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.
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.
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.
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.
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.
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):
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.
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.
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):
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.
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 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.
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.
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.