The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements include the accounts of Positive Physicians Holdings, Inc. and its wholly owned subsidiary (collectively referred to as the “Company”). Positive Physicians Holdings, Inc. is a Pennsylvania domiciled holding company, which was incorporated on May 1, 2018 for the purpose of acquiring three Pennsylvania based reciprocal insurance exchanges: Positive Physicians Insurance Exchange (“PPIX”), Professional Casualty Association (“PCA”), and Physicians’ Insurance Program Exchange (“PIPE”). In connection with the completion of the Company’s initial public offering, PPIX, PCA, and PIPE converted from reciprocal insurance exchanges into stock insurance companies and were merged together to form Positive Physicians Insurance Company (“Positive Insurance Company”), a wholly owned subsidiary of the Company. The Company’s initial public offering and its acquisition of Positive Insurance Company were completed on March 27, 2019. Prior to that time, the Company had minimal assets and liabilities and had not engaged in any operations. References to the Company or Positive Insurance Company financial information in this Quarterly Report prior to the conversion and merger date is to the financial information of PPIX, PCA, and PIPE on a combined basis. When used in this Quarterly Report, “we” and “our” mean PPIX, PCA, and PIPE prior to March 27, 2019, and Positive Insurance Company thereafter.
Positive Insurance Company
Positive Insurance Company writes medical malpractice insurance for healthcare providers practicing in Pennsylvania, New Jersey, Ohio, Delaware, Maryland, South Carolina, and Michigan. Diversus Management, LLC (“Diversus Management”) manages and administers essentially all of the operations of Positive Insurance Company under the terms of a management agreement. Diversus Management is a wholly owned subsidiary of Diversus, Inc. (“Diversus”). Pursuant to the terms of the agreement, effective March 27, 2019, Diversus Management provides such administrative services to Positive Insurance Company in exchange for fees based upon a percentage of Positive Insurance Company’s gross written premiums, less return premiums. Diversus Management may also earn quarterly performance management fees based on Positive Insurance Company’s combined ratio and net earned premiums. Positive Insurance Company remains responsible for all underwriting decisions and the payment of all claims and claims related expenses incurred under policies issued by Positive Insurance Company and for all sales commissions paid to producers.
Products and Services
Positive Insurance Company underwrites medical professional liability coverage for physicians, their corporations, medical groups, clinics and allied healthcare providers. Medical professional liability insurance (“MPLI”) protects physicians and other health care providers against liabilities arising from the rendering of, or failure to render, professional medical services. We offer claims-made coverage, claims-made plus, and occurrence-based policies as well as tail coverage in Pennsylvania, New Jersey, Ohio, Delaware, Maryland, South Carolina, and Michigan. Our policies include coverage for the cost of defending claims. Claims-made policies provide coverage to the policyholder for claims reported during the period of coverage. We offer extended reporting endorsements, or tails, to cover claims reported after the policy expires. Occurrence-based policies provide coverage to the policyholders for all losses incurred during the policy coverage year regardless of when the claims are reported. Although we generate a majority of our premiums from individual and small group practices, we also insure several major physician groups.
The Company accounts for its medical professional liability insurance business as a single reporting segment line of business.
Option Agreement
Upon completion of the conversions of PPIX, PCA, and PIPE and the securities offering on March 27, 2019, the Company and Diversus entered into an option agreement whereby either party has the option to cause Diversus, subject to shareholder approval, to merge with and become a wholly owned subsidiary of the Company. Under the terms of the agreement, the option may be exercised by either the Company or Diversus at any time (1) during the period beginning 2 years after completion of the conversions of the exchanges and ending 54 months after the completion of the conversions, or (2) if earlier than 2 years after the completion of the conversions, then such date that the majority stockholder of the Company no longer has the right to appoint a majority of the board of directors of the Company. In connection with any merger, the common stock shareholders of Diversus will receive either cash, common stock shares of the Company, or some combination thereof for their shares of Diversus’ common stock. With respect to the preferred stock shares of Diversus, they will either be paid out in cash or converted into common stock shares of Diversus as if such preferred stock shares were converted into Diversus’ common stock shares immediately prior to the effective date of the merger.
6
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Our consolidated financial statements include our accounts and those of our wholly owned subsidiary. We have eliminated all inter-company accounts and transactions in consolidation.
Positive Physicians Holdings, Inc. was formed on May 1, 2018. Prior to the completion of the initial public offering, the Company, PPIX, PCA, and PIPE were under the common control of Diversus. Additionally, prior to March 27, 2019, the Company did not engage in substantive pre-combination activities, and accordingly, is not considered the acquirer of the net assets of Positive Insurance Company. The acquirer of these net assets is the majority stockholder of the Company. Accordingly, the accompanying unaudited financial statements do not reflect any adjustments to fair value as might have been determined had the Company accounted for the acquisition of Positive Insurance Company’s net assets as a business combination.
We recommend you read the interim consolidated financial statements we include in this Form 10-Q Report in conjunction with the financial statements and the notes to our financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
|
3.
|
Summary of Significant Accounting Policies
|
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and notes. Actual results could differ from these estimates and such differences could be material. The Company’s principal estimates include the liability for losses and loss adjustment expenses, deferred acquisition costs, other-than-temporary impairments of investments, and valuation of deferred tax assets.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to be cash on hand and depository bank accounts with original maturities of three months or less, are readily convertible to known amounts of cash, and present insignificant risk of changes in value due to changing interest rates.
