the amounts of $30,000 and $7,000, respectively, with outstanding borrowings under
the notes bearing interest at 5%, and matures on January 31, 2018. On May 2, 2012, the Exchange entered into a surplus note agreement with SIS in the amount of $500,000, with outstanding borrowings bearing interest at 8%, and matures on
April 1, 2035. All of the surplus notes have been issued in exchange for cash from the original note holders and the notes are carried at face value. The notes are subordinated to all policyholders and general creditor obligations of the
Exchange, and all payments of interest and principal are subject to prior approval of the Commonwealth of Pennsylvania Insurance Department (the Department). During the year ended December 31, 2016, the Exchange received permission  E-26




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  from the Department to pay interest but not to redeem the remaining notes. During the year ended December 31, 2017, the Exchange received permission from the Department to pay the balance of
the surplus notes of $537,000 and the related accrued interest of $10,463 in January 2017. No interest expense was incurred by the Exchange related to these notes during the year ended December 31, 2017. The Exchange has an agreement with Gateway Risk Services, Inc. (Gateway), a company affiliated with SIS, whereby Gateway provides
the Exchange with specialty services for claims administration. Gateway manages the claims process on behalf of the Exchange. The Exchange incurred and paid fees related to services provided by Gateway totaling $135,000 and $135,000 for the years
ended December 31, 2017 and 2016, respectively. There were no amounts due to Gateway at December 31, 2017 and 2016. In April
2017, the Exchange and Andrews Outsource Solutions, LLC (AOS), a company affiliated with SIS, entered into an agreement, with the Form D filing approved by the Department on April 6, 2017, whereby AOS is to provide litigation
management services and legal and paralegal support services to the Exchange. During the year ended December 31, 2017, the Exchange incurred litigation management services of $441,100 related to this agreement. There were no amounts due to AOS
at December 31, 2017. During the year ended December 31, 2017, the Exchange collected premiums on behalf of Physicians Insurance
Program Exchange (PIPE), a Pennsylvania reciprocal exchange and an affiliate of the Exchange. At December 31, 2017, the amount due to PIPE was $15,046 and is included in due to affiliate in the accompanying balance
sheet. There were no amounts due to PIPE at December 31, 2016. During the year ended December 31, 2017, Diversus, the parent
company of SIS, Gateway, and AOS, paid for certain expenses on behalf of the Exchange. At December 31, 2017, the amount due to Diversus was $7,219 and is included in due to affiliate in the accompanying balance sheet. There were no
amounts due to Diversus at December 31, 2016. During the year ended December 31, 2017, the Exchange paid for certain expenses on
behalf of Professional Casualty Association (PCA), a Pennsylvania reciprocal exchange and an affiliate of the Exchange. At December 31, 2017, the amount due from PCA was $350 and is presented as due from affiliate in the
accompanying balance sheet. There were no amounts due from PCA at December 31, 2016.  13.
Management Agreement: The Exchange has an agreement with Strategic Risk Solutions (VT), Inc. (SRS), an unrelated company, whereby SRS provides the
Exchange with accounting, administrative, and regulatory services. The Exchange incurred fees related to services provided by SRS totaling $102,040 and $104,085, respectively, for the years ended December 31, 2017 and 2016. At December 31,
2017 and 2016, the amounts due to SRS were $1,820 and $1,250, respectively.  14.
Assessments: The Exchange is aware of various insurance entities insolvencies that produced business in the Commonwealth of Pennsylvania. The Exchange
has received assessments for its pro-rata share of the cost of such insolvencies from the Pennsylvania Property and Casualty Insurance Guaranty Fund. Statutory accounting principles require the Exchange to
provide a liability for the full cost of such insolvencies up to the maximum annual assessment limit (2.0%).  E-27




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  Based upon the available information, the Exchange has provided a gross liability of $105,012
and $134,047 at December 31, 2017 and 2016. The Exchange has not recorded applicable premium tax credits at December 31, 2017 and 2016 related to guaranty assessments. Total guaranty fund expense, net of prior years refunds and
premium tax credits, for the years ended December 31, 2017 and 2016 was $(28,315) and $35,239, respectively. MCARE 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.
The Exchange assesses its policyholders as required by MCARE in addition to collecting the premium assessed. The assessments collected from policyholders are included in Deposits and amounts held for others in the accompanying balance
sheets, and no income is recognized by the Exchange. At December 31, 2017 and 2016. the Exchange had liabilities of $300,090 and $15,275, 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. The Exchange assesses its policyholders as required by NJPIGA in addition to collecting the premium assessed. The assessments collected from policyholders
are included in Deposits and amounts held for others in the accompanying balance sheets, and no income is recognized by the Exchange. At December 31, 2017 and 2016, the Exchange had liabilities of $31,272 and $19,870, respectively,
for amounts collected on behalf NJPIGA.  15.
Statutory Information: Accounting principles used to prepare statutory financial statements differ from those used to prepare 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 the Exchange are prepared in accordance with accounting practices prescribed by the 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 allowance valuation; (3) acquisition costs, such as commissions, management fees, premium taxes, and other items, have been charged to operations when incurred, whereas GAAP allows capitalization of these expenses and
amortized over the term of the policies; (4) the carrying value of bonds are based on NAIC ratings whereas GAAP requires bonds to be valued based on whether management intends to hold the bonds 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 limited to those temporary deductible differences
which are expected to reverse within three years, whereas under GAAP, no such limitation exists; and (7) ceded reinsurance amounts (unearned premiums and estimated loss recoverables) are shown net of the related liability, whereas presented on
a gross basis and reflected as an asset for GAAP.  E-28