Investments
Investments in fixed maturity securities are classified as available-for-sale and are stated at fair value. Unrealized holding gains and losses, net of related tax effects, on available-for-sale fixed maturity securities are recorded directly to accumulated other comprehensive income. Investments in equity securities are stated at fair value and unrealized holding gains and losses are credited or charged to net income (loss) as incurred and are included in realized investment gains (losses), net in the accompanying consolidated statements of operations.
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. Short-term investments are considered to be short-term, highly liquid investments that are less than one year in term to the dates of maturity at the purchase dates, and they present insignificant risk of changes in value due to changing interest rates.
The Company regularly evaluates all of its investments based on current economic conditions, credit loss experience, and other specific developments. If there is a decline in a security’s net realizable value that is other than temporary, it is considered as a realized loss and the cost basis in the security is reduced to its estimated fair value.
7
A fixed maturity security is considered to be other-than-temporarily impaired when the security’s fair value is less than its amortized cost basis and 1) we intend to sell the security, 2) it is more likely than not that we will be required to sell the security before recovery of the security’s amortized cost basis, or 3) we believe we will be unable to recover the entire amortized cost basis of the security (i.e., credit loss has occurred). Other-than-temporary-impairments (“OTTI”) of fixed maturity securities are separated into credit and noncredit-related amounts when there are credit-related losses associated with the impaired fixed maturity security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered, by comparing the present value of cash flows expected to be collected from the security, computed using original yield as the discount rate, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.”
Deferred Acquisition Costs
Certain direct acquisition costs consisting of commissions, premium taxes and certain other direct underwriting expenses that vary with and are primarily related to the successful production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned. The method followed in computing deferred acquisition costs limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected losses and loss adjustment expenses, may require adjustments to deferred acquisition costs. If the estimation of net realizable value indicates that the deferred acquisition costs are not recoverable, then they would be written off.
Prepaid Management Fee
Prepaid management fee comprises costs incurred by the Company to execute a new management agreement with Diversus Management and is amortized on a straight-line basis over the seven-year useful life of the agreement.
Liability for Losses and Loss Adjustment Expenses
Liability for losses and loss adjustment expenses include an amount determined from individual case estimates and loss reports and an amount, based on prior experience, actuarial assumptions and management judgments for losses incurred but not reported. Such liabilities are necessarily based on assumptions and estimates, and while management believes the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates for establishing the resulting liabilities are continually reviewed. Estimating the ultimate cost of future losses and loss adjustment expenses is an uncertain and complex process. This estimation process is based upon the assumption that past developments are an appropriate indicator of future events and involves a variety of actuarial techniques that analyze experience, trends, and other relevant factors. The uncertainties involved with the reserving process include internal factors, such as changes in claims handling procedure, as well as external factors, such as economic trends and changes in the concepts of legal liability and damage awards. Accordingly, final loss settlements may vary from the present estimates, particularly when those payments may not occur until well into the future. Adjustments to previously established reserves are reflected in the operating results of the period in which the adjustment is determined to be necessary. Such adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.
We also offer extended reporting coverage at no additional charge in the event of disability, death or retirement after a policyholder reaches the age of 55 and has been a mature-claims policyholder with Positive Insurance Company for at least one year. An extended reporting endorsement policy reserve is required to assure that premiums are not earned prematurely. This reserve is actuarially determined and the balance is included in unearned premiums in the consolidated balance sheets.
Reinsurance
The Company cedes insurance risk to other insurance companies. This arrangement allows us to minimize the net loss potential arising from large risks. Reinsurance contracts do not relieve the Company of its obligation to its policyholders. Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contract.
8
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments, non-U.S. government bonds, premiums receivable, and balances recoverable from reinsurers. Non-U.S. government bonds are diversified, and no one investment accounts for greater than 5% of our invested assets. Cash and cash equivalents are deposited with financial institutions with balances that fluctuate in excess of federally insured limits. If the financial institutions were not to honor their contractual liability to us, we could incur losses. We are of the opinion that there is low risk because of the financial strength of the respective financial institutions. We are also subject to concentrations of credit risk through short-term money market investments. The credit risk related to short-term money market investments is minimized by our investing in money market funds or repurchase agreements, both secured by U.S. government securities.
No one insured accounted for over 10% of premiums receivable as of June 30, 2020 and December 31, 2019 or gross written premium for the three and six months ended June 30, 2020 and 2019. We have reinsurance contracts with various reinsurers all of whom have A.M. Best ratings of A or better or have provided collateral to secure their obligations.
Revenue Recognition
Premiums are earned on a daily pro rata basis over the terms of the insurance policies. Unearned premium reserves are established to cover the unexpired portion of the policies in force less amounts ceded to reinsurers. For consideration received for policies with effective dates subsequent to the reporting period, the Company records an advance premium liability in lieu of written premium.
Premiums associated with tails are generally earned as written, except for the afore-mentioned extended reporting coverage in the event of disability, death or retirement. Other forms of tails, in which premiums are earned as written, include the following: 1) An insured who terminates a claims-made policy with their prior carrier, and who purchases tail coverage (extended reporting coverage) from their old carrier or obtains retroactive (prior-acts) coverage from a new carrier, or 2) Stand-alone tail coverage in which an insured is offered a tail policy by their prior carrier but seeks a competitive quote from a different carrier. Both types of tail coverage insure against claims reported after the end of the original policy period for incidents that occurred while that policy was in effect.
Comprehensive Income
Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale fixed maturity securities and unrealized losses related to factors other than credit on fixed maturity securities, are reported as a separate component in the equity section in the accompanying consolidated balance sheets. Such items, along with net income (loss), are components of comprehensive income, and are reflected in the accompanying consolidated statements of comprehensive income. Reclassifications of realized gains and losses on sales of investments out of accumulated other comprehensive income are recorded in realized investment gains (losses), net in the accompanying consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated 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 Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversal of existing taxable temporary differences, tax planning strategies, projected future taxable income, and recent financial operations.
Prior to March 27, 2019, PPIX, PCA, and PIPE filed separate federal income tax returns. The Company did not recognize any interest and penalties in the accompanying consolidated statements of operations for the three and six months ended June 30, 2020 and 2019. PPIX, PCA, and PIPE remain subject to examination by the Internal Revenue Service for tax years 2016 through 2018 and the short stub period in 2019. Beginning with the 2019 tax year, the Company will file a consolidated federal income tax return.
9
|
4.
|
Recent Accounting Pronouncements
|
As an emerging growth company, we have elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. The following discussion includes effective dates for both public business entities and emerging growth companies, as well as whether specific guidance may be adopted early.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that requires lessees to recognize leases, including operating leases, on the lessee’s balance sheet, unless a lease is considered a short-term lease. This guidance also requires entities to make new judgments to identify leases. The guidance was effective for annual and interim reporting periods beginning after December 15, 2018 and permitted early adoption. The Company’s adoption of this guidance on January 1, 2019 did not have a significant impact on our financial condition, results of operations or cash flows.
Recently Issued Accounting Pronouncements
New accounting rules and disclosure requirements can impact the results and the comparability of the Company’s consolidated financial statements. The following recently issued accounting pronouncements are relevant to the Company’s consolidated financial statements:
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification ("ASC") and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13 will remove all current recognition thresholds and will require entities under the new current expected credit loss ("CECL") model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument's contractual life. The new CECL model is based upon expected losses rather than incurred losses. Additionally, the credit loss recognition guidance for available-for-sale securities is amended and will require that credit losses on such debt securities should be recognized as an allowance for credit losses rather than a direct write-down of amortized cost balance. The ASU was effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which extended the effective date of adopting ASU 2016-13. Under ASU 2019-10, ASU 2016-13 will be effective for Public Business Entities that are filers with the Securities and Exchange Commission (“SEC”), excluding smaller reporting companies such as the Company, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For all other entities, including smaller reporting companies like the Company, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar year-end companies). The Company is currently a smaller reporting company, so the Company’s expected adoption date for ASU 2016-13 is January 1, 2023. At this time, we are evaluating the potential impact of ASU 2016-13 in the Company’s consolidated financial statements.
The Company uses fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Fixed maturity available-for-sale securities and equity securities are recorded at fair value on a recurring basis. FASB ASC Topic 820 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy under ASC Topic 820 are as follows:
|
|
Level 1:
|
Quoted (unadjusted) prices for identical assets in active markets.
|
|
|
Level 2:
|
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.
|
10
|
|
Level 3:
|
Unobservable inputs that cannot be corroborated by observable market data.
|
Under ASC Topic 820, we base fair values of assets on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FASB ASC Topic 820. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon our or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. Management uses its best judgment in estimating the fair value of financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts we could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period end and have not been re-evaluated or updated for purposes of the consolidated 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.
In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest-level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Amortized cost/cost, gross unrealized gains, gross unrealized losses, and fair value of fixed maturity securities by major security type for the results at June 30, 2020 and December 31, 2019 are as follows:
|
|
|
Amortized
Cost/Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
11,359,661
|
|
|
$
|
205,497
|
|
|
$
|
18,101
|
|
|
$
|
11,547,057
|
|
|
States, territories, and possessions
|
|
|
1,088,928
|
|
|
|
59,450
|
|
|
|
—
|
|
|
|
1,148,378
|
|
|
Subdivisions of states, territories, and possessions
|
|
|
12,290,490
|
|
|
|
495,142
|
|
|
|
6,946
|
|
|
|
12,778,686
|
|
|
Industrial and miscellaneous
|
|
|
72,558,805
|
|
|
|
3,686,060
|
|
|
|
201,280
|
|
|
|
76,043,585
|
|
|
Total fixed maturity securities
|
|
$
|
97,297,884
|
|
|
$
|
4,446,149
|
|
|
$
|
226,327
|
|
|
$
|
101,517,706
|
|
|
|
|
Amortized
Cost/Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
10,689,829
|
|
|
$
|
100,223
|
|
|
$
|
38,490
|
|
|
$
|
10,751,562
|
|
|
States, territories, and possessions
|
|
|
1,096,638
|
|
|
|
46,385
|
|
|
|
—
|
|
|
|
1,143,023
|
|
|
Subdivisions of states, territories, and possessions
|
|
|
12,440,863
|
|
|
|
389,472
|
|
|
|
7,470
|
|
|
|
12,822,865
|
|
|
Industrial and miscellaneous
|
|
|
69,445,114
|
|
|
|
1,591,777
|
|
|
|
6,299
|
|
|
|
71,030,592
|
|
|
Total fixed maturity securities
|
|
$
|
93,672,444
|
|
|
$
|
2,127,857
|
|
|
$
|
52,259
|
|
|
$
|
95,748,042
|
|
11
The table below sets forth the contractual maturity profile of our investments in fixed maturity securities at June 30, 2020 and December 31, 2019. 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.