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  The Department has adopted certain prescribed accounting practices that differ from those
found in the NAIC statutory accounting practices. Specifically, the Department prescribes 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 SAP, the unearned premiums would not be reduced by the management fees paid relate to unearned premiums reserve. Statutory net (loss) income and surplus and other funds of the Exchange as determined in accordance with SAP prescribed or permitted by the
Department for the years ended December 31, 2017 and 2016 are as follows:  2017


2016Statutory net (loss) income

$
(439,756
)

$
911,171Statutory surplus and other funds


16,882,485



17,487,422 A reconciliation of statutory surplus and other funds between NAIC statutory accounting practices and practices
prescribed by the Department are as follows:  2017


2016Statutory surplus and other funds prescribed by the Department

$
16,882,485


$
17,487,422State prescribed practices:Unearned management fees


(1,399,576
)


(1,060,802
)Statutory surplus and other funds per NAIC statutory accounting practices

$
15,482,909


$
16,426,620 In accordance with Pennsylvania law, the Exchange is required to maintain minimum subscribers surplus of
$1,125,000. Additionally, Pennsylvania law sets the maximum amount of dividends that may be paid by the Exchange during any twelve-month period after notice to, but without the approval of, the Department. This amount cannot exceed the greater of
(1) 10% of the Exchanges surplus as reported on its most recent annual statement filed with the Department or (2) the Exchanges statutory net income for the period covered by the annual statement as reported on such statement.
During the years ended December 31, 2017 and 2016, no dividends were declared or paid by the Exchange. The Exchange 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 the Exchanges total adjusted capital, as defined by the NAIC, to its authorized control level RBC. At December 31, 2017 and 2016, the Exchanges RBC exceeded minimum RBC requirements. Note 16: Subsequent Events Subsequent
events have been evaluated through January 22, 2019, which is the date the financial statements were available to be issued. On
January 1, 2018, the Exchange entered into a reinsurance contract with JLT Re (North America), Inc. (JLT). JLT and SIS co-brokered the contract. JLT is to be compensated by the reinsurers
through commissions, and JLT, in turn, will pay a portion of the commissions to SIS. Under the terms of the agreement, reinsurance is ceded by the Exchange. For MCARE eligible insureds in Pennsylvania, the reinsurance liability is $200,000 in excess
of $300,000 per claim. For insured individuals not covered by MCARE, the reinsurance liability is $700,000 in excess of $300,000 per claim. For insureds in other states with policy limits of $200,000 per claim, the reinsurer liability is $100,000 in
excess of $100,000 per claim. For insureds with policy limits in excess of $200,000 per claim, not exceeding $1,000,000 per claim, the reinsurance liability is $700,000 in excess of $300,000. The reinsurance contract has a two-year term and expires on January 1, 2020.  E-29




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##### Table of Contents

POSITIVE PHYSICIANS INSURANCE EXCHANGE   NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016  On June 1, 2018, SIS adopted a Plan of Conversion (Plan) to convert the
Exchange from a reciprocal inter-insurance exchange to a stock form of ownership pursuant to the Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock
Conversion Act. Under the Plan, the Exchange would merge with PCA and PIPE and would become a wholly-owned subsidiary of Positive Physicians Holdings, Inc., a newly formed Pennsylvania business corporation (Holdings). As part of the
Plan, as amended, Holdings will offer and sell its common stock to subscribers of the Exchange, PCA, and PIPE as well as to other interested investors. Other than eligible stockholders of Diversus, it is not expected that Diversus would be a direct
or indirect purchaser of common stock in the offering. The Plan is subject to the approval of the Pennsylvania Insurance Commissioner.  E-30




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##### Table of Contents

Item 16. FORM 10-K SUMMARY None.




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##### Table of Contents

Exhibit Index  Exhibit No.