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Amortized
Cost/Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost/Cost
|
|
|
Fair Value
|
|
|
Due in less than one year
|
|
$
|
17,075,418
|
|
|
$
|
17,211,639
|
|
|
$
|
8,570,607
|
|
|
$
|
8,584,991
|
|
|
Due after one year to five years
|
|
|
58,599,281
|
|
|
|
61,398,223
|
|
|
|
59,713,323
|
|
|
|
60,844,219
|
|
|
Due after five years to ten years
|
|
|
21,091,272
|
|
|
|
22,320,449
|
|
|
|
24,656,702
|
|
|
|
25,539,400
|
|
|
Due after ten years
|
|
|
531,913
|
|
|
|
587,395
|
|
|
|
731,812
|
|
|
|
779,432
|
|
|
|
|
$
|
97,297,884
|
|
|
$
|
101,517,706
|
|
|
$
|
93,672,444
|
|
|
$
|
95,748,042
|
|
Realized gains and losses are determined using the specific identification method. During the three and six months ended June 30, 2020 and 2019, proceeds from maturities and sales and gross realized gains and losses on securities and other investments are as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Proceeds
|
|
$
|
10,748,023
|
|
|
$
|
2,329,834
|
|
|
$
|
18,262,365
|
|
|
$
|
7,306,915
|
|
|
Gross gains
|
|
|
771,306
|
|
|
|
41,207
|
|
|
|
823,155
|
|
|
|
59,898
|
|
|
Gross losses
|
|
|
516,504
|
|
|
|
186,205
|
|
|
|
773,791
|
|
|
|
239,842
|
|
The components of net realized investment gains (losses) for the three and six months ended June 30, 2020 and 2019 are as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Gain (loss) on sales of fixed maturity securities
|
|
$
|
3,887
|
|
|
$
|
22
|
|
|
$
|
42,930
|
|
|
$
|
(28,248
|
)
|
|
Gain (loss) on sales of equity securities and other investments
|
|
|
250,915
|
|
|
|
(145,020
|
)
|
|
|
6,434
|
|
|
|
(151,696
|
)
|
|
Total gain (loss) on sales of investments
|
|
|
254,802
|
|
|
|
(144,998
|
)
|
|
|
49,364
|
|
|
|
(179,944
|
)
|
|
Unrealized gain (loss) on equity securities and other investments
|
|
|
237,138
|
|
|
|
318,616
|
|
|
|
(1,521,845
|
)
|
|
|
1,205,213
|
|
|
Total net realized investment gains (losses)
|
|
$
|
491,940
|
|
|
$
|
173,618
|
|
|
$
|
(1,472,481
|
)
|
|
$
|
1,025,269
|
|
The components of net investment income for the three and six months ended June 30, 2020 and 2019 are as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Fixed maturity securities
|
|
$
|
593,377
|
|
|
$
|
561,161
|
|
|
$
|
1,245,052
|
|
|
$
|
1,126,231
|
|
|
Cash and short-term investments
|
|
|
50,745
|
|
|
|
154,571
|
|
|
|
137,241
|
|
|
|
177,584
|
|
|
Equity securities
|
|
|
23,841
|
|
|
|
76,383
|
|
|
|
72,605
|
|
|
|
143,119
|
|
|
Other income
|
|
|
7,125
|
|
|
|
5,250
|
|
|
|
14,250
|
|
|
|
13,750
|
|
|
|
|
|
675,088
|
|
|
|
797,365
|
|
|
|
1,469,148
|
|
|
|
1,460,684
|
|
|
Less investment expenses
|
|
|
26,542
|
|
|
|
31,118
|
|
|
|
54,305
|
|
|
|
66,181
|
|
|
Net investment income
|
|
$
|
648,546
|
|
|
$
|
766,247
|
|
|
$
|
1,414,843
|
|
|
$
|
1,394,503
|
|
12
The following tables show fair value and gross unrealized losses of our fixed maturity investments with unrealized losses that are not deemed to be other-than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2020 and December 31, 2019:
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
Description of securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
3,670,584
|
|
|
$
|
945
|
|
|
$
|
444,584
|
|
|
$
|
17,156
|
|
|
$
|
4,115,168
|
|
|
$
|
18,101
|
|
|
States, territories, and possessions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Subdivisions of states, territories, and possessions
|
|
|
—
|
|
|
|
—
|
|
|
|
68,379
|
|
|
|
6,946
|
|
|
|
68,379
|
|
|
|
6,946
|
|
|
Industrial and miscellaneous
|
|
|
4,947,932
|
|
|
|
201,280
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,947,932
|
|
|
|
201,280
|
|
|
Total fixed maturity securities
|
|
$
|
8,618,516
|
|
|
$
|
202,225
|
|
|
$
|
512,963
|
|
|
$
|
24,102
|
|
|
$
|
9,131,479
|
|
|
$
|
226,327
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
Description of securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
2,628,516
|
|
|
$
|
8,227
|
|
|
$
|
4,061,077
|
|
|
$
|
30,263
|
|
|
$
|
6,689,593
|
|
|
$
|
38,490
|
|
|
States, territories, and possessions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Subdivisions of states, territories, and possessions
|
|
|
—
|
|
|
|
—
|
|
|
|
93,000
|
|
|
|
7,470
|
|
|
|
93,000
|
|
|
|
7,470
|
|
|
Industrial and miscellaneous
|
|
|
4,773,607
|
|
|
|
5,934
|
|
|
|
350,922
|
|
|
|
365
|
|
|
|
5,124,529
|
|
|
|
6,299
|
|
|
Total fixed maturity securities
|
|
$
|
7,402,123
|
|
|
$
|
14,161
|
|
|
$
|
4,504,999
|
|
|
$
|
38,098
|
|
|
$
|
11,907,122
|
|
|
$
|
52,259
|
|
Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates, which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.
We evaluated each security and took into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. We found that the declines in fair value are most likely attributable to increases in interest rates, and there is no evidence that the likelihood of not receiving all of the contractual cash flows as expected has changed. Our fixed maturity portfolio is managed by our investment committee in concert with an outside investment manager for investment grade bond investments. By agreement, the investment manager cannot sell any security without the consent of our investment committee if such sale will result in a net realized loss.
We monitor our investment portfolio and review securities that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. When assessing whether the amortized cost basis of the security will be recovered, we compare the present value of the cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as the “credit loss.” If there is a credit loss, the impairment is considered to be other-than-temporary. If we identify that an other-than-temporary impairment loss has occurred, we then determine whether we intend to sell the security, or if it is more likely than not that we will be required to sell the security prior to recovering the amortized cost basis less any current-period credit losses. If we determine that we do not intend to sell, and it is more likely than not that we won’t be required to sell the security, then the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the other-than-temporary impairment loss will be recognized in other comprehensive income (loss), net of tax. If we determine that we intend to sell the security, or that it is more likely than not that we will be required to sell the security prior to recovering its amortized cost basis less any current-period credit losses, then the full amount of the other-than-temporary impairment will be recognized in earnings.
For the six months ended June 30, 2020 and 2019, we determined that none of our fixed maturity securities were other-than-temporarily impaired. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.
13
The table below presents the level within the fair value hierarchy generally utilized by us to estimate the fair value of assets disclosed on a recurring basis at June 30, 2020:
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
U.S. government
|
|
$
|
11,547,057
|
|
|
$
|
—
|
|
|
$
|
11,547,057
|
|
|
$
|
—
|
|
|
States, territories, and possessions
|
|
|
1,148,378
|
|
|
|
—
|
|
|
|
1,148,378
|
|
|
|
—
|
|
|
Subdivisions of states, territories and possessions
|
|
|
12,778,686
|
|
|
|
—
|
|
|
|
12,778,686
|
|
|
|
—
|
|
|
Industrial and miscellaneous
|
|
|
76,043,585
|
|
|
|
—
|
|
|
|
76,043,585
|
|
|
|
—
|
|
|
Total fixed maturity securities
|
|
|
101,517,706
|
|
|
|
—
|
|
|
|
101,517,706
|
|
|
|
—
|
|
|
Equity securities
|
|
|
260,915
|
|
|
|
260,915
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
101,778,621
|
|
|
$
|
260,915
|
|
|
$
|
101,517,706
|
|
|
$
|
—
|
|
The table below presents the level within the fair value hierarchy generally utilized by us to estimate the fair value of assets disclosed on a recurring basis at December 31, 2019:
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
U.S. government
|
|
$
|
10,751,562
|
|
|
$
|
—
|
|
|
$
|
10,751,562
|
|
|
$
|
—
|
|
|
States, territories, and possessions
|
|
|
1,143,023
|
|
|
|
—
|
|
|
|
1,143,023
|
|
|
|
—
|
|
|
Subdivisions of states, territories and possessions
|
|
|
12,822,865
|
|
|
|
—
|
|
|
|
12,822,865
|
|
|
|
—
|
|
|
Industrial and miscellaneous
|
|
|
71,030,592
|
|
|
|
—
|
|
|
|
71,030,592
|
|
|
|
—
|
|
|
Total fixed maturity securities
|
|
|
95,748,042
|
|
|
|
—
|
|
|
|
95,748,042
|
|
|
|
—
|
|
|
Equity securities
|
|
|
7,756,966
|
|
|
|
7,756,966
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
103,505,008
|
|
|
$
|
7,756,966
|
|
|
$
|
95,748,042
|
|
|
$
|
—
|
|
|
6.
|
Deferred Acquisition Costs
|
The following table summarizes the movements in deferred acquisition costs for the three and six months ended June 30, 2020 and 2019:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Balance, beginning of period
|
|
$
|
2,968,462
|
|
|
$
|
4,690,104
|
|
|
$
|
2,584,486
|
|
|
$
|
3,985,193
|
|
|
Amount capitalized during the period
|
|
|
227,097
|
|
|
|
933,145
|
|
|
|
1,920,875
|
|
|
|
3,760,410
|
|
|
Amount amortized during the period
|
|
|
601,090
|
|
|
|
1,964,792
|
|
|
|
1,910,892
|
|
|
|
4,087,146
|
|
|
Balance, end of period
|
|
$
|
2,594,469
|
|
|
$
|
3,658,457
|
|
|
$
|
2,594,469
|
|
|
$
|
3,658,457
|
|
Under the Company’s current reinsurance agreement, we retain 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 and clash occurrences;
|
|
|
•
|
mitigate the effect of individual loss occurrences;
|
|
|
•
|
cover us against losses in excess of policy limits and extra contractual obligation claims;
|
|
|
•
|
stabilize underwriting results; and
|
|
|
•
|
increase our underwriting capacity.
|
Under Pennsylvania law, each insured must maintain MPLI of at least $1,000,000 for each claim and $3,000,000 of annual aggregate coverage. 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 in loss on all Pennsylvania claims and reinsurance covers the excess up to $1,000,000 that is not covered by the Pennsylvania MCARE Fund. We cede to reinsurers any Pennsylvania claims in excess of $1,000,000.