Description3.1

Amended and Restated Articles of Incorporation of Positive Physicians Holdings, Inc. (incorporated by reference to Exhibit 
3.1 to the Registrants Registration Statement on Form S-1 (333-229322)).3.2

Bylaws of Positive Physicians Holdings, Inc. (incorporated by reference to Exhibit 
3.2 to the Registrants Registration Statement on Form S-1 (333-229322)).4.1

Form of certificate evidencing shares of common stock of Positive Physicians Holdings, Inc. (incorporated by reference to Exhibit 
4.1 to the Registrants Registration Statement on Form S-1 (333-229322)).10.1

Management Agreement between Positive Physicians Insurance Company, Positive Physicians Holdings, Inc., Diversus Management, Inc., and Diversus, Inc. dated March 27, 2019.10.2

Standby Stock Purchase Agreement dated as of June 
8, 2018, among Insurance Capital Group, LLC, Positive Physicians Insurance Exchange, Professional Casualty Association, Physicians Insurance Program Exchange, and Positive Physicians Holdings, Inc. (incorporated by reference to Exhibit 10.2 to the
 Registrants Registration Statement on Form S-1 (333-229322)).10.3

Amendment to Standby Stock Purchase Agreement dated as of September 
21, 2018, among Insurance Capital Group, LLC, Positive Physicians Insurance Exchange, Professional Casualty Association, Physicians Insurance Program Exchange, and Positive Physicians Holdings, Inc. (incorporated by reference to Exhibit 
10.3 to the Registrants Registration Statement on Form S-1 (333-229322)).10.4

Amendment No. 2 to the Standby Stock Purchase Agreement dated as of December 
6, 2018, among Insurance Capital Group, LLC, Positive Physicians Insurance Exchange, Professional Casualty Association, Physicians Insurance Program Exchange, and Positive Physicians Holdings, Inc. (incorporated by reference to Exhibit 10.4 to the
 Registrants Registration Statement on Form S-1 (333-229322)).10.5

Amended and restated Supplemental Agreement dated September 
21, 2018, among Diversus, Inc., Insurance Capital Group, LLC, Positive Physicians Insurance Exchange, Professional Casualty Association, Physicians Insurance Program Exchange, and Positive Physicians Holdings, Inc. (incorporated by reference to Exhibit 10.5
to the Registrants Registration Statement on Form S-1 (333-229322)).10.6

Option Agreement among Diversus, Inc., Insurance Capital Group, LLC, and Positive Physicians Holdings, Inc. dated March 27, 2019.10.7

Management Services Agreement between Positive Physicians Holdings, Inc. and Diversus Management Inc. dated March 27, 2019.10.8

Medical Malpractice Working Excess Reinsurance Contract effective January 
1, 2018 between Hannover Ruck Se and Positive Physicians Insurance Exchange (incorporated by reference to Exhibit 10.8 to the Registrants Registration Statement on Form S-1 (333-229322)).10.9

Medical Malpractice Working Excess Reinsurance Contract effective January 
1, 2018 between Hannover Ruck Se and Positive Physicians Insurance Exchange (incorporated by reference to Exhibit 10.8 to the Registrants Registration Statement on Form S-1 (333-229322)).




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##### Table of Contents

10.10

Loan Agreement between Positive Physicians Holdings, Inc. and Diversus, Inc. dated March 27, 2019.10.11

Medical Malpractice Working Excess Reinsurance Contract effective January 
1, 2018 between Hannover Ruck Se and Professional Casualty Association (incorporated by reference to Exhibit 10.11 to the Registrants Registration Statement on Form S-1 (333-229322)).10.12

Medical Malpractice Working Excess Reinsurance Contract effective January 
1, 2018 between Hannover Ruck Se and Physicians Insurance Program Exchange (incorporated by reference to Exhibit 10.12 to the Registrants Registration Statement on Form S-1 (333-229322)).14.1

Code of Ethics and Business Conduct21.1

Subsidiaries of Positive Physicians Holdings, Inc.31.1

Certification of Principal Executive Officer Pursuant to Rules 
13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Principal Financial Officer Pursuant to Rules 
13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




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##### Table of Contents

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.  Positive Physicians Holdings, Inc.Date: April 24, 2019



By:

/s/ Lewis S. Sharps, M.D.Title

Lewis S. Sharps, M. D., President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed
below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.  Name

Title

Date/s/ Lewis S. Sharps

President, Chief Executive Officer, and Director (Principal Executive Officer)

April 24, 2019Lewis S. SharpsDirector

April 24, 2019Paul M. J. Brockman/s/ William E. Hitselberger

Director

April 24, 2019William E. HitselbergerDirector

April 24, 2019Craig A. Huff/s/ Stephen J. Johnson

Director

April 24, 2019Stephen J. JohnsonDirector

April 24, 2019Duncan McLaughlin/s/ Scott C. Penwell

Director

April 24, 2019Scott C. PenwellDirector

April 24, 2019Matthew T. Popoli/s/ James L. Zech

Director

April 24, 2019James L. Zech/s/ Daniel A. Payne

Chief Financial OfficerDaniel A. Payne

(Principal Financial Officer)

April 24, 2019