14
Other states in which we write insurance require doctors to maintain certain minimum coverage and provide a fund that provides coverage for losses above a certain amount, but some states do not prescribe insurance requirements for doctors.
We offer primary coverage up to $1,000,000 for each claim and $3,000,000 of annual aggregate coverage in Delaware, Maryland, Michigan, Ohio, New Jersey, and South Carolina. We retain the first $300,000 in loss for claims from these states, and reinsurance covers the excess up to $1,000,000. If an insured in New Jersey requests, additional coverage of $1,000,000, each claim, each insured, each policy can be provided and is fully ceded to the reinsurer up to a maximum aggregate liability of $2,000,000 to the reinsurer per the term of the reinsurance agreement. In South Carolina and Michigan, the insured can elect policy limits of $200,000 per claim and, on these claims, we retain the first $100,000 and the reinsurer covers the next $100,000.
We also purchase additional reinsurance coverage for clash, losses in excess of policy limits and extra contractual obligation claims.
Our premiums under the current reinsurance agreement are based on a percentage of our earned premiums during the term of the agreement. The agreement was renewed on April 1, 2020.
Reinsurance does not legally discharge the insurance company issuing the policy from primary liability for the full amount due under the reinsured policies. A primary factor in the selection of reinsurers from whom we purchase reinsurance is their financial strength. Our reinsurance arrangements are generally renegotiated annually. The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. Our reinsurance providers, the majority of whom are longstanding partners that understand our business, are all carefully selected with the help of our reinsurance broker. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. Hannover Re, our current reinsurance partner, has an “A+ (Superior)” rating from A.M. Best. According to A.M. Best, companies with a rating of “A” or better “have an excellent ability to meet their ongoing obligations to policyholders.”
We generally do not assume risks from other insurance companies. However, we could be required by statute to participate in guaranty funds, which are formed to pay claims on policies issued by insolvent property and casualty insurers domiciled in certain states, such as Pennsylvania. This participation, where applicable, requires us to pay an annual assessment based on our premiums written and determined on a market share basis. As of June 30, 2020, our participation was not material.
The effect of reinsurance on premiums written, amounts earned, and losses incurred for the three and six months ended June 30, 2020 and 2019 is as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
3,515,340
|
|
|
$
|
3,783,325
|
|
|
$
|
11,233,852
|
|
|
$
|
11,980,842
|
|
|
Ceded
|
|
|
2,176,966
|
|
|
|
648,254
|
|
|
|
2,423,445
|
|
|
|
2,600,731
|
|
|
Premiums written, net of reinsurance
|
|
$
|
1,338,374
|
|
|
$
|
3,135,071
|
|
|
$
|
8,810,407
|
|
|
$
|
9,380,111
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
5,164,623
|
|
|
$
|
6,075,535
|
|
|
$
|
11,066,071
|
|
|
$
|
12,428,915
|
|
|
Ceded
|
|
|
464,901
|
|
|
|
747,541
|
|
|
|
1,681,639
|
|
|
|
1,609,714
|
|
|
Premiums earned, net of reinsurance
|
|
$
|
4,699,722
|
|
|
$
|
5,327,994
|
|
|
$
|
9,384,432
|
|
|
$
|
10,819,201
|
|
|
Losses and loss adjustment expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
3,470,626
|
|
|
$
|
6,365,077
|
|
|
$
|
7,436,399
|
|
|
$
|
10,276,266
|
|
|
Ceded
|
|
|
274,815
|
|
|
|
2,097,637
|
|
|
|
1,054,985
|
|
|
|
2,687,150
|
|
|
Losses and loss adjustment expenses incurred,
net of reinsurance
|
|
$
|
3,195,811
|
|
|
$
|
4,267,440
|
|
|
$
|
6,381,414
|
|
|
$
|
7,589,116
|
|
15
|
8.
|
Losses and Loss Adjustment Expenses
|
At June 30, 2020, the Company estimated that its liability for unpaid losses and loss adjustment expenses (“LAE”) for all insurance policies and reinsurance contracts issued by its insurance business was $63,510,324. This amount included estimated losses from claims plus estimated expenses to settle claims. This estimate also included estimated amounts for losses occurring on or prior to June 30, 2020 that had not yet been reported to the Company. At June 30, 2020, the Company also estimated that its reinsurance recoverable on unpaid claims was $7,424,458.
Management believes that its unpaid losses and LAE are fairly stated at June 30, 2020. However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates, assumptions and judgments using data currently available. As additional experience and data become available regarding claims payment and reporting patterns, legal and legislative developments, judicial theories of liability, changes in social attitudes and economic conditions, the estimates are revised accordingly. Original estimates are also increased or decreased, as additional information becomes known regarding individual claims. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at June 30, 2020, then the related adjustments could have a material adverse impact on the Company’s financial condition, results of operations and liquidity.
Positive Insurance Company uses a combination of the Actual versus Expected Method, Bornhuetter-Ferguson Method, Expected Loss Ratio Method, Frequency/Severity Method, and the Incurred Loss Development Method in order to estimate its liability for losses and LAE. There were no significant changes in the methodologies and assumptions used to develop the liabilities for losses and LAE during the six months ended June 30, 2020.
At June 30, 2020 and December 31, 2019, the Company had no unrecognized tax benefits, no accrued interest and penalties, and no significant uncertain tax positions. No interest and penalties were recognized during the six months ended June 30, 2020 and 2019.
At June 30, 2020 and December 31, 2019, the Company had unused net operating loss (“NOL”) carryforwards of $1,133,600 and $3,600,298, respectively, which will begin to expire in 2038, if unused. The Company’s remaining unused NOLs that were generated prior to the conversions and merger in 2019 are subject to limitations under Section 382 of the Internal Revenue Code and are limited in the amount that can be utilized in any one year. The Company’s NOL balance at June 30, 2020 primarily consists of taxable losses that were generated by the holding company in 2020.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act includes certain income tax-related law changes that have a material effect on the Company’s deferred income taxes. The most significant effect on the Company’s deferred income taxes is due to changes in the federal net operating loss carryback provisions which allow the Company to carryback NOLs originating in 2018 and 2019 to prior tax years with corporate income tax rates of 34% (as opposed to forward to future tax years with corporate income tax rates of 21%). As a result of this legislation, during the first six months of 2020, the Company significantly reduced its NOL balance by $2,969,550, or $623,606 tax-effected, and recorded additional federal income tax refunds of $1,205,964.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the Company’s 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), tax planning strategies, and projected future taxable income in making this assessment. At June 30, 2020 and December 31, 2019, management determined that it was more likely than not that all of the deferred tax assets will be realized by the Company in future years. Accordingly, the Company did not record a valuation allowance against its deferred tax assets at June 30, 2020 and December 31, 2019.
|
10.
|
Agreements with Diversus
|
Positive Insurance Company has a management agreement with Diversus Management, whereby Diversus Management provides administrative services to Positive Insurance Company in exchange for fees based on a percentage of Positive Insurance Company’s gross written premium, less return premium. Under the current agreement, which became effective March 27, 2019, Diversus Management earns management fees at 12%. Diversus Management may also earn quarterly performance management fees based on Positive Insurance Company’s combined ratio and net earned premiums. No quarterly performance fees were payable under the terms of the agreement at June 30, 2020.
16
Management fees are recorded in other underwriting expenses in the consolidated statements of operations. The Company incurred management fees for the respective periods as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Management fees
|
|
$
|
823,577
|
|
|
$
|
887,322
|
|
|
$
|
2,142,988
|
|
|
$
|
2,936,702
|
|
In connection with the execution of the existing management agreement with Diversus Management, the Company paid Diversus $10,000,000 to execute the agreement. Such payment is presented as prepaid management fee in the accompanying consolidated balance sheets and is amortized on a straight-line basis over a period of seven years. For each of the three months ended June 30, 2020 and 2019, the Company incurred amortization expense of $357,143. For the six months ended June 30, 2020 and 2019, the Company incurred amortization expense of $714,285 and $357,143, respectively. These amounts are recorded in other underwriting expenses in the consolidated statements of operations and included as part of both the current and prior year amounts disclosed in the table above.
Positive Insurance Company has contracts with Gateway Risk Services, LLC and Andrews Outsource Solutions LLC, both of which are wholly owned subsidiaries of Diversus, under which those companies provide claims processing and risk management services. Fees incurred by Positive Insurance Company under these contracts are recorded in other underwriting expenses in the consolidated statements of operations as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Claims processing and risk management services
|
|
$
|
402,875
|
|
|
$
|
408,875
|
|
|
$
|
795,450
|
|
|
$
|
808,250
|
|
Additionally, the former attorney-in-fact of PCA earned commissions related to our gross written premium and other accounts. Beginning March 27, 2019, these commissions were paid to Specialty Insurance Agency, LLC, a wholly owned subsidiary of Diversus. These commissions are recorded in other underwriting expenses in the consolidated statements of operations. Positive Insurance Company incurred related commission expenses for the respective periods as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Commissions
|
|
$
|
16,133
|
|
|
$
|
-
|
|
|
$
|
78,206
|
|
|
$
|
77,850
|
|
The Company and Diversus entered into a loan agreement dated March 27, 2019 to provide a $6,000,000 credit facility to Diversus for working capital purposes. The Company terminated the loan agreement on May 19, 2020. There was no outstanding balance on the credit facility prior to the termination of the loan agreement.
The Company is authorized to issue 10,000,000 shares of $0.01 par value common stock. In connection with the completion of the initial public offering on March 27, 2019, 3,615,500 shares of the Company’s common stock were issued. At June 30, 2020, 3,615,500 shares of common stock remain issued and outstanding.
On September 27, 2019, the Company granted its Chief Executive Officer options to purchase 216,930 shares of common stock at an exercise price of $12.01 per share, which was the closing sale price of the Company’s common stock on the date the options were granted. Of the total options, 108,465 shares will vest in equal monthly installments over a three-and-one-half year period following September 27, 2019, and the remaining 108,465 shares will vest upon the achievement by the Company of certain milestones. All vested option shares shall be exercisable for eight years from the date of vesting. The stock-based compensation expense recorded by the Company during the three and six months ended June 30, 2020 was $23,707 and $71,122, respectively.
The holding company has cash and other liquid assets aggregating $15,824,903 at June 30, 2020. The holding company’s principal source of future liquidity will be dividend payments from Positive Insurance Company, which is restricted by the insurance laws and regulations of the Commonwealth of Pennsylvania as to the amount of dividends or other distributions it may pay to the Company.
17
An order by the Pennsylvania Insurance Department approving the conversions of PPIX, PCA, and PIPE prohibits the declaration or payment of any dividend, return of capital, or other distribution by the Company to Insurance Capital Group, LLC and Enstar Holdings (US) LLC, the two principal stockholders of the Company, or any other shareholder without the prior approval of the Pennsylvania Insurance Department, for a period of three years following the effective date of the conversions. Additionally, by the order of the Pennsylvania Insurance Department, Positive Insurance Company cannot pay a dividend to the Company for a period of three years following the effective date of the conversions without the approval of the Pennsylvania Insurance Department.
Prior to its payment of any dividend, Positive Insurance Company will be required to provide notice of the dividend to the Pennsylvania Insurance Department. This notice must be provided to the Pennsylvania Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The Pennsylvania Insurance Department has the power to limit or prohibit dividends if Positive Insurance Company is in violation of any law or regulation.
As discussed in Note 1, the conversions of PPIX, PCA, and PIPE to stock insurance companies and the simultaneous acquisition of these companies resulted in the issuance of the Company’s common stock as of March 27, 2019. The basic weighted average number of common shares outstanding was 3,615,500 for the three and six months ended June 30, 2020 and 2019. For the period prior to the date of the conversions, the net common shares issued in the initial public offering were assumed to be outstanding since January 1, 2019.
The following table presents a reconciliation of the numerators and denominators that were used in the basic and diluted per share computations for the Company’s common stock:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
358,063
|
|
|
$
|
(560,947
|
)
|
|
$
|
(764,640
|
)
|
|
$
|
(469,158
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
3,615,500
|
|
|
|
3,615,500
|
|
|
|
3,615,500
|
|
|
|
3,615,500
|
|
|
Basic earnings per common share
|
|
$
|
0.10
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
358,063
|
|
|
$
|
(560,947
|
)
|
|
$
|
(764,640
|
)
|
|
$
|
(469,158
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
3,615,500
|
|
|
|
3,615,500
|
|
|
|
3,615,500
|
|
|
|
3,615,500
|
|
|
Add: vested stock options
|
|
|
23,243
|
|
|
|
—
|
|
|
|
23,243
|
|
|
|
—
|
|
|
Number of shares used in diluted computation
|
|
|
3,638,743
|
|
|
|
3,615,500
|
|
|
|
3,638,743
|
|
|
|
3,615,500
|
|
|
Diluted earnings per common share
|
|
$
|
0.10
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.13
|
)
|
The Company’s operations and business have experienced disruptions due to the conditions surrounding the COVID-19 pandemic spreading throughout the United States. These disruptions include, but are not limited to, office closures and difficulties in maintaining operational continuance during remote operations required by illness, social quarantining, and work from home orders that were in force. The Company’s management has devoted substantial time and attention to assessing the potential impact of COVID-19 and those events on the Company’s operations and financial position and developing operational and financial plans to address those matters.
As a result of the COVID-19 pandemic, the Company has seen premium decreases due to policy endorsements associated with doctors electing to work part time, take a leave of absence or retire. In addition, some of our insureds have elected to temporarily change their areas of practice and/or specialties. For example, a doctor may choose to drop from orthopedic surgery to office-only status due to the lack of elective surgeries. The Company has received notification for such requests from our policyholders which went into effect on June 30, 2020 and necessary reimbursements or credits against future payments have been applied. During the second quarter, the Company recorded approximately $160,000 in return premium adjustments, or reductions in direct premiums written, associated with these policy endorsements.
18
In terms of collections, prior to the pandemic, the Company’s policy was to cancel any insurance policies for which premiums had not been received within 60 days subsequent to policy effective date, with notice of intent to cancel sent to the insured after 30 days post-inception date, or post-payment due date. As a result of COVID-19, the Company has updated this policy and suspended cancellations of insurance contracts resulting from non-payment of premium and deferred payments until June 30, 2020 for invoices due after April 1, 2020. Due to this change in policy, the Company recorded an allowance for uncollectible premium of approximately $150,000 at June 30, 2020 based on the aging of outstanding premiums receivable.
On August 1, 2020, the Company’s independent registered public accounting firm changed its name from Baker Tilly Virchow Krause, LLP to Baker Tilly US, LLP.
On May 18, 2020, the Company received a written notice from the Listing Qualifications Department of Nasdaq indicating that the Company is not in compliance with Listing Rule 5550(a)(4), due to the Company’s failure to meet the minimum 500,000 publicly held shares requirement for continued listing on the Nasdaq Capital Market. On August 5, 2020, the Company filed with the SEC a Form 25, notification to voluntarily delist from the Nasdaq Capital Market, after announcing its intention on July 27, 2020 and that it anticipates that its common stock will be quoted on the OTCQX Best Market following the Nasdaq delisting. The delisting will be effective August 17, 2020 at which time the Company’s stock will begin trading on the OTCQX Best Market. The Company’s stock will continue to trade under the symbol, PPHI.
